The Securities and Exchange Board of India (Sebi) proposed setting up a Performance Validation Agency (PVA) to protect investors from misleading claims. The agency would validate claims of performance by Sebi-registered intermediaries/entities.
Sebi released a consultation paper on August 31, 2023, seeking public comments on this proposal until September 21, 2023.
What Is PVA?
PVA will be an independent body that 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 (investment advisors), RA, portfolio manager, AMC, stock brokers, etc.," the paper said.
Why Setup A PVA?
Protect Investors Against Misleading Claims: Currently, intermediaries and other financial entities are required to present their performance to attract clients. "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. Investors lack the means to verify these performance claims by traders, brokers, mutual fund distributors and RIAs. This led to Sebi proposing a PVA that will validate these claims.
Help Intermediaries Market Their Services: Currently, Mutual Fund Asset Management Companies (AMCs) and portfolio managers self-verify their claims. Further, IAs and RAs are currently barred from referring to their past performance in their advertisements. So they are not able to showcase their expertise. Similarly, stock brokers are 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," the paper said.
Further, the demand from registered intermediaries to showcase their performance to investors is another reason to set up PVA. "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 PVA Will Work?
Performance claims shall be validated by PVA based on specified parameters such as returns, risk, volatility, and other suitable parameters to be decided later. PVA will do this in exchange for a fee.
PVA will validate various claims, including claims by Sebi-registered intermediaries/other entities of the actual profit made by their clients. For stock/portfolio performance claims, intermediaries must provide the actual recommendations made to clients and the recommended holding periods, which PVAs will check.
In short, PVA's role is to independently assess and validate various financial performance claims to ensure transparency and fairness in the financial industry.
