• Commercial Law Advisors

SEBI penalizes partnership firm for investment advisory activities without obtaining registration



Background:

SEBI received a complaint against “Wealth Management Research” (WMR) a partnership firm for carrying on remote investment advisory activities without holding a registered Investment Advisor certificate from SEBI, for a period of four months (January 28, 2016 – May 30, 2016). The complaint was referred to Special Task Force – Madhya Pradesh Police to take legal actions against the concerned parties.


WMR accepted the charge of not obtaining the requisite registration from SEBI due to “non-awareness and limited knowledge of SEBI Act”. It immediately ceased further operations, disabled its website, dissolved the partnership, refunded the fees received from clients and also closed the bank accounts.


Issues:

  1. Whether there has been a violation of Section 12(1) of SEBI Act read with Regulation 3(1) of the Investment Advisors Regulations and Regulations 3 (a)(b)(c) and (d) of the Prohibition of Fraudulent and Unfair Trade Practice (PFUTP) Regulations read with Section 12A (a)(b)(c) of the SEBI Act.

  2. Does the violation attract monetary penalty under the provisions of Sections 15HA and 15HB of the SEBI Act.

  3. Mode of calculating the quantum of monetary penalty.

Key observations:

  1. The modus operandi of providing investment advice, strategy and tips through phone and online without obtaining a registration certificate from SEBI was considered indulging in fraudulent investment advisory activity.

  2. The adjudicating officer (AO), observed that publishing terms and phrases like ‘accurate tips’, ‘great accuracy percentile’, ‘trading tip calls to stock traders at NSE and BSE ensuring your profit’ on a website, that assure guaranteed profits and returns are misleading and can lure gullible investors into investing through the firm.

  3. To decide the scope of the term ‘fraud’ a reference was drawn to an order passed in the matter of Pan Asia Advisors Limited V. SEBI, “where if a person by his act either directly or indirectly causes the investors in the securities market in India to believe in something which is not true and thereby induces the investors to deal in securities, then that person is said to have committed fraud on the investors…

  4. It was observed that collection of fees/consideration from investors while assuring guaranteed profits by an unregistered investment advisor indicates deceitful practice and amounts to misrepresentation. This practice was deemed violative of Section 12A (a), (b) and (c) of the SEBI Act r/w the provisions of Regulations 3(b) to (d) of the PFUTP Regulations.

  5. According to Sec. 4 of the Partnership Act, a partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Therefore, the adjudicating officer held all the partners of WMR are jointly and severally liable for the misconduct of providing unregistered investment advisory services to its clients.

  6. To address the inadvertence of WMR, a reference was drawn to SEBI v. Shri Ram Mutual Fund where the Supreme Court held that, “penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violations becomes wholly irrelevant”.

  7. The AO derives the power to impose monetary penalty on WMR under the provisions of sections 15HA & 15HB of the SEBI Act. The quantum of monetary penalty imposed as per section 15 I of the SEBI Act is linked to the subjective satisfaction of the AO.

  8. While adjudging the quantum of the penalty the AO took regard of the following factors:

  9. The amount of disproportionate gain or unfair disadvantage made on result of default;

  10. The amount of loss caused to the investor as a result of default;

  11. The repetitive nature of the default.

After due consideration and evaluation of the matter a penalty of Rs. 7,00,000/- was imposed on WMR.

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