Co-authored with Mr. Rahul Das (Senior Associate), and Ms. Rashmi Birmole (Associate), Finsec Law Advisors
The relationship between an investor and an investment adviser is characterised by high levels of trust and confidence. The position of trust and dominance occupied by investment advisers intrinsically carries the risk of misuse, no matter how remote. Tackling this risk, and any competing interests that may arise out of an investment adviser’s pecuniary considerations, has historically been the focus of regulations governing the activities of such advisers, across the world.
In India, investment advisers (IA) are governed by the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013(IA Regulations), which prescribe a set of fiduciary duties and general obligations in connection with an IA’s dealings with investors. In terms of marketing activities, as per an advisory released by the Telecom Regulatory Authority of India (TRAI) in the context of unsolicited bulk SMSs in 2017,service providers were directed to ensure that messages from SEBI registered IAs are only sent as transactional messages, and not in the form of promotional messages. However, apart from the same, the marketing and advertising activities of IAs, until recently, have largely remained unaddressed in the absence of any clear regulatory guidelines to that effect.
On April 5, SEBI released the Advertisement Code to regulate advertisements issued by IAs and Research Analysts (the Code). Shortly after, SEBI also released guidelines governing the use of brand/trade names by an IA or a Research Analyst (RA) on April 6 (Brand Use Guidelines). The Code and the Brand Use Guidelines are scheduled to come into effect from 1stMay, and appear to have been adopted to protect inexperienced investors from being misled by deceptive marketing tactics adopted by certain existing SEBI registered IAs and unauthorised entities masquerading as IAs.
The Code and the Brand Use Guidelines seek to primarily regulate the approval process and the contents of advertisements issued by IAs/RAs. The key terms of the same have been briefly summarised below.
Any communication issued by an IA/RA, that may influence the investment decision of an investor, and is published or designed for use in any publication or display, in any format, shall be considered as an ‘advertisement’. The Code shall also extend to advertisements issued by any other investment/research/consultancy agency associated with an IA/RA, which refers to the concerned IA/RA. IAs must obtain prior approval from the BSE Administration & Supervision Ltd. (BASL), the designated supervisory body for IAs, before publishing, circulating or displaying any advertisements.
Advertisements should be presented using unambiguous and concise language and contain accurate, true and complete information. The Code prescribes information that must be mandatorily included in an advertisement, such as the name, registered office address, SEBI registration number, brand name, corporate identification number, etc. In terms of the Brand Use Guidelines, IAs/RAs should also ensure that additional details such as logo and contact information are prominently displayed on any portal, notice board, advertisements, publications, KYC forms and client agreements.
Advertisements shall also mandatorily contain standard warnings against market risks, assured returns/guaranteed performance and incase of references to specific securities, a disclaimer indicating the illustrative nature of such references.
Further, the Code sets forth several general prohibitions in respect of the contents of an advertisement, which generally prohibit the use of statements or testimonials which are or may be construed as false, misleading, biased, deceptive or presumptive. IA/RAs are also cautioned against including statements with complex terms and excessive details designed to exploit inexperienced investors or statements which are inconsistent with the nature and risk and return profile of a product.
Additionally, the Code also sets out specific prohibitions against certain practices, such as the use of references to any report, as free, unless it is actually free, assured returns, use of superlative terms, and more importantly, statements which ascribe qualitative advantages over other intermediaries and references to past performance.
On a cursory glance, it is clear that the Code and the Brand Use Guidelines will impact the existing marketing and advertising strategies adopted by IAs to solicit and retain clients. Let’s first analysethe upside. Firstly, there is hardly any room to criticize the inclusion of mandatory details and standard warnings in advertisements. These helpinvestors distinguish between legitimate and unregistered IAs, and separate the grain from the chaff, so to speak. Secondly, the principle-based approach adopted in respect of the general prohibitions will allow SEBI greater flexibility in identifying and initiating action against certain IAs who adopt unscrupulous and manipulative techniques to lure investors.
However, certain provisions of the Code may impede an IA’s marketing activities without necessarily meeting the intended purpose of investor protection. 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 generic branding activities, objective commentary on market trends, educational content or tailored correspondence with existing clients could 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.
As seen above, the Code also imposes a prohibition against including references to past performances in advertisements. It must be noted that such inclusion was also discussed in the Concept Paper on Regulation of Investment Advisers released in 2011 to deliberate on the regulatory framework for IAs in India, wherein, ironically, it was proposed to permit references to past, specific recommendations if accompanied by a list of all recommendations made by the IA, within a preceding period of atleast a year. However, the proposal did not find mention in the ensuing IA Regulations. Further, considering the emphasis placed on performance data by investors while selecting an IA, this could also limit an IA’s ability to demonstrate their skills and provide investors with valuable information to enable them to compare, determine and engage the best suited IA. In our view, the industry should come together to validate the information, based on uniform external benchmarks, to mitigate the underlying concern of IAs cherry-picking profitable investment recommendations and presenting distorted records of past performance. This information should then be put up in a centralised location, as is currently being made available for customers using PMS and mutual fund products.
Similarly, the per se prohibition against using statements ascribing ‘qualitative advantages’ over other intermediaries is also restrictive and may present roadblocks in an IA’s efforts to carve a distinct brand identity in a rapidly expanding market. 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. It is also noteworthy to emphasize that these prohibitions do very little to address unregistered IA activities, which form the lion’s share of malpractices plaguing the investment advisory space. In fact, SEBI should curb the unregistered players with strong action, so that the regulated can draw comfort that they are not paying a large compliance cost in vain.
In summary, it appears that viable alternatives that might better address concerns associated with misleading marketing practices could be tweaked or clarified allowing ‘good’ marketing while prohibiting dubious types.