NISM Series X-A · Unit 12 of 12 · about 8% of the paper
Regulatory environment and ethical issues: NISM Series X-A notes and practice questions
SEBI's investment adviser regulations, the fiduciary duty and the code of conduct for advisers. Learn the exact rules.
What to know in Unit 12
- Who needs registration.
- Fee limits and segregation.
- Risk profiling, suitability and records.
Key terms, examples and exam traps
SEBI (Investment Advisers) Regulations
These regulations require anyone providing investment advice for a fee to be registered with SEBI and to follow conduct rules.
Example. A person charging a fee for investment advice must hold the regulator's registration.
Exam trap. This statement is false: Anyone can give paid investment advice without registration.
Fee modes
An adviser may charge a fixed fee or a fee based on assets under advice, but not both for the same client, and within the limits prescribed by SEBI.
Example. An adviser charges a flat annual fee rather than a percentage.
Exam trap. This statement is false: Advisers may charge both fixed fee and percentage at the same time.
Fee cap
SEBI has capped fees: up to ₹1.51 lakh per family per annum in fixed fee mode, or up to 2.5% of assets under advice per annum in AUA mode.
Example. A fixed fee cannot exceed the prescribed limit per family.
Exam trap. This statement is false: SEBI places no limit on advisory fees.
Segregation of advisory and distribution
Advisory and distribution must be kept separate: an individual adviser cannot do both for the same client, and non-individual advisers need separate arrangements.
Example. An adviser cannot earn commissions on the products sold to her advisory client.
Exam trap. This statement is false: An adviser may sell commission-based products to her advisory clients.
Risk profiling
Advisers must profile every client's risk before giving advice and document it, to ensure suitability.
Example. An adviser uses a questionnaire to determine the client's risk tolerance.
Exam trap. This statement is false: Risk profiling is optional for advisers.
Suitability
Advice must be suitable for the client's risk profile, goals, horizon and financial position, and the reasons must be recorded.
Example. An adviser recommends a safe product to an elderly client with low risk tolerance.
Exam trap. This statement is false: Advice can ignore the client's risk profile.
Client agreement
An adviser must enter into a written agreement with each client stating fees, services, and the rights and obligations of both.
Example. A client signs a document describing the services and fees.
Exam trap. This statement is false: An adviser can provide services with no written agreement.
Disclosure of conflicts
An adviser must disclose any conflict of interest, such as holdings in recommended securities or relationships with product providers.
Example. An adviser tells the client that she owns the recommended security.
Exam trap. This statement is false: Conflicts need not be disclosed.
Record keeping
An adviser must keep records of advice, risk profile, communications and fees for at least five years.
Example. An adviser retains the client's risk profile and recommendations on file.
Exam trap. This statement is false: Records need to be kept for only one month.
Qualification and certification
An individual adviser needs prescribed qualifications and the NISM certification, and must meet minimum experience and net worth norms.
Example. A person with the right degree and NISM certificate applies for registration.
Exam trap. This statement is false: Certification is not required for registration.
Principal officer and compliance
A non-individual adviser must appoint a principal officer with prescribed qualifications and a compliance officer to ensure compliance.
Example. A firm appoints a certified principal officer.
Exam trap. This statement is false: Firms need not appoint any compliance officer.
Advertisement code
Advertisements by advisers must be fair, not misleading, and must not promise assured returns or guarantee performance.
Example. An adviser's brochure must not claim guaranteed returns.
Exam trap. This statement is false: Advisers may promise guaranteed returns.
Confidentiality
An adviser must keep client information confidential and use it only for the advisory purpose, unless required by law.
Example. An adviser does not share a client's holdings with anyone else.
Exam trap. This statement is false: An adviser may sell client data to product companies.
Code of conduct
The code of conduct for advisers includes honesty, diligence, care, transparency, avoidance of conflicts and compliance with the law.
Example. An adviser acts honestly and in the client's best interest.
Exam trap. This statement is false: The code allows misleading statements about returns.
Grievance redressal
Advisers must have a mechanism to address client complaints, and clients can approach SEBI's complaint system and online dispute resolution if unsatisfied.
Example. A client files a complaint on the regulator's portal after the adviser does not respond.
Exam trap. This statement is false: Clients have no route for complaints against advisers.
Annual audit
Registered advisers must undergo an annual compliance audit and submit reports as required.
Example. A firm gets its compliance reviewed every year.
Exam trap. This statement is false: Advisers are never audited.
Prohibition of guaranteed returns
No intermediary may promise or guarantee returns on market-linked products; doing so is a violation.
Example. A representative says, 'You will definitely get 15% every year.'
Exam trap. This statement is false: Intermediaries may guarantee returns if the client is wealthy.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Principal officer and compliance”?
- A non-individual adviser must appoint a principal officer with prescribed qualifications and a compliance officer to ensure compliance.
- Exchanges provide the trading platform; depositories hold securities in electronic form; clearing corporations settle trades.
- An adviser must keep client information confidential and use it only for the advisory purpose, unless required by law.
- Human life value estimates the present value of the future income of a person that his family would lose on his death.
Q2. Which term is described here? The code of conduct for advisers includes honesty, diligence, care, transparency, avoidance of conflicts and compliance with the law.
- Financial planning process
- Sukanya Samriddhi Yojana
- Code of conduct
- Debt fund risk
Q3. Which term is described here? An adviser must keep client information confidential and use it only for the advisory purpose, unless required by law.
- Money market instruments
- Fee modes
- Confidentiality
- REIT
Q4. Which term is described here? An adviser may charge a fixed fee or a fee based on assets under advice, but not both for the same client, and within the limits prescribed by SEBI.
- Tax on mutual funds
- Debt fund risk
- Debt market
- Fee modes
Q5. Which term is described here? SEBI has capped fees: up to ₹1.51 lakh per family per annum in fixed fee mode, or up to 2.5% of assets under advice per annum in AUA mode.
- Fee cap
- Endowment plan
- XIRR
- Settlement guarantee
Q6. Which term is described here? An individual adviser needs prescribed qualifications and the NISM certification, and must meet minimum experience and net worth norms.
- Qualification and certification
- Short-term vs long-term capital gains
- Settlement cycle
- Residential status
Frequently asked questions
How much of NISM Series X-A comes from Unit 12?
Unit 12 (Regulatory environment and ethical issues) usually carries about 8% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series X-A Unit 12?
Who needs registration. Fee limits and segregation. Risk profiling, suitability and records.
Are these NISM Series X-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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UpperCrust Academy is independent study material from UpperCrust Wealth. It is not affiliated with NISM, SEBI or AMFI. For education only. Not investment advice. Always confirm the latest syllabus and rules on the official NISM website.