SEBI Intends To Promote Agency for Validating Performance of Mutual Funds, Advisors, Research Analysts, Algorithms
Moneylife Digital Team 01 September 2023
The market regulator Securities and Exchange Board of India (SEBI), which has been firing one discussion paper a week, has now proposed the creation of a performance validation agency (PVA) to validate any claims of performance by registered intermediaries. This, hopes SEBI, would “facilitate these intermediaries or entities to showcase their validated performance to investors to grow the reach of their services.“
 
SEBI is concerned that, in the rush for more clients, some of these intermediaries or other entities may indulge in making inflated claims of their performance or recommendations, thereby misleading investors. SEBI wants to standardise the calculations and validate such claims.
 
Currently, mutual funds (MF) disclose the performance of mutual fund schemes. Similarly, portfolio managers report their performance in SEBI’s portal and a portal set up by the Association of Portfolio Managers of India (APMI). However, this performance is self-declared and no dedicated agency currently validates the performance.
 
Investment advisers (IAs) and research analysts (RAs) are also involved in giving investment advice and ‘buy, sell or hold’ recommendations. Many of them claim high returns on their own site or in the investment portal smallcase.in.
 
SEBI’s advertisement code for IAs and RAs prohibits them from making any reference to past performance. Stock brokers providing services relating to algorithmic trading are not even regulated in part of their activity, as much as IAs and RAs are.
 
SEBI claims that there have been demands from registered intermediaries to showcase their performance to investors to establish or enhance their credibility in the eyes of investors and to help grow the reach of their services to investors.
 
To address this demand, SEBI is proposing 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 and performance. To achieve this, SEBI is planning to create an independent body called PVA in all segments – from mutual funds to PMS to IAs and RAs to algo trading.
 
Since the PVA would be required to process enormous amounts of data with attendant security and privacy of customer data, the regulator thinks market infrastructure institutions (MIIs) in the securities market would be a natural fit for PVA work as a wholly-owned subsidiary of one MII or a jointly supported entity by multiple MIIs. PVAs would be the intermediaries for its services.
 
Surprisingly, claims permitted to be validated by PVAs include claims of ‘actual profit’ made by clients carried out by the PVA for all based on trading or investment details using the PAN of the clients. This means if the clients of IAs and RAs have not acted upon their recommendation, the performance of the recommendation would not be taken into account. However, the performance of algorithms would be established merely by testing the algorithms during a prospective reasonable test period.
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