SEBI INFORMAL GUIDANCE – WHO IS A PRINCIPAL OFFICER FOR THE PURPOSE OF SEBI (INVESTMENT ADVISERS) REGULATIONS, 2013? – Eshwars
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SEBI INFORMAL GUIDANCE – WHO IS A PRINCIPAL OFFICER FOR THE PURPOSE OF SEBI (INVESTMENT ADVISERS) REGULATIONS, 2013?

Authored by Aishwarya Lakshmi V.M.

Applicant: PayTM Money Limited

Date of the guidance: 09.04.2021

Factual Background:

1. The Applicant is a non-individual SEBI registered Investment Adviser and is also carrying on the business of stock broking and depository participant.

2. The Applicant also offers execution services to its clients inter alia including Asset Management Companies by incurring out-of-pocket expenses, but without getting any commission or brokerage.

3. The Applicant intends to obtain electronic consent from its clients for executing the mandatory agreement as prescribed by SEBI in its Circular dated September 23, 2020.

4. Also, the Applicant intends to appoint an ‘equivalent management body’ as the principal officer for the purpose of the Regulations.

Guidance sought:

1. Whether obtaining reimbursement of out-of-pocket expenses from clients would violate Regulation 22A of SEBI (Investment Advisers) Regulations, 2013?

2. Whether obtaining electronic consent from its clients would be sufficient to qualify as ‘agreement’ between the Applicant and its clients?

3. Whether a Committee appointed by the Board to oversee the advisory functions can be considered as ‘Equivalent Management Body’ and whether a member of the Committee can be appointed as ‘Principal Officer’ for the purpose of the Regulations?

Provisions Involved:

Regulations 22A,[i] 19(1)(d)[ii] and 2(1)(s)[iii] of SEBI (Investment Advisers) Regulations, 2013.

Informal Guidance by SEBI:

i. SEBI, while relying on Clause 1 of the said Regulation 22A, interpreted the term ‘by whatever name called, whether directly or indirectly’ and stated that the Applicant cannot avail reimbursement of out-of-pocket expenses from its clients.

ii. SEBI, drawing reference from Annexure A of the circular dated September 23, 2020[i], clarified that the ‘agreement’ as envisaged in the said Regulation 19(1)(d) should contain certain mandatory covenants. Hence, it categorically laid down that obtaining a mere electronic consent would not qualify as an ‘agreement’ between the Applicant and its clients.

iii. SEBI clarified that the head/member of the Board of Directors can only be construed as ‘Principal Officer’ for the purpose of SEBI (Investment Advisers) Regulations, 2013. The context of using the term “Equivalent Management Body” in the said definition is to be understood in respect of other non-individual Investment Advisers, such as an LLP. Hence, any member of a Committee appointed by the Board cannot be appointed as the ‘Principal Officer’ for the purpose of the Regulations. If the Investment Adviser is a company, the principal officer can only be the Managing Director or any director designated specifically for the said purpose.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/apr-2021/sebi_let_IG_paytm_p.pdf

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] Reg. 22A, Implementation of advice or execution:

(1)  Investment adviser may  provide  implementation  services  to  the  advisory  clients  in securities market:

Provided that investment  advisers  shall ensure  that  no  consideration  including  any commission  or  referral  fees,  whether  embedded  or  indirect  or  otherwise,  by  whatever name called is  received; directly  or indirectly, at investment adviser’s group or family level for the said service, as the case maybe.

(2)  Investment adviser shall provide implementation services to its advisory clients only through direct schemes/products in the securities market.

(3)  Investment adviser or group or family of investment adviser shall not  charge  any implementation fees from the client.

(4) The client shall not be under any obligation to avail implementation services offered by the investment adviser.

[ii] Reg 19, Maintenance of Records:

1) An Investment Adviser shall maintain records:

  1. d) Copies of agreements with clients, incorporating the terms and conditions as may be specified by the Board.

[iii] Reg. 2(1)(s), Principal Officer: “principal officer” shall mean the managing  director  or  designated  director  or managing partner or executive chairman of the board or equivalent management body who is responsible for the overall function of the business and operations of non-individual investment adviser.

[i] The said circular can be accessed at: https://www.sebi.gov.in/legal/circulars/sep-2020/guidelines-for-investment-advisers_47640.html

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