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Unit study guide · NISM Series X-A

Key Regulations

15 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

Under the SEBI Act, 1992, what are SEBI's main aims?

SEBI's aims are to protect investors' interests and to develop and regulate the securities market. The SEBI Act, 1992 sets out this mandate. Remember: SEBI's mandate: protect investors, and develop and regulate the securities market.

Hint Common mistake: Mixing up SEBI's role with the RBI's role over rates and the currency.

X-A-241

From the practice bank · 2

Which law provides for the recognition of stock exchanges and regulates contracts in securities?

The Securities Contracts (Regulation) Act, 1956 provides for recognising stock exchanges. It also regulates contracts in securities. Remember: SCRA covers stock exchange recognition and contracts in securities.

Hint Common mistake: Assuming general contract law governs stock exchanges.

X-A-242

From the practice bank · 3

Which person can give investment advice without registering as an investment adviser?

A chartered accountant giving advice only incidental to professional services is exempt. The IA Regulations list exemptions like this one. They do not cover anyone whose paid business is advice. Remember: Exemptions cover advice incidental to another professional or regulated activity, not advice sold as a business.

Hint Common mistake: Treating any qualified professional as exempt even when advice is the main paid activity.

X-A-243

From the practice bank · 4

For how long must an investment adviser keep records such as client risk profiles and the advice given?

Records must be preserved for at least five years. The IA Regulations allow physical or electronic records, and signed electronic records must be digitally signed. Remember: Advisers keep the required records for at least five years.

Hint Common mistake: Thinking records can be deleted once the client relationship ends.

X-A-244

From the practice bank · 5

Who can carry out an investment adviser's yearly audit of compliance with the IA Regulations?

The yearly compliance audit must be done by a member of ICAI, ICSI or the Institute of Cost Accountants of India. The adviser then submits the report as SEBI specifies. Remember: The yearly compliance audit is done by an outside CA, CS or cost accountant.

Hint Common mistake: Treating an internal compliance review as the required audit.

X-A-245

From the practice bank · 6

An individual investment adviser's client count crosses 300 during the year. What must the adviser do?

The adviser must inform the supervisory body and apply for registration as a non-individual adviser within three months. The same applies when fees in a financial year cross ₹3 crore, whichever comes first. Remember: Above 300 clients or ₹3 crore of fees in a year, an individual adviser must move to non-individual registration.

Hint Common mistake: Assuming the adviser simply stops taking clients.

X-A-246

From the practice bank · 7

The spouse of an individual investment adviser is a mutual fund distributor. Which arrangement do SEBI's rules allow?

The family of an individual adviser may not distribute to the clients the adviser advises. The adviser also may not advise clients who receive distribution services from family members. Remember: An individual adviser's family must not distribute to the adviser's own clients.

Hint Common mistake: Thinking disclosure makes a family distribution link acceptable.

X-A-247

From the practice bank · 8

Which set of information must an adviser collect from a client for risk profiling under SEBI's rules?

The adviser must collect the client's age, goals and time frame, income, existing assets, risk appetite and liabilities. It must also assess the client's capacity to absorb losses. Remember: A risk profile needs age, goals and time frame, income, assets, risk appetite and debts.

Hint Common mistake: Profiling risk from income and the investment amount alone.

X-A-248

From the practice bank · 9

An adviser offers implementation services so that clients can act on its advice. Which practice is allowed?

The adviser may help clients invest only if no commission or referral fee is received at any level. The rule covers embedded and indirect payments, and payments to the adviser's group or family. Clients may also choose not to use the service. Remember: Implementation is optional for the client and earns the adviser no commission at any level.

Hint Common mistake: Thinking a referral fee paid to family falls outside the rule.

X-A-249

From the practice bank · 10

Under SEBI's insider trading rules, what is unpublished price-sensitive information (UPSI)?

UPSI is information about a company or its securities that is not generally available and is likely to move the price once public. Trading on it or passing it on is restricted. Remember: UPSI is unpublished information likely to move the price once it becomes public.

Hint Common mistake: Treating information as UPSI even after it has been made public.

X-A-250

From the practice bank · 11

An adviser buys a share for himself just before telling many clients to buy it, then sells as their buying lifts the price. Which SEBI rules does this most directly breach?

Trading ahead of his own recommendation to profit from clients breaches the PFUTP Regulations, 2003. These rules forbid fraudulent, manipulative and unfair practices in the securities market. Remember: Trading ahead of one's own recommendation to profit from clients is a fraudulent and unfair trade practice.

Hint Common mistake: Treating front-running as only a paperwork or registration issue.

X-A-251

From the practice bank · 12

Under the Prevention of Money-Laundering Act, where must a regulated intermediary report suspicious transactions?

Suspicious transaction reports go to the Financial Intelligence Unit–India (FIU-IND). PMLA also requires customer due diligence and record keeping. Remember: Suspicious transaction reports go to FIU-IND.

Hint Common mistake: Thinking suspicious activity is reported to the client's bank.

X-A-252

From the practice bank · 13

Why does a minor's investment account need a guardian?

A minor cannot make a valid contract under the Indian Contract Act. So a guardian acts for the minor until the minor turns 18. Remember: Minors cannot contract, so a guardian acts for them.

Hint Common mistake: Thinking minors are barred from owning investments.

X-A-253

From the practice bank · 14

Which law makes the dishonour of a cheque for insufficient funds a criminal offence?

Section 138 of the Negotiable Instruments Act, 1881 makes a cheque dishonoured for insufficient funds a criminal offence, subject to its conditions. Remember: Section 138 of the NI Act covers cheques dishonoured for insufficient funds.

Hint Common mistake: Taking a bounced cheque to a consumer forum as if it were a service defect.

X-A-254

From the practice bank · 15

Why does a financial intermediary ask a client to fill a FATCA and CRS self-certification?

The self-certification identifies clients who are tax residents of other countries. Under FATCA and the Common Reporting Standard, such accounts are reported for exchange of tax information between countries. Remember: FATCA and CRS forms identify foreign tax residency for information exchange.

Hint Common mistake: Confusing tax-residency reporting with risk profiling.

X-A-255