Social media can be hazardous to your financial health, regulator warns

Amid growing concerns about social media driving retail trading activity, the European Securities and Markets Authority (ESMA) issued a warning to investors and online posters.

The regulator published a statement on the practice of posting investment recommendations on social media, which aims to clarify what constitutes a recommendation, and how such advice should be posted. It also warns about the consequences of violating rules against abusive trading via social media.

ESMA issued the statement in response to a rise in the use of social media to disseminate recommendations, citing a concern that “retail investors are not aware of the risks associated with following such recommendations.”

The statement stressed that investment recommendations must be produced and distributed in an “objective and transparent way so that investors, before making any investment decision, can distinguish facts from opinions.”

It also said that it’s “crucial that investors are able to easily identify the source of information and any conflicts of interest of those making the recommendations.”

Violations of ESMA’s rules relating to investment recommendations can result in regulatory action or, for cases that involve spreading false or misleading information, may result in market manipulation charges, it also warned.

“In times where social media platforms are a key source of information for retail investors, I believe it is important that they should be aware of the risks associated with relying on recommendations disseminated on social media when making investment decisions,” said Anneli Tuominen, interim chair of ESMA, in a release.

“The aim of the statement is also to remind those who recommend investments on social media and other similar platforms of the applicable rules and what happens when those are not respected,” she said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.