1. Legal Basis - What Must Be Disclosed?

Disclosure of fees and risks is a statutory duty under fiduciary law. In securities market, it is mandatory under multiple SEBI regulations:

A. SEBI [Investment Advisers] Regulations, 2013 - Regulation 15 & 19:

Investment Adviser must:

• Disclose fee they get for advice on particular product
• Holdings in products on which advising
• Risks involved
• Any conflict of interest arising out of association with issuers
• Maintain records: KYC, risk profiling, suitability, agreement copies, advice whether oral or written, data on fees and time of providing advice

Website disclosure requirements 2026:

• Registered name and SEBI registration number
• Principal officer details
• Fee schedule - fixed fee or % of AUA
• Investor charter, grievance redressal with SCORES link
• Standard risk disclaimers: Investment in securities market are subject to market risks

B. SEBI [Portfolio Managers] Regulations, 2020:

• Minimum investment Rs 50 lakh
• Provider has to offer proper disclosure document on risks and fees to investors

C. SEBI [Mutual Funds] Regulations:

• Scheme Information Document must disclose expense ratio, exit load, riskometer

D. SEBI Circular for Derivatives Risk Disclosure May 19, 2023:
When individual traders log into trading account, risk disclosure should pop up: 9 out of 10 individual traders in equity F&O incurred net losses.

E. SEBI AIF Regulations:

• Template provides for disclosure regarding direct plans, AIF fees, such as distribution, placement charges
• Category III AIFs barred from charging upfront distribution fee, any fees charged by distributors must be disclosed to investors in advance

F. Companies Act 2013 + PFUTP:
SEBI has defined mis-selling as fraudulent trade practice [FTP] under PFUTP Regulations, 2003. It includes instances where material facts are concealed or associated risks are not specified.

2. Why Disclosure Matters - Fiduciary Principle

Investment Adviser is fiduciary. SEBI mandates full disclosure of fees, potential conflicts, and risks involved. If advisor refuses to share details, walk away. Transparency ensures investor can assess suitability.

3. Case Laws - Where Disclosure Failure Led to Penalty

Case 1: YES Bank AT1 Bond Mis-selling - SEBI Order 2021 - LEADING CASE - Rs 27 Cr Penalty

Facts: YES Bank issued Additional Tier 1 bonds - risky, perpetual, can be written down if bank fails. Bank sold these to retail investors, including senior citizens, as "Super FD" or safe product with higher interest.[AT1]

SEBI Findings:

• Bank misrepresented, manipulated and mis-sold AT1 bonds to individual investors
• Officials suppressed material facts about risky nature - that bonds are subordinate, write-down clause, no guarantee
• Provided partial and inaccurate information about risks and returns
• High net-worth and urban retail investors mis-sold with inaccurate sales pitch that downplayed risks

Order: SEBI imposed penalties totaling Rs 27 Crore on YES Bank and officials. Also found violation of mis-selling as fraudulent trade practice.

Ratio: Non-disclosure of fees and risks = fraudulent trade practice under PFUTP. Bank must disclose that AT1 is not FD, has risk of full write-down.

This case is now cited in every disclosure training.

Case 2: Money Market Manthan Financial Services - SEBI Adjudication

Facts: Investment adviser promised assured returns, assigned wrong risk category to clients, charged unreasonable fees.

Held: Established that noticees by promising assured returns, assigning wrong risk category, mis-representation and mis-selling had indulged in fraudulent and unfair trade practices, violation of PFUTP Regulations 2003. Penalty under Sec 15HA SEBI Act attracted.

Principle: Assigning wrong risk profile + non-disclosure of fee structure = FTP.

Case 3: Highbrow Market Research Pvt Ltd - SEBI Final Order

Allegation: Assured returns, manipulated risk profile of clients, sold multiple services charging unreasonable fees without heed to suitability.

Held: Although SEBI initially alleged violation, Tribunal examined whether promising returns + fee non-disclosure alone is PFUTP. Held need to prove manipulation. But established principle: Charging unreasonable fees and manipulating risk profile to sell multiple services violates Investment Adviser Code of Conduct.

Case 4: Karvy Stock Broking - 2019 - Misuse of Client Securities + Non-disclosure of Risks

SEBI barred Karvy - pledged client securities without consent, did not disclose fees for pledge. Rs 2000 Cr securities misused. Demonstrates that non-disclosure of fees and risks of pledging leads to ban.

Case 5: AIF Direct Plans - SEBI Press Release 2024

SEBI directed AIFs to offer direct plans to boost transparency, curb mis-selling. Template provides for disclosure regarding distribution, placement charges. Barring upfront fees.

Case 6: Derivatives Risk Disclosure - Behavioural Experiment - Dvara Research 2022

SEBI received flood of complaints from retail investors alleging not fully informed of risks. Study with 303 respondents randomly given inaccurate sales pitch that downplayed risks vs accurate pitch. Result: Inaccurate pitch increased risk-taking by 40%.

Led to mandatory pop-up disclosure: 9/10 traders lose in F&O.

4. Disclosure Format - What Courts Expect

As per SEBI and case laws, valid disclosure must be:

1. Prior and Informed: Before investment, not after
2. Specific: Not generic "market risks" - must disclose specific risks like write-down, subordination, liquidity
3. Quantified Fees: Exact amount / % - e.g., 2% advisory + 0.5% distribution trail
4. Conflict: If adviser gets commission from product manufacturer, must disclose
5. Suitability: Risk profiling must match product - cannot sell high-risk AT1 to low-risk retiree
6. Language: In language client understands, not buried in 50-page document

Failure = Mis-selling = Fraudulent Trade Practice = Penalty under Sec 15HA - up to Rs 25 Cr or 3x profit.

5. Remedies for Non-Disclosure

• Complaint to SEBI SCORES
• Arbitration at Stock Exchange
• Suit for misrepresentation under Indian Contract Act Sec 17, 18
• Class action under Companies Act Sec 245