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 to update material information and carrying out unregistered investment advisory activities through two partnership firms. Although the violations related to non-updation were deemed technical and no client complaints were received, the Noticee's engagement in advisory services prior to registration and continued unregistered activities for over two years were considered serious breaches. The Board rejected the DA's recommendation against cancellation, viewing the Noticee's police complaint as a tactic to evade accountability. While mitigating factors such as cessation of activities and refund to clients were noted, the Board held these insufficient to overlook the infractions. Consequently, the Noticee's registration as an Investment Adviser was suspended for six months.

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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.

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