The Securities and Exchange Board of India’s (Sebi) complaints redressal system SCORES received 17,892 complaints against registered and unregistered investment advisors as of June 30, 2024, according to a recent report of the Association of Registered Investment Advisers (ARIA). Of the complaints, 35 per cent were against registered RIAs, and 65 per cent were against unregistered RIAs, those not registered with the BSE Administration and Supervision Ltd (BSEASL) or those whose licenses lapsed. The data shows that 94 per cent of the complaints (6,351) were against 10 per cent of the registered RIAs, 74 per cent of registered RIAs (711) had zero complaints against them, and 16 per cent (155 RIAs) had less than 10 complaints.

Also Read: EPFO To Migrate To New IT System In 3 Months To Address Member Grievances: Check Benefits

Sebi-registered RIAs can be individuals, proprietorships, partnerships, or other entities. The highest number of complaints were against proprietorships (59 per cent), followed by corporate entities (29 per cent), partnerships, individuals, etc. (13 per cent).

The report says there were more complaints and orders against unregistered entities, with ‘tips and trading calls’ being the most common reason for grievances. The association has urged Sebi to consider actions against registered and unregistered RIAs breaching the law.

Here are more details:

Complaints and Enforcement Orders Since Inception:

According to the report, as of March 2024, Sebi has issued over 800 enforcement orders since inception against registered and unregistered entities. Excluding the overlapping duplicate orders, the report found 151 relevant orders, wherein 44 orders (29 per cent) were against registered entities and 107 orders (71 per cent) against unregistered entities.

The top complaints were against ‘Trading Call Providers’,comprising 73 per cent of the total, followed by ‘Platform or Online RIAs’ at four per cent, ‘Advisory’ related complaints at 1 per cent, and the remaining 22 per cent ‘Not ascertainable’ complaints, as per the report.

In both cases, registered and unregistered entities, the highest number of orders was passed on derivatives (futures and options), constituting 72 per cent and 93 per cent, respectively.

Sebi Orders In 2023-24:

In FY 2023-24, there were 421 orders; excluding the duplicate, there were 128 orders, including 91 main orders and 37 supporting orders. Of the main orders, 60 orders (66 per cent) were against unregistered advisors, and 31 (34 per cent) were against registered advisors.

Reasons For Rule Violations:

The report found 21 categories of contravention by registered RIAs and two overall categories by unregistered advisors.

Registered Entities (Advisors):

Registered RIA violations were in the following categories:

Risk profiling and Suitability Issues include:

Risk profiling process.

Implementation.

Risk-related communication.

Risk profiling questions.

Suitability process.

Suitability assessment.

Mis-selling of services.

Also Read: Five Ways Senior Citizens Can Maintain Good Mental Health

Fee issues:

Complaints include unfair fees, charges before communicating the risk profiling, fees received more than six months in advance, misrepresentation of the fee structure, inability to disclose the refund policy, etc.

Qualification or Certification Issues:

Investment advisors are not certified when the NISM certification has expired, education documents are not submitted, or fake documents are submitted.

False Return Assurance:

Promising assured return to investors and fraudulent representation, including making false claims, windfall gains, and creating fake portfolios of clients to show the profit earned.

Violation in Complaints Redressal:

Complaint redressals delayed beyond 30 days, forcing the complainants to withdraw grievances and not submit the action taken report.

Non-Disclosure:

Information not submitted to Sebi for inspection when asked in an interim order, or provided false facts.

Changes in Material Information:

Changes in material information were not communicated to Sebi. It includes violations such as not intimating Sebi about a change in office address, deliberately operating from another place, hiding existing RIA registration and applying for a new one, hiding information about engaging in advisory without registration, false submission to get registered, etc.

Failure in Maintaining Records:

Failure to maintain records includes KYC details, fee details under client master, invoices, risk profiles, suitability assessments, voice recordings, emails, etc., and without their backup.

In addition, there were other violations and subsequent orders.

• Six orders were issued against violations in display and information disclosure, such as not displaying RIAs’ holdings, positions, affiliations to clients, and disclosing incorrect information on the website, and statistics not disclosed. It issued five KYC violations related to not obtaining KYC from clients, missing PAN information for clients, not obtaining CKYC registration, etc.

• The absence of a segregated bank account for IA and business, a common team for IA and business, also led Sebi to issue five orders during the last financial orders.

• Orders were passed against RIAs for not maintaining authenticated client agreement copies, not executing the agreement before receiving fees and providing services, or due to the improper format of the agreement.

• One of the prominent violations was ‘fit and proper issues’, which included criminal charges against the authorised person, director unfit due to involvement in unethical practices, concealed connection to a husband who had been issued Sebi’s order earlier, and concealing information about engagement in an un-registered advisory.

• Involvement of unregistered entities, like when RIA is in the wife’s name but the husband provides the services, selling research reports without RA registration, and providing unregistered IA services from a partnership firm or other entity

• There were also violations for not using the term ‘Investment adviser’ in correspondence and not including the word ‘Investment Advisor’ in the name.

• Two orders were passed because of not maintaining the minimum net worth required and two for not appointing a principal officer and not being able to provide evidence such as attendance sheet, material, etc., of Prevention of Money Laundering Act (PMLA) training.

• One order each was issued for failing to furnish an audit report, sharing client details in SCORES with consultants without a formal agreement, not appointing a compliance officer, and not obtaining BSE Administration and Supervision Limited (BASL) membership.

Also Read: Received A Call From TRAI? Verify It’s Genuine Before Sharing Details

Unregistered Entities (Advisors):

Sebi found 60 violations against unregistered entities and passed 60 orders about services and 10 orders related to fraud and misrepresentation, such as showing itself as a Sebi-registered entity, promising guaranteed return, or concealing the facts about the market risk involved in securities.

What Sebi Has Ordered?

The report shows that for registered entities, the maximum orders were about license cancellation and imposing a penalty. The other orders were about the suspension of registration, debarring from the securities market, resolving pending complaints, refunding money, warning to comply with the rules, restraining from public company association and from disposing assets, and deposits to remain with SEBI Escrow account.

For unregistered entities, the maximum orders were about refunding money and debarring these entities from the securities market. In 58 out of 60 cases, unregistered entities were asked to refund the money, compared to only two out of 31 cases for registered entities.