SEBI Performance Validation Agency Proposal: A lot of investors are currently fishing in the dark. They have no way to cross-verify performance claims made by traders, brokers or even mutual fund distributors (MFDs) and registered investment advisors (RIAs).
For example, when MFDs or RIAs tell you that their advice delivered alpha to their clients, you have no other way to check whether they saying the truth or simply enticing you to buy their products or services. Even in the case of stock trading, it has been seen that verified profit and loss (P&L) statements can be gamed.
In order to bring more transparency for investors, the Securities and Exchange Board of India (SEBI) has proposed setting up a Performance Validation Agency (PVA) that will validate claims of performance by SEBI-registered intermediaries/entities. The proposal, if implemented, will be a win-win for both the investors and well as such intermediaries or entities.
While investors will be able to make their decisions based on authentic data, the PVA will also help intermediaries grow the reach of their services by showcasing their validated performances.
Why this proposal?
SEBI has released a Consultation Paper on PVA. The paper noted that currently, intermediaries/other entities are required to showcase their performance to attract more clients and grow and continue to do business.
“However, in the rush for more clients some of these entities may indulge in making inflated claims of their performance or recommendations to investors, thereby misleading the investors,” the regulator said.
Also, the claims made by mutual fund Asset Management Companies (AMCs) and portfolio managers are mostly self-verified. Currently, there is no dedicated agency to validate their claim.
In the case of stock trading, brokers are currently not “allowed to make any reference to the past or expected future return/performance of algorithms or associate with any platform providing reference to the past or expected future return/performance of algorithms.”
SEBI’s consultation paper said there has been a demand from registered intermediaries to showcase their performance to investors so as to establish/enhance their credibility in the eyes of investors and to help grow the reach of their services to investors.
“In order to address this demand, 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 market regulator said.
How will PVA work?
SEBI has proposed to create the PVA as an independent body, which will engage in validating claims/performance related to “investment advice, ‘buy/sell/hold’ recommendation, mutual fund scheme, portfolio management service, algorithm, etc. by SEBI registered intermediaries/other entities such as IA, RA, portfolio manager, AMC, stock brokers, etc”
SEBI said that the proposed PVA will be a “natural fit” as a wholly-owned subsidiary of Market Infrastructure Institutions (MIIs) in the securities market as they handle an “enormous amount of data” related to the securities market on a daily basis.
The purpose of such PVA would be to enable intermediaries/other entities to market their products based on validations made by the PVA.
SEBI further said that the recognition of such PVA shall be based on the eligibility of the parent entity, for which the eligibility criteria shall be prescribed by the regulator.
The PVAs may also be permitted to charge a reasonable fee for its service.
Types of claims that PVAs shall validate
- Claim of ‘Actual profit’ made by clients
- Performance claim of SEBI registered intermediaries/other entities and algorithms
- Performance of recommended stock/portfolio
- Any other performance claims
SEBI’s proposal for setting up the PVA is currently open for public comments that can be sent by email to cinsltationMIRSD@sebi.gov.in by September 21, 2023. More details about sending comments on the proposal are available on the SEBI website.