On August 31, 2023, SEBI released a consultation paper on creation of a Performance Validation Agency (PVA).
What is a Performance Validation Agency (PVA)?
Financial intermediaries or other agencies showcase their performance to build credibility and attract more clients to their business. However, some of these entities may indulge in making inflated claims of their performance or recommendations to investors, thereby misleading the investors.
So, it is proposed to create an independent body called Performance Validation Agency (PVA) to validate the claims/ performance related to investment advice, 'buy/sell/holdârecommendation, mutual fund scheme, portfolio management service, algorithm, etc. by SEBI registered intermediaries/ other entities such as IA, RA, portfolio manager, AMC, stockbrokers, etc.
What is the criteria to be a PVA?
The recognition of a PVA will be based on the eligibility of its parent entity. The eligibility criteria will be prescribed by SEBI.
Requisite systems for a PVA
- Systems or processes to maintain data, grievance redressal, and information sharing with SEBI.
- An adequate office space, equipment and human resource to effectively discharge its functions.
What is the role of a PVA?
- Performance claims shall be validated by PVA based on specified parameters such as returns, risk, volatility and other suitable parameters as may be decided by industry forum in consultation with PVA and SEBI. PVA shall be responsible to maintain confidentiality of the information received by it during this process.
- For this purpose, PVA may partner with other knowledge partners such as Credit Rating Agencies.
- SEBI registered intermediaries/ other entities will be enabled to seek the services of PVA for validating all their security/ portfolio recommendations or claims.
Will the PVA charge for its services?
Yes, a PVA can charge a reasonable fee for its services.
What are the different claims that will be validated by the PVA?
- Claim of âactual profitâ by the clients on the basis of advice/recommendation/services provided by SEBI registered intermediaries/other entities.
- Performance claim of SEBI registered intermediaries/other entities and the performance of algorithms will be done by testing the algorithms.
- Performance or recommended stock/portfolio
- Other performance claims shall be validated. Any claim should be independently verifiable from sources other than the entity making the claim.
How do SEBI registered intermediaries/ other entities seek performance validations on security/portfolio recommendations?
For client-specific recommendation, they shall display recommendation and their validation by PVA on their respective websites with restricted access to the concerned clients only.
For public recommendations, they shall display recommendation and their validation by PVA on the websites of the intermediaries and PVA on the same day.
For recommended security/portfolio, they shall display it on the website of the intermediary and the PVA in the format decided by the industry forum in consultation with PVA and SEBI. Such validation shall be done for a reasonable period prior to and after the date of the recommendation.
Questions by SEBI:
- Whether SEBI registered intermediaries/ other entities should validate their claims/ performance before disclosing them to clients/ investors.
- Whether there is a need to have a separate entity (PVA) to validate the claims/ performance of SEBI registered intermediaries/other entities.
- Whether PVA should be a subsidiary of MII or a jointly supported entity by multiple MIIs.
- Suggestions on any other types of claims that should be validated by PVA.