SEBI Brings Agency To Verify Claims By Algo Providers, Research Analysts and Investment Advisors

The Securities and Exchange Board of India on Friday released a circular providing for a verification of risk and return claims on investments through a performance validation agency.

It will be known as the Past Risk and Return Verification Agency, or PaRRVA, and will check the accuracy of the claims made by investment advisors, research analysts, algorithmic trading service providers, and other intermediaries empanelled with stock exchanges.

The regulator has mentioned that credit rating agencies (CRAs) that fulfil certain eligibility standards can request recognition as a verification agency, and stock exchanges can also apply to be recognised as a supporting data centre for the CRAs.

However, to be recognised, the CRAs will need to have a minimum operational experience of 15 years, a net worth of at least Rs 100 crore, and a track record of rating at least 250 issuers of listed or proposed to be listed debt securities. Furthermore, they should also have an established mechanism to address investor complaints and an online dispute redressal system.

Meanwhile, for a stock exchange to be recognised for its data centre, it will need a minimum operational experience of at least 15 years. Other conditions include a net worth of at least Rs 200 crore, nationwide presence with trading terminals, an investor grievance redressal mechanism, and an online dispute redressal system.

SEBI will assess applications based on the defined eligibility criteria. Upon approval, the CRA will have three months to set up the necessary infrastructure, including technology, servers, API connectivity, and other verification systems.

Finally, SEBI will conduct pre-recognition site visits to evaluate system readiness and compliance with cybersecurity frameworks. CRAs and stock exchanges must also undergo third-party audits and provide SEBI with auditor-certified confirmation of operational adequacy.

Following recognition, the PaRRVA and its associated data centre will conduct a two-month pilot phase to test the risk-return verification process. SEBI may extend this period if necessary to fine-tune technological systems and workflows.

Thereafter, in a pilot phase, the verified risk-return metrics will remain confidential and will not be disclosed to the public. After this, the feedback from market participants will be collected for process improvements.

The Oversight Committee, comprising representatives from market infrastructure institutions (MIIs), CRAs, stock brokers, and mutual funds, will assess the implementation.

Once fully operational, PaRRVA will be responsible for defining the methodology for risk-return metric computation, developing and testing a robust verification system, establishing agreements with regulated entities and MIIs, ensuring compliance with cybersecurity standards, and conducting audits.