SEBI proposes agency to validate claims of intermediaries

Markets regulator SEBI has proposed the creation of a performance vValidation agency (PVA) to validate the claims of intermediaries and other financial firms registered with SEBI.

These financial entities need to showcase their performance to attract more clients and grow and continue to do business. However, in a bid to compete for clients, some of these entities make inflated that can mislead investors, said a SEBI consultation paper.

Currently, asset management companies (AMCs) calculate the performance of mutual fund schemes. Similarly, portfolio managers have been permitted to report their performance per certain benchmarks. The claims made by these intermediaries/entities are mostly self-verified and currently there is no dedicated agency to validate such claims.

Investment advisers (IAs) and research analysts (RAs) are also inherently involved in giving investment advice and 'buy/sell/hold' recommendations, respectively. In terms of the advertisement code for IAs and RAs issued by SEBI, IAs and RAs are currently not allowed to make any reference to past performance.

There has, however, been a demand from registered intermediaries to showcase their performance to investors so as to establish/enhance their credibility.

Accordingly, it is proposed to create an independent body, a performance validation agency (PVA) that will check the accuracy of claims and verify performance related to investment advice, 'buy/sell/hold' recommendations, mutual fund schemes, portfolio management services, algorithms, etc., of SEBI-registered intermediaries and other entities, such as IAs, RAs, portfolio managers, AMCs, stock brokers, etc.

The PVA shall validate the claims by SEBI-registered intermediaries and other entities regarding the actual profit made by their clients on the basis of advice, recommendations and other services.

The PVA shall also validate the performance claims of these SEBI-registered companies and individuals, as well as test the performance of algorithms during a prospective reasonable test period.

Apart from the above, other performance claims may be validated by the PVA too, subject to the core principle that there will be no cherry-picking of favourable events, strategies, clients or other results.

Any claims made should be independently verifiable from sources other than the entity making the claim—that's the aim behind setting up this new agency, according to SEBI.