CA firms often consider offering both tax advisory and PMS referral services. This article explains whether this is permitted and how to structure the arms-length requirement.
The Regulatory Framework
Permissible Activities
CA firms can offer tax advisory services as part of their core practice. They can also refer clients to registered PMS providers, provided they structure the arrangement appropriately.
Arms-Length Requirement
The PMS provider shall act in a fiduciary capacity towards its Client and shall maintain arm's length relationship with its other activities. This applies to any relationship between a CA firm and a PMS provider.
Structuring the Arms-Length Relationship
Key Principles
- Independence: The PMS provider must be independent in its investment decisions
- No Conflict of Interest: No conflict of interest should exist between tax advisory and PMS services
- Arm's Length: Transactions and relationships must be at arm's length
- Disclosure: All relationships and arrangements must be disclosed to clients
Practical Implementation
Separate Teams:
- Tax advisory team separate from PMS referral team
- Independent decision-making
- No sharing of client information without consent
Separate Agreements:
- Separate agreements for tax advisory and PMS services
- Clear terms and conditions for each service
- Client consent for each service
Disclosure Requirements:
- Disclose any referral arrangements
- Disclose any fees or commissions received
- Disclose any potential conflicts of interest
What CA Firms Can Do
1. Provide Tax Advisory Services
CA firms can continue to provide tax advisory services as part of their core practice. This includes:
- Income tax planning
- GST compliance
- Tax filing
- Financial planning (general)
2. Refer Clients to PMS Providers
CA firms can refer clients to registered PMS providers, provided:
- The referral is disclosed to the client
- The PMS provider is SEBI-registered
- The arrangement is at arm's length
3. Provide PMS Advisory Support
CA firms can provide advisory support to PMS clients, including:
- Tax planning for PMS investments
- Portfolio accounting
- Capital gains computation
- Tax filing for PMS income
What CA Firms Cannot Do
1. Manage Client Portfolios
CA firms cannot manage client portfolios without PMS registration. If you are managing someone's money or portfolio, that is not advisory but a PMS.
2. Exercise Discretion
CA firms cannot exercise discretion in investment decisions without PMS registration.
3. Provide Investment Advice Without IA/RA Registration
CA firms cannot provide investment advice (recommending specific securities) without IA or RA registration.
Disclosure Requirements
To Clients
CA firms must disclose:
- Any referral arrangements with PMS providers
- Any fees or commissions received
- Any potential conflicts of interest
- The arms-length nature of the relationship
To Regulators
CA firms must ensure:
- Compliance with SEBI regulations
- Appropriate registrations (IA/RA/PMS)
- Proper documentation of referral arrangements
Best Practices
For CA Firms
- Maintain Clear Boundaries: Separate tax advisory from PMS referral
- Disclose Arrangements: Disclose referral arrangements to clients
- Use Registered PMS Providers: Only refer to SEBI-registered PMS providers
- Document Everything: Maintain proper documentation of all arrangements
- Review Regularly: Regularly review compliance with arms-length requirements
For PMS Providers
- Maintain Independence: Independent investment decisions
- Arm's Length: Arms-length relationship with referrers
- Disclosure: Disclose referral arrangements to clients
- Compliance: Ensure compliance with SEBI regulations
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on CA firm structuring and PMS referral compliance. Our securities law experts help firms structure arms-length relationships and ensure regulatory compliance. Contact us for guidance on CA firm structuring and other regulatory matters.