National Post (National Edition)

BCSC targets social media and stocks

New rules in works to tame manipulati­on


The British Columbia Securities Commission hopes to unveil new rules this summer to beef up the regulator's power to pursue those who use social media channels to manipulate stock prices and markets.

The rules haven't been finalized, and would have to be approved by the B.C. government, but they could go as far as requiring anyone recommendi­ng buying or selling securities on social media platforms to disclose whether they have long or short positions, said Peter Brady, executive director of the BCSC.

He said the regulator's focus is on how to manage conflict of interest, a “big underlying issue” when it comes to recommendi­ng stocks that has become even more important with the proliferat­ion of social media.

“The pump and dump game has changed,” Brady said in an interview, adding that traditiona­l enforcemen­t tools “may not be up to the task in a world dominated by social media.”

The capital market watchdog's plan to introduce rules for all social media platforms is noteworthy amid recent volatility in previously underwhelm­ing stocks such as GameStop and AMC, which appears to have been driven in no small part by retail investors across North America responding to videos on YouTube and postings on the social media platform Reddit.

Brady said the B.C. securities regulator, no stranger to wild stock swings and promotiona­l activity, is looking at a number of new enforcemen­t tools following a wave of “problemati­c promotiona­l activities” over the past few years, much of it involving cannabis and blockchain companies, and battery metals such as lithium and cobalt.

In addition to the rules that would specifical­ly target disclosure on social media, legislativ­e amendments to the provincial securities act passed last March relieved the BCSC of the need to establish that a misreprese­ntation had an effect on share price, a change that lowers the burden of proof for the regulators and makes enforcemen­t easier.

The BCSC only has to prove only that a statement or omission would be “important” to a “reasonable Investor” in determinin­g whether to trade a security.

“If we don't have to prove market impact, then we can be more effective in combating misleading statements (including) on social media,” Brady said. “Maybe you would never be able to show that that lie is going to move the stock.”

He said there has not yet been a test case of the lower threshold, and it is too soon to say if any of the new powers sought by the watchdog could be used to intervene in current cases of trading volatility, which bled from stocks including GameStop, BlackBerry Ltd., and Bed Bath & Beyond into the silver market last week.

“We don't know exactly what's going on with GameStop. It's very early,” Brady said, noting that individual facts and jurisdicti­on would determine the course of any enforcemen­t action.

“Putting that aside, the new tools, this sort of `don't lie' provision, it could apply,” he said, “if the investigat­ion supports it.”

As others have suggested, Brady said Canadian regulators could also attempt to deal with the novel situation by using a discretion­ary power that allows them to make orders that are “in the public interest” even if there isn't a specific breach of securities law. On the books since the 1960s, this power has historical­ly been reserved for conduct that rises of the level of “abusive” to investors or the capital markets.

In a joint statement last week, Canada's provincial securities regulators and the national investment industry regulator said they are monitoring the volatile trading and what's driving it.

“(We) will take appropriat­e regulatory action to protect investors if we identify that abusive or manipulati­ve trading activity may be taking place,” the Canadian Securities Administra­tors and the Investment Industry Regulatory Organizati­on of Canada said in the statement.

Social media “scrapers” are among the tools already being used by regulators across the country to sift through online activity and unearth potential market misconduct. This is done using key word searches, including company names, Brady said.

He added that the watchdogs also rely on tips, which they will continue to do even as they contemplat­e new powers to respond to questionab­le social media posts.

“The simple idea is this: Somebody shouldn't be able to lie on social media about a stock,” he said.

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