I have for very long been bitterly opposed to the rule of the Securities and Exchange Board of India (SEBI) that mutual funds cannot use celebrities in their advertisements. In fact, I have been against it for so long that I have stopped talking about it. But yesterday, the SEBI Board approved a silly tweak to this rule, and that gives me the perfect excuse to attack the rule itself one more time.
The first point is of course that celebrities are allowed to endorse so many other things even in the world of finance – banks and insurance companies do use celebrities because they do not come under SEBI and their regulators do not share SEBI’s celebrity phobia. Outside of finance, celebrities endorse all kinds of products, and even governments use them to spread awareness of issues of national importance. What makes one think that the buyers of mutual funds are of such abysmally low intelligence that celebrity endorsement would be detrimental to their interests, while bank depositors are so smart and savvy that they would not be swayed by the presence of celebrities?
The second point is that the logo of one large mutual fund operating in India contains the image of one of the greatest celebrities that one can think of. The visage of Benjamin Franklin himself graces the Franklin Templeton Mutual Fund. I remember asking a senior SEBI official about this many years ago. The response that I got was that Benjamin Franklin was a foreign celebrity and most Indians would not know about him. I thought then that this response was an affront to the intelligence of the Indian mutual fund investor. Forget the fact that Benjamin Franklin was one of the founding fathers of the United States, and easily the greatest US diplomat ever (it was his diplomacy that ensured US independence by getting the support of France). Benjamin was simply one of the greatest intellectuals of his time anywhere in the world (the man who brought lightning down from the clouds). His face adorns the largest denomination US dollar note (the $100 bill, which is popularly called the Benjamin), and his book Poor Richard’s Almanac and the essay The Way to Wealth are recommended readings in personal finance. This example itself serves to demonstrate how thoughtless the rule is.
I am well aware of the genesis of this whole regulation (it goes back to a celebrity gracing an IPO so long ago that everybody has forgotten about it). But regulators are supposed to have the common sense not to react to such isolated instances with sweeping general rules disproportionate to the situation at hand. Above all, any regulation needs something more than the mere whim of a regulator to justify it.
So did the SEBI Board have the good sense to jettison this silly rule yesterday? No, not at all. It merely said that:
Celebrity endorsements of Mutual Funds shall be permitted at industry level; however, not for endorsing a particular scheme of a Mutual Fund or as a branding exercise of a Mutual Fund house. Further, prior approval of SEBI shall be required for issuance of such advertisements which feature celebrities.
I do not even know where to begin about the silliness of this. Globally, we know that the mutual fund industry makes money with high cost actively managed funds rather than low cost ETFs, and that the industry has launched some very toxic products (leverage inverse ETFs for example). So it is not as if the industry cannot hire a top notch celebrity to endorse the most profitable products that the industry produces today without any concern for their suitability to the average investor. As far as prior approval is concerned, this takes the regulator into an area where it should not tread for reputational considerations. Moreover, if such prior approval can solve the celebrity problem, why would that magic not work for individual funds?
Even now, it is not too late for the regulator to accept that it has had a silly rule in the rule book for too long, and that when it comes to scrapping silly rules, it is better late than never.
Tue, 03 Jan 2017
The Securities and Exchange Board of India (SEBI) seems to be more aggressive in requiring listed companies to disclose material information than it is in disclosing important regulatory information itself or requiring regulated entities to disclose it. That is the only conclusion that can be drawn from the Draft Red Herring Prospectus (DRHP) filed by the National Stock Exchange (NSE) last week. The NSE is an important Financial Market Infrastructure (FMI) and yet critical information about market integrity at this FMI is becoming available only now in the context of its listing!
The third risk factor in this DRHP discloses the following information regarding complaints about unfair access being provided to some trading members at NSE:
SEBI received these complaints nearly two years ago
In response to a directive from SEBI, NSE submitted a report on this to SEBI more than a year ago.
A year ago, SEBI engaged a team headed by professors of the Indian Institute of Technology, Bombay to examine these complaints.
The report of this team was sent to NSE nine months ago. NSE in turn submitted a response disputing these findings.
Four months ago, SEBI sent an Observation Letter to NSE stating that “the architecture of [NSE] with respect to dissemination of TBT data ... was prone to manipulation and market abuse” and advised NSE to appoint an independent agency to conduct an examination of all the concerns highlighted in the IIT Interim Report.
The report of the Independent Agency was filed with SEBI a fortnight ago.
All this information is becoming public only as a result of the NSE filing for a public issue. SEBI seems to have taken the narrow and untenable view that the operations of a large Financial Market Infrastructure are of concern only to its shareholders and so disclosure is required only when the FMI goes public. It is surely absurd to claim that listed companies should be held to higher disclosure standards than key regulated entities. If this absurdity is really the regulator’s view, then it should forthwith require that all depositories, exchanges and clearing corporations become listed companies so that they conform to higher disclosure standards.
In my view, all the documents whose existence has now been disclosed represent material information about the operation of one of India’s most critical Financial Market Infrastructure. These documents ought to have been disclosed long ago, but it is still not too late for the regulator to release suitably redacted versions of all these documents:
Since some of the facts are disputed, both sides of the story should be disclosed with a clear disclaimer.
Since individuals ought not to be named without firm evidence, these names ought to be redacted before disclosing the documents.
Since some of the documents may contain proprietary confidential information, these too should be redacted before publication.
Mon, 02 Jan 2017
The following posts appeared on the sister blog (on Computing) during September-December 2016.
How to make the banks paranoid about security? (Cross-posted on this blog as well).
Tweets during September-December 2016 (other than blog post tweets):
- 16 December 2016
- "All it took was a crying baby and a phone call". Relying on mobile authentication is so silly. https://www.youtube.com/watch?v=lc7scxvKQOo h/t Bruce Schneier
- 15 December 2016
- Australian fintechs don't need licence to test services for 12 months with 100 retail clients http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-440mr-asic-releases-world-first-licensing-exemption-for-fintech-businesses/ h/t Regulation Asia
- 6 December 2016
- Birch: Watson was right that world market for only 5 computers: they are Apple, Amazon, Facebook, Google & Microsoft http://www.chyp.com/fintech-banks-are-coming-to-the-usa/
- 5 December 2016:
- retweeted Bruce Schneier: Guessing Credit Card Security Details https://www.schneier.com/blog/archives/2016/12/guessing_credit.html
- 29 November 2016
Birch on money for the masses (private token money in pre-industrial revolution England) http://www.chyp.com/making-money-for-the-masses/
Mason in Jacobin: The development of finance reveals the progressive displacement of market coordination by planning https://www.jacobinmag.com/2016/11/finance-banks-capitalism-markets-socialism-planning/
- 18 November 2016
- Aswath Damodaran has written what is easily the best piece so far on the Tata Sons controversy http://aswathdamodaran.blogspot.in/2016/11/the-4c-tradeoff-promise-and-peril-of.html
- 2 November 2016
- Huertas has some new ideas on how to organize a global bank: LLPs, PE, unit banks: http://clsbluesky.law.columbia.edu/2016/11/02/global-banks-good-or-good-bye/
- 11 October 2016
- Perhaps the best answer to the "why no bankers in jail for 2008" question: http://clsbluesky.law.columbia.edu/2016/10/11/americas-corporate-crime-dilemma/
- 19 September 2016
- Eric Paley says venture capital funded cash burn and billion dollar exit plans can be dangerous for the founder https://techcrunch.com/2016/09/16/venture-capital-is-a-hell-of-a-drug/
- 13 September 2016
- High frequency trading (HFT) algorithms are "human, all too human", "High feelings trading". https://socfinance.wordpress.com/2016/09/13/nietzsches-take-on-high-frequency-trading/