SEBI calls for independent body to validate claims of registered entities

Capital markets regulator SEBI (Securities and Exchange Board of India) has proposed the formation of an independent body called 'Performance Validation Agency (PVA)' to validate claims of performance by SEBI-registered entities.

"It is proposed to facilitate registered intermediaries to disclose their performance to investors, while at the same time having checks and balances to protect the interest of investors against unverified claims/performance," the capital markets regulator has suggested via a consultation paper.

SEBI has proposed the PVA will validate the claims related to investment advice, 'buy/sell/hold recommendations, mutual fund scheme, portfolio management service, algorithm, etc., by entities such as IA, RA, portfolio manager, AMC, and stock brokers.

The SEBI paper aims to show such entities' validated performance to investors, which it says will help them grow the reach of their services.

The paper comes in the wake of increasing debate over the usage of profit and loss statements on social media in order to attract clients, with many arguing against such practices.

Some of these entities, says SEBI, may indulge in making inflated claims of their performance to investors, thus misleading them. Claims made by such entities are mostly self-verified, and currently, no dedicated agency validates such claims.

SEBI says Investment Advisers (IAs)and Research Analysts (RAs) are also inherently involved in giving investment advice and 'buy/sell/hold' recommendations, respectively. However, they are currently not allowed to make any reference to past performance, says the regulator.

There has been a demand from registered entities to show their performance to investors so as to establish their credibility to help grow the reach of their services.

In terms of criteria for recognition from the PVA, it'll require processing the data on claims of entities, keeping the privacy of customer data in mind. "It is crucial the entity that handles the data is able to shoulder the responsibility to gather, process, and validate the huge amount of data," the SEBI says.

Currently, market infrastructure institutions (‘MIIs’) in the securities market handle enormous amounts of data on a daily basis, primarily related to the securities market. Considering this, SEBI says it is a natural fit for PVA to be a wholly-owned subsidiary of MII or a jointly supported entity by multiple MIIs, which will enable intermediaries to market products after their validations.

"Recognition of PVA shall be based on the eligibility of the parent entity, for which the eligibility criteria shall be prescribed by SEBI."

For smooth functioning, PVA will put in place systems or processes for maintaining data, grievance redresssal, and sharing of information with SEBI. The PVA will validate claims on parameters such as returns, risk, volatility, etc. The regulator says it can partner with other knowledge partners such as credit rating agencies.

The regulator has sought public comments on whether such entities should validate claims before disclosing them to clients; whether there is a need to have a separate entity; whether PVA should be a subsidiary of MII; and suggestions on other types of claims that should be validated by PVA.