Editorial. SEBI’s advertising code for investment advisors needs fine-tuning

It is not difficult to see why the Securities Exchange Board of India (SEBI) has decided to prescribe a stringent advertising code for Registered Investment Advisors (RIAs) and Research Analysts (RAs) from May 1. With a new generation of investors taking to the markets since Covid, there’s been a surge in mis-selling of equity products.

SEBI has passed dozens of regulatory orders in the last couple of years against both registered and unregistered ‘advisors’ soliciting clients through doubtful means and defrauding them of their money. The new code, which seeks to plug such malpractices by registered entities, requires every advertisement to carry the name, SEBI registration number and registered office of the RIA/RA with a disclaimer that investments in securities markets are subject to market risks. This will let investors know upfront that they’re dealing with a regulated entity dealing in non-guaranteed products.  Statements which are false, misleading, consisting of legalese or cooked-up testimonials are prohibited. So is mention of any assured return or display of the SEBI logo. Advertisements disparaging competitors or using superlative terms such as best, top, Number 1 are banned too.

As these are precisely the kind of misleading pitches that have been used to mis-sell equity advice, these restrictions are much-needed. However, two aspects of the new code appear too sweeping and need modifying. Defining advertisements as “all forms of communication that may influence any investor” should be narrowed to refer to communications targeting prospective investors. Given that RAs/RIAs dispense investment recommendations, they will need to interact quite frequently with existing clients on investment matters. It will be impossible to put all these mailers through the approval process required by the code. The bar on RIAs/RAs highlighting their past performance or qualitative advantages also seems harsh, as these are the attributes based on which investors should be choosing their advisor.

While the code itself is welcome, one aspect that calls for a rethink is the requirement that every advertisement that a RIA/RA plans to issue must be pre-approved by BSE Administration and Supervision Limited, that too for a fee. While pre-approval may be feasible for print ads, it is difficult to see how digital advertisements which are dynamically tweaked based on audience response, can be pre-approved. In framing advertising rules for regulated entities, SEBI needs to keep in mind that the investment advisory profession is in a nascent stage in India, with 1,300-odd licensed entities in competition with many more unlicensed operators. Too many barriers in the way of legitimate advisors soliciting clients, can have the unintended consequence of pushing investors towards fly-by-night entities who have no compunction about using over-the-top social media messaging to amass followers, and make away with their money.

COMMENT NOW