Third Schedule Code of Conduct

Most of the Investment Advisers Regulations tell an adviser what to do in a particular situation. The Third Schedule is different. It sets the standard that applies all the time.

The workbook is explicit about that. The code is to be followed by all Investment Advisers at all times.

There are 9 headings. They start with honesty and fairness and end with the responsibility of senior management.

In between they cover being diligent, having the resources to do the job, finding out about the client, telling the client things, charging fairly, handling conflicts, and complying with everything else.

None of them is a number. There is no threshold to clear and no form to file. They are standards, which means a regulator reads them against what the adviser actually did.

Two of the heads are easy to miss and both get examined. Capabilities is a duty to have the resources and procedures the business needs. And the senior management of a body corporate bears primary responsibility for standards of conduct across the firm.

The source. The SEBI (Investment Advisers) Regulations, 2013 set out in the Third Schedule a code of conduct to be followed by all Investment Advisers at all times (section 18.6.17).

The 9 heads, in the workbook's own order.

The four reinforcements added on top. To strengthen the conduct of Investment Advisers and protect investors, the workbook records that advisers must comply with: a restriction on free trials; proper risk profiling and the consent of the client on risk profiling; receiving fees through banking channels only; and display of complaint status on the adviser's website.

How the code differs from the rest of the chapter. Section 18.6.10 tells an adviser what suitability requires; section 18.6.15 tells it how to segregate advisory from distribution. The Third Schedule imposes no procedure. It is the standard against which any procedure is judged, which is why the workbook says at all times rather than naming an occasion.

The code attaches no figure of its own. Fees are subject to any ceiling as may be specified by SEBI, which the Schedule does not state. The only count is the 9 heads.

Deccan Advisory Services is a non-individual SEBI-registered Investment Adviser with 340 clients and 3 advisory staff. Test one year of its conduct against the Schedule.

Fair and reasonable charges. It charges Mr Bhide an asset-based fee of 2.5% on Rs 60,00,000 of assets under advice, or Rs 1,50,000 a year. Fees may be charged subject to any ceiling specified by SEBI, and must in addition be fair and reasonable. Two separate tests, and clearing the first does not answer the second.

Diligence. For Mr Bhide's Rs 60,00,000 the firm recommends 3 equity funds. Its file holds a single fact sheet. The Schedule requires advice offered after thorough analysis and taking into account available alternatives — so the absence of a comparison is itself the breach, whatever the funds go on to return.

Capabilities. 340 clients across 3 advisers is 113 clients each. If the firm cannot review each portfolio and cannot answer queries, it has failed the duty to have and employ effectively appropriate resources and procedures. Notice that no rule caps clients per adviser; the head is a standard, and this is how a standard bites.

Information about clients. A prospective client refuses to disclose income. The firm must seek the financial situation, investment experience and investment objectives relevant to the service. It cannot proceed on a blank profile and call the omission the client's choice.

Conflicts of interest. The firm's managing partner owns 8% of an AMC whose funds it recommends. Avoidance comes first; where the conflict cannot be avoided, there must be appropriate disclosure and fair treatment. Recommending the funds and saying nothing fails both limbs.

Compliance. A junior employee, a person associated with investment advice, sends WhatsApp tips to 40 clients without risk profiling. The Compliance head binds the adviser including its partners, principal officer and persons associated with investment advice. The firm cannot disown the employee.

Responsibility of senior management. And this is where the breaches land. Deccan is a body corporate, so its senior management bears primary responsibility for maintaining standards of conduct and adherence to proper procedures. Not the junior employee who sent the messages.

On the four reinforcements the firm also fails two: it ran a 7-day free trial, and it accepted Rs 40,000 of one client's fee in cash rather than through banking channels.

Chapter 18 (Key Regulations), section 18.6.17 (Code of Conduct for Investment Adviser), which reproduces the Third Schedule, with the four strengthening measures at the end of the same section and the Investor Charter at 18.6.18. Expect a question asking which of four described obligations is not in the code, one asking who bears primary responsibility for standards of conduct in a body corporate — the senior management — and one on the diligence head, where thorough analysis and consideration of available alternatives are the examinable words.

• It is the Third Schedule to the Investment Advisers Regulations, 2013. Not the First, and not a SEBI circular.
• At all times. The code is not triggered by a transaction or a complaint; it applies continuously.
• Senior management of a body corporate bears primary responsibility. Not the compliance officer, not the employee who acted. This is the most-tested line in the Schedule.
• Do not confuse it with the broker's code of conduct, which sits under the Stock Brokers Regulations and has its own clauses on best price execution and dealings with other brokers.
• Diligence requires thorough analysis and consideration of available alternatives. A recommendation with no comparison fails this head even if the product was fine.
• Capabilities is a real obligation, not a preamble — resources and procedures must be appropriate and effectively employed.
• Conflicts must be avoided first, disclosed second. Disclosure is the fallback where avoidance is not possible, not an alternative to it.
• Fees are subject to any ceiling specified by SEBI and must also be fair and reasonable. Two tests; the Schedule itself states no figure.
• Compliance binds partners, the principal officer and persons associated with investment advice, not only the registered entity.