The Securities and Exchange Board of India, or Sebi, has finalised new rules for regulating investment advisers on the lines of the structure in the mutual fund industry to prevent growing complaints from investors about being short-changed.

The securities market regulator wants a self-regulatory organisation, or SRO, to be set up. The body will oversee investment advisers besides making a clear distinction between advisers and distributors of financial products, said a person familiar with the regulator's proposal.

Recent instances of rogue trading whereby wealth managers have cheated high net worth investors (HNIs) by selling complex financial products is what has prompted Sebi to work out a new set of rules.

There are scores of financial advisers operating in the country - several of them unqualified - who pose a threat to investors. The regulator's concern stems from the fact that these advisers recommend and push investment schemes that may not be in the best interest of an investor.

Sebi now intends to mandate all investment advisers to be certified and become a member of the SRO, which is likely to be set up in this financial year, said the person familiar with the proposal.

"Investment advisers would have to provide research-based advice to investors. They can't simply advise an investor without exercising due diligence," the person said.

"Risk-profiling of an investor needs to be done. If the person is a retired individual, then accordingly, a suitable product needs to be recommended or sold," he added.

Sebi is also considering to define roles for advisers and distributors so that investors are not short-changed. As of now, the line between advisers and distributors is blurred. Some distributors masquerade as advisers, raising the issue of conflict of interest.

This is the second time that Sebi has worked out rules to regulate the activities of investment advisers who advise investors on a host of investment products for a fee. In 2007, it had come out with draft regulations for this segment but did not finalise it.

This time around Sebi is firming up rules after a couple of incidents involving wealth managers at well-known foreign banks came to light.

In December last year, a 300-crore fraud was reported in Citibank's Gurgaon branch as one of its realtionship managers sold high-return schemes to rich customers. The regulator's concern is that since financial products are long-term in nature, investors are often left in the lurch when relationship managers switch jobs. Sebi plans to mandate individual and institutional agents to maintain records of their communication with investors as it will establish an audit trail.

"Maintaining records will help as one can hold institutions responsible even if its relationship managers move on," said the person. Since investment advisers advice on a range of products such as mutual funds, insurance, bonds, fixed deposits, commodities and stocks, their activities come under multiple regulators including Sebi, RBI, Irda and PFRDA. "Sebi is in discussions with other regulators to sort out inter-regulatory issues." he said. (Economic Times)