The Legal Minefield of Investment Recommendations on Social Media for Influencers

Josef Bergt

2024

Introduction

In the digital age, the proliferation of financial discourse on social media platforms has significantly altered the dynamics of investment advice and market behavior. The advent of digital communication has revolutionized the way financial advice is disseminated, especially on social media platforms. This transformative shift has prompted regulatory bodies such as the European Securities and Markets Authority (ESMA) and various National Competent Authorities (NCAs) to intensify their oversight and enforcement of compliance measures, particularly under the ambit of the Market Abuse Regulation (MAR; Regulation (EU) No 596/2014). As the landscape of financial communication continues to evolve, it becomes crucial for (financial) influencers, experts, and enthusiasts in the financial sector to grasp and adhere to the stipulated regulatory frameworks to mitigate legal risks and safeguard investor interests.

Transparency and Accuracy: The Cornerstones of Social Media Communication

The core tenet of issuing investment recommendations on social media is the maintenance of transparency and accuracy. The essence of such communications, whether they are posts, videos, or any interactive content, is that they often influence market behaviors and investment decisions. Therefore, the dissemination of such recommendations is not merely an act of expressing personal viewpoints, but a significant responsibility bound by legal and ethical standards as outlined in the MAR.

Defining an Investment Recommendation

An investment recommendation is construed broadly to include any communication that suggests or prompts action regarding buying or selling financial instruments. This can encompass direct advice or more subtle suggestions about portfolio composition, regardless of the medium or the language used. The regulation’s extensive scope means that even informal discussions on social media platforms can constitute investment advice if they influence financial decisions. This includes, but is not limited to, suggestions, advice, and insights regarding the buying or selling of financial instruments, communicated through any digital or social media platform. The broad scope of this definition necessitates a heightened level of awareness and precision in how financial information is presented online.

Framework and Compliance Requirements

The legal framework governing these communications is detailed in MAR, along with various Delegated and Implementing Regulations. These documents collectively establish a comprehensive set of requirements designed to ensure that every piece of communicated advice is clear, objective, and verifiable. Key compliance mandates include:

• Identification Requirements: Every investment recommendation must transparently identify the creator of the content, including their name, position, and the date and time of the recommendation. This requirement ensures traceability and accountability.
• Objective Presentation: Financial communications must clearly distinguish between facts, interpretations, and opinions. The sources used must be reliable, and any uncertainty regarding the information must be clearly indicated to maintain the integrity of the advice.
• Disclosure of Conflicts of Interest: The regulations mandate that any potential or actual conflicts of interest be clearly disclosed. This is crucial for maintaining the impartiality of the recommendations and for enabling investors to make informed decisions. Whenever recommendations are expressed across various social media platforms, on each platform a declaration of any conflicts of interest must be included.

Additional Obligations for Experts and Professionals in the Financial Sector

Professionals and acknowledged experts bear additional responsibilities, which include:

• Methodology and Assumptions: A thorough explanation of the valuation methodologies and the assumptions used must be provided. This enhances the comprehensibility and credibility of the recommendations.
• Explicit Risk Warnings: Communications should include a detailed description of the investment's duration and associated risks, providing a clear expectation of the investment's timeframe and volatility.
• Update Frequency: The frequency of updates to the recommendation should be disclosed to ensure ongoing relevance and accuracy as well as the disclosure of amendments of the recommendation after being initially disclosed.
• Disclosure of Financial Positions: If the communicator holds a significant financial position in the discussed instrument, this must be disclosed. The threshold for such disclosure is typically a net long or short position exceeding 0.5% of the issued share capital of the issuer.

Consequences of Non-Compliance

Failure to adhere to these regulations can lead to significant repercussions, including administrative and criminal sanctions. The severity and nature of these penalties can vary significantly across different jurisdictions within the European Union, reflecting the local enforcement policies and legal frameworks. Specifically, individuals may face fines up to EUR 5,000,000, while legal entities could incur fines up to EUR 15,000,000.

Conclusion

The role of social media in shaping investment landscapes is undeniable and growing Public communications on social media pose risks related to market abuse, including market manipulation and insider trading. These activities are considered severe offenses and can even result in criminal prosecution in some jurisdictions. Examples include giving false signals about market conditions, failing to disclose conflicts of interest, or engaging in coordinated actions to manipulate financial instrument prices. Such behaviors can lead to market manipulation, especially if the communicators profit from the resulting price impacts. Thus, it is crucial to be informed and cautious about participating in financial trends or strategies on social media that might be manipulative or deceptive. Compliance with the MAR is not just a legal obligation but a fundamental component of maintaining market integrity and investor trust. As the digital dialogue around investments continues to expand, adhering to these regulations becomes increasingly crucial.

Sources: ESMA (2024), Requirements when posting investments recommendations on social media and ESMA Warning (2024), For people posting Investment Recommendation on social media (ESMA74-1103241886-912).

Executive Summary:

• Investment recommendations on social media must be transparent and accurate, conforming to the stringent requirements of the MAR.
• The definition of an investment recommendation under MAR is broad, encompassing a wide range of financial communications on social media.
• All communications that could influence investment decisions need to clearly identify the contributors, differentiate facts from opinions, and disclose any potential conflicts of interest.
• Professionals are subject to additional disclosure requirements, including methodologies, investment durations, and their personal financial positions.
• Non-compliance with these standards can result in severe penalties, emphasizing the need for rigorous adherence to regulatory expectations.