NISM Series III-A · Chapter 19: SEBI (Investment Advisers) Regulations, 2013

L1 · Foundation

SEBI (Investment Advisers) Regulations, 2013

Who is an investment adviser and what investment advice is — with trading calls and mass media excluded; the eleven exemptions from registration and the IAASB; the fifteen general responsibilities including the fiduciary duty, no consideration from anyone but the client, and the fifteen-day bar on trading contrary to advice; risk profiling and suitability; disclosures; client-level segregation of advisory and distribution; implementation services; the eight records, five-year preservation and yearly audit; the compliance officer; the code of conduct and the 2019 conduct norms including fees through banking channels only; the fee caps; IFSC guidelines and qualification requirements; and the Capvision case.

24 min read · Worth 2% of the paper · Written from pages 354–369 of the official NISM workbook · Updated 17 September 2026

What this chapter covers

This chapter carries 2 per cent of the III-A examination.

LEARNING OBJECTIVES: After studying this chapter, you should know about: General Responsibilities of Investment Advisers · Identifying Risk Profile of the clients · Disclosure Requirements of Investment Advisers · Code of Conduct for Investment Advisers

19.1 Introduction

Investment adviser means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes a part-time investment adviser or any person who holds out himself as an investment adviser, by whatever name called.

Note the last words — by whatever name called, and the definition includes anyone who merely holds out himself as an investment adviser.

"Investment advice" means advice relating to investing in, purchasing, selling or otherwise dealing in securities, and advice on investment portfolio containing securities, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.

Two exclusions matter. Investment advice is given through newspapers, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations. And trading calls shall not be considered as investment advice for purpose of Investment Adviser Regulations.

Trading calls belong to the research analyst regime — where providing trading calls is expressly a research service. The two frameworks divide the ground between them.

Asset under advice means the aggregate net value of securities for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by an investment adviser or concluded by the client directly or through other service providers.

Persons associated with investment advice means any member, partner, officer, director or employee or any sales staff of such investment adviser including any person occupying a similar status or performing similar function irrespective of nature of association with an investment adviser who is engaged in providing investment advisory services to the clients.

Accordingly, all client-facing such as sales staff, service relationship managers, client relationship managers etc. whatever name called shall be deemed to be persons associated with investment advice but not include persons who discharge clerical or office administrative functions where there is no client interface.

The dividing line is the client interface.

Who need not register

Investment Adviser is required to be registered with the SEBI, but Section 4 exempts:

a) Any person who gives general comments in good faith regarding trends in the financial or securities market or the economic situation where such comments do not specify any particular securities or investment product.
b) Any insurance agent or insurance broker who offers investment advice solely in insurance products and is registered with IRDA.
c) Any pension advisor who offers investment advice solely on pension products and is registered with PFRDA.
d) Any distributor of mutual funds, who is a member of a self-regulatory organization recognized by the Board or is registered with an association of asset management companies of mutual funds, providing any investment advice to its client incidental to its primary activity.
e) Any advocate, solicitor or law firm, who provides investment advice to their client's incidental to legal practice.
f) Any member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Work Accountants of India, Actuarial Society of India or any other professional body as may be specified by SEBI, who provides investment advice to their clients, incidental to his professional service.
g) Any stockbroker, portfolio manager, merchant banker, registered under SEBI... who provides any investment advice to its client's incidental to their primary activity — but all these intermediaries are required to comply with general obligations and responsibilities specified in Chapter of III of these regulations.
h) Any Fund manager by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with SEBI.
i) Any person who provides investment advice exclusively to clients based out of India — provided that persons providing investment advice to Non-Resident Indian or Person of Indian Origin shall fall within the purview of these regulations.
j) Any principal officer, persons associated with advice and partner of an investment adviser which is registered — provided that such principal officer, persons associated with advice and partner shall comply with regulation 7.
k) Any other person as may be specified by the Board.

The word doing the work in most of these is "incidental." A lawyer, an accountant, a mutual fund distributor, a broker or a portfolio manager may advise incidentally to the main service. Advising as a business is what needs registration.

And note exemption (g)'s sting — brokers, portfolio managers and merchant bankers are exempt from registration but must still comply with general obligations and responsibilities specified in Chapter III.

Administration and supervision

As per Regulation 14... SEBI has recognized a body or body corporate for the purpose of administration and supervision of investment advisers, and no person will act as an investment adviser unless such a person is enlisted with the recognized body or body corporate, in which case the provisions of Investment Advisers Regulations and the specified provisions of the bye-laws or articles of such a body or body corporate shall apply.

Such an entity is designated as "Investment Adviser Administration and Supervisory Body (IAASB)", and the first IAASB recognized by SEBI is BSE Administration & Supervision Ltd, (BASL) wholly-owned subsidiary of BSE Limited.

All existing SEBI registered Investment Advisors and new applicants... are mandatorily required to register with BASL as a member, BASL and SEBI prescribing conditions including maintenance of minimum net-worth, deposit, renewal of certification, if any, payment of annual fees, other fees, charges etc., with membership liable to be terminated on failure.

19.2 General responsibilities — Regulation 15

An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.

An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.

The client pays, and only the client — the foundation of the whole regime.

An investment adviser shall maintain an arms-length relationship between its activities as an investment adviser and other activities, and where also engaged in other activities shall ensure that its investment advisory services are clearly segregated from all its other activities.

**Conflict of interest with other activities shall be disclosed to the client.

Confidentiality: no divulging of any confidential information about its client... without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law.

The fifteen-day rule. An investment advisor shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice. However, during the period of such fifteen days, if the investment adviser is of the opinion that the situation has changed, then it may enter into such a transaction on its own account after giving such revised assessment to the client at least 24 hours in advance of entering into such transaction.

Fifteen days, with a 24-hour escape — but only after telling the client the view has changed.

Also, the adviser must:

Follow Know Your Client (KYC) procedure as specified by SEBI.
Always abide by the Code of Conduct.
Not act on its own account, knowingly to sell securities or investment products to or purchase securities or an investment product from a client.
Obtain prior approval from SEBI for a change in control.
Furnish SEBI information and reports.
Ensure representatives and partners comply with the certification and qualification requirements at all times.
Take sole responsibility for artificial intelligence tools, irrespective of the scale and scenario of adoption. This covers the security, confidentiality, integrity of the client data, use of any other information or data to arrive at investment advice, investment advice based on output of Artificial Intelligence tools and compliance with any law.
Ensure compliance with the Investor Charter.
Under 15A, charge fees from a client including an accredited investor in the manner as specified by the Board.

19.3 Risk profiling and suitability

Investment advisers are required to identify the risk profile of their clients.

**The adviser must obtain such information as is necessary for the purpose of giving investment advice, including the following: i. age; ii. investment objectives including time for which they wish to stay invested, the purposes of the investment; iii. income details; iv. existing investments/ assets; v. risk appetite/ tolerance; vi. liability/borrowing details.

Six items — age, objectives, income, existing investments, risk appetite and liabilities — which is why the third review question answers All of the above.

And a process is needed, not just a form: assessing a client's capacity for absorbing loss; identifying whether the client is unwilling or unable to accept the risk of loss of capital; appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers.

Unwilling or unable — a distinction that matters, since one is preference and the other is capacity.

On tools: where tools are used for risk profiling, it should be ensured that the tools are fit for the purpose and any limitations are identified and mitigated.

On questionnaires: questions must be fair, clear and not misleading, and must ensure that the questionnaire is not vague or use double negatives or in a complex language that the client may not understand and is not structured in a way that it contains leading questions.

And afterwards: the risk profile of the client is communicated to the client after a risk assessment is done, and information provided by clients and their risk assessment is updated periodically.

Suitability — Regulation 17

All investments on which investment advice is provided is appropriate to the risk profile of the client.

It has a documented process for selecting investments based on the client's investment objectives and financial situation.

It understands the nature and risks of products or assets selected for clients.

It has a reasonable basis for believing that a recommendation or transaction entered into: i. meets the client's investment objectives; ii. is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance; iii. is such that the client has the necessary experience and knowledge to understand the risks involved.

Three limbs — objectives, capacity to bear risk, and understanding.

And for complex products: any recommendation to purchase a particular complex financial product must be based upon a reasonable assessment that the structure and risk-reward profile of the financial product are consistent with the client's experience, knowledge, investment objectives, risk appetite and capacity for absorbing the loss.

19.4 Disclosures

To a prospective client: all material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and such other information as is necessary to make an informed decision on whether or not to avail its services.

Own positions: its holding or position, if any, in the financial products or securities which are the subject matter of advice.

Conflicts: any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/ securities, including any material information or facts that might compromise its objectivity or independence.

Product facts: all material facts relating to the key features of the products or securities, particularly, performance track record.

Warnings: the adviser shall draw the client's attention to the warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending.

Outside SEBI's purview: where advising on products outside the purview of the Board, the adviser shall disclose to the client that such products or services and his advisory services in respect of such products or services are outside the regulatory purview of the Board and no recourse from the Board shall be available to such clients for any grievance arising therefrom.

Artificial intelligence: the extent of use of Artificial Intelligence tools in providing investment advice.

And on past performance: SEBI has enabled Investment Advisers (IAs) to share past performance data with clients for the period prior to the operationalization of PaRRVA.

19.5 Segregating advice from distribution — Regulation 22

An individual investment adviser shall not provide distribution services.

The family of the individual investment adviser shall not provide distribution services to the client advised by the individual investment adviser and no individual investment adviser shall provide advice to a client who is receiving distribution services from other family members.

For non-individuals, segregation is at the group level. Same client cannot be offered both advisory or distribution services within the group of the non-individual entity, and a client can either be an advisory client where no distribution consideration is received at the group level or distribution services client where no advisory fee is collected from the client at the group level.

One client, one relationship — advice or distribution, never both.

"Group" is defined as an entity which is holding, subsidiary, associate, subsidiary of holding company to which it is also a subsidiary or investment company or venturer of the company as per Companies Act 2013 for a corporate adviser, and otherwise an entity which has a controlling interest or is subject to the controlling interest of a non-individual investment adviser.

And structurally: the non-individual adviser shall maintain arm's length relationship between its activities as investment adviser and distributor by providing advisory services through separate identifiable department or division.

19.6 Implementation of advice — Regulation 22A

Investment advisors may provide implementation services to their advisory clients in the securities market, provided that investment advisers shall ensure that no consideration including 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.

Investment adviser shall provide implementation services to its advisory clients only through direct schemes/products in the securities market. Investment adviser shall not charge any implementation fees from the client. The client shall not be under any obligation to avail implementation services offered by the investment adviser.

Four conditions — no consideration at group or family level, direct schemes/products only, no implementation fee, and no obligation on the client.

19.7 Records — Regulation 19

(a) Know Your Client records of the client.
(b) Risk profiling and risk assessment of the client.
(c) Suitability assessment of the advice being provided.
(d) Copies of agreements with clients, incorporating the terms and conditions as may be specified by SEBI.
(e) Investment advice provided, whether written or oral.
(f) Rationale for arriving at investment advice, duly signed and dated.
(g) A register or record containing a list of the clients along with PAN, the date of advice, nature of the advice, the details of products/securities in which advice was rendered and fee/consideration, if any charged/received for such advice.
(h) Records of communication including emails, call recordings etc. with all clients including prospective clients.

Note (b) and (c) — risk profiling and suitability are recorded, which is what distinguishes this list from the research analyst's.

Preservation: all records shall be maintained either in physical or electronic form and preserved for a minimum period of five years, provided that where records are required to be duly signed and are maintained in electronic form, such records shall be digitally signed.

Audit: an investment adviser shall conduct a yearly audit in respect of compliance with these regulations from a member of the Institute of Chartered Accountants of India or Institute of Company Secretaries of India or Institute of Cost Accountants of India, and under the guidelines shall ensure the annual audit is completed within 6 months from the end of the financial year.

Website: as per regulation 19A, an investment adviser shall maintain a functional website containing such details as may be specified by SEBI.

19.8 Compliance officer — Regulation 20

A non-individual investment adviser shall appoint either: i. a compliance officer; or ii. an independent professional who is a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India or Institute of Cost Accountants of India or member of any other professional body as may be specified by the Board, provided such a professional holds a relevant certification from NISM.

**And where the independent professional is used, the principal officer shall submit an undertaking to the Board or the body or body corporate recognized under regulation 14... to the effect that the principal officer shall be responsible for monitoring the compliance.

19.9 Code of conduct and the 2019 norms

Nine clauses. Honesty and fairness — act honestly, fairly and in the best interests of its clients and the integrity of the market. Diligence — due skill, care and diligence, advice offered after thorough analysis and taking into account available alternatives. Capabilities — appropriate resources and procedures... needed for the efficient performance of its business activities. Information about clients — seek information on their financial situation, investment experience and investment objectives and maintain the confidentiality of such information. Information to its clients — adequate disclosures of relevant material information. Fair and reasonable charges — fees subject to any ceiling as may be specified by SEBI, and fair and reasonable. Conflicts of interest — avoided as far as possible, and otherwise disclosed with clients fairly treated. Compliance — by the adviser, its partners, principal officer and persons associated with investment advice. Responsibility of senior management — the senior management of a body corporate that is registered as an investment adviser shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.

SEBI's circular of December 27, 2019 added four conduct norms.

Restriction on a free trial. Investment advice can be given after completing risk profiling of the client and ensuring the suitability of the product. To prevent IAs from advising prospective clients on a free and trial basis, SEBI specifically advised IAs against it. Further, IAs shall not accept part payments (where some part of the fee is paid in advance) for any product/service.

The first sentence is the second review question — advice comes after risk profiling and suitability, both.

Proper risk profiling and consent. Advisers shall provide investment advice only after completing the following steps: a. Complete the risk profile of the client based on information provided by the client. b. Obtain the consent of the client on the completed risk profile either through registered email or physical document.

Fees through banking channels only. IAs shall accept fees strictly by account payee crossed cheques / demand draft or by way of direct credit into their bank account through NEFT/ RTGS/IMPS/UPI. It is clarified that IAs shall not accept cash deposits. This is to ensure a proper audit trail of fees received from clients.

No cash at all — the fourth review question.

Display of complaints status. Advisers must display the specified information on the homepage (without scrolling) of their website/mobile app, in a font size of 12 or above, on monthly basis (within 7 days from the end of the previous month).

The guidelines

Agreement: the adviser shall ensure that neither any investment advice is rendered nor any fee is charged until the client has signed the aforesaid agreement and provided a copy of the signed agreement to the client.

Fees — two modes only. Assets under Advice (AUA) mode - The maximum fees that may be charged under this mode shall not exceed 2.5 per cent of AUA per annum per client across all services offered by IA. Fixed fee mode - The maximum fees that may be charged under this mode shall not exceed INR 1,25,000 per annum per client across all services offered by IA.

2.5 per cent of AUA, or Rs 1,25,000 a year.

Growth threshold: an individual IA shall apply for registration as non-individual IA on or before reaching 150 clients. Once the number reaches 150 till the grant of registration as non-individual IA, individual IA shall not be on board with fresh clients.

Records: telephone recording, email from registered email id, physical records, a record of SMS messages, any other legally verifiable record for a period of 5 years.

Audit: completed within 6 months from the end of the financial year.

Non-individual clients: the adviser shall use the investment policy as approved by the board/management team of such non-individual clients for risk profiling and suitability analysis.

Display of details: on website, app, printed or electronic materials, KYC forms, client agreements and correspondence — Complete name of IA as registered with SEBI, Type of Registration -Individual, Non-Individual, Registration number, the validity of the registration, complete address with telephone numbers, Contact details of the Principal Officer... [and] Corresponding SEBI regional/local office address.

19.10 IFSC and qualifications

Eligibility in an IFSC: any entity, being a company or a limited liability partnership (LLP), or any other similar structure recognised under the laws of its parent jurisdiction, desirous of operating in IFSC as an IA, may form a company or LLP to provide investment advisory services, though the formation of a separate company or LLP shall not be applicable in case the applicant is already a company or LLP in IFSC. Advisory services may be given only to persons referred in Clause 9(3) of the IFSC Guidelines, and the adviser must comply with the applicable guidelines issued by the relevant overseas regulator/ authority, while dealing with persons resident outside India and non-resident Indians.

Qualification. This applies to an individual adviser, the principal officer of a non-individual adviser, and persons associated with investment advice. At all times they must have one of two things.

Option 1: a graduate degree or any equivalent educational qualification from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association or CFA Charter from the CFA Institute, and relevant certification from NISM or from any other organization or institution accredited by NISM.
Option 2: a Post Graduate Program in the Securities Market (Investment Advisory) from NISM or a Post Graduate Program in Financial Planning from NISM or any other program of NISM as may be specified by the Board.

Certification must be kept current. They shall obtain a fresh relevant NISM certification... before expiry of the validity of the existing certification or within three years from the date of registration certificate, as the case may be, to ensure continuity in compliance with certification requirements, and shall have at all times relevant NISM certification.

Case 19.1 — Capvision Investment Advisor v SEBI

The facts. The appellant was an investment advisor registered with SEBI. In 2015 SEBI received a SCORES complaint alleging that the appellant misappropriated some money from the complainant paid towards commodity trading.

**An employee/representative of appellant persuaded the complainant to trade in commodities and to transfer money for the said purpose to open a trading account. All these was done through messaging system of the employee/representative of the appellant rather than through the company's own general messaging system.

**And: appellant induced complainant through a fake trading account in the guise of an MCX account and sent false trading messages to complainant.

**The Adjudicating Officer imposed a penalty of Rs 16 lakhs (Rs 8 lakh each for violation of Code of Conduct and non-redressal of client grievance) under section 15HB of the SEBI Act, 1992.

The appeal. The adviser argued that company did commit any violations because it was an action/mistake made by an employee without knowledge of the company, that the employee was dismissed, and that of Rs 3,37,000/- deposited by the complainant to open a trading account, Rs 2,50,000/- has been repaid... deducting the balance amount against the services provided for investment advice.

**SEBI answered that the appellant was carrying commodity broking in the guise of providing investment advice. The account no. 'MCX 4661' were clearly creations of such unauthorised transactions and was not even registered with MCX. And that repayment was neither prompt nor complete — two cheques worth Rs 1 lakh had bounced and only after substantial follow up and long-time the said amount was paid.

The Tribunal's conclusion: an investment adviser who was expected to provide honest and sincere advice to its clients itself was misguiding its client as well as misusing clients' funds, and the records confirmed that the appellant violated provisions of Investment Advisor Regulations and conducted its business without proper care and diligence thereby resulting in losses to its clients. The complaint of January 2015 was even partially settled only by March 2016.

The order. Given the fact that the appellant is small investment adviser and the amount involved in the matter is only Rs 3.37 lakhs penalty of 16 lakhs imposed under Section 15HB of the SEBI Act where the maximum penalty is Rs 1 crore appears disproportionate. The penalty need not be reduced substantially because this is not the first time the appellant has committed the offence.

Consolidated penalty of 16 lakhs is reduced to Rs 8 lakhs.

Note the reasoning on both sides — proportionality reduced the penalty, but a repeat offence stopped it being reduced further.

The chapter's review questions confirm four things:

An adviser may not transact on its own account contrary to its advice for fifteen days.
Investment advice may be given only after risk profiling of the client and ensuring suitability of the product.
Risk profiling rests on income, age, liability/borrowing details and the rest — all of the above.
Investment advisers may accept fees by banking channel only.

Think of it like this

Advice, trading calls and mass media — where the line falls

Two regimes sit side by side, and the definitions divide the ground carefully.

Then two carve-outs.

Investment advice is given through newspapers, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

Because mass-media commentary is not advice to a client — there is no client, no risk profile and no suitability assessment to make.

Further trading calls shall not be considered as investment advice for purpose of Investment Adviser Regulations.

Because trading calls belong to the other regime. Under the Research Analyst Regulations, providing trading calls is expressly a research service, along with making 'buy/sell/hold' recommendation and giving price target or stop loss target.

So the two frameworks split the work. An analyst publishes views on securities to whoever will read them; an adviser advises a particular client, having first established age, investment objectives, income details, existing investments/ assets, risk appetite/ tolerance and liability/borrowing details.

Which is why only the adviser's regime has a suitability chapter — the requirement that all investments on which investment advice is provided is appropriate to the risk profile of the client.

And why the records differ. An adviser must keep Risk profiling and risk assessment of the client and Suitability assessment of the advice being provided; an analyst need not.

Both are caught however they describe themselves. The adviser definition covers any person who holds out himself as an investment adviser, by whatever name called.

Paid only by the client — the structural rule

One sentence in Regulation 15 shapes everything else in these Regulations.

Not from the product manufacturer, not from a distributor, not in any form.

Everything else follows.

Distribution is separated. An individual investment adviser shall not provide distribution services, and the family of the individual investment adviser shall not provide distribution services to the client advised by the individual investment adviser. For non-individuals, same client cannot be offered both advisory or distribution services within the group, and a client can either be an advisory client where no distribution consideration is received at the group level or distribution services client where no advisory fee is collected from the client at the group level.

Implementation is unpaid and optional. An adviser may implement, provided no consideration including 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, provided it is only through direct schemes/products, provided it shall not charge any implementation fees, and provided the client shall not be under any obligation to avail implementation services.

Fees are capped and channelled. 2.5 per cent of AUA per annum per client or INR 1,25,000 per annum per client, accepted strictly by account payee crossed cheques / demand draft or by way of direct credit into their bank account through NEFT/ RTGS/IMPS/UPI, with no cash deposits.

And trading against the client is barred. No transaction contrary to its advice given to clients for a period of fifteen days, and no acting on its own account, knowingly to sell securities or investment products to or purchase securities or an investment product from a client.

The adviser sits on one side of the table only — which is what act in a fiduciary capacity towards its clients means in practice.

Fifteen days, and the twenty-four hour escape

The rule against trading contrary to advice is precise, and so is its exception.

An investment advisor shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice.

Fifteen days from the day of the advice, and only transactions contrary to it — the adviser is not barred from following its own advice.

Then the exception: during the period of such fifteen days, if the investment adviser is of the opinion that the situation has changed, then it may enter into such a transaction on its own account after giving such revised assessment to the client at least 24 hours in advance of entering into such transaction.

Three conditions in that sentence. The adviser must genuinely form the view that the situation has changed; it must give the client the revised assessment; and it must wait at least 24 hours before trading.

The client gets the new view first, and a day to act on it.

A companion rule has no time limit at all: an adviser shall not act on its own account, knowingly to sell securities or investment products to or purchase securities or an investment product from a client.

Never on the other side of your own client's trade.

Compare the research analyst's window — no dealing within 30 days before and 5 days after publication of a research report, and never in a manner contrary to his given recommendation.

Different periods, same idea. The analyst publishes, so the danger is front-running the publication; the adviser advises a client, so the danger is taking the opposite side of that client's position.

And in both regimes, disclosure runs alongside. An adviser must disclose its holding or position, if any, in the financial products or securities which are the subject matter of advice and any actual or potential conflicts of interest arising from any connection to or association with any issuer.

Risk profiling done properly — and the questionnaire rules

The Regulations do not merely require a risk profile; they say how to build one.

Six items of information: age · investment objectives including time for which they wish to stay invested, the purposes of the investment · income details · existing investments/ assets · risk appetite/ tolerance · liability/borrowing details.

Note that liabilities are on the list. A client with high borrowings has less capacity to bear loss whatever his stated appetite.

Then a process, not just data: assessing a client's capacity for absorbing loss · identifying whether the client is unwilling or unable to accept the risk of loss of capital · appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers.

"Unwilling or unable" distinguishes preference from capacity, and the two need different responses.

On tools: where tools are used for risk profiling, it should be ensured that the tools are fit for the purpose and any limitations are identified and mitigated.

On the questionnaire itself, questions must be fair, clear and not misleading, and the adviser must ensure the questionnaire is not vague or use double negatives or in a complex language that the client may not understand and is not structured in a way that it contains leading questions.

No double negatives, no leading questions — unusually practical drafting, aimed at questionnaires designed to produce the answer the adviser wants.

And two closing duties: the risk profile of the client is communicated to the client after a risk assessment is done, and information provided by clients and their risk assessment is updated periodically.

The 2019 circular adds consent. The adviser must complete the risk profile of the client based on information provided by the client and obtain the consent of the client on the completed risk profile either through registered email or physical document.

For non-individual clients, the adviser shall use the investment policy as approved by the board/management team of such non-individual clients for risk profiling and suitability analysis.

What Capvision decided about employees, and about penalties

Two arguments were run, and the Tribunal's treatment of each is worth knowing.

The defence: the company did commit any violations because it was an action/mistake made by an employee without knowledge of the company, and when it found out the action was taken against the employee dismissing him, with Rs 2,50,000/- of the Rs 3,37,000/- repaid, deducting the balance amount against the services provided for investment advice.

It did not succeed. The Tribunal accepted SEBI's case that the appellant was carrying commodity broking in the guise of providing investment advice, that the account 'MCX 4661' were clearly creations of such unauthorised transactions and was not even registered with MCX, and that repayment was neither prompt nor complete — two cheques worth Rs 1 lakh had bounced and only after substantial follow up and long-time the said amount was paid.

The conclusion: an investment adviser who was expected to provide honest and sincere advice to its clients itself was misguiding its client as well as misusing clients' funds, and the appellant violated provisions of Investment Advisor Regulations and conducted its business without proper care and diligence thereby resulting in losses to its clients.

Grievance handling was itself a charge — the original penalty was Rs 8 lakh each for violation of Code of Conduct and non-redressal of client grievance, and a complaint lodged in January 2015 was even partially settled only by March 2016.

Then proportionality. Given the fact that the appellant is small investment adviser and the amount involved in the matter is only Rs 3.37 lakhs penalty of 16 lakhs imposed under Section 15HB of the SEBI Act where the maximum penalty is Rs 1 crore appears disproportionate.

But only so far: the penalty need not be reduced substantially because this is not the first time the appellant has committed the offence.

Consolidated penalty of 16 lakhs is reduced to Rs 8 lakhs — halved, not set aside.

And the code of conduct explains why the employee argument failed: the senior management of a body corporate that is registered as an investment adviser shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.

Key terms in this chapter

Asset under advice: The aggregate net value of securities for which the investment adviser has rendered investment advice, irrespective of whether implementation services are provided by the adviser or concluded by the client directly or through other service providers.
Audit, website and compliance officer: An investment adviser must conduct a yearly audit of compliance with the Regulations by a member of the ICAI, ICSI or ICMAI and submit the report as SEBI specifies, the annual audit being completed within six months from the end of the financial year. Regulation 19A requires a functional website containing the details SEBI specifies. Under regulation 20 a non-individual adviser must appoint either a compliance officer or an independent professional who is a member of the ICAI, ICSI or ICMAI or another specified professional body holding a relevant NISM certification, to monitor compliance; where the independent professional is appointed, the principal officer must give an undertaking to SEBI or the body recognised under regulation 14 that he will be responsible for monitoring compliance.
Capvision Investment Advisor case: A SEBI-registered investment adviser faced a SCORES complaint in 2015 alleging misappropriation of money paid for commodity trading. An employee had persuaded the complainant to trade in commodities and transfer money to open a trading account, using his own messaging system rather than the company's, and the complainant was induced through a fake trading account presented as an MCX account, with false trading messages sent to him. The adjudicating officer imposed Rs. 16 lakh under section 15HB of the SEBI Act, being Rs. 8 lakh each for violation of the code of conduct and for non-redressal of the client's grievance. On appeal the adviser argued the acts were an employee's mistake without the company's knowledge, that the employee had been dismissed and that Rs. 2,50,000 of the Rs. 3,37,000 deposited had been repaid after deducting for advisory services. SEBI showed that the adviser was carrying on commodity broking in the guise of investment advice, that the account was not even registered with MCX, and that repayment came only after two cheques bounced and substantial follow-up. The Tribunal held that an adviser expected to give honest and sincere advice was misguiding its client and misusing client funds and had conducted its business without proper care and diligence, causing losses; the complaint of January 2015 had been only partially settled by March 2016. Considering the adviser's small size and the Rs. 3.37 lakh involved against a statutory maximum of Rs. 1 crore, the penalty was found disproportionate but was not reduced substantially because this was not the first offence, and was reduced from Rs. 16 lakh to Rs. 8 lakh.
Client level segregation of advisory and distribution: An individual investment adviser may not provide distribution services; the family of an individual adviser may not provide distribution services to a client he advises, and he may not advise a client receiving distribution services from other family members. A non-individual adviser must have client level segregation at group level, so that the same client cannot be offered both advisory and distribution services within the group and must be either an advisory client from whom no distribution consideration is received at group level or a distribution client from whom no advisory fee is collected at group level. Group means a holding, subsidiary, associate, fellow subsidiary, investment company or venturer under the Companies Act, 2013 for a corporate adviser, and otherwise an entity having or subject to a controlling interest of the non-individual adviser. The non-individual adviser must maintain an arm's length relationship between advisory and distribution activities by providing advisory services through a separate identifiable department or division.
Code of conduct for investment advisers: Honesty and fairness — acting honestly, fairly and in the best interests of clients and the integrity of the market; diligence — acting with due skill, care and diligence, offering advice after thorough analysis and taking account of available alternatives; capabilities — having and effectively employing appropriate resources and procedures; information about clients — seeking information about their financial situation, investment experience and investment objectives and keeping it confidential; information to clients — making adequate disclosures of relevant material information; fair and reasonable charges — fees subject to any SEBI ceiling and fair and reasonable; conflicts of interest — avoiding them as far as possible and otherwise disclosing them and treating clients fairly; compliance — by the adviser, its partners, principal officer and persons associated with investment advice, so as to promote clients' best interests and market integrity; and responsibility of senior management — the senior management of a body corporate registered as an investment adviser bearing primary responsibility for maintaining appropriate standards of conduct and adherence to proper procedures.
Conduct norms of December 2019: Investment advice may be given only after completing risk profiling of the client and ensuring the suitability of the product, so advisers must not advise prospective clients on a free or trial basis and must not accept part payments where some part of the fee is paid in advance. Advisers must complete the client's risk profile based on the information provided and obtain the client's consent to the completed profile by registered email or physical document. Fees must be accepted strictly by account payee crossed cheque or demand draft or by direct credit to the adviser's bank account through NEFT, RTGS, IMPS or UPI, cash deposits being prohibited so as to ensure a proper audit trail. Advisers must display specified complaints information on the homepage of their website or mobile app without scrolling, in font size 12 or above, updated monthly within seven days from the end of the previous month.
Disclosures by investment advisers: To a prospective client, all material information about the adviser including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and other information necessary for an informed decision; its holding or position in the financial products or securities that are the subject of advice; any actual or potential conflict of interest from any connection with an issuer, including material information or facts that might compromise its objectivity or independence; all material facts about the key features of the products or securities, particularly the performance track record; the client's attention drawn to warnings and disclaimers in documents and advertising material; where products or services are outside SEBI's purview, that they and the advisory services on them are outside that purview and no recourse from SEBI is available for grievances; and the extent of use of artificial intelligence tools in providing investment advice.
Exemptions from registration: Registration is not required by a person giving general comments in good faith on trends in the financial or securities market or the economic situation which do not specify any particular security or investment product; an IRDA-registered insurance agent or broker advising solely on insurance products; a PFRDA-registered pension advisor advising solely on pension products; a mutual fund distributor who is a member of a recognised SRO or registered with an association of asset management companies, advising incidentally to its primary activity; an advocate, solicitor or law firm advising incidentally to legal practice; a member of the ICAI, ICSI, ICWAI, Actuarial Society of India or another specified professional body advising incidentally to professional service; a SEBI-registered stockbroker, portfolio manager or merchant banker advising incidentally to its primary activity, who must nonetheless comply with the general obligations and responsibilities in Chapter III; a fund manager of a mutual fund, alternative investment fund or other SEBI-registered entity; a person advising exclusively clients based outside India, though advice to a non-resident Indian or person of Indian origin falls within the Regulations; a principal officer, person associated with advice or partner of a registered adviser, who must comply with regulation 7; and any other person SEBI specifies.
General responsibilities of an investment adviser: To act in a fiduciary capacity and disclose all conflicts of interest as they arise; not to receive any consideration in any form from anyone other than the client being advised in respect of the underlying products or securities advised on; to maintain an arms-length relationship between advisory and other activities and to segregate advisory services clearly; to disclose conflicts between advisory and other activities; to keep client information confidential save with permission or as required by law; not to transact on its own account contrary to its advice for fifteen days, unless it gives the client a revised assessment at least twenty-four hours in advance; to follow KYC procedures; to abide by the code of conduct; not to act on its own account knowingly to sell securities or investment products to, or buy them from, a client; to obtain SEBI's prior approval for a change in control; to furnish SEBI with information and reports; to ensure representatives and partners meet certification and qualification requirements at all times; to be solely responsible for matters connected with artificial intelligence tools irrespective of the scale and scenario of adoption; to comply with the Investor Charter; and to charge fees, including from accredited investors, in the manner SEBI specifies.
Guidelines for investment advisers: No investment advice may be rendered and no fee charged until the client has signed the prescribed agreement and been given a copy. Fees may be charged in two modes only: assets under advice mode, capped at 2.5 per cent of assets under advice per annum per client across all services, and fixed fee mode, capped at Rs. 1,25,000 per annum per client across all services. An individual adviser must apply for registration as a non-individual adviser on or before reaching 150 clients and may not onboard fresh clients between reaching that number and the grant of the non-individual registration. Records including telephone recordings, emails from registered email ids, physical records, SMS records and any other legally verifiable record must be kept for five years, and the annual audit completed within six months of the financial year end. For non-individual clients the adviser must use the investment policy approved by the client's board or management team for risk profiling and suitability analysis. Advisers must display prominently on their website, app, printed and electronic materials, KYC forms, client agreements and correspondence their complete name as registered with SEBI, type of registration, registration number, validity, complete address with telephone numbers, the principal officer's contact details and the corresponding SEBI regional or local office address.
Implementation of advice: Under regulation 22A an investment adviser may provide implementation services to its advisory clients in the securities market provided no consideration, including commission or referral fees, whether embedded, indirect or otherwise by whatever name called, is received directly or indirectly at the adviser's group or family level for that service; implementation is provided only through direct schemes or products; no implementation fee is charged to the client; and the client is under no obligation to avail the adviser's implementation services.
Investment advice: Advice relating to investing in, purchasing, selling or otherwise dealing in securities, and advice on an investment portfolio containing securities, whether written, oral or through any other means of communication, for the benefit of the client, and including financial planning. Advice given through newspapers, magazines or any electronic, broadcasting or telecommunications medium widely available to the public is not investment advice for these Regulations, and trading calls are also excluded.
Investment adviser: Any person who, for consideration, is engaged in the business of providing investment advice to clients or other persons or groups of persons, including a part-time investment adviser and any person who holds himself out as an investment adviser, by whatever name called. Investment advisers must be registered with SEBI, subject to the exemptions in section 4.
Investment Adviser Administration and Supervisory Body: Under regulation 14 SEBI may recognise a body or body corporate for administration and supervision of investment advisers, and no person may act as an investment adviser unless enlisted with it, whereupon the Regulations and the specified provisions of that body's bye-laws or articles apply. Such an entity is designated the Investment Adviser Administration and Supervisory Body, the first being BSE Administration & Supervision Ltd, a wholly owned subsidiary of BSE Limited, with which all existing registered advisers and new applicants must register as members, subject to conditions such as minimum net worth, deposit, renewal of certification, annual and other fees, and periodic reporting, failing which membership may be terminated.
Investment advisers in an IFSC: Any entity, being a company, limited liability partnership or similar structure recognised under the laws of its parent jurisdiction, wishing to operate in an IFSC as an investment adviser may form a company or LLP to provide advisory services, though a separate entity is unnecessary if the applicant is already a company or LLP in the IFSC. Such advisers may provide advisory services only to persons referred to in clause 9(3) of the IFSC Guidelines, and must comply with the applicable guidelines of the relevant overseas regulator or authority when dealing with persons resident outside India and non-resident Indians.
Persons associated with investment advice: Any member, partner, officer, director, employee or sales staff of an investment adviser, including any person of similar status or performing a similar function, whatever the nature of association, who is engaged in providing investment advisory services to clients. All client-facing roles such as sales staff and service or client relationship managers are deemed to be such persons, but persons discharging clerical or office administrative functions with no client interface are not.
Qualification and certification requirements: An individual investment adviser, the principal officer of a non-individual adviser and persons associated with investment advice must at all times have either a graduate degree or equivalent educational qualification from a university or institution recognised by the Central or a State Government or a recognised foreign university, institution or association, or a CFA charter from the CFA Institute, together with the relevant NISM certification or one from another organisation accredited by NISM; or a Post Graduate Program in the Securities Market (Investment Advisory) or in Financial Planning from NISM or another NISM programme SEBI specifies. They, and in a partnership firm the partners engaged in providing advice, must hold the relevant NISM certification at all times and obtain a fresh certification before expiry of the existing one, or within three years from the date of the registration certificate as the case may be, to ensure continuity of compliance.
Records of an investment adviser: Know your client records; risk profiling and risk assessment of the client; suitability assessment of the advice provided; copies of agreements with clients incorporating the terms and conditions SEBI specifies; investment advice provided, whether written or oral; the rationale for arriving at the advice, duly signed and dated; a register or record listing clients with PAN, the date and nature of the advice, details of the products or securities advised on and any fee or consideration charged or received; and records of communication including emails and call recordings with all clients including prospective clients. All are maintained in physical or electronic form and preserved for a minimum of five years, records required to be signed and kept electronically being digitally signed.
Risk profiling: The adviser must obtain the client's age, investment objectives including the intended holding period and the purpose of the investment, income details, existing investments and assets, risk appetite or tolerance, and liability or borrowing details. It must have a process for assessing the risk the client is willing and able to take, including capacity for absorbing loss, whether the client is unwilling or unable to accept the risk of loss of capital, and appropriate interpretation of responses without attributing inappropriate weight to particular answers. Any tools used must be fit for purpose with limitations identified and mitigated; questionnaires must be fair, clear and not misleading, not vague, not using double negatives or complex language, and not containing leading questions. The risk profile must be communicated to the client after assessment, and the information and assessment updated periodically.
Suitability: Under regulation 17 the adviser must ensure that all investments advised on are appropriate to the client's risk profile; that it has a documented process for selecting investments based on the client's investment objectives and financial situation; that it understands the nature and risks of the products or assets selected; and that it has a reasonable basis for believing a recommendation or transaction meets the client's investment objectives, is one whose related investment risks the client can bear consistently with those objectives and risk tolerance, and is one the client has the necessary experience and knowledge to understand. A recommendation to purchase a complex financial product must rest on a reasonable assessment that the product's structure and risk-reward profile are consistent with the client's experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss.

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Original explanatory writing based on the official NISM workbook for Series III-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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