Registered Entities to Cut Ties with Unregistered Financial Advisors: SEBI

The Securities and Exchange Board of India (SEBI) has issued a circular directing ‘persons regulated by the board’ (including recognised stock exchanges, clearing corporations and depositories) and their agents to cut ties with unregistered financial advisors providing recommendations or making claims related to securities. Association through a ‘specified digital platforms’ has been kept out of the purview of this direction and so are persons engaged in investor education. The circular provides a three-month window to end existing contracts.

Additionally, a consultation paper on recognition as ‘specified digital platform’ has been circulated for public comments. The aim is to lay down the preventive and curative measures required to be demonstrated by the digital platform to the satisfaction of the board for recognition as Specified Digital Platform (SDP) under SEBI (Intermediaries) Regulations, 2008, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and SEBI (Depositories and Participants) Regulations, 2018.

The preventive measures outlined in the circular inter-alia include policy on collaboration, availability of technical assistance including AI/ML tools to identify and analyse the content and advertisement related to securities, comprehensive guidelines, policy on violation, policy on impersonation, usage of a verified label or badge system, policy on action, policy on transparency & accountability, etc.

The curative measures to mitigate the impact of non-perfection of preventive measures may include technical abilities, mechanism for escalation of unlawful content/advertisement and entities, policy for taking action such as blocking content, taking down content, blacklisting, disabling links etc. specifying a clear turn around time. Digital platforms may apply within three months to seek recognition as SDPs. A dispute resolution mechanism has also been outlined in the circular. Comments on the circular may be shared until November 12, 2024 through the link or email to consultationMIRSD@sebi.gov.in.

SEBI has been curbing unverified investment claims made by unregistered financial advisors and influencers for quite some time now. In September last year, SEBI had floated a consultation paper proposing to limit the association of registered intermediaries or regulated entities with unregistered financial influencers. Changes had also been made to SEBI (Investment Advisers) Regulations, 2013 in 2023 and an extension granted to comply with the revised investment advisers requirement by 2025. Few months back, another notification by SEBI mandated AI disclosure for investment advisors and research analysts.