[Awaneesh and Tanya are students at Gujarat National Law University.]
Recently, the Securities and Exchange Board of India (SEBI) introduced amendments to its Securities and Exchange Board of India (Investment Advisers) (Second Amendment) Regulations 2024 and Securities and Exchange Board of India (Research Analysts) (Third Amendment) Regulations 2024. These amendments aim to create a supportive framework for Research Analysts (RAs) and Investment Advisors (IAs) through regulatory tweaks and adjustments. The author of this analysis examines these amendments, evaluating their possible advantages, disadvantages, and alignment with global regulatory standards.
Post-Amendment: What All has Changed Now?
Broadening definition of research services
The range of research services available to RAs has expanded considerably. The new definition includes responsibilities such as the preparation and publication of research reports, formulation of buy/sell or hold recommendations, provision of research analysis, giving price target or stop loss target, issuance of trading calls, evaluation of IPOs, and the recommendation of model portfolios.
Allowing part-time professionals
In an innovative move, the SEBI has allowed part-time professionals to become RAs and IAs. Such professionals can now provide their services to the sector while maintaining their other professional engagements. But they are required to keep their advisory services separate from their other regular business activities. Additionally, such part-time professionals shall be required to explicitly identify themselves as “part-time RA/IA” in all their client-interactions so as to manage client expectations and to ensure accountability and transparency. This would highly help professionals such as lawyers, chartered accountants, architects, and insurance agents to become part-time professionals.
Relaxation in eligibility criteria
The SEBI has made a notable adjustment to its eligibility criteria for individuals aspiring to become Investment Advisers. The revised regulations stipulate that an individual with a graduate degree in any field, along with a valid certification from the National Institute of Securities Markets, meets the qualifications to serve as an Investment Adviser.
Prior to this amendment, the SEBI had a rigorous criterion for evaluating an individual to become an Investment Adviser. Previously, it was necessary for an individual to hold a postgraduate degree in finance or an MBA. A relevant experience of 5 years in the sector was also required. This provision appears to focus on expanding the talent pool, lowering entry barriers, and motivating a greater number of individuals to pursue this profession.
Flexibility in fee structure
SEBI has implemented enhanced flexibility in the fee structures applicable to both RAs and IAs. Their ability to transition between various fee charging modes has been streamlined. This will offer professionals an essential environment to address client requirements and enhance their business management capabilities more effectively. The previous mandate to observe a specific waiting period has been eliminated.
This modification also enables IAs to transition between a percentage-based model and a fixed-fee structure. The prior limitation of a 12-month duration has now been eliminated. This would grant investment advisors enhanced flexibility in designing their fee structures.
Introduction of deposit system and service segregation
The amendment has done away with stringent net worth requirements. A deposit system has now been introduced. RAs and IAs are now required to deposit amount as per their client base.
The amendments include rigorous regulations concerning the distribution of services. It is essential for research analysts and financial counsellors to define clear boundaries between their distribution, advising, and research services. The regulations explicitly limit advisory services to securities and financial products overseen by financial sector authorities, effectively reducing the likelihood of conflicts of interest.
A previous regulation imposed considerable limitations on advisory services pertaining to securities and financial products overseen by financial sector authorities. The availability of guidance on subjects including wills, estate planning, gold, and real estate was either insufficient or provided by separate legal entities. The recent amendments require investment advisers to notify their clients that the related goods or services do not align with the regulatory framework, and that clients will not have the option to seek recourse from SEBI for any complaints related to these offerings.
Compulsory disclosure of artificial intelligence tool usage
The compulsory reporting of applications utilizing artificial intelligence (AI) tools is a critical stipulation. RAs and IAs must now articulate clearly and succinctly the degree to which AI tools are integrated into their services. This new regulation demonstrates SEBI's commitment to better technological transparency and aiding clients in understanding the technological underpinnings of financial advice.
A Critique of these Amendments and Key Loopholes
A market as dynamic and fast like Securities Market needs a sufficient focus on compliance and sufficient focus to cater to client needs and service quality. Allowing part-time professionals may lead to compromise dilution of professionalism and accountability which the market desperately needs. For example, in professions like medical and law, where the risks are equally high, part-time engagements are very rare due to the responsibility inherent in these roles. Therefore, it is also imperative that advisors maintain their focus on their fiduciary responsibilities by working full-time in the securities market. There is a need to introduce stringent fiduciary standards for IAs which is based upon the “client-first principle”. Such standards would prioritize the interests of the clients over those of the advisor or their organization. A lesson can be taken from the United Kingdom's Financial Conduct Authority regulations that enforce strict fiduciary duties on financial professionals. Such measures are highly desirable to track dual employment and prevent conflicts of interest, ensuring transparency and accountability across the securities market.
While relaxation in eligibility criteria for IAs in order to allow graduates from all disciplines can be justified as an attempt to promote diverse skill sets in the market. But transition from ‘finance-degree’ to ‘graduate in any discipline’ might risk diluting quality in absence of compensatory safeguards like enhanced training. This might lead to investors getting subpar advice. For example, the United States does allow candidates from all the disciplines for financial advisors but, it enforces rigorous qualification exams like the Series 7 or Series 65 to ensure professional competency. SEBI must implement a similar post-licensing regulatory mechanism to reduce risks associated with lower entry barriers. Without these measures, there is a risk of subpar advice permeating the market, resulting in loss of investor trust and ultimately leading to a “race to the bottom” in service quality.
A clarity regarding the standardization of fee structure models is needed so as to provide a clear idea and retain the investor’s trust in the market. SEBI must ensure a standardized template for disclosures, as provided under Financial Industry Regulatory Authority Regulations in the United States.
While mandatory AI- tool usage regulation encourages ethical AI usage and ensures that clients are aware of automated decision-making systems. It might turn out to be a potential competitive disadvantage for firms having proprietary AI systems. For instance, an algorithmic methodology or outputs disclosure may expose trade secrets, which would give rise to anti-competitive activities. Therefore, it is need of the hour that SEBI must clarify the scope of such disclosures—whether they pertain solely to the AI’s decision-making process, its results, or both. A balanced approach can be seen in the European Union's AI Act, which seeks to regulate AI systems without stifling innovation by emphasizing transparency in high-risk applications while protecting proprietary algorithms.
Though SEBI seeks to regulate AI usage and focuses on disclosure, it lacks detailed rules on ethical AI practices and data privacy. In United States, while there is not any AI-specific rules, their market regulator the Securities and Exchange Commission (SEC) has many tech oversight initiatives and practices which adheres to strict data-privacy laws.
Conclusion
These amendments are a welcome step by the SEBI for catering to its huge investor base. It is a cautious approach whereby SEBI has tried to increase its talent pool of professionals without compromising on regulatory oversight. SEBI has also entered into an arena of regulating the usage of AI, becoming first among market regulators to regulate AI usage in the securities market.
A comparative review with advanced market regulators like United States SEC highlights both progress and gaps. SEBI’s focus on integrating AI transparency and flexible fee structures have definitely positioned India as a forward-thinking regulatory hub. However, areas such as enforcement rigor, global alignment of professional standards, and comprehensive AI governance remain opportunities for further development to match the sophistication of global financial ecosystems.
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