Increased focus on requirements for publishing investment recommendations on social media

Social media plays a central role

With the increasing participation of retail investors in the EU financial markets, investing has become more accessible to the public. This naturally leads to a rise in the number of forums where private investors discuss and exchange views on their investment decisions and trading strategies.

In this context, social media plays a central role when used to spread, share, and discuss information about financial markets and investment strategies.

In light of MAR (Market Abuse Regulation), an investment recommendation encompasses any public communication, including posts on social media, where an individual directly or indirectly provides advice or ideas regarding the buying or selling of financial instruments or the composition of a portfolio of financial instruments. This also includes any public message containing an opinion on the future price of a stock or other financial instrument. It is, however, important to note that a case-by-case assessment is always necessary to determine if a communication qualifies as an investment recommendation.

Rule #1

Exercise caution when sharing your own opinions on social media about the value or price of a financial instrument or recommending an investment strategy, as you may be providing an investment recommendation. Remember to:

• Even if you use "non-technical" language, it does not mean you are not providing an investment recommendation.
• If you share communication for an "educational purpose" (e.g., to illustrate economic theories or valuation strategies), it is best to use historical data and past examples to avoid leading investors to base their investment choices on the information. Ensure that you do not recommend an investment strategy or express an opinion on the current or future price/value of a financial instrument/issuer.
• MAR and its implementing regulation (EU) 2016/958 ("Level II Regulation") together form the MAR framework. The aim is to ensure fair market functioning and investor protection by:
•  Ensuring that investment recommendations are presented objectively and that any conflicts of interest are clearly disclosed.
•  Preventing and prohibiting actions that may constitute market abuse, such as market manipulation, insider trading, and illegal disclosure of confidential information.
• Failure to comply with these rules can result in administrative or criminal sanctions, depending on the type of violation:
• For actions such as insider trading, illegal disclosure of confidential information, or market abuse, fines can be up to EUR 5,000,000 for individuals and up to EUR 15,000,000 for companies.
• For breaches of the investment recommendation rules, fines can be up to EUR 500,000 for individuals and up to EUR 1,000,000 for companies.

Rule #2

When sharing an investment recommendation on social media, ensure you follow the rules in the MAR framework. Spreading false or misleading information on social media or sharing confidential information with a few selected individuals can be serious violations that may even lead to criminal prosecution in some member states.

Who can provide recommendations?

In principle, anyone can provide investment recommendations, but the obligations you have depend on who you are. The MAR framework sets out general requirements that apply to everyone and some "additional" requirements for professionals and experts. We have compiled an overview here.

The general requirements in the Level II Regulation require that anyone producing investment recommendations must:

• Include the identification of the producers of the investment recommendation.
• Include the date and time of the recommendation.
• Ensure the objective presentation of investment recommendations.
• Ensure that all sources of information are reliable and, if there is doubt, clearly state it.
• Disclose any conflicts of interest clearly and include them within the recommendation (regardless of format) so that investors reasonably notice them.
• When recommendations are disseminated via different social media channels, each of them must include a disclosure of interests or conflicts of interest.
• Note that including a link in the recommendation referring to a disclosure may be insufficient, as a link does not guarantee that the disclosure is presented clearly and is readily available to the public.

The additional requirements require "professionals" and "experts" to disclose (non-exhaustive list):

• A summary of any valuation basis or method and the underlying assumptions used in the recommendation.
• The investment horizon and an appropriate risk warning.
• The planned frequency of updates to the recommendation.
• If the recommendation has been changed after publication concerning the issuer it pertains to.
• If they hold a net long or short position of over 0.5% of the total issued share capital of the issuer the recommendation pertains to.

Rule #3

Be aware that the obligations you may be subject to when making recommendations can vary depending on who you are and the specific activity. Remember, the prohibitions against insider trading, market manipulation, and illegal disclosure of internal information apply to everyone, regardless of your "MAR category."

What risks are associated with market abuse?

Public communications shared on social media can pose risks related to market abuse, such as market manipulation, insider trading, and illegal disclosure of internal information.

All these actions are serious violations, and in some member states, they may lead to criminal prosecution. See examples below:

Example 1: Market manipulation may occur when communications:

• Provide (or are likely to provide) false or misleading signals regarding supply, demand, or price of a financial instrument.
• Ensure (or are likely to ensure) the price of a financial instrument at an abnormal or artificial level, including spreading rumors where the senders knew (or should have known) that the information was false or misleading.

Example 2: Failing to disclose a conflict of interest can be seen as an indicator of a vested interest in providing false or misleading signals or ensuring prices at an artificial level, where the person subsequently benefits from the communication’s impact on the price of the instrument in question.

Example 3: Market manipulation can occur on a larger scale, such as by spreading information through social media in an attempt to elicit a reaction from other users. Competent authorities will analyze such circumstances on a case-by-case basis, but be aware that groups of people connected via social media may aim to get investors to promote or perform coordinated actions to artificially influence the price of certain financial instruments. This can constitute market manipulation, especially when those responsible subsequently benefit from price changes resulting from the investors encouraged through social media. It is important to stay vigilant and make your own assessments when participating in financial trends.

Rule #4

Some communications can pose risks of market manipulation, insider trading, and illegal disclosure of internal information. Therefore, make sure to stay informed, be cautious, and avoid suspicious posts and invitations to participate in strategies aimed at creating trends.

LES’ Comment

At LES, we view positively the increased focus by ESMA and national competent authorities on certain requirements in MAR, particularly concerning investment recommendations published on social media. With the growing use of social media, such as LinkedIn, for publishing information about financial instruments, it is crucial to ensure that these activities comply with the applicable rules and requirements in MAR.

It is essential to recognize that fast and widely accessible communication channels, such as social media, can pose a potential risk for market abuse, especially when it comes to disseminating investment recommendations. Therefore, ESMA and the national regulators' efforts to strengthen the regulatory framework around these activities are very welcome.

It is important to ensure that investors' interests are protected to the fullest extent, and at LES, we look forward to monitoring how ESMA and national authorities work to effectively enforce and uphold these rules so that investors can trust the integrity and transparency of the market.