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The Securities and Exchange Board of India (SEBI) has issued guidelines on the regulatory framework for research analysts and investment advisers to bolster investor protection and ensure transparency. These guidelines came after the regulator notified the research analyst (RA) rules and investment adviser (IA) norms in December last year. The new norms encompass qualification standards, fee structures, deposit requirements, and client segregation protocols. The regulator introduced fresh compliance mandates, particularly for entities utilising artificial intelligence (AI) tools in their services.

Under the revised framework, SEBI said research analysts are required to maintain a deposit based on their client base, ranging from Rs 1 lakh for up to 150 clients to Rs 10 lakh for over 1,000 clients. These deposits aim to provide additional security for investors. Also, investment advisers are mandated to follow a graded deposit system tied to client numbers. SEBI said existing IAs must comply with the deposit requirements by June 30, 2025, while new applicants must adhere to them immediately. Similarly, all research analysts must meet the deposit requirements by April 30, 2025.

Further, the markets watchdog has permitted individuals and entities to hold dual registrations as RAs and IAs, providing their advisory and research services are distinctly segregated. SEBI said such entities must adhere to separate compliance frameworks for each function. Both RAs and IAs are required to ensure client-level segregation to prevent conflicts of interest. Clients availing advisory services from an entity cannot access distribution services within the same group and vice versa.

With the growing adoption of artificial intelligence in financial services, SEBI has imposed stringent obligations on RAs and IAs to leverage such tools. Entities must disclose the extent of AI usage in their offerings and ensure data security and compliance with applicable rules. Additionally, the regulator mandated detailed disclosures regarding terms and conditions for research and advisory services, including fee structures and conflict-of-interest declarations. Also, RAs and IAs must undertake annual compliance audits, submitting reports to their respective supervisory bodies -- Research Analyst Administration and Supervisory Body (RAASB) and Investment Adviser Administration and Supervisory Body (IAASB), respectively.

Any adverse findings must be published on their websites, besides corrective actions. These entities are also required to establish a functional website, containing mandatory disclosures and ensure KYC compliance for all clients. The guidelines introduced provisions for part-time RAs and IAs, allowing professionals like teachers, architects, and lawyers to register, provided their primary occupations do not conflict with the market rules. However, these individuals involved in advisory activities like providing advice or any recommendation, or making any claim in respect of or related to a security or securities, without being registered with or permitted by the SEBI will remain ineligible for registration. The markets watchdog's new rules extend to model portfolio recommendations by RAs, mandating detailed reports that include benchmarking, risk disclosures, and rationale. Investment advisers providing financial planning services covering non-Sebi-regulated products must secure client declarations acknowledging the limited regulatory oversight.

Source: Ace Equity