SEBI’s amendment to Investment Advisor Regulations addresses AI concerns

The Securities and Exchange Board of India (SEBI) on Tuesday published proposed amendments to tighten the norms for investment advisors in India. The SEBI (Investment Advisers) (Second Amendment) Regulations, 2024, addressed the growing use of Artificial Intelligence (AI) in the investment advisory industry and the data protection concerns that are attached to it. .The amendment speaks of the use of AI in providing investment advice. It pins the responsibility on the investment advisors for the security, confidentiality, and integrity of client data and the accuracy of the advice generated.“An investment adviser who uses Artificial Intelligence tools, irrespective of the scale and scenario of adoption of such tools, for servicing its clients shall be solely responsible for the security, confidentiality, integrity of the client data, use of any other information or data to arrive at investment advice, investment advice based on output of Artificial Intelligence tools and compliance with any law for the time being in force,” the amendment said. .SEBI mandates that any person wishing to give investment advice must be qualified and registered under the Investment Advisor Regulations (IA Regulations), 2013.The proposed amendment also suggested key changes to the definition of ‘Investment Advice’, the qualification for a person to be an investment advisor, and introduced norms regarding the maintenance of the website. .Below are some key changes proposed by SEBI.Definition of Investment Advice: The definition of investment advice has been revised to exclude trading calls. Additionally, a new category of "part-time investment advisor" has been introduced.Qualification and Certification: The minimum qualification requirements for individuals associated with investment advice have been relaxed. Now graduates can become SEBI certified IA, this is a departure from the earlier requirement which mandated that only professionals could register as IAs. However, mandatory NISM certifications have been introduced for individual investment advisors, principal officers of non-individual investment advisors, and associated persons.Deposit Requirements: Investment advisors are now required to maintain a specified deposit with a scheduled bank. This deposit can be used to settle disputes arising from arbitration and conciliation proceedings.Registration Process: A separate registration form has been introduced for part-time investment advisors. Individual advisers exceeding 300 clients or earning fees above ₹3 crore annually must transition to non-individual registration within three months. Additionally, part-time advisers are restricted to a maximum of 75 clients. Non-individual investment advisers are required to appoint a compliance officer responsible for ensuring adherence to regulations.Client Relationship and Reporting:Investment advisors must maintain detailed records of client information, including PAN details and details of advice provided. Records of communication with clients, including emails and call recordings, must also be maintained.Website Maintenance: Investment advisors are now required to maintain a functional website with specified details..These amendments are expected to come into effect on the date SEBI notifies them.