SEBI looking to set up performance validation agency to verify claims of intermediaries

Capital markets regulator SEBI on Friday came out with a proposal to set up a Performance Validation Agency (PVA) to validate any claims of performance by registered intermediaries, including investment advisers, research analysts, and portfolio managers.

The proposed move would facilitate these intermediaries to showcase their validated performance to investors in a bid to boost their credibility in the eyes of investors and to help grow the reach of their services.

At present, 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 are mostly self-verified and currently, there is no dedicated agency to validate such claims.

"Intermediaries/other 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," SEBI said in its consultation paper.

Accordingly, the regulator has proposed to create an independent body called Performance Validation Agency (PVA) to validate the claims related to investment advice, 'buy, sell, hold' recommendations, mutual fund schemes, portfolio management services, and algorithms, by registered intermediaries such as investment advisers (IAs), research analysts (RAs), portfolio managers AMCs and stock brokers.

It has been suggested that PVA should be a wholly-owned subsidiary of market infrastructure institutions (MIIs) or a jointly supported entity by multiple MIIs, whose purpose would be to enable intermediaries to market their products based on validations made by the PVA.

"Recognition of PVA shall be based on the eligibility of the parent entity, for which the eligibility criteria shall be prescribed by Sebi," the regulator suggested.

Under the proposal, the agency would be required to process the data and claims or performance of intermediaries including privacy of customer data on strategies.

Performance claims should be validated by the agency based on specified parameters such as returns, risk, volatility and other suitable parameters.

Further, the agency should validate claims concerning actual profit made by clients, performance claims of intermediaries as well as algorithms, the performance of recommended stock and any other performance claims. For this purpose, PVA can collaborate with other knowledge partners such as credit rating agencies.

Also, PVA should be responsible for maintaining confidentiality of the information received by it during this process.

In order to ensure smooth functioning, the agency should be required to put in place systems for maintaining data, grievance redressal and sharing of information with Sebi. Also, it should be permitted to charge a reasonable fee for its services.

The Securities and Exchange Board of India (SEBI) has sought comments from the public till September 21 on the proposals.