Sub: Consultation Paper on Amendments to the SEBI (Investment Advisers) Regulations, 2013

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1 To, Dt Deputy General Manager Investment Management Department, Division of Funds I Securities Exchange Board of India SEBI Bhavan, Plot No C4-A, G Block Bandra Kurla Complex, Bandra (East), Mumbai Via sebiria@sebi.gov.in Dear Sir/Madam, Sub: Consultation Paper on Amendments to the SEBI (Investment Advisers) Regulations, 2013 At the outset, we, at Indian Association of Investment Professionals (IAIP 1 ), a member society of the CFA Institute 2 appreciate the opportunity to submit our response to Consultation Paper on Amendments to the SEBI (Investment Advisers) Regulations, 2013 Since the last consultation paper in 2016 and 2017 on the amendments, the nation has evolved in its saving and spending habits. The Mutual Fund industry has had record inflows, though well below global averages in penetration and size per capita. The industry is stepping into the corridors of a multi-year growth trajectory, which all the more necessitates creating a robust and trustworthy ecosystem. India s diversity presents its own unique set of challenges, which often require a different answer to the same problem. The investor needs to be protected and the industry needs to be supported. We support the vision and direction proposed by the regulator, whilst recommending a steady and measured approach. Ease of doing business has been a key initiative of the government. The regulations, instead of being binary, should also consider other levers like investor education/awareness, great accountability, better self-regulation etc. The comments, distilled from feedback received from our members representing a wide section of the industry, are enclosed below for your review and further engagement. We would be happy to hear and discuss the merits / demerits of suggestions proposed by other practitioners and request to be included in the deliberation process. 1 IAIP is an association of over 2000 local investment professionals who are CFA charter holders and about professionals who have cleared exams, eligible and awaiting charter. The Association consists of portfolio managers, product managers, credit rating analysts, valuation professionals, security analysts, investment advisors, and other financial professionals, that; promote ethical and professional standards within the investment industry, facilitate the exchange of information and opinions among people within the local investment community and beyond, and work to further the public's understanding of the CFA designation and investment industry. 2 CFA Institute is a global non-profit association of investment professionals with over 149,000 members in over 140 countries. Through our global research and outreach efforts, CFA Societies around the world endeavour to provide resources for policy makers, financial services professionals and their customers in order to align their interests. Our members engage with regulators in all major markets. Through our policy positions and surveys, we have advocated for strengthening fiduciary responsibility of advisers, and improving transparency of various financial instruments.

2 1. Details on our Association: Name: Indian Association of Investment Professionals (CFA Society India). Contact number : address : advocacy@iaipirc.org Postal address : Naman Centre, Bandra Kurla Complex, Mumbai 2. Suggestions/Comments: Sr. No. Pertains to Point No 1. Proposal i Agree with Qualification Name of entity / person / intermediary/ Organization Suggestions Rationale Suggestion: We agree that advice should be separated from distribution, but this transition should be gradual and meticulously planned as there are multiple challenges/risks associated with it. Challenges/ Risks: a) Demand and Supply of Investment Advisors: As per data published on SEBI website, there are only 782 registered investment advisors in the country for a population of 1.3 billion. Even these advisors are concentrated in certain geographies. Given the non-uniform state of development and hence different per capital income in various geographies within the country, a blanket rule to segregate advisory and distribution would not be feasible. b) Role of distributor in creating awareness of a product: Awareness with regards to financial products is very low in India. Presently, for many, investment in financial products is limited to bank deposits or to a certain extent insurance products. While distributors have played a role in creating awareness, under the proposed regime, people in lower income group would be left ignored for service. For example, An individual earning Rs. 20,000 per month who might require an SIP of Rs per month and an insurance policy will not pay Rs.5000-Rs to an investment advisor for creating his/her financial plan. c) Not all products available in direct mode: Currently only Mutual Funds are available in a direct mode (with no commissions), but holistic advice for a family or client consists of usage of many other products like Term Insurance, Health Insurance, AIF, PMS, Govt Bonds,

3 Corporate Deposits, etc. If an RIA is not allowed to work on these products he is handicapped in providing holistic advice to his clients. Therefore direct mode option should be available all financial products. d) Infrastructure required at client/portfolio level for collecting fees: What could be a key bottleneck is not charging of fees but collection of fees from the client. There may be issues of late payment from client (sometimes non-payment as well). The advisor s fee collection would in turn depend on client s cash flows management. e) Regulating the incentive structure for various financial products: One of key reasons of a product mis-selling is different incentive structure for selling various products. Uniformity between various products and also within a product segment could go a long way in minimizing mis-selling. 2. Proposal ii Disagree. 3. Proposal iii Suggestion: Immediate Relatives have to be allowed to be in the business of their choice, based on their inclination, business model, and financial situation. Disagree. Suggestion: Most clients need help with both advice & execution. Therefore RIAs should be allowed to offer execution services in a corporate structure through a separate India is a very diverse market with clients of all types and families spread wide and far. Therefore everyone should be allowed to pursue opportunities as per their interest. Related Party Disclosures: To protect the need for clear segregation of advice & distribution, SEBI could insist on appropriate related party disclosures as in case of how corporates transact with their group companies and disclose. Any corporate or individual registered as an investment advisor should beforehand discuss with the client the compensation arrangement and document the same. There should be no double charging by way of advisory fees as well as distribution commissions. RIAs can make a disclosure that the products that they earn a commission on, is not charged for fees.

4 4. Proposal iv 5. Proposal V subsidiary with a different board of directors, though allowing for common shareholders. Disagree. Suggestion: Time frame of March 31, 2019, is too short for making adjustments to business models. SEBI should allow for 3-5 year time frame for such changes. If insistence is to follow a 2019 deadline, advisors should be refunded their fees on a prorata basis. Disagree Appropriateness is not sufficient. SEBI should have MFDs following suitability guidelines as per the RIA regulations for clients they advise. Suitability is to be viewed in the context of fiduciary duty of distributors while suggesting products in which clients money will be invested. Large Costs have been incurred by advisors to set up RIA practice in a corporate structure. Net worth of Rs. 25L, Registration Fees of Rs. 5L, these are large costs for someone setting up an advisory business. Such frequent changes render people in doubt and also financially impaired given they have no clarity on what model to follow. This, therefore questions the viability of the whole model of advisory. SEBI should allow a 3-5 year time frame to make appropriate adjustments to their business model, also incorporate other changes suggested above. The clause is highly ambiguous as to what is appropriateness. The current definition of appropriateness is not free from fallacy as there are no clear, standard and measurable guidelines for spelling out suitability aspect. Suitability has to be determined basis Risk capacity of clients. Risk capacity has two components 1. Ability to take risk 2. Willingness to take risk. Ability to take risk should be determined basis clients age, income level, current investment corpus, future cash flow prospects, liquidity requirement, time -horizon for investments whereas willingness to take risk must be based on psychological profile and comfort of clients w.r.t financial market volatility. Recommend use of Investment Policy Statement: In sum, to logically measure and document overall Risk capacity of clients, MFDs should make use of an Investment Policy Statement / Risk Profiling questionnaire.

5 If you or your staff have questions or seek further clarification, please do not hesitate to contact Vinay Bagri, or at advocacy@iaipirc.org Sincerely yours, Vinay Bagri, CFA Chair Advocacy Committee Indian Association of Investment Professionals, Member Society of CFA Institute