SEBI brings in advertisement code for investment advisers, research analysts

The advertisement code for IAs/RAs has come a month after SEBI told mutual funds not to assure returns to investors.

In a letter dated March 3, sent to the Association of Mutual Funds of India (AMFI), it reminded the entities to stick to the advertisement code as part of the SEBI MF regulations.

Prohibitions in advertisements

As per the circular issued on April 5, IAs and RAs have been asked to refrain from making statements, which are false, misleading, biased or deceptive, based on assumptions or projections.

Further, the regulator has banned statements designed to exploit the lack of experience or knowledge of the investors.

These entities have also been barred from using extensive technical or legal terminology or complex language and the inclusion of excessive details, which may distract the investors.

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From now on, IAs and RAs won’t be able to refer to any report, analysis, or service as free, unless it actually is free and without condition or obligation.

Additionally, they won’t be allowed to make any promise or guarantee of assured or risk-free return to the investors and refer to past performance of the IA/RA.

“The advertisement shall not imply any assured returns or minimum returns or target return or percentage accuracy or service provision till achievement of target returns or any other nomenclature that gives the impression to the client that the investment advice/recommendation of research report is risk-free and/or not susceptible to market risks and/or that it can generate returns with any level of assurance,” SEBI said in the circular.

“A lot of IAs and RAs have been advertising on social media about model portfolios, which are not the actual returns of investors. So, now SEBI has said that any form of past performance can’t be advertised. It seems like these compliances will also apply to personal messages with clients,” said Shyam Sekhar, chief ideator at ithought Advisory.

However, according to Sekhar, the most egregious mis-selling is done by banks, which must be immediately addressed.

These entities have also been barred from making statements which directly or indirectly discredit other advertisements or intermediaries or make unfair comparisons or ascribe any qualitative advantage over other intermediaries.

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As part of the fresh compliances, SEBI has also mandated prior approval for the advertisement/material to be obtained from the regulator’s recognised supervisory body before the issue of advertisement.

Further, IA/RA would not be allowed to engage in games, leagues, schemes, competitions etc, which may involve distribution of prize monies, medals, gifts, etc.

Disclosures in the advertisements

SEBI has asked these entities to include the name of the IA/RA, registered office address, SEBI Registration Number and other regulatory details in the advertisement.

In case the mode of advertisement is SMS/Message/Pop-up, social media etc. and the details such as full name, logo/brand name, full registered office address, SEBI registration number, membership number of a SEBI recognized supervisory body and standard disclaimer are not mentioned, then official website hyperlink should be provided in such SMS/Message/Pop-up, etc. and the website must contain all such details.

According to Harshad Chetanwala, a SEBI-registered investment advisor and co-founder of MyWealthGrowth.com, there are two kinds of IAs; fee-based IAs and corporate IAs.

“Individual IAs who are fee-based don’t usually rely on advertisements, but word of mouth. Further, it is yet to be seen how prior approval for advertisements will work. Whether these compliances mean that the regulator will have to approve each and every piece of communication, which will be a daunting task. Any regulation brings in more protection for investors, but we will have to see how these guidelines will be implemented,” Chetanwala said.

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Further, just like mutual funds and stocks, advertisement and communications by IAs/RAs also now need to include standard warning, “Investment in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The guidelines are a step in the right direction, but there should be a clear definition as to what is considered as an advertisement or now. As of now, it is not clear whether educational material shared on social media sites would be considered as an advertisement,” said a SEBI-registered research analyst on condition of anonymity.

The provisions of the circular will be applicable with effect from May 1, 2023.