Q.18: We are Equity Investment Advisors and have a query regarding interpretation of the following as mentioned in Section 15 (7) of SEBI regulations (also pointed in attached document for the same). It mentions the following:

‘An investment advisor shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice.’

Provided that during the period of such fifteen days, if the investment adviser is of the opinion that the situation has changed, then it may enter into such a transaction on its own account after giving such revised assessment to the client at least 24 hours in advance of entering into such transaction.

With regards to the above, we are seeking clarity regarding the following situations.

Does it mean that if a client buys a particular scrip on Advisors recommendation and Advisor buys the same scrip, advisor cannot sell the scrip for 15 days. However, after 15 days are over advisor can sell the entire or partial quantity of the scrip with him though he may let the client hold the scrip.

Would seek your answer for a reverse position to this also ie advisor continues to hold the scrip but recommends the client to sell. Is this in itself compliant stance or would it depend on the reasons for advisors action.

I am coming from a point of view that the allocation and stance to buy/ hold or sell may depend on the individual risk profile, need of funds, horizon, financial status and even periodic portfolio reallocation etc which can be very different for advisor and client and hence need for different actions for financial plans of both.

Hence only following the 15 day rule for contrary action is it enough to satisfy compliance needs is the question

It is very important to understand this because if an Advisor has several hundred or thousand clients and your answer is that Advisor should inform all his clients of every small such change, it is practically impossible and undesired.

Response:

Point-1: By following the 15 day rule for contrary action, it will be enough to satisfy the compliance, as Regulation 15(7) kicks in from the date of advice given to clients.

Point-2: It is obvious and natural that advice given to client is based on his risk, suitability, etc. which differs from that of the advisor himself. Hence, the arising transactions will also be different. However, also refer the following point.

This is also validated by the IA Regulations itself in various places like Regulation 16, 17, etc.

Point-3: Going by the language of the section, like “the situation has changed” and “revised assessment” it is evident that the regulation intends the following:

When an RIA gives advice to its clients, which is based mainly on market situation like bull-trend or bear-trend or some other trend as per Adviser’s analysis and scrip’s situation like fundamentally strong scrip, or such other scrip analysis by Adviser and any other situation like Industry situation, etc. then the RIA himself should not enter into transactions on his own-account which is contrary to the advice given because what is it (related to situation which has changed) that made the IA to enter into contrary transaction. This revised assessment of? situation should also be updated to the clients, if such is the case.

It is but natural that, if the RIA is driven by some other compulsions like need of funds, etc. OTHER THAN ANY CHANGE OF ABOVE-NATURE OF SITUATION then there is no non-compliance, as such.

Example:

RIA advised to client to buy Vodafone Idea Ltd. because may be as per market situation / scrip situation / industry situation RIA feels it is a good bet.

RIA also buys the scrip.

Case-1:

Now, RIA learns from news that K.M. Birla resigns from board of this company.

RIA sells this scrip (within 15 days of advice given to client), because of this change in situation.

THIS IS NON-COMPLIANCE.

RIA should have informed all his clients of the changed situation and revised assessment and waited for 24 hours before selling the scrips.

Case-2:

RIA sells this scrip (after 15 days of advice given to client), because of this change in situation.

THIS IS FINE.

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