Fine-tuning needed

Guidelines for investment advisers should be clear

The Securities and Exchange Board of India (Sebi) has proposed a new advertisement code for investment advisers (IAs) and research analysts (RAs) to reduce chances of misleading investors through false, confusing, biased, or deceptive claims. This could be considered an addendum to the existing code of conduct for IAs and RAs and it follows on the heels of recent instructions to mutual funds to avoid claims of assured returns. The new code, which comes into force on May 1, 2023, seeks to eliminate statements designed to exploit lack of experience or knowledge. IAs and RAs should thus refrain from overuse of technical or legal terminology and complex language. They should also avoid excessive detail and not promise assured returns to investors. Further, just like mutual funds, advertisements and communications by IAs/RAs now need to include a warning that “investment in securities market is subject to market risks. Read all the related documents carefully before investing”.
 

Sebi has also mandated that prior approval for advertisements is to be obtained from the regulator’s recognised supervisory body before the issue. In addition, IAs/RAs cannot participate in, or organise games, leagues, schemes, and competitions that may involve the distribution of prize money, medals, gifts, etc. The code is very broad and it could be interpreted to cover direct personal messages to investors. It covers all forms of communications, issued by, or on behalf of IAs and RAs, including pamphlets, research reports, newspaper or TV ads, mails, content on electronic messaging and social media platforms. IAs and RAs have been asked to refrain from statements that are false, misleading, biased or deceptive, or based on assumptions or projections. For instance, they may not refer to any report, analysis, or service as free, unless it is free, without condition or obligation. Also, they cannot imply or make any guarantee of assured or risk-free return on the basis of past performance. These entities are also barred from making statements that directly or indirectly discredit other advertisements or intermediaries, or make unfair comparisons to ascribe any qualitative advantage over other intermediaries.
 

All these may stop practices that are common especially on social media, where IAs and RAs display “model portfolios” not actually held by investors, or hype up their own performances via disparaging comparisons with rivals. However, while this adds a potential layer to protection for investors, many IAs generate business through word of mouth, seeking out individual high net-worth clients. Hence, they could fall outside this regulatory net. Also, it is not clear if this code will stop mis-selling by banks and financial institutions, which tend to rely on verbal communication by a network of agents (who are not themselves IAs/RAs) to pull in business. Prior approval for advertisements may prove cumbersome or impossible to apply in practice. If this applies to paid communications only, it may be sidestepped. Much of IA/RA content is disseminated for free on social media. If it applies to all communications by IAs/RAs, the sheer volume to be ratified makes it impossible to implement. Thus, the regulator needs to clearly define an “advertisement” and to distinguish it from a data release or educational material. While the code is a step forward in principle, it will need to be fine-tuned.