The prohibition on assured returns and guarantees is one of the most critical restrictions in the Advertisement Code for Research Analysts (RAs). This prohibition is designed to protect investors from misleading claims about investment returns. This article provides a comprehensive technical analysis of this prohibition.
Regulatory Basis
The prohibition on assured returns is specified in the Advertisement Code circular dated April 5, 2023 (SEBI/HO/MIRSD/MIRSD-PoD-2/P/CIR/2023/51).
The Prohibition
What is Prohibited
The advertisement shall not contain:
- Any promise or guarantee of assured or risk free return to the investors
- Any implication of assured returns
- Any implication of minimum returns
- Any implication of target return
- Any implication of percentage accuracy
- Service provision till achievement of target returns
- Any other nomenclature that gives the impression to the client that:
- The recommendation of research report is risk-free
- The recommendation is not susceptible to market risks
- The recommendation can generate returns with any level of assurance
What is Allowed
- Information about the nature of the product
- Information about the risks
- Disclosure of past performance (subject to verification)
- Standard risk disclosures
Why the Prohibition Exists
1. Market Risk
Investments in securities are inherently subject to market risk. No RA can guarantee returns.
2. Investor Protection
Investors should not be misled into believing that investments are risk-free.
3. Regulatory Mandate
SEBI prohibits assured returns to protect market integrity.
4. Professional Standards
Promising assured returns is not consistent with professional standards.
Prohibited Language
Phrases to Avoid
- "Guaranteed returns"
- "Assured returns"
- "Risk-free investment"
- "Minimum return of X%"
- "Target return of X%"
- "100% accuracy"
- "No risk of loss"
- "You will make money"
- "Sureshot returns"
- "Can't lose"
- "Guaranteed profit"
Permissible Language
- "Investment is subject to market risk"
- "Past performance is not indicative of future results"
- "There is no assurance of returns"
- "Investors should consider their risk profile"
Examples
Example 1: Prohibited Statement
"Subscribe to our research service and earn guaranteed returns of 20% on your investment."
Analysis: This is prohibited because it promises guaranteed returns.
Example 2: Prohibited Statement
"Our research recommendations have a 90% accuracy rate."
Analysis: This is prohibited because it implies percentage accuracy.
Example 3: Prohibited Statement
"Invest in these stocks for assured 15% returns."
Analysis: This is prohibited because it promises assured returns.
Example 4: Permissible Statement
"Our research recommendations are based on thorough analysis of financial data and market trends. Investments are subject to market risk and there is no assurance of returns."
Analysis: This is permissible because it includes appropriate risk warnings.
Example 5: Permissible Statement
"Past performance of our recommendations is available for review. Please note that past performance is not indicative of future results."
Analysis: This is permissible (subject to PaRRVA verification requirements).
The "Service Provision Till Achievement" Prohibition
Prohibition: Service provision till achievement of target returns is prohibited.
Meaning: RAs cannot promise to provide services until the client achieves a target return.
Example of Prohibited:
- "We will continue providing research until you achieve your target return of 20%."
Rationale: This creates an impression that the RA is guaranteeing achievement of the target return.
The "Any Other Nomenclature" Prohibition
Prohibition: Any other nomenclature that gives the impression to the client that:
- The recommendation of research report is risk-free
- The recommendation is not susceptible to market risks
- The recommendation can generate returns with any level of assurance
Meaning: Even if the RA does not use the words "guaranteed" or "assured," any language that implies risk-free or guaranteed returns is prohibited.
Practical Guidelines
1. Always Include Risk Disclaimers
Always include risk disclaimers in advertisements.
2. Avoid Implied Guarantees
Avoid language that implies guarantees, even indirectly.
3. Focus on Process, Not Returns
Focus on the research process, not on outcomes.
4. Use Standardized Language
Use standardized language for risk warnings.
5. Review All Content
Review all content for prohibited language.
Common Compliance Gaps
1. Implying Guaranteed Returns
Some RAs imply guaranteed returns without explicitly saying it.
Solution: Avoid any implication of guaranteed returns.
2. Using "Target Returns"
Some RAs use target returns in a way that implies assurance.
Solution: Clearly state that target returns are not guaranteed.
3. Offering "Risk-Free" Recommendations
Some RAs claim their recommendations are risk-free.
Solution: Clearly state that all investments carry risk.
4. Promising to Continue Until Target Achievement
Some RAs offer to continue services until a target is achieved.
Solution: Do not make such promises.
Conclusion and How Anuj Desai & Associates Can Help
The prohibition on assured returns is a non-negotiable compliance requirement. RAs must ensure that all advertisements clearly communicate that investments are subject to market risk.
Anuj Desai & Associates offers specialized services to help RAs comply with the assured returns prohibition:
- Review of advertisements for prohibited language
- Guidance on permissible and impermissible claims
- Development of compliant advertising templates
- Compliance audit and advisory
Contact us today to ensure your advertisements comply with the assured returns prohibition. Our team will review your advertisements and provide a tailored compliance roadmap.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for legal and compliance matters. Anuj Desai & Associates is a SEBI compliance consulting firm based in India.