SEBI strictly prohibits portfolio managers from guaranteeing or assuring returns in their marketing communications. This article explains the prohibition and compliance requirements.
The Regulatory Prohibition
Legal Basis
Regulation 22(11) of the SEBI (Portfolio Managers) Regulations, 2020 provides that the portfolio manager shall charge an agreed fee from the clients for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return.
Scope of Prohibition
The prohibition applies to:
- Direct guarantees of returns
- Indirect assurances of returns
- Any statement that implies guaranteed returns
- Any suggestion of risk-free investment
Code of Conduct
The Code of Conduct requires that portfolio managers shall not make any statement or indulge in any act, practice or unfair competition, which is likely to be harmful to the interests of other portfolio managers.
Why the Prohibition Exists
Investor Protection
The prohibition protects investors from false promises and unrealistic expectations. Investment in securities is inherently risky, and no returns can be guaranteed.
Market Integrity
The prohibition maintains market integrity by preventing misleading claims that could distort investor decisions.
Professional Standards
The prohibition upholds professional standards by ensuring that portfolio managers compete on the basis of genuine skill rather than unrealistic promises.
What is Prohibited
Direct Guarantees
Portfolio managers cannot state or imply that returns are guaranteed. This includes:
- "Guaranteed returns"
- "Assured returns"
- "Risk-free investment"
- "100% safe investment"
Indirect Assurances
Portfolio managers cannot make statements that indirectly assure returns, such as:
- "Minimum return of X%"
- "Protected from losses"
- "Capital guaranteed"
- "No downside risk"
Historical Performance Implications
While portfolio managers can cite past performance, they must not imply that past performance guarantees future results.
What is Permitted
Past Performance Disclosure
Portfolio managers can disclose past performance, provided:
- It is calculated using TWRR methodology
- It is net of all fees, taxes, and expenses
- It includes the standard disclaimer
- It is accompanied by appropriate benchmarks
Standard Disclaimer
All performance communications must include:
- "Past performance is not indicative of future results"
- "Investment in securities market are subject to market risks"
Risk Disclosure
Portfolio managers must disclose the risks associated with investments, including:
- Market risks
- Liquidity risks
- Credit risks
- Other relevant risks
Enforcement and Consequences
Regulatory Action
SEBI has asked portfolio managers not to make unrealistic and exaggerated claims about their performance and returns. The regulator has clarified that this advisory does not preclude it from taking appropriate action against any entity found in violation.
Potential Penalties
Non-compliance can result in:
- Enforcement action by SEBI
- Monetary penalties
- Suspension or cancellation of registration
- Reputational damage
Recent Directives
SEBI directed PMS players to remove all misleading and exaggerated advertisements issued in the public domain and marketing materials distributed to clients. Portfolio managers must refrain from making any statements regarding their investment capabilities or historical returns that may mislead investors.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS marketing compliance. Our securities law experts help portfolio managers ensure marketing materials are compliant, avoid prohibited claims, and maintain regulatory compliance. Contact us for guidance on marketing compliance and other regulatory matters.