The Securities and Exchange Board of India (SEBI) board has approved a regulatory framework for Index Providers with the objective of fostering transparency and accountability in the governance and administration of financial benchmarks in the securities market.
Markets regulator SEBI has proposed the creation of a Performance Validation Agency (PVA) to validate any claims of performance by SEBI registered intermediaries and other entities.
Intermediaries/ ther entities need 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, 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 vis-a-vis 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’ recommendation, 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 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 called Performance Validation Agency (PVA) to validate the 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 broker, etc.
PVA shall validate the claims by SEBI registered intermediaries/ other entities of the actual profit made by their clients on the basis of advice/ recommendation/ services provided by them.
PVA shall validate the performance claims of SEBI registered intermediaries/ other entities. PVA shall validate the performance of algorithms by testing the algorithms during a prospective reasonable test period.
Apart from the above, any other performance claim may be validated by PVA, subject to the core principle that there will be no selective cherry-picking of favourable events/ strategies/ client and other results. Further, any claim should be independently verifiable from sources other than the entity making the claim.