SEBI Rolls Out Pilot Framework for Risk-Return Verification in Financial Ads

The Past Risk and Return Verification Agency (PaRRVA), a new validation agency set up by the Securities and Exchange Board of India (SEBI), is now operational. Its purpose is to verify the performance claims market intermediaries make in their advertisements and communications, investment advisors, research analysts, and stockbrokers, in particular. 

This is yet another step in SEBI's ongoing efforts to enhance transparency in the market and protect investors from the kinds of historical data that can mislead.

The initial stage of the initiative will see SEBI operating a two-month pilot phase. It will be during this period that feedback from stakeholders will be incorporated and used to refine the framework. Agencies will start testing the verification process, but only under the watchful eye of the regulator. The circular makes a concerted push for financial promotions to be governed by a consistent, standardized, and truly accountable performance reporting framework.

Eligibility and Responsibilities of Verification Agencies

For a credit rating agency (CRA) to be acknowledged as a PaRRVA, it has to meet severe eligibility norms. These enumerate at least 15 years of operating experience, a net worth of at least 100 crore rupees, and the presence of a robust grievance redressal system that even includes an Online Dispute Resolution (ODR) mechanism. Recognition from SEBI is conferred only after the fulfillment of these prerequisites. Following that, the eligible CRA gets the nod to act as a verification agency.

CRAs must also partner with a recognized stock exchange that will act as the PDC. The PDC is responsible for data collection from entities such as mutual funds and stock exchanges. In addition, the PDC supervises the verification system, ensuring data integrity, security, and confidentiality.

Clear Disclaimers and Oversight to Guard Investor Interests

The verification standards will be defined by PaRRVA, which will also oversee the management of grievances and the storage of all verified records for 5 years at minimum. If and when any risk-return data that has been verified by PaRRVA is displayed, it must be done with mandatory disclaimers that past performance can never be said to guarantee future outcomes, that verified returns do not indicate with certainty that any gains will be produced, and that what clients actually earn may look nothing like what was earned by any hypothetical client. Performative issues and disclaimers aside, how are we actually going to earn our bounce-back after the Great Recession?  How will we also serve you, our clients, in path-breaking ways after we earn that virtue?

Conflicts between the verification agency and intermediaries will first be handled through internal resolution processes. If any disputes remain unresolved after that, the intermediaries and the verification agency can take them to the ODR platform. For now, SEBI has stated that the entire framework will operate under its oversight. There will be a committee, designated by SEBI, that will supervise the resolution platform.

This initiative marks a momentous move in making sure that both retail and institutional investors receive credible, clear, and concise information when they are assessing financial products.