SEBI’s latest framework to administer investment advisers, research analysts | Explained

The story so far: Capital markets regulatorSecurities and Exchange Board of India (SEBI) on May 2 introduced a framework for better administration and supervision of Research Analysts (RAs) and Investment Advisers (IAs). The framework envisages that stock exchanges will form dedicated bodies to administer these two essential functions. This is to help SEBI have a thorough vision about the functioning of both RAs and IAs. The framework introduces criteria and rules about the eligibility and functions, among other things, of the two supervisory bodies, and will come into force on July 25. 

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What is the purpose of placing two oversight bodies?  

SEBI observed that, given the potential for growth in the number of investors in the country, we would see the emergence of a large number of RAs and/or IAs. Regulations for the former were first notified in December 2014. Since then, the regulator observed, the ecosystem has undergone “significant changes,” prompting a review of the regulations.  

The markets regulator took note of the growth in size of the ecosystem. On March 31, 2015, 27 RAs were registered with them. As of February 20 this year, this numberhad gone up to 1,176, that is, over 40 times in under a decade.  

Its counterparts in Canada and the United States have delegated the responsibility for regulating RAs to self-regulatory organisations, whilst IAs in the two countries are regulated by securities market regulators (alongside the relevant State security regulator in the U.S.). In countries like the U.K., France, Germany, Hong Kong, Singapore, Japan and Australia, the securities market regulator directly oversees the functioning of the two entities.

SEBI felt that the paradigm followed in the U.S. and Canada suffered from certain shortcomings. It observed a possible conflict of interest since the self-regulatory body is directly funded by the industry that it needs to regulate. This also prompted concerns about regulatory interests being potentially intertwined with that of the industry. The other concern relates to inadequate oversight because the self-regulator may not have the essential independence or resources to monitor and enforce necessary actions. 

Thus, SEBI observed that since market institutions already possess experience and have mechanisms in place to manage disputes between investors and intermediaries (including RAs), they could provide “the highest degree of accountability,” as is expected from the body.  

So, what is happening now?  

The framework delegates the responsibility for last mile enforcement to a recognised stock exchange. This is to be executed by two bodies to be appointed by the exchanges themselves, that is, the Research Analyst Administration and Supervisory Body (RAASB) and the Investment Adviser Administration and Supervisory Body (IAASB). SEBI has clarified that both supervisory bodies would come under the purview of a single stock exchange.  

This is to ensure “efficiency in the system and economies of scale.” However, as was agreed in its March board meeting, SEBI would explore enabling more than one stock exchange. This is to account for the progress in the industry and a rise in the number of entities in the future, and to promote competition in the ecosystem. It is pertinent to note that the BSE Administration and Supervision Ltd. (BASL), a wholly owned subsidiary of BSE Ltd., was granted recognition as an IAASB for a period of three years, starting June 2021.  

As for segregating responsibility, the framework makes the stock exchange responsible for undertaking the initial scrutiny and managing everyday compliance. Thus, the exchange shall monitor compliance with regulations and circulars for RAs and IAs by SEBI; the executive controls, however, would stay with SEBI. While the exchange can take administrative action, such as imposing penalties or issuing warning letters, SEBI would be empowered to enforce these actions. It is important to note that SEBI can also take suo motu cognisance of any compliance-related issue, and retains the authority to levy penalties or initiate disciplinary action.

What are the eligibility criteria for stock exchanges to oversee RAASBs/IAASBs? 

The stock exchange where these supervisory bodies would be based must have existed for at least 15 years. It must also have nation-wide terminals, an investor grievance redressal mechanism, including an online dispute resolution mechanism, and must have a net worth of at least ₹200 crores. The stock exchange must also have the capacity for investor service management. This would be assessed through their reach of Investor Service Centers (ISCs)— which must exist in at least 20 cities.  

But how does one monitor the efficacy of RAASBs and IAASBs?  

SEBI will monitor the performance of the said bodies through periodical reports and inspections.  

The framework mandates that the two entities constitute an internal committee to oversee the activities of administration and supervision. This committee must periodically review the performance of the stock exchange as RAASB/IAASB and make recommendations to SEBI. The panel should constitute public interest directors – who shall function as the majority members of the committee, a maximum of two key management personnel of the exchange and independent external representation from RAs, IAs and proxy advisers (with a minimum of one representative for each segment).  

How would the transition be facilitated?  

Existing RAs and IAs registered with the markets’ regulator would be grandfathered into the RAASB and IAASB respectively. Pending applications for RAs will continue to be processed by SEBI as per the existing mandate. Once the registration is granted, the entity shall be enlisted with RAASB.  

The same goes for IA applications pending with SEBI or with BASL. Successful applicants would be enlisted within the IAASB framework.  

Fresh applications from July 25 must be routed through the RAASB or IAASB. Thereafter, enlistment of the entity with the concerned supervisory body shall form a pre-requisite for consideration by SEBI.