The SEBI (Research Analysts) Regulations, 2014 introduced the concept of "family of client" as part of the framework for client-level segregation of research and distribution activities. Understanding this definition and its implications is crucial for Research Analysts seeking to comply with regulatory requirements.
Definition of Family of Client
Regulatory Definition
Regulation 2(1)(fc) of the RA Regulations defines "family of client" as including:
- Individual Client: The individual client himself/herself
- Dependent Spouse: The spouse of the client
- Dependent Children: Children of the client
- Dependent Parents: Parents of the client
Understanding "Dependent"
The term "dependent" is crucial to the definition. Dependent family members are those whose assets originate from the income of a single entity, i.e., the earning client (individual) in the family.
Key Characteristics
- Single Client Concept: The family of client is reckoned as a single client for regulatory purposes
- Control Record: PAN of all members in the family of client would jointly and severally be the control record
- Dependency Requirement: Members must be dependent on the earning client
Implications for Client-Level Segregation
Regulation 26C Requirements
Regulation 26C of the RA Regulations requires client-level segregation at group level for research services and distribution services. The key principles are:
- No Dual Provision: The same client cannot be offered both research and distribution services within the group
- One Service Only: A client can either be receiving research services where no distributor consideration is received at the group level or distribution services where no research services fee is collected from the client at the group level
Application to Family of Client
The family of client concept means that:
- Family as Unit: The entire family of the client is treated as a single client for segregation purposes
- No Disaggregation: Individual family members cannot be split across research and distribution services
- Uniform Treatment: All family members must receive the same type of service (either research or distribution)
Practical Implementation
For an individual client, "family of client" shall be reckoned as a single client and PAN of all members in "family of client" would jointly and severally be the control record.
Exceptions
The same shall not be applicable for non-individual clients.
Implications for Fee Limits
Fee Limit Application
The fee limit of ₹1,51,000 per annum per family of client applies to:
- Individual Clients: Individual clients
- HUF Clients: Hindu Undivided Family clients
Family-Based Fee Calculation
The fee limit applies per family of client, meaning:
- Family Cap: The total fees charged to all family members combined cannot exceed the limit
- No Individual Limit: There is no separate limit for individual family members
- Family Determination: The fee limit applies based on the family of client definition
Compliance Requirements
Annual Declaration
The client shall provide an annual declaration or periodic updation, as the case may be, in respect of such dependent family members.
Control Record
PAN of all members in "family of client" would jointly and severally be the control record.
Annual Certificate
RA shall maintain on record an annual certificate from a member of ICAI/ICSI/ICMAI or from an auditor (in case of individual RA)/statutory auditor (in case of a non-individual RA or research entity) confirming compliance with the client-level segregation requirements.
Compliance Timeline
Such annual certificate shall be obtained within six months from the end of the financial year starting from for the financial year ending March 31, 2025 and the same shall form part of compliance audit, in terms of regulation 25(3) of the RA Regulations.
Practical Considerations
Identifying Family Members
RAs should:
- Obtain Declaration: Obtain declaration from clients about family members
- Verify Dependency: Verify dependency status
- Maintain Records: Maintain records of family members
- Update Regularly: Update records on a regular basis
Determining Dependency
Dependent family members are those whose assets originate from income of a single entity, i.e., the earning client (individual) in the family.
Handling Changes
When family composition changes:
- New Dependents: Add new dependents to the control record
- Ceased Dependents: Remove dependents who are no longer dependent
- Update Declaration: Obtain updated declaration
Special Considerations
Non-Individual Clients
The family of client concept does not apply to non-individual clients. For non-individual clients:
- Separate Treatment: Each non-individual client is treated separately
- No Family Concept: The family concept does not apply
Accredited Investors
The family of client concept applies differently for accredited investors:
- Fee Limits: Fee limits do not apply to accredited investors
- Segregation Exemption: Exemption may be available for institutional clients and accredited investors
Expert Legal Guidance
Anuj Desai & Associates provides expert legal services for Research Analysts on understanding and applying the family of client provisions. Our securities law experts help RAs develop compliant policies for identifying family members, obtaining declarations, and maintaining records. We assist in drafting family declarations, establishing verification procedures, and ensuring compliance with regulatory requirements.