SEBI proposes 'digital badges' to regulate ties between finfluencers, regulated entities

Capital markets regulator SEBI (Securities and Exchange Board of India) has proposed a framework to recognise "specified digital platforms" (SDPs) that will regulate associations between regulated entities and third parties, such as financial influencers. To curb unregistered advice and unauthorised market claims, SEBI released a consultation paper outlining measures like a verified label or badge system for SEBI-registered entities on Tuesday.

What is SDP?

A “specified digital platform” (SDP) is a digital platform identified by the board that implements preventive and curative measures to avoid prohibited activities. To be recognised as an SDP, a platform must demonstrate compliance to the board's satisfaction.

Entities regulated by the board, including stock exchanges and clearing corporations, are prohibited from associating with individuals providing investment advice or performance claims regarding securities unless those individuals are registered or authorised by the board. However, these restrictions do not apply to associations made through an SDP, which must actively prevent and address any activities explicitly prohibited by the board.

To be recognised as a specified digital platform (SDP) by SEBI, a digital platform must implement robust mechanisms to prevent and address violations of securities regulations. Key requirements include collaborating with SEBI to share relevant data and act on its guidance. The platform should utilise advanced technologies, such as artificial intelligence (AI) and machine learning (ML), for monitoring and verification while preventing impersonation and fraud. Additionally, it must allow only SEBI-registered or recognised intermediaries and their agents to provide securities market-related content and advertisements.

Additionally, the platform must have a system for escalating and reporting fraudulent content and a blacklisting mechanism for repeat offenders. Applications for SDP recognition must be submitted within three months of the circular’s issuance. Furthermore, the platform must implement a verified label or badge system for SEBI-registered entities and ensure that only content and advertisements from these recognised entities are permitted, which is in line with recent SEBI regulation amendments. This system should also allow the platform to flag unregistered entities for further scrutiny and remove their content or advertisements.

Alternatively, under the new proposed framework, the board may permit entities exempted under SEBI regulations or individuals creating content solely for investor education, provided they do not offer advice or recommendations, make claims about returns or performance, or promote any related products or services.

In August 2024, SEBI amended regulations to prevent unregistered entities from making unsolicited recommendations or claims about securities. SEBI prohibits regulated entities from associating with individuals offering unregistered advice or making claims about securities returns unless authorised. However, the new draft circular allows recognised digital platforms (SDPs) to act as intermediaries for securities-related content and advertisements, provided they comply with SEBI's preventive and curative measures.

Public comments on the consultation paper are due by November 12, 2024.