The wait is finally over!! We have SEBI’s amended regulations with us.
The latest amendment to the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”), brings about important changes and increases the scope of services for research analysts.
Let’s take a download of the amendment in the regulations.
Definition of Research Analyst and its Scope of Services:
The definition is already provided in the existing regulation, but the word ‘for consideration’ is inserted into the definition, making it more specific as to who can be termed as a research analyst.
#consideration shall mean any form of economic benefit, including non-cash benefit, received or receivable, directly or indirectly, in any form, whether from the client or otherwise, for providing research services.
The revised definition reads like this:
“Research analyst” means a person who, for consideration, is engaged in the business of providing research services and includes a part-time research analyst.
Scope of Research Services:
Along with the existing scope of services, there have been three new additions to the scope of research services:
Recommending model portfolio;
Providing trading calls.
Any other service of similar nature or character.
Hence, anyone who wants to recommend on model portfolio or provide intraday calls are required to obtain an RA license.
#trading calls shall mean intraday, ultra-short duration, non-delivery-based (other than hedging) recommendations or any recommendation related to securities that are not personalized or investor-specific.
Qualification and certification requirements:
SEBI has amended the eligibility criteria for the research analysts.
Now even a graduate having a degree in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science, or other financial services is eligible for the RA license.
In addition to the above, SEBI has specified that if there is any person associated with research services, he/she shall at least have a graduate degree, which can be in any discipline.
The requirement of experience is completely done away with. However, the applicant must clear the NISM Series XV for research analysis.
#person association with research services shall mean any member, partner, officer, director, or employee, or any other staff of such research analyst or research entity, including any person occupying a similar status or performing a similar function, irrespective of the nature of association with the research analyst or research entity who is engaged in providing research services to the clients or other persons or group of persons or the general public.
Net Worth Requirements
The research analyst is now required to maintain the deposit instead of net worth. This deposit shall be maintained with the scheduled bank marked as a lien in favor of RAASB.
Further instructions on the deposit requirements are yet to be issued by SEBI.
Part-time Research Analyst:
SEBI has introduced the concept of “part-time research analysts,” who are individuals or partnership firms and offer research services for payment but are also involved in other businesses or employment.
#other business or employment means such business activity or employment that is not related to securities and:
a. It does not involve handling or managing of money or funds of the client or person;
or
b. It is not related to providing advice or recommendations to any client or person in respect of any products or assets for investment purposes;
Note:
Part-time RAs shall ensure to use of the term “part-time research analyst” in all their correspondences.
Part-time RAs shall not have more than 75 clients in total at any point in time.
All the requirements of the regulations shall be complied with by the part-time RAs.
Records to be maintained by RAs
In addition to the existing requirements, the RAs will now have to also maintain the following:
KYC records of the paid clients.
Register to contain the list of the clients along with the client’s PAN, the date and nature of the research service, details of the products/securities for which the research service was provided, and fee/consideration, if any charged/received for such research service.
All communication, including emails, call recordings, etc., with all clients, including prospective clients, shall be recorded.
Records of the terms and conditions of research services and the consent on the same from the clients.
The mode of recording the communication and terms & conditions of research services is yet to be specified by SEBI.
Appointment of Compliance Officer
SEBI, with this amendment, has elaborated on who can be the compliance officer. Now all the body corporations, including LLPs and partnership firms, are required to appoint a compliance officer.
It is not mandatory to have an in-house compliance officer; instead, the RA may appoint an independent professional who is CS/CA/CMA to act as a compliance officer. These independent professionals shall be responsible for monitoring the compliance as per the regulations, provided these independent professionals have cleared NISM certification.
However, in such cases, the principal officer is required to submit an undertaking with RAASB stating that he/she is responsible for monitoring compliance with the regulations.
#Principal officer in case of a non-individual RA entity shall mean a person who is responsible for the overall function of the business and operations.
In case the non-individual entity is solely into research services, then a director or a managing partner should be the principal officer.
If the non-individual entity is involved in other services, then the business head or the unit head should be designated as the principal officer.
Introduction of client-level segregation of research services and distribution services
With this insertion, SEBI has specified that individual RAs cannot provide distribution services.
In the case where a family of individual RAs (i.e., spouses, parents, and children) are providing distribution services to a client, individual RAs cannot provide research services to that client and vice versa.
Non-individual RAs are required to maintain the same at a group level for research and distribution services.
#group shall mean holding, a subsidiary, associate, subsidiary of a holding company to which it is also a subsidiary, an investing company, or the venturer of the company as per the provisions of the Companies Act, 2013.
Other important insertions:
1. Investment advisers who are registered with SEBI as individuals or partnership firms may also apply for an RA license. Till now, it was only permitted for companies and LLPs.
2. RA shall disclose to the client the extent of the use of artificial intelligence tools in providing research services.
3. RA shall now maintain a functional website for providing its services.
4. RA will not have to submit the audit reports with RAASB.
Though the notification is published, a lot of questions are yet to be answered by SEBI. With these amendments, there shall be new challenges and opportunities for the RAs. Challenges in terms of more compliance, reporting, etc., and opportunities in terms of additions to the scope of services like model portfolios, intraday calls, etc.
However, we need to wait for SEBI’s further clarification and guidance on the amendments made so far.
For further queries, please contact us at anjalibansalcs@gmail.com.
Disclaimer: While every effort has been made to ensure the accuracy of this article, Anjali Bansal and Associates assumes no responsibility for any errors or omissions. This document does not substitute professional advice, and readers should seek guidance before acting on any information contained herein.
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