This framework introduces a mechanism to verify the past performance claims made by investment advisors (IAs), research analysts (RAs), and algo providers (collectively, Regulated Persons).
Under the new framework, a registered credit rating agency will be designated as PaRRVA, an independent body responsible for verifying the risk-return metrics of investment advice, strategies, and model portfolios before these are publicly displayed or promoted. PaRRVA will collaborate with a recognized stock exchange to establish the PaRRVA Data Centre (PDC), which will act as its data collection and dissemination hub.
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The PDC, in partnership with other Market Infrastructure Institutions (MIIs), AMFI (for mutual fund NAVs), and Regulated Persons, will gather raw data. Using this data, the PDC will generate verified outputs based on a methodology set by PaRRVA. These verified data sets will then be made publicly available on PaRRVA’s website, complete with detailed disclosures and disclaimers.
The framework includes specific guidelines to prevent selective or misleading presentations of past performance. Regulated Persons will no longer be able to display only a single successful stock pick, model portfolio, or algorithm. They must present the entire set of recommendations or strategies submitted for verification, accompanied by appropriate disclosures, risk caveats, and QR codes linking to PaRRVA for full performance details.
The framework also mandates that performance data must be displayed for defined timeframes, explicitly prohibiting cherry-picking or arbitrary date selection.
Previously, Regulated Persons were prohibited from advertising or publicly displaying their past performance to prevent misrepresentation. While this restriction was well-intentioned, it created a contradiction, as mutual funds have long been permitted to disclose their past performance with appropriate disclaimers.
For investors, evaluating a mutual fund or an investment adviser typically involves assessing how the product or advice has performed in the past. In this context, a blanket ban on IAs and RAs displaying past performance may have been excessive. Instead of an outright prohibition, Sebi could have allowed performance disclosures with strong safeguards, such as mandatory risk metrics, standardized formats, and full disclosure of the number and range of recommendations.
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If an IA or RA was found to have misrepresented data, Sebi could have used its existing regulatory powers to take enforcement action.
The introduction of PaRRVA addresses this longstanding issue. Sebi’s goal appears to be twofold: to allow Regulated Persons to present their past performance, while ensuring these claims are verified through an independent and neutral process that investors can trust.
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In this sense, the PaRRVA framework strikes a balance, permitting Regulated Persons to showcase their track records while minimizing the risk of cherry-picking or exaggeration.
However, the framework poses practical challenges. The sheer volume of data that will need to be processed—particularly if hundreds of Regulated Persons submit real-time or end-of-day recommendations—could burden PaRRVA and the PDC, necessitating robust infrastructure to manage this scale efficiently.
Additionally, since the framework does not specify the maximum fees PaRRVA may charge, smaller Regulated Persons may find compliance financially burdensome, potentially limiting the framework’s scalability and uptake. PaRRVA will also play a significant role in shaping public perception of a Regulated Person’s performance, so it must ensure uniform standards, resolve disputes promptly, and maintain trust as a neutral third party.
Another notable gap is the exclusion of mutual fund distributors (MFDs) from this verification framework. Given that many MFDs provide investment advice and financial planning services, particularly for mutual funds, their exclusion creates a regulatory gap. If the goal is to standardize verification across all forms of investment advice, Sebi may want to consider extending PaRRVA’s applicability to include MFDs.
This is not to say that PaRRVA is unnecessary—quite the opposite. It is a thoughtful intervention in a market increasingly populated by influencers, tipsters, and unregulated entities making unchecked performance claims. The key challenge lies in execution.
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If implemented effectively, the framework could enable Regulated Persons to display their past performance, potentially attracting more investors. However, as always, past performance is not a reliable indicator of future returns.
Shivaang Maheshwari is a financial regulatory lawyer. Views expressed are personal.
