The Client Who Wants to Hand Over the Keys
Vikram, 45, is a senior manager at a listed pharmaceutical company and has a Rs 3.5 crore portfolio with a registered individual adviser, Nisha. In one meeting he makes three requests. First, he wants to give her a power of attorney so that she can 'just decide and execute' without consulting him, and he offers her 20% of the profits as an incentive to do well. Second, he says: 'Buy ABC Pharma tomorrow morning. A friend on the board told me the quarterly numbers will beat estimates and there is a USFDA approval coming next month. We will make a quick 15%.' Third, he asks her to route all his trades through a broker who, he says, will pay her Rs 20 per order as a 'referral' and will also give her office space free of cost. Nisha's practice currently covers 90 clients on a non-discretionary, fee-only basis. She has no other registration.
1. Analyse the power-of-attorney and profit-sharing request. What can Nisha lawfully accept and what would it turn her practice into?
Read the worked answer
Nisha should decline both elements.
The POA. An investment adviser registration permits advice and, where the client consents, execution of transactions on the client's instruction. It does not permit managing a portfolio at her own discretion. Discretionary management of client portfolios, with or without a POA, is portfolio management activity and requires registration under the SEBI (Portfolio Managers) Regulations, which also carries a minimum investment threshold and separate compliance, reporting and audit obligations. Accepting a general POA and trading without pre-trade client consent would place her outside her registration.
The profit share. A 20% share of profits aligns her compensation with risk-taking rather than with the client's outcome. It also converts the relationship into a partnership in the trading results, which is incompatible with a fiduciary advisory role and with a fee structure that must be transparent and disclosed. If the arrangement functions as discretionary management for a share of gains, it reinforces the portfolio-management characterisation.
What she can accept: a limited, specific authority, for example a standing instruction to execute a defined model portfolio with a documented pre-approved mandate and periodic rebalancing confirmation - but only if the documentation and consents are correct and reviewed with her compliance adviser. Safer still: continue non-discretionary, with signed transaction confirmations.
She should also record the conversation. If Vikram moves to another adviser who accepts the arrangement, that is his choice; her obligation is not to facilitate it.
2. What must Nisha do about the tip on ABC Pharma, and what are the consequences of acting on it or of passing it on?
Read the worked answer
She must refuse, and refuse clearly.
The client is a senior manager of a listed company. Information about unpublished quarterly results and a pending regulatory approval is unpublished price-sensitive information (UPSI). Communicating it to Nisha is itself a violation of the SEBI (Prohibition of Insider Trading) Regulations, 2015 by the client. Nisha, having received it, is now in possession of UPSI. Trading or advising a trade on the basis of that information would expose both of them to action for insider trading, and can attract disgorgement of profits, penalties and, in serious cases, criminal liability.
Actions:
- Do not trade, do not advise, do not mention the name to any other client or colleague.
- Tell Vikram plainly that the information cannot be used and that he should not share it further; note that his own company's code of conduct and the PIT Regulations bind him as an insider.
- Document the date, time, content of the tip and her response in the client file, and inform her compliance officer or designated person.
- Put a hold on any pending instruction for the same security until the information becomes public or is stale.
- Consider whether the relationship can continue. A client who repeatedly offers inside information makes the adviser's own compliance position untenable.
Note that acting on a 'mosaic' of genuinely public information is lawful; the distinction is whether the specific fact is unpublished and price-sensitive, which here it plainly is.
3. How should she respond to the broker referral and free office space, and why does it matter beyond the money?
Read the worked answer
She should decline, and the reason is structural rather than moralistic.
The Rs 20 per order is a per-transaction inducement: it pays her more when the client trades more. That is a direct incentive to churn, and it is precisely the conflict the advisory relationship is meant to eliminate. Free office space from a broker is worse in kind, because it is a recurring benefit that ties her business costs to one execution venue - a soft-dollar arrangement that is hard to value and hard to disclose meaningfully.
Beyond the money:
- Best execution. Her duty is to obtain the best execution for the client. A financial interest in one broker compromises her ability to compare brokerage, execution quality and service.
- Disclosure is not a cure. Telling the client about the arrangement does not neutralise a per-trade incentive; the conflict must be avoided, not merely announced.
- Regulatory exposure. Undisclosed inducements from intermediaries are a standard inspection finding and sit badly with the Code of Conduct's requirements of fairness and avoidance of conflicts.
Her response should be a short, written policy: no commissions, no per-order payments, no free infrastructure from product manufacturers or intermediaries; execution through a broker chosen on written comparison of cost and quality, reviewed periodically; any gift or hospitality above a nominal threshold declined and logged. Sending that policy to Vikram also tests whether the relationship is workable - and if he chose her because he expected these arrangements, that is information she needs early.