How to get fined by SEBI if you're an Investment Advisor

The Story

Investment planning can be daunting, especially for those new to the financial world.

You have two options at your disposal.

Roll up your sleeves, do your research, and take charge of your investments. Invest your money in financial instruments you believe will generate and protect you from risks.

Alternatively, you can take the second route: Let an investment adviser (IA) cherry-pick a few investment instruments and curate a diverse, well-rounded portfolio for you.

Imagine you choose the latter route and seek advice from a SEBI-registered IA on how to get started.

Now, you trust your adviser because you know they are duly governed under SEBI’s regulations and possess the necessary qualifications.

Further to your relief, your IA’s website boasts numerous client testimonials about how it helped its clients earn great returns. These reviews bolster your trust, and you do precisely what they ask of you.

Unfortunately, one day, you discover that your investment adviser is under SEBI’s investigating lens for allegedly flouting many of its regulations.

Instantly, you stress about your investments and are sceptical about whether you made the right decision when choosing your IA.

Fast-forward to September 2022, and clients of the investment adviser Monetary Solutions must have experienced a similar sense of concern when SEBI decided to examine the firm closely.

Let’s explain.

See, investment advisers are not just freewheeling stockpickers. They must adhere to a string of rules designed to protect clients and ensure transparency.

Let's break down some of these key regulations.

First, before any advice is given or fees charged, there must be a signed investment advisory agreement detailing all the terms and conditions.

Next, to ensure that IAs are up to the task, they must meet the qualification and certification requirements set out in Regulation 7 of the IA Regulations.

See, Regulation 7 of the SEBI mandates that individual investment advisers or principal officers must possess a postgraduate degree or professional qualification in finance-related fields and at least five years of relevant experience. They and their associates must continuously upgrade their certifications from institutions like NISM (National Institute of Securities Markets).

Every conversation an IA has with a client or prospective client is crucial, and records of these interactions must be meticulously maintained for at least five years.

Annual audits are another critical aspect. IAs must undergo these audits within six months of the financial year’s end to ensure they comply with all IA regulations and circulars. Any adverse findings must be reported to SEBI within a month.

Additionally, IAs must necessarily do a deep dive into each client's risk tolerance and financial goals to make sure their investment strategy is on point. This includes looking at factors like age, investment objectives, income, existing investments, liabilities, and risk appetite.

Also, IAs can't offer free trials for their products or services—it's a strict no-go. Further, they have to use the SEBI Complaints Redress System (SCORES) to handle investor grievances and share any complaints on their websites or apps.

And guess what?

SEBI's investigation into Monetary Solutions uncovered some pretty shocking stuff. Several regulatory breaches were uncovered.

For instance, seven employees of Monetary Solutions dealt with clients without the required qualifications and certifications during SEBI's inspection.

On top of that, they were charging fees without any formal agreements in place, and they didn't even bother to keep essential client records like call recordings, agreements, KYC documents, invoices or even email communications.

But wait, there's more!

Their website was full of fake testimonials claiming big profits their clients made using their expertise, and they conveniently forgot to disclose the investor charter on their site. Now, this charter is vital as it provides investors with clear and concise information about their rights, responsibilities, the grievance redressal mechanism, and the dos and don'ts of investing in the securities market.

To add to this, the emails sent to the prospective clients mentioned offering free trials, which is a big no-no according to SEBI’s rules.

As if that wasn't enough, they were also operating from an unregistered location, totally ignoring regulatory requirements.

The discovery that clients were asked to deposit advisory fees directly into the proprietor's personal account was the last nail in the coffin, yet another blatant disregard for proper financial practices.

After all these breaches came to light and Monetary Solutions couldn’t offer any solid reasoning for its wrongdoing, SEBI took decisive action.

This Monday, SEBI fined Monetary Solutions Rs 25 Lakhs under the PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) and IA (Investment Advisers) rules. And with one fell swoop, SEBI has sent out a message to everybody in the market.

Play by the rules, or face the music.

Until then…