Ticket, Check. Passport, Check. Visa, Check. Travel log, Check. Fancy Camera, Check. Our foreign travel checklist looks so much like this, doesn’t it? Similarly, Research Analysts and Investment Advisers who are registered with SEBI also have an audit checklist which they need to fulfill. This has been mandated by SEBI as they need to get an annual compliance audit. There is no specified time frame which is to be followed to get this audit done but the consultation paper issued by SEBI on October 7th, 2016 proposing the amendments to the regulations states that the audit has to be done within 3 months from the end of the financial year. A research entity needs to appoint a Compliance Officer to look after the compliance of the regulation.
Let’s find out what is the 10-point audit checklist for Research Analyst and how the RAs should get prepared for annual compliance audit under SEBI (Research Analyst) Regulations, 2014.
- Point 1 – Qualification and Certification Requirements (Reg. 7)
A Research Analyst must meet the qualifications and certification requirements at all times. If any certificate is due for renewal, it should be renewed in advance.
Documents Required: Professional Qualification & NISM Certification certificates
- Point 2 – Capital Adequacy Requirements (Reg. 8)
The capital adequacy requirement must be fulfilled, throughout the validity of certificate. For an individual and partnership firm, the requirement is Rs. 1 lakh. In case of a company or LLP, the requirement is Rs. 25 lakhs.
Documents Required: Balance sheet, if any or CA certificate (latest one)
- Point 3 – Communication to SEBI (Reg. 13.ii)
Any material change in the operations of the company needs to be communicated to SEBI in writing, like hiring employees, change of communication address, etc.
Documents Required: Copy of letters / emails to SEBI and Form A submitted to SEBI at the time of application. Form A will be the basis to check if there are any changes.
- Point 4 – Client Correspondences (Reg. 13.iii)
The words “research analyst” should be mentioned in all correspondence with your clients, at all times.
Documents Required: Copy of letters/emails/other documents like research reports, which are sent to clients.
- Point 5 – Internal Policies and Procedures (Reg. 15)
You are required to keep a written policy document which governs the dealing and trading by you or the research analyst employed by you.
Document Required: Written Internal Policies
- Point 6 – Limitations on Trading (Reg. 16)
If any employee is involved in personal trading activities, it needs to be monitored. They need to take approval before trading in securities.
Documents Required: Declarations by Research Analyst, Approval Forms as per the policies, etc.
- Point 7 – Compensation of Research Analyst (Reg. 17)
A proper, formal approval process for compensation of research analysts should be there in case of an entity.
Documents Required: Approval in writing, Resolution passed by Board of Directors
- Point 8 – Basis for research report to be documented (Reg. 18.7)
Adequate documentary basis, supported by research, should be there for preparing a research report
Document Required: Documents for the basis of research report
- Point 9 – Disclosures in Research Reports & Contents of the Report (Reg. 19 & 20)
You are required to make certain disclosures in the research reports about you, your associates etc.
Document Required: Copy of research reports or the disclosure document
- Point 10 – Maintenance of Records (Reg. 25)
You are required to maintain the Research Report duly signed and dated; Research recommendation provided; Rationale for arriving at research recommendation and Record of Public Appearance.
Document Required: Copy of records maintained
This entire list has to be taken care of for the audit of RAs along with a note to remember, i.e., these documents need to be maintained either electronically / physically for at least 5 years.
- By Saloni Parakh