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SEBI body to vet return claims of intermediaries

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The Securities and Exchange Board of India (SEBI) has proposed to create a Performance Validation Agency (PVA) to validate the claims and performance related to investment advice and buy, sell, and hold recommendations given by intermediaries.

Investment advisers and research analysts are not allowed to make any reference to past performance, as per the advertisement code. Stock brokers are not allowed to make any reference to the past or expected future return of algorithms or associate with any platform that does so.

Asset management companies calculate the performance of mutual fund schemes. Similarly, portfolio managers have been permitted to report their performance vis-à-vis certain benchmarks. The claims made by these entities are mostly self-verified, and there is no dedicated agency to validate such claims.

“The creation of an independent agency will help eliminate bias and errors in performance numbers,” said Sameer Kamdar, founder of Smart Money. “It is even more important from the point of view of the PMS industry, as there were many complaints of asset managers twisting performance data to benefit their schemes and show others in a poor light.”

Role of PVA

A PVA will validate performance based on parameters such as returns, risk, volatility, and other parameters as decided by industry forums in consultation with the PVA and SEBI. The body will also validate claims of the actual profit made by clients on the basis of advice given by the intermediaries.

“It has been often seen that selective, cherry-picked, or fake claims are made about past returns for marketing a financial product or service. A fact-checking agency would help curb the misinformation and verify claims of past performances,” said Anil Choudhary, partner, Finsec Law Advisors.

The PVA will be allowed to charge fees, something that could push up the cost of doing business for advisors, which have already been burdened by higher compliance, said Suresh Sadagopan, principal officer, Ladder7 Wealth Planners.

“The PVA is more relevant to those who give stock recommendations and provide model portfolios. MF distributors and even RIAs who give asset allocation advice may not fall come under its ambit. Say a portfolio allocates some money to fixed income and other non-listed instruments. How will you track that and map it to the client’s portfolio?” said Kirtan Shah, chief executive, Credence Wealth Advisors.

A PVA will be a wholly-owned subsidiary of a market infrastructure institution or one supported by multiple MIIs.

Comments on the proposals have been invited until September 21.





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