For much of last year, the United States witnessed a decoupling of Wall Street from Main Street. Defying the sluggish activity in the real sector, the stock market indices hit one record high after another in the second half of 2020 as investors and speculators poured their money into the stock market, in the hope of making easy money.
Spurred on by Wall Street, bourses in many parts of the world witnessed unprecedented bull runs, and in other cases, such as on Bursa Malaysia, extreme volatility which offered opportunities for quick profits . provided one picks the right stocks . at the right time.
Concerned by the proliferation of self-proclaimed stock picking gurus who ply their expertise, or purported expertise, through various media, the Securities Commission Malaysia ('SC') issued the Guidance Note on Provision of Investment Advice ('Guidance Note') on 30 December 2020.
The SC explained in a media release accompanying the issuance of the Guidance Note that "[the] guidance note .is issued in response to the increasing number of queries and complaints received regarding various social media, chat rooms and messaging applications that appear to be providing specific stock recommendations and/or investment advice to members of the public, who are given access to these recommendations and/or advice upon payment of a fee." According to the SC, the Guidance Note seeks to provide clarity to the industry and members of the public on conduct which the SC would consider as falling within the regulated activity of providing investment advice under the Capital Markets and Services Act 2007 ('CMSA').
Requirement for licence to provide investment advice
The SC reiterated that under paragraph 5 of Schedule 2 of the
CMSA, a person is required to hold a licence issued by the SC for
providing investment advice if the person:
- carries on a business of advising others concerning securities or derivatives; or
- as part of a business, issues or promulgates analyses or reports concerning securities or derivatives.
Considerations in determining "carrying on business of advising others concerning securities or derivatives"
The Guidance Note stipulates that in making the assessment as to whether a person is "carrying on business of advising others concerning securities or derivatives", the SC will take into account the overall circumstances of the person undertaking the activity. In the Guidance Note, the SC addresses this issue in two parts, namely "advising others concerning securities or derivatives" and "carrying on business."
The SC is likely to consider a person as "advising others concerning securities or derivatives" where "any communication involving providing recommendations or opinions [is] likely to induce a person to take any action or position (e.g. buy, sell or hold) regarding a particular class, sector, or instrument in relation to securities or derivatives."
The SC is more likely to consider that a person is "carrying on a business" if the activity is undertaken in a structured manner with regularity, or where any of the following is in place:
- pay-for-advice arrangements;
- offering a fee-based subscription to a channel or group, including on social media, which offers investment advice; or
- expectation of benefits or gratification, direct or indirectly, from the provision of investment advice.
The SC cautioned in the Guidance Note that the factors mentioned above are not intended to be exhaustive.
Item (c) above is particularly interesting. It can conceivably include a situation when a person receives a benefit from a third party (and not his target audience) for providing investment advice in relation to a particular security or derivative.
The Guidance Note provides illustrations as guidance. The pertinent ones are as summarised below.
1. Discussions on blogs, forums and other social media
The SC is more likely to consider a discussion on specific stocks on blogs, forums or other social media as investment advice if the discussion involves the provision of recommendation or opinion which may induce the reader or audience to take an action (e.g. buy, sell or hold) regarding the specific stock.
Such activity of giving investment advice is likely to require a licence under the CMSA, if the person undertaking that activity is considered to be carrying on a business.
2. Trainings and seminars on stock trading
Conducting trainings or seminars on stock trading is not likely to require a licence from the SC. However, a licence will be required if the training or seminar includes any material, content or if any of the trainers or speakers makes a statement that amounts to a recommendation or inducement to take action or a position (e.g. buy, sell or hold) regarding a particular class, sector, or instrument in relation to securities or derivatives.
3. Restrictions on licensed representatives
The holder of a Capital Markets and Services Representative Licence ('CMSRL') for dealing in securities or derivatives may only conduct stock or derivatives trading seminars if he is representing his principal (i.e. a holder of a Capital Markets and Services Licence) ('CMSL') and it is incidental to his role as a CMSRL holder. The term "incidental" in this regard refers to circumstances where the CMSRL holder is providing advice in his capacity as the commissioned or salaried representative of the CMSL and only to his clients. A CMSRL holder is not allowed to provide recommendations on specific stocks or derivatives outside such scope, for example to the general public or non-clients.
4. Radio and television appearances
A person making any comment concerning securities or
derivatives, whether on radio, television or through any other
medium of communication, is encouraged to disclose to his audience
(including readers) in his communication:
- whether or not he is licensed by the SC to provide investment advice; and
- whether he has any interest in the securities or derivatives that is the subject of his discussion.
However, the making of such disclosure does not absolve the person from the responsibility to assess whether he is required to hold a licence under the CMSA, or if he is so licensed, whether or not such activity is within the scope of his licence.
5. Standard of conduct for licensed investment advisors
The SC also reminded licensed investment advisors to adhere to standards of conduct that do not cast doubt on their competency, soundness of judgment and integrity, for example, by refraining from making any false or misleading representation that is likely to induce a person to invest in securities or derivatives.
The Guidance Note is a useful reminder to unlicensed self-proclaimed investment gurus seeking celebrity status as stock pickers extraordinaire and to licensed investment advisers as to the limits beyond which some of their activities could run afoul of securities law.
Since the issuance of the Guidance Note, the SC has directed seven entities and their related individuals to cease and desist from undertaking all activities in relation to the conduct of a business of providing investment advice without a licence under the CMSA. According to the SC, these operators had been carrying on the business of advising others concerning securities or derivatives, including providing stock recommendations upon payment of a fee through subscription-based private chat groups on Telegram, WhatsApp and Facebook. More details are set out in the SC's media release which is available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.