SEBI Takes a Stand Against Misleading Risk-Free Return Promises

The Securities and Exchange Board of India (SEBI), which had previously instructed mutual funds not to promise returns to investors, has now introduced an advertising code for investment advisers (IAs) and research analysts (RAs) one month later. According to the new code of conduct, IAs and RAs are not allowed to pledge or guarantee certain or risk-free returns to investors, nor to mention their previous results in their communications.

The usage of words such as “best”, “No. 1”, “top adviser/research analyst”, “leading”, and “one of the best among market leaders” is prohibited for these entities. Nevertheless, they may cite factual information regarding any awards they may have received from independent organizations. In addition, the IAs must obtain prior approval for their advertising materials from a supervisory body recognized by SEBI prior to publication.

As part of its new code to reinforce the behavior of IAs and RAs during the publication of advertisements, the regulator has instituted these compliances.

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The regulator stated on Wednesday that the advertisement shall not indicate any guaranteed return, minimum return, target return, or percentage accuracy, nor any other designation that suggests to the client that the investment advice or research report recommendation is risk-free, impervious to market risks, or capable of producing returns with any degree of certainty.

The regulator has placed restrictions on the use of technical or legal jargon, as well as the inclusion of excessive information that may distract the investors. Additionally, the regulator has banned any statements that are inaccurate, misleading, prejudiced, or deceptive, as well as any assumptions, projections, or false testimonials.

Furthermore, the IA/RA is not permitted to participate in games, leagues, schemes, or competitions that may entail the distribution of prize money, medals, gifts, or other such items.

If an IA/RA is suspended, they are not permitted to issue any advertisements, either alone or in collaboration with other IA/RAs, during the suspension period.

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The advertising code will be applicable to any form of communication. This may include pamphlets, circulars, brochures, notices, research reports, or any other form of literature, document, information, or material published or intended for use in publications or displays in any electronic, wired, or wireless communication, such as text messaging, social media platforms, and audio-visual formats.

All the regulations set forth in this circular will come into effect on May 1. The regulations for IAs and RAs were implemented in 2013 and 2014, respectively.