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.