2025 (7) TMI 1466 - Board - SEBI

Investment Adviser Suspended 6 Months for Unregistered Advisory and Failing to Update Material Information Under IA Regulations

The SEBI Board found that the Noticee violated regulation 13(a) and 13(b) of the IA Regulations and clauses 1, 5, and 8 of the Code of Conduct by failing ... Cancellation or suspension of the registration of the Noticee - non-updation and non-submission of material information by the Noticee and carrying out unregistered investment advisory activities through F3 Financials and Garuda Finance, i.e., two partnership firms - violation of regulation 13(b) read with regulation 13(a) of SEBI (Investment Advisers) Regulations, 2013 (IA Regulations) and clauses 1 and 8 of the Code of Conduct under the Third Schedule to IA Regulations read with regulation 15(9) of IA Regulations - principles of natural justice - HELD THAT:- I concur with the finding of the DA that the allegation of non-updation and non-submission of material information by the Noticee stands established and thus, the Noticee has violated the provisions of regulation 13(b) read with regulation 13(a) of IA Regulations, and clause 1 and 8 of the ‘Code of Conduct for Investment Adviser’ as laid down in the Third Schedule to the IA Regulations read with regulation 15(9) of IA Regulations. I note that the DA in his Enquiry Report was of the view that this was not a fit case for recommending cancellation of registration of the Noticee as in the view of DA, violation regarding non-updation of change of address was technical in nature. I also note that no complaint has been received from any client on this account and no serious harm has been caused to anyone, and therefore, I agree with the DA that the violation is technical in nature and I am inclined to grant benefit to the Noticee. It is curious to note that the noticee was giving investment advice through F3 Financials during pendency of his application for registration which is a serious concern. It is assumed that a person who applies for grant of registration as an IA is aware of conditions for grant of registration such as certification requirement, networth requirement, ‘fit and proper’ criteria, etc. However, by engaging in investment advisory services prior to grant of registration certificate, the Noticee has shown scant regard for applicable regulations. I note that the DA in his Enquiry Report was of the view that this is not a fit case for recommending cancellation of registration of the Noticee as an IA in view of the police complaint being filed by the Noticee against his ex-employers for misusing his KYC details for undertaking unregistered investment advisory activities through F3 Financials. However, as earlier noted at para 40, the filing of police complaint appears to be an afterthought and merely a ruse to evade submission of details sought by SEBI as well as any possible enforcement action for carrying out unregistered investment advisory activity. Therefore, I do not agree with the views of the DA in this regard. I agree with the conclusion of the DA that the Noticee was involved in providing unregistered investment advisory activities through his partnership firm, Garuda Finance and failed to update SEBI regarding the same and thus, has violated the provisions of regulation 13(b) read with regulation 13(a) of IA Regulations, and clause 1, 5 and 8 of the ‘Code of Conduct for Investment Adviser’ as laid down in the Third Schedule to the IA Regulations read with regulation 15(9) of IA Regulations. The DA in his Enquiry Report was of the view that this not a fit case for recommending cancellation of registration of the Noticee as an IA in view of the Noticee ceasing of the activities of Garuda Finance, refunding the fees collected to the complainants and resolving all complaints filed by clients. I agree that these factors are indeed mitigating in nature, however, I also note that the Noticee was providing investment advisory activities through an unregistered firm even prior to obtaining registration from SEBI in his individual capacity. Further, the Noticee was involved in providing unregistered investment advisory activities for more than 2 years through multiple entities, firstly through F3 Financials from February 2019 to June 2019 and immediately thereafter, through Garuda Finance from July 2019 to March 2021. I deem these instances to be aggravating enough while dealing with the Noticee’s infractions and therefore, I do not agree with the views of the DA in this regard. Further, I do not concur with the recommendation of the DA and deem it fit that suspension of registration of the Noticee as an IA for a period of six months would be commensurate with the violations committed by the Noticee as the violations are grave enough to not be condoned lightly. ISSUES: Whether failure to forthwith inform the Securities and Exchange Board of India (SEBI) of a material change, specifically change of address, by a registered Investment Adviser (IA) constitutes a violation of regulation 13(b) read with regulation 13(a) of SEBI (Investment Advisers) Regulations, 2013 (IA Regulations) and clauses 1 and 8 of the Code of Conduct under the Third Schedule to IA Regulations read with regulation 15(9) of IA Regulations.Whether providing investment advisory services through an unregistered entity (F3 Financials), without updating SEBI during pendency of registration application or after grant of registration, amounts to unregistered investment advisory activity in contravention of IA Regulations and related Code of Conduct.Whether providing investment advisory services through a partnership firm (Garuda Finance) without the firm itself being registered with SEBI, despite the individual IA's registration, constitutes unregistered investment advisory activity violating IA Regulations and related Code of Conduct.Whether the conduct of the IA in providing investment advisory services prior to obtaining SEBI registration and through unregistered entities justifies cancellation or suspension of registration under SEBI (Intermediaries) Regulations, 2008.Whether mitigating factors such as technical nature of violations, filing of police complaints, cessation of unregistered activities, refund of fees, and resolution of investor complaints justify leniency in imposing penalties. RULINGS / HOLDINGS: Failure to forthwith inform SEBI of a material change such as change of address is a violation of regulation 13(b) read with regulation 13(a) of IA Regulations and clauses 1 and 8 of the Code of Conduct, as the change of address is a 'material change' that 'goes to the root of the business' and must be informed 'forthwith', meaning 'immediately' or 'without unnecessary delay.'Providing investment advisory services through F3 Financials, an unregistered entity, without disclosure to SEBI during or after registration application, constitutes unregistered investment advisory activity in violation of regulation 13(b) read with regulation 13(a) of IA Regulations and clauses 1, 5 and 8 of the Code of Conduct.Providing investment advisory services through Garuda Finance, a partnership firm not registered with SEBI, despite the IA's individual registration, constitutes unregistered investment advisory activity violating regulation 13(b) read with regulation 13(a) of IA Regulations and clauses 1, 5 and 8 of the Code of Conduct; an individual IA cannot provide advisory services through an unregistered non-individual entity circumventing distinct eligibility criteria.The IA's engagement in investment advisory activities prior to obtaining SEBI registration and through unregistered entities demonstrates disregard for applicable regulations and aggravates the violations committed.Although some violations are 'technical in nature' and mitigating factors exist, the overall violations are 'grave enough to not be condoned lightly,' warranting suspension of registration for six months rather than cancellation. RATIONALE: The Court applied the statutory framework comprising the SEBI Act, SEBI (Intermediaries) Regulations, 2008, and SEBI (Investment Advisers) Regulations, 2013. The IA Regulations impose a duty under regulation 13(b) to 'forthwith inform the Board in writing' of any 'material change' in information submitted, with 'forthwith' interpreted in light of Supreme Court precedent as 'immediately' or 'without unnecessary delay.'The distinction between individual and non-individual Investment Advisers under IA Regulations, including differing certification, net worth, and 'fit and proper' criteria, precludes an individual IA from providing advisory services through an unregistered partnership firm, as this would circumvent regulatory requirements and render the statutory scheme redundant.The Court rejected the IA's contention of being a victim of fraud regarding unregistered activities through F3 Financials, noting delayed police complaints and failure to respond timely to SEBI's inquiries, indicating afterthoughts to evade regulatory scrutiny.The Court considered mitigating factors such as the technical nature of the non-updation of address, cessation of unregistered activities, refund of fees, and resolution of complaints, but found the prior unregistered activities and failure to disclose to SEBI as aggravating circumstances requiring a proportionate disciplinary response.The Court adhered to principles of natural justice by granting multiple opportunities for hearing and considering all submissions, including those related to settlement proceedings, which were ultimately withdrawn, reviving the enforcement process.The decision marks no doctrinal shift but reinforces strict compliance with registration and disclosure requirements under IA Regulations, emphasizing the importance of prompt disclosure of material changes and prohibition of unregistered advisory activities through entities not registered with SEBI.