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SEBI publishes consultation paper proposing creation of Performance Validation Agency

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SEBI has recently published a consultation paper proposing establishment of an agency that shall validate any claims of performance made by the SEBI registered intermediaries thereby facilitating these intermediaries to showcase these validated performance to investors to grow the reach of their services.

The move has been initiated by SEBI to curb the common practice adopted by intermediaries of inflating their performance claims to lure more investors. Moreover, all the claims made by intermediaries are self-verified till now and by bring in a Performance Validation Agency (“PVA”) the securities market will be facilitated with a dedicated agency to validate claims of all intermediaries.

PVA shall be responsible to evaluate and validate the claims made by the registered intermediaries and bring in credibility in the eyes of the investors through this process. To facilitate a seamless process, the consultation paper suggests that the agency shall be an independent body looking into investment advice, ‘buy/sell/hold’ recommendation, mutual fund scheme, portfolio management service, algorithm, etc. by SEBI registered intermediaries / other entities such as Investment Advisors, Research Analyst, Portfolio Managers, Asset Management Company, stockbrokers, etc.

Further, since the data that PVA shall have to evaluate will be enormous in size, the paper suggests PVA to be wholly owned subsidiary of a Market Infrastructure Intermediary or a jointly supported entity by multiple MIIs who have expertise in handling such amount of data. The recognition of PVA shall be based on the eligibility of the parent entity, for which the eligibility criteria shall be prescribed by SEBI.

The circular enlists 4 major claims that shall be validated by PVA which are: i) Claim of ‘Actual profit’ made by clients; ii) Performance claim of SEBI registered intermediaries / other entities and algorithms; iii) Performance of recommended stock / portfolio; and iv) Any other performance claims.

Lastly, all SEBI registered intermediaries seeking client specific performance validation shall display on their website with restricted access and performance validation of publicly recommended security / portfolio.

A copy of the Consultation Paper on Performance Validation Agency is enclosed below.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

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