In an endeavour to regulate the conduct of Investment Advisers (“IA”) and Research Analysts (“RA”), SEBI, recently, on April 5, released the Advertisement Code to regulate advertisements issued by IAs and RAs (“the Code”). Shortly after, SEBI also released guidelines governing the use of brand/trade names by an IA/RA on April 6 (“Brand Use Guidelines”).
The Advertisement Code and the Brand Use Guidelines which are to come into effect from May 01, 2023, will significantly impact the existing marketing and advertising strategies adopted by IAs and RAs to solicit and retain clients.
The key provisions of the Code and the Brand Use Guidelines have been summarised below:
All forms of communication issued by an IA/RA, in an electronic, wired, wireless, audio-visual or any other format, that may influence the investment decision of an investor shall be considered as ‘advertisements’ for the purpose of the Code. These shall include all pamphlets, brochures, notices, reports, hoardings, mails, text messages, audio-visual communication, etc.
Advertisements issued by any other investment/research/consultancy agency associated with an IA/RA, which refers to the concerned IA/RA, shall also be governed under the Code.
(2) Prior approval
All advertisements used by IAs/RAs must be approved by a SEBI recognized supervisory body before being circulated, published or used. The BSE Administration & Supervision Ltd. (“BASL”) has been designated for supervising advertisements by IAs. The supervisory body, in case of RAs, is yet to be designated.
(3) Advertisement content
Advertisements shall be presented using un ambiguous and concise language and contain accurate, true and complete information. The advertisement shall mandatorily include basic information about the concerned IA/RA, including the name, registered office address, SEBI registration no., brand name, corporate identification number, etc.
Standard warnings/disclaimers that must be included have been specified below:
(a) A standard warning against market risks in legible font. In the case of audio-visual advertisements, such standard warning and voice-over shall be clearly audible. The standard warning shall also be translated into the language that the advertisement is issued in.
(b) For advertisements issued as SMS/message/pop-ups/social media posts where required details and warnings cannot be displayed, the official website link of the IA/RA shall be provided.
(c) Advertisements referring to specific securities shall display a standard disclaimer indicating the illustrative nature of such references.
(d) A standard disclaimer to the effect that SEBI registration/BASL membership/NISM certification does not guarantee performance or provide any assurance of returns to investors.
(4) Prohibited content
The Code sets forth general and specific prohibitions in respect of the contents of an advertisement, as set out below:
(a) Statements or testimonials which are or may be construed as false, misleading, biased, deceptive or presumptive;
(b) Statements which are likely to be misunderstood or disguise the significance of statements contained in the advertisement;
(c) Information which is prohibited from being published;
(d) Statements with complex technical or legal terms or excessive details or statements designed to exploit inexperienced investors;
(e) Statements which exaggerate or are inconsistent with the nature and risk and return profile of the product;
(f) References to any report, analysis, or service as free, unless it is actually free and unconditional;
(g) Promises or guarantees of assured or risk-free returns to investors;
(h) Statements which discredit other intermediaries, make unfair comparisons or ascribe qualitative advantages over other intermediaries;
(i) References to past performance of the IA/RA;
(j) Superlative terms such as “Best” or “No. 1” so as to provide any endorsement of the quality or standing of the IA/RA. Factual details of awards issued by independent organisations can be included;
(k) Use of the SEBI logo;
(5) Use of brand names
An IA/RA shall ensure that basic information, such as name, SEBI registration number, logo, address, and contact information, is prominently displayed in any portal, notice board, advertisements, publications, KYC forms and client agreements. In addition to the above, the name and contact details of the compliance officer and the grievance officer shall also be displayed in any correspondence with clients.
On a cursory glance, the Code and the Brand Use Guidelines can be viewed as an attempt to balance investor protection against unscrupulous advertisements and marketing trends in the evolving Indian wealth management space. However, a closer look reveals that certain provisions of the Code may materially impede an IA/RA’s marketing activities without necessarily meeting the intended purpose of protecting the interest of investors.
To start with, the scope of the term ‘advertisements’ is notably broad. It is unclear whether communications which are not intended to solicit clients, such as objective commentary on market trends, educational content or tailored correspondence with existing clients shall constitute advertisements for the purpose of the Code. To address the ambiguity, SEBI should issue a clarification on the kinds of communication that will not fall within the purview of advertisements.
The Code also imposes a blanket prohibition against including references to past performances in advertisements. Considering the emphasis placed on performance data by investors while selecting an IA, this could limit an IA’s ability to demonstrate their skills and provide investors with valuable information to enable them to compare, determine and engage the IA who is best suited to advise them on their financial goals. In our view, SEBI may consider mandating the disclosure of verifiable information, to mitigate the underlying concern of IAs presenting distorted or misleading records of past performance, and ensure that no unwarranted inferences are made.
Similarly, the per se prohibition against using statements ascribing ‘qualitative advantages’ over other intermediaries is also restrictive and may present major roadblocks in an IA/RA’s efforts to carve a distinct brand identity in the market and build competitive advantages. In our view, qualifying such statements with the disclosure of verifiable information to substantiate the claims made can achieve the intended purpose, in place of a complete prohibition.
In summary, it appears that viable alternatives that might better address concerns associated with misleading marketing practices have not been considered while framing the Code. If market participants had been consulted prior to issuance of the Code, it may have resulted in a more balanced framework for advertisements. Given the current inflection point of the wealth management industry, it is our firm belief that regulations must be designed to encourage growth rather than stifle it.