8.3 Professionalism, Ethics & Fiduciary Responsibility

Fiduciary duty — the core of an RIA's role

Under Regulation 15(1) of the SEBI (Investment Advisers) Regulations, 2013, a registered Investment Adviser "shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise". Regulation 15(9) applies the Third Schedule Code of Conduct to the adviser and its representatives. (Regulation 16 is risk profiling and Regulation 17 is suitability — a frequent mix-up.) Fiduciary duty means the adviser must place the client's interest above its own commercial interest, its distribution income, and the interests of any related party. This is a higher standard than the suitability standard that governs a distributor.

The PAIA does not owe the fiduciary duty personally (the RIA does), but the PAIA is the daily operational face of the firm. A PAIA who suggests an unsuitable product, hides a conflict, or leaks confidential data causes the RIA to breach its fiduciary duty. So the PAIA's professionalism is the practical mechanism by which the RIA meets its legal standard.

The Third Schedule code of conduct — principles

Note on the schedules: The Code of Conduct is the Third Schedule of the IA Regulations, 2013 (issued under Regulation 15(9)). The First Schedule is Form A, the application form; the Second Schedule is the fee structure (application, registration and renewal fees payable to SEBI, under Regulation 9). It is a common exam trap to confuse them.

The Third Schedule has nine numbered clauses. Learn them by their exact headings — NISM questions often quote a heading and ask what it covers.

Two duties candidates often expect to find in this list actually sit in the regulations rather than the schedule: the fiduciary duty and conflict disclosure are Regulation 15(1), and the prohibition on divulging confidential client information is Regulation 15(2).

How the PAIA supports each principle

The PAIA does not give advice, but every principle above has a PAIA-level action:

• Honesty and fairness — the PAIA must not soften risk language to make a sale easier, and never says "this will definitely give you X%".
• Diligence — the PAIA holds the relevant NISM certification, keeps it valid, and refers rather than guesses.
• Capabilities — the PAIA uses the firm's approved templates, CRM and disclosure packs instead of improvising documents.
• Information about clients — the PAIA collects the profile completely and accurately, and keeps it confidential.
• Information to its clients — the PAIA ensures the client actually received the fee schedule, MITC and risk disclosure before acting.
• Fair and reasonable charges — the PAIA quotes the fee as it stands under the SEBI cap and never invents a discount.
• Conflicts of interest — the PAIA keeps the conflict register updated and escalates any new conflict immediately.
• Compliance — the PAIA cooperates with inspections, audits and IAASB supervision, and logs every interaction the same day.
• Responsibility of senior management — the PAIA escalates, in writing, any instruction from the firm that would breach the code, so senior management owns the decision.

Conflicts of interest — disclose and manage

A conflict of interest exists whenever the RIA's (or PAIA's) personal or firm interest could bias the advice. Common examples in an Indian advisory firm:

• the RIA also acts as a distributor and earns commission on products it recommends;
• the RIA has a referral arrangement with a PMS, insurance company, or platform;
• the RIA or its employees hold a material position in a security being recommended;
• a related party (group company) issues the product being recommended.

The IA code of conduct requires disclosure as and when the conflict arises, not just a one-time boilerplate in the agreement. The PAIA supports disclosure by:

1. keeping the conflict register updated;
2. ensuring the disclosure is sent before the client acts on the advice;
3. documenting that the client received and acknowledged it;
4. escalating any new conflict that emerges mid-engagement to the RIA immediately.

Mere disclosure is not enough where the conflict is fundamental — the RIA may need to decline the advice or waive the commission. The PAIA cannot make that call but must raise it.

Mis-selling — what the PAIA must refuse

Mis-selling is recommending a product that is unsuitable, or misrepresenting it to make it sell. Indicators the PAIA should treat as red flags:

• recommending a product without a current risk profile on file;
• switching a client frequently (churning) to generate commission;
• selling a high-commission product where a lower-cost alternative is equally suitable;
• describing a debt fund as "like a fixed deposit";
• bundling insurance with investment and presenting only the return.

The PAIA's job is to stop these before they reach the client, or to escalate if instructed to proceed.

Confidentiality and data protection

Client confidentiality is both an ethical principle (Third Schedule) and an operational requirement. India does not yet have a single data-protection statute applying to IAs in the same direct way as GDPR does in Europe, but the Digital Personal Data Protection Act, 2023 applies to personal data processing, and the IA code of conduct adds a sector-specific layer. The PAIA should:

• collect only the data the engagement needs (data minimisation);
• store it in access-controlled, encrypted systems;
• never share KYC or portfolio data with third parties without the client's written consent;
• destroy or return client records on request when the engagement ends, subject to the 5-year retention rule for regulatory records.

A confidentiality breach — for example, a KYC document forwarded to an unrelated party — is reportable to the firm's compliance officer and can attract SEBI action against the RIA.