Key Regulations: formula sheet

Key formulas

Risk profile rule

Effective risk level = lower of (risk tolerance, risk capacity)

If willingness is high but ability is low, advise on the basis of low risk. This is a safe way to answer exam cases.

Suitability test

Advice is suitable only if it fits risk profile + goals + time horizon + financial situation

All four must match. One mismatch makes the advice unsuitable.

Onboarding sequence

KYC → client agreement → data gathering → risk profile → suitable advice → disclosures → records

Risk profiling comes before any advice is given.

Agreement basics

Written agreement + copy to client + fees and services stated + grievance terms

The agreement is in writing and the client must receive a copy.

Disclosure duty

Disclose conflicts, fees and material facts before or at the time of advice

Disclosure does not remove the duty to give suitable advice.

AUA mode fee cap

Maximum fee = 2.5% × assets under advice, per client per annum

Covers all services of the adviser to that client. It is a ceiling, not a fixed rate.

Fixed fee mode cap

Maximum fee = a rupee cap per client per annum, set by SEBI and revised from time to time

Also covers all services. Use the figure in the current NISM workbook or SEBI circular.

Advance fee limit

Advance fee ≤ 2 quarters (6 months)

Applies to fees collected in advance from the client.

Payment modes

Banking channels or other modes with an audit trail; no cash

Cheque, demand draft, bank transfer and similar traceable modes are acceptable.

Segregation rule

Distribution services must not be provided to the IA's own advisory clients

Individual IA: cannot provide distribution services to its advisory clients, and nor can the IA's family members. Non-individual IA: distribution arm kept separate at arm's length with client-level segregation, and no distribution services to the same advisory client.

Mutual fund recommendation

IA recommends direct plans only

Regular plans carry distributor commission, which would create a conflict.

Conflict rule

Avoid conflict; if unavoidable, disclose it to the client

Disclosure supports avoidance. It does not replace it where the rules ban the activity.

SEBI Act, 1992 – objectives

Protect investors + Promote market development + Regulate the market

The three-part purpose of SEBI. Exam options often replace one with an unrelated aim such as 'set interest rates'.

SEBI's three powers

Quasi-legislative (regulations) | Quasi-judicial (orders, penalties) | Executive (registration, inspection, investigation)

Match the action in the question to the power.

SCRA, 1956 – focus

Regulation of stock exchanges and trading in securities

Think recognition of exchanges, listing and securities contracts.

Depositories Act, 1996 – focus

Dematerialisation and book-entry transfer of securities

Depository, depository participant, beneficial owner.

Appeal route

SEBI order → Securities Appellate Tribunal → Supreme Court

Appeal to the Supreme Court lies on a question of law.

Mutual fund regulation

SEBI (Mutual Funds) Regulations, 1996

Structure: Sponsor → Trust (trustees) → AMC; plus custodian and registrar. Trust holds assets for unit holders.

Portfolio manager regulation

SEBI (Portfolio Managers) Regulations, 2020

Replaced the 1993 regulations. Services: discretionary, non-discretionary, advisory. The disclosure document must reach the client at least two days before the agreement is signed.

PMS minimum investment

₹50 lakh per client

Can be in funds or securities. Applies to the client's total investment with that portfolio manager, not per portfolio. Accredited investors can be onboarded differently.

AIF regulation

SEBI (Alternative Investment Funds) Regulations, 2012

Categories I, II and III. Privately pooled investment vehicles. Category I includes venture capital, social venture, infrastructure, SME and angel funds. Category II may borrow only for day-to-day operations, within limits.

AIF minimum investment

₹1 crore for ordinary investors

Exceptions: ₹25 lakh for employees or directors of the AIF or its manager and for angel fund investors. Accredited investors can be subject to different thresholds, including for large value funds.

PMS vs AIF

PMS = individual portfolio; AIF = pooled fund

In PMS, securities are held in the client's name. In an AIF, the investor holds units of the fund.

Core AML duties

Identify client (KYC) → Keep records → Monitor transactions → Report suspicious ones

Remember this sequence. Most questions test one of these four duties.

Three stages of money laundering

Placement → Layering → Integration

Placement is entry into the system. Layering hides the trail. Integration brings money back looking clean.

Who receives STRs

Reporting entity → FIU-IND

The Financial Intelligence Unit - India is the central agency that receives and analyses suspicious transaction reports.

No tipping off

STR filed ⇒ client must not be informed

Telling the client about a report is a breach of the rules.

Beneficial owner

Beneficial owner = natural person who ultimately owns or controls the client

Look through companies, trusts and firms to a real person.

Risk-based approach

Higher risk client ⇒ enhanced due diligence

Examples of higher risk: PEPs, complex structures, high-risk jurisdictions.

CKYC identifier

KYC once → KIN generated → record reused by other entities

KIN is the KYC Identification Number assigned in the central registry.

Core code of conduct principles

Honesty + Due diligence + Client interest first + Disclosure + Suitability + Confidentiality + Compliance

These are the themes tested. Any option that allows hiding a conflict or guaranteeing returns breaks the code.

Grievance redress route

Adviser's own mechanism → SEBI SCORES → ODR / arbitration / other legal remedy

The adviser should try to resolve first. SCORES is SEBI's online complaint platform.

SEBI action ladder

Warning / directions → monetary penalty → suspension → cancellation of registration → prosecution (serious cases)

Severity of action depends on the gravity of the violation.

Guaranteed returns rule

Advisers must not guarantee returns or assure certainty of results

Any such promise is a code violation and a common trap option.

Quick revision

• Investment advice must come from a registered adviser under the SEBI (Investment Advisers) Regulations, 2013.
• Individual advisers and principal officers must pass both X-A and X-B, as stated in the exam rules.
• Risk profiling and suitability come before advice, and a client's profile must guide the recommendation.
• Advisory and distribution activity must be kept separate, with the conditions given in the Regulations.
• Know the fee modes allowed and the limits set in the Regulations, exactly as in the workbook.
• Conflicts of interest must be identified and disclosed to the client.
• SEBI's powers come from the SEBI Act, 1992.
• Mutual funds, portfolio managers and AIFs each have their own SEBI regulations.
• KYC and anti-money laundering checks apply to every client relationship, and records must be kept.
• Clients have a defined route for grievances, starting with the adviser and then the SEBI complaint system.
• Breaches of the Regulations can lead to penalties and action by SEBI.
• NISM certificates are valid for 3 years from the date of the examination.

Common mistakes

• Treating risk tolerance as the only measure of risk profile. Fix: Always check risk capacity too, and go by the lower of the two.
• Thinking client consent makes an unsuitable product acceptable. Fix: Suitability is the adviser's duty. Consent does not cure unsuitable advice; explain the risk and advise within the profile.
• Treating 2.5% as the fee every adviser must charge Fix: Read it as a ceiling per client per year, covering all services, not as a standard rate.
• Adding the AUA cap and the fixed fee cap together Fix: The adviser picks one mode for the client. Only that mode's cap applies.
• Saying the SCRA created SEBI. Fix: SEBI was given statutory status by the SEBI Act, 1992. The SCRA, 1956 is about exchanges and trading in securities.
• Thinking SEBI only protects investors. Fix: Remember all three: protect investors, develop the market and regulate the market.
• Treating PMS minimum as ₹1 crore or the usual AIF minimum as ₹50 lakh. Fix: Remember the order: PMS ₹50 lakh is lower, the usual AIF minimum of ₹1 crore for ordinary investors is higher.
• Saying PMS pools client money like a mutual fund. Fix: In PMS each client has an individual portfolio. Pooling is a feature of mutual funds and AIFs.
• Saying STRs are filed with SEBI. Fix: Remember that STRs go to FIU-IND. SEBI sets the guidelines and supervises.
• Thinking CKYC removes the need for any verification by the adviser. Fix: CKYC saves repeated paperwork, but the intermediary must still be satisfied about the client and follow its own risk-based checks.

Exam tips

• Expect short case questions where one step is missing. Find the missing step.
• When tolerance and capacity differ, the safe answer is the lower one.
• Treat options with 'client insists, so it is fine' as traps.
• Learn the exact record-keeping period from the workbook; options often change the number.
• Negative marking applies, so skip a question only if you cannot narrow to two options.
• Memorise 2.5% for AUA and two quarters in advance. For the fixed fee, use the rupee cap in the current NISM workbook or SEBI circular. Examiners build wrong options around nearby values.
• Watch for the words 'maximum' and 'per annum'. In calculations, apply the cap to all services combined for the client.
• Expect scenario questions where an adviser or family member sells products to an advisory client. The answer is usually segregation.