New Delhi, June 24 -- The Securities and Exchange Board of India (SEBI) has proposed a uniform advertising code for all regulated entities, a move that is likely to ease and clarify norms for entities such as portfolio managers and investment advisors, while tightening rules for mutual funds.
Portfolio management services (PMSes), investment advisors (IAs) and stock brokers may soon be able to use celebrity endorsements to promote their entities, while mutual funds and online bond platforms may be required to go through a performance-rating agency to make claims around "fixed returns" and past performance.
In a consultation paper issued on June 23, SEBI said it was seeking to consolidate a fragmented regulatory framework.
"While the underlying regulatory objective across such frameworks remains substantially similar - namely ensuring that advertisements are fair, balanced, truthful, transparent and not misleading - the prescriptions, terminology, approval mechanisms, disclaimers and compliance expectations vary across such entities," the paper said.
SEBI's proposal aims to make the advertising code consistent across various parameters, including approval of advertisement content, use of rankings or ratings, citations of assured returns, risk disclaimers, and celebrity endorsements.
New proposals vs current norms
There are seven main proposals, and here's how they compare with the current rules:
1. The first proposal is to replace prior approval of advertising content with a post-issuance reporting model. After issuance, the advertisements would need to be monitored by SEBI-recognized supervisory bodies.
Currently, stock brokers and online bond platform providers (OBPPs) have to seek prior approval from stock exchanges, while IAs and research analysts (RAs) need a go-ahead from supervisory bodies. Mutual funds need only to do post-issuance reporting, while PMSes are exempt from both requirements.
2. The second is to permit celebrity endorsements for all regulated entities, provided these are used only to promote the brand or entity. Such endorsements would require prior approval, and their use for product-specific promotions would be "restricted". However, the paper does not clarify whether "restricted" implies a complete ban or limited usage.
Currently, mutual funds are allowed to use celebrity endorsements only at the industry level, while there are no such specifications for PMSes. Online bonds platforms, RAs, IAs and stock brokers are prohibited from using them.
3. The third is to mandate that all entities use ratings and rankings assigned by the Past Risk and Return Verification Agency (PaRRVA). The rating agency will work with the industry body to work out an appropriate methodology for each entity.
Currently, mutual funds and PMSes can cite their past performance independently, subject to certain conditions, while stock brokers, IAs and RAs have to get their return metrics verified by PaRRVA. OBPPs are not required to go through PaRRVA currently and are allowed to make claims of "fixed returns" with appropriate disclaimers.
4. The fourth proposal seeks to provide better clarity on what constitutes educational and investor awareness content, and to exclude such content from the purview of the advertising code.
5. SEBI has proposed prohibiting the use of "dark patterns", as defined by the Central Consumer Protection Authority. For example, a design pattern that creates a false sense of urgency to push investors into making a quick purchase or "subscription traps", where cancellation options are hidden or made difficult to access.
Currently, SEBI norms do not cover this.
6. The sixth is to allow the use of abbreviated disclosures for short-format messaging. These disclosures may be given through a hyperlink, with details made available on the entity's official website.
Currently, every advertisement, irrespective of the format, is required to carry a comprehensive set of disclaimers.
7. The last proposal is to have a common portal for submitting advertising content for post-issue reporting. Currently, advertising material is submitted by some entities to exchanges, and by others to supervisory bodies.
Published by HT Digital Content Services with permission from VC Circle.