Common inspection violations for research analysts: what to look out for

Redressal of client grievances

Violation observed: Research analysts often fail to resolve client grievances within the timelines specified by SEBI circulars.

Solution: Resolve a client's complaint within one month, as set out in the grievance-redressal process. Clients should first reach out to their point of contact; aim to resolve the issue within three to five working days, with options to email or call and an escalation to a senior team member where needed. If the matter remains unresolved after one month, clients can escalate it through SEBI's SCORES portal and then the ODR Portal.

Violation observed: Many research analysts do not update or maintain correct complaints data on their websites.

Solution: Do not provide incorrect complaint data. Keep complaints data on the website up to date before the seventh of every succeeding month. If there is no website, provide the data to clients by email. The SEBI complaint-data format and Investor Charter format are available in SEBI's investor-charter circular.

Violation observed: The specified Investor Charter is not displayed on the website or mobile application. Where these are not maintained, the charter is not sent to clients by email.

Solution: Make the Investor Charter easy to find on the website and mobile application. If neither is maintained, send it to all clients by email.

Assured returns and misleading claims

Violation observed: Some research analysts misguide clients by mentioning services provided by investment advisers.

Solution: Offer only services permitted for research analysts. Research analysts can give recommendations on securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. Ensure website content, client communications and welcome kits accurately reflect the services offered without exaggerated claims.

Violation observed: Advertising personalised advice, making claims such as being the 'best' or affiliated with MIIs, or promising guaranteed returns.

Solution: Research analysts must not offer personalised services or show favouritism. Avoid superlative terms such as 'Best', 'No. 1', 'Top Adviser/Research Analyst', 'Leading' or 'One of the best amongst market leaders'. Do not promise assured returns, and clearly explain investment risks to clients.

The following disclaimers must appear on the website, mobile application or any other platform used to provide services to clients. The font should not be smaller than 10.

• Registration granted by SEBI and certification from NISM is no way guarantee performance of the intermediary or provide any assurance of returns to investors.
• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Violation observed: Publishing unverified or misleading claims about the number of research analysts employed by the firm or the accuracy of recommendations.

Solution: Ensure all claims about research analysts and recommendations are verified and accurate. Employees, temporary staff and voluntary workers should not encourage or circulate rumours or unverified information obtained from clients, industry, trade or other sources.

Violation observed: Showing profit screenshots to attract clients, or promising to recover losses if they invest more despite prior losses.

Solution: Research analysts are not allowed to mention past performance. Avoid encouraging clients to invest more by promising to recover previous losses. Focus on clear, realistic advice and do not share profit screenshots. Maintain testimonials in the records in case of an inspection at the registered office.

Research reports

Violation observed: Many research analysts fail to maintain duly signed and dated copies of research reports.

Solution: Maintain duly signed and dated copies of research reports to support transparency and accountability. They may be stored digitally or physically.

Violation observed: There is often no documented rationale for the research recommendations made.

Solution: Always document and retain the rationale behind each recommendation. It should be available for review and may be maintained digitally or physically.

Violation observed: Research reports sometimes do not include the disclosures mandated under SEBI regulations.

Solution: Ensure every report includes the necessary disclosures, including any pending disciplinary action, the research analyst's interest in the subject company and confirmation of the following:

• No financial interest is held in the company.
• There is no actual or beneficial ownership of more than 1% in the company.
• There are no other material conflicts of interest.
• No compensation has been received from the subject company.

Address of the research analyst

Violation observed: Material changes - including a change in the principal place of business or the opening of a new corporate office - are not communicated to SEBI.

Solution: Inform SEBI promptly of important changes, such as an address update, by submitting an application. Also notify clients of an address or other important change within two weeks.

Violation observed: The website lists an address that the research analyst does not own or rent, or rent agreements do not accurately set out the business details.

Solution: Use the address registered with SEBI and operate from that location. When the address changes, inform SEBI and update the website and other client-facing platforms. Ensure the rent agreement accurately identifies the type of business being pursued and remains valid.

Other observations

Violation observed: Incorrect or incomplete information is provided during inspections.

Solution: Give inspection teams accurate and complete information. Put checks in place to verify it before submission.

Violation observed: Insufficient due diligence is carried out when hiring employees, or individuals are employed whose previous experience raises concerns about the operation of the research analyst.

Solution: Carry out thorough due diligence, including verification of qualifications and background. Regularly review employee expertise against regulatory expectations and operational needs. Train employees not to make client promises based on market rumours.

Violation observed: Communications between employees and clients are not monitored effectively.

Solution: Set up robust systems to monitor and review employee-client communications, address issues quickly and train employees on the process.

Violation observed: Fresh NISM certification is not obtained before the existing certification expires.

Solution: Obtain fresh NISM certification before the existing certification expires. A research analyst must ensure that certification remains valid at all times.

By addressing these common issues and implementing the solutions, research analysts can enhance their practice, avoid regulatory trouble and build stronger client relationships.