By Sandeep Parekh
The relationship between an investor and an investment adviser is characterised by high levels of trust and confidence. This position intrinsically carries the risk of misuse, no matter how remote. Tackling this risk, and any competing interests that may arise out of an investment adviser’s pecuniary considerations, has been the focus of regulations governing the activities of such advisers.
In India, investment advisers (IAs) are governed by the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (IA Regulations), which prescribe a set of fiduciary duties and general obligations in connection with an IA’s dealings with investors. In terms of marketing activities, per an advisory released by the Telecom Regulatory Authority of India (Trai) in the context of unsolicited bulk SMSs in 2017, service providers were directed to ensure that messages from Sebi-registered IAs are only sent as transactional messages, and not in the form of promotional messages. Apart from this, the marketing and advertising activities of IAs, until recently, have largely remained unaddressed in the absence of any clear regulatory guidelines.
On April 5, Sebi released the Advertisement Code to regulate advertisements issued by IAs and Research Analysts (the Code). Shortly after, Sebi also released guidelines governing the use of brand/trade names by an IA or a research analyst (RA) (Brand Use Guidelines). The Code and the Brand Use Guidelines are scheduled to come into effect from May 1, and have been adopted to protect inexperienced investors from being misled.
The Code and the Brand Use Guidelines seek to primarily regulate the approval process and the contents of advertisements issued by IAs/RAs. Any communication issued by an IA/RA that may influence the investment decision of an investor and is published or designed for use in any publication or display, in any format, shall be considered as an ‘advertisement’. The Code shall also extend to advertisements issued by any other investment/research/consultancy agency associated with an IA/RA, which refers to the concerned IA/RA. IAs must obtain prior approval from the BSE Administration & Supervision Ltd. (BASL) before publishing or displaying any advertisements.
Advertisements should be presented using unambiguous and concise language and contain accurate and complete information. The Code prescribes information that must be mandatorily included in advertisements, such as name, registered office address, Sebi registration number, brand name, corporate identification number, etc. In terms of the Brand Use Guidelines, IAs/RAs should ensure that details such as logo and contact information are prominently displayed on any portal, notice board, advertisements, publications, KYC forms, and client agreements. Advertisements shall also mandatorily contain standard warnings against market risks, assured returns/guaranteed performance and in case of references to specific securities, a disclaimer indicating the illustrative nature of such references.
Further, the Code sets forth several general prohibitions on the contents of an advertisement, generally prohibiting the use of statements or testimonials which are or may be construed as false, misleading, biased, deceptive or presumptive. IA/RAs are also cautioned against including statements with complex terms and excessive details or statements inconsistent with the nature and risk and return profile of a product. Additionally, the Code has specific prohibitions against certain practices such as the use of references to any report as free unless it is actually free, assured returns, use of superlative terms, and statements which ascribe qualitative advantages over other intermediaries and references to past performance.
The Code and the Guidelines will impact the existing marketing and advertising strategies of IAs to solicit and retain clients. First, there is hardly any room to critcise the inclusion of mandatory details and standard warnings in advertisements. These help investors identify legitimate IAs. Second, the principle-based approach adopted for general prohibitions will allow Sebi greater flexibility in initiating action against IAs who adopt manipulative techniques to lure investors.
However, certain provisions of the Code may impede an IA’s marketing activities without necessarily meeting the purpose of investor protection. To start with, the scope of the term ‘advertisements’ is quite broad. It is unclear whether communications which are not intended to solicit clients, such as generic branding activities, objective commentary on market trends, educational content, or tailored correspondence with clients could constitute advertisements for the purpose of the Code. To address the ambiguity, Sebi must list the kinds of communication that won’t be termed advertisements.
The Code also prohibits including references to past performances in advertisements. Such inclusion was also discussed in the concept paper on Regulation of Investment Advisers released in 2011 to deliberate on the regulatory framework for IAs in India, wherein, ironically, it was proposed to permit references to past, specific recommendations if accompanied by a list of all recommendations made by the IA, within a preceding period of atleast a year. However, the proposal did not find mention in the ensuing IA Regulations. Further, considering the emphasis placed on performance data by investors while selecting an IA, this could also limit an IA’s ability to demonstrate their skills and provide investors with valuable information to enable them to compare, determine and engage the best suited IA. The industry should come together to validate the information, based on uniform external benchmarks, to mitigate the underlying concern of IAs cherry-picking profitable investment recommendations and presenting distorted records of past performance. This information should then be put up in a centralised location, as is currently being made available for customers using PMS and mutual fund products.
Similarly, the per se prohibition against using statements ascribing ‘qualitative advantages’ over other intermediaries is also restrictive and may present roadblocks in an IA’s efforts to carve a distinct brand identity in a rapidly expanding market. Qualifying such statements with the disclosure of verifiable information to substantiate the claims made can achieve the intended purpose. These prohibitions do very little to address unregistered IA activities, which form the lion’s share of malpractices plaguing the investment advisory space. In fact, Sebi should curb the unregistered players with strong action, so that the regulated can draw comfort that they are not paying a large compliance cost in vain.
Viable alternatives that might better address concerns associated with misleading marketing practices could be tweaked or clarified allowing ‘good’ marketing while prohibiting dubious types.
Coauthored with Rahul Das, senior associate and Rashmi Birmole, associate, Finsec Law Advisors
Sandeep Parekh, Managing partner, Finsec Law Advisors. Views are personal.