Will Periodic Social Media Disclosures by Investment Advisors Help Investors?

May 15, 2024 Mutual Fund

In this day and age of social media and influencers, all sorts of information and misinformation are disseminated.

Last year, the Advertising Standards Council of India revised its guidelines mandating the Securities and Exchange Board of India (SEBI) registration for influencers in the banking & financial services sector, popularly known as ‘finfluencers‘, to provide investment-related advice.

The capital market regulator, SEBI, has now come up with guidelines to keep a check on the activity of finfluencers. It has particularly tightened disclosures for ‘Investment Advisors (IAs)’ by issuing a circular last week while they express views and propagate their services on social media.

As you may know, the regulator has recognised the Investment Advisers Administration and Supervisory Body (IAASB) for the administration and supervision of investment advisors. So far, the IAASB has been seeking reports from IAs on an ad-hoc basis.

But now on, with immediate effect, the regulator has decided to specify a standardised format for periodic reporting for investment Advisors based on recommendations received from the Industry Standard Forum (ISF).

Investment Advisors will now be required to periodic report for half-yearly periods ending on September 30 and March 31 of every financial year to the IAASB.

What Will This Periodic Report Contain?

IAs in the required format, other than the mandatory personal details, will now be required to disclose details such as the following in the prescribed format:

• Trade Name or brand name under which they operate, the logo (if any)
• The SEBI registration number and enlistment/membership number of IAASB
• Date of incorporation in case non-individual IA and date of birth for individual IAs
• In the case of non-individual IAs, the legal structure of the organisation, along with the registered address, correspondence address, the principal place of business, the branches
• The official website address
• Social media handle details, viz. Facebook, X (formerly known as Twitter), LinkedIn, YouTube, etc.
• Make known their bank accounts for receiving advisory fees
• Total number of persons associated with investment advice
• NISM certification details of all such persons
• Who is the Managing Director, Principal Officer (PO), Compliance officer, contact person and their contact details
• List of other directors
• Shareholding Pattern (provide details of shareholders having a holding of 10% or more
• Last inspection carried out by SEBI/IAASB
• Number of advertisements issued and those approved by IAASB during the half-year period
• Complaint and investor charter – i.e., whether complaints data and the investor charter have been updated on the website of the IA or, in the absence of the website, communicated to clients by the 7th of the succeeding month for each month of the half-year period.

What Is the Objective of SEBI’s Periodic Reporting for IAs?

The objective behind this is to bring better transparency and accountability while Investment Advisors use social media to propagate their views and even services. With bank accounts for the investment advisory fees received, it would be rather uncomplicated for the regulator to keep track of the financial activities to discover malpractices (if any).

In the past, there have been ample instances of investors being misled and taken for a ride by spreading misinformation on social media. Even SEBI-registered Investment Advisors have misused their authority and provided misleading information, swayed investors with guaranteed returns in the market, and used technical jargon at times to impress novice investors while sometimes even confusing investors.

Much of it still happens today, which the regulator has rightly recognised and thus made disclosures binding now for IAs.

[Read: Should You Invest in Best Mutual Funds Recommended by Social Media Influencers?]

Will SEBI’s Period Reporting for IAs Help Investors?

Well, the irony is that on social media, not all who propagate investment or financial advice are necessarily “Registered Investment Advisors”. SEBI, in the past, has observed a dramatic growth in the number of unregistered investment advisors or ‘financial influencers’ unsolicited financial advice across various social media platforms.

[Read: Can You Rely on Investment Advice from Finfluencers?]

At present, there are only around 950 active SEBI-registered investment advisors in India as of May 12, 2024 (compared to 1,300+ last year). This number is measly compared to some of the developed markets, where Investment Advisors command respect.

For a country as populace as ours, where not many people are well-versed with the nuances of investments and the world of finance, we surely need many more genuine registered Investment Advisors —a fact which even the current SEBI Chairperson, Ms Madhabi Puri Buch, acknowledged seven months ago in the Association of Registered Investment Advisers (ARIA) conference.

So, the question remains: what if these unregistered individuals or non-individuals, who may lack the essential qualifications and expertise and are involved in rendering financial advice or service directly or indirectly, continue to mislead and sway investors on social media? How does SEBI plan to keep a check on those who provide unsolicited and unverifiable financial/investment advice that puts investors at risk?

Acting against unregistered Investment Advisors after much of the damage is done (after investors are misled and complaints are filed) would be akin to only doing a post-mortem. Amidst a time when there is far greater participation of retail investors in the markets today, far more vigilance is required.

It remains to be seen how the regulator nabs the unregistered individuals and non-individuals offering unsolicited and unverifiable financial/investment advice on social media.

Moreover, the count of registered investment advisors needs to go up significantly. In this respect, an enabling environment is necessary whereby the regulator and the industry work together. Also, enough efforts must be taken to educate investors to deal with registered investment advisors (or any other market intermediaries for that matter). The Investor Education Protection Fund (IEPF) ought to be prudently put to use, whereby investor education is not just limited to short advertisements but is done far more earnestly and deeply to make investors thoughtful.

Happy Investing!

This article first appeared on PersonalFN here