Can SEBI crack down on unregulated social media financial gurus?

The urge to make profits without much effort is common in our society and this has created an insatiable demand for miracles. Unscrupulous gurus and babies flourished for this reason. So are the so-called financial gurus on social media who promise astronomical returns on investments of a few thousand rupees, and that too within a trading day. Let’s call it miracle in markets, a practice that cannot be completely stopped but can definitely be curbed by the Securities and Exchange Board of India (SEBI).

SEBI was established at a time when the markets were governed by deep paranoia of massive scandals and scams. So it focused more on investor enhancement rather than investor empowerment. Why else would advertising get away with financial security issues by quickly reading out the caveats and statutory warnings?

The demand for stock market miracles and the supply of tips have skyrocketed in recent years with the ubiquitous spread of social media and the decentralization of information. Fake Twitter profiles offer free tips and promise mouth-watering returns to lure naive investors into joining the Telegram channels of the so-called financial gurus.

On Telegram, many such financial gurus run paid channels, on which they offer stock tips. This is largely an illegal operation because they are not SEBI registered research analysts who can suggest stock calls or investment advisors who are allowed to even create portfolios. They don’t take the license because it puts a lot of trade restrictions on them.

To advertise their services, these financial gurus deploy a regular narrative – of being self-made and living the high life, with fancy cars and luxury vacations.

Some financial gurus have created an abundance of fake handles to admire their own financial forecast, supposed trading adventures and successes to create further proof of concept. Other such financial gurus use these fake handles to discredit other professionals. It’s a circus out there.

The shady practice came to a head when pictures of screenshots of trading statements claiming regular profits in lakhs and crores were posted on social media. But a fake screenshot posted by a popular YouTuber was recently called out. He placed a trade that was impossible to do because it exceeded the limit set by the exchanges. This caused a lot of anger online.

With an opportunity to verify trade profit claims, a provider of options analytics tools has created a Verified Screenshot service that can be connected to brokers’ terminals. This is a good initiative that can intimidate fraudsters, but it can fail in a professional and reliable measurement of performance.

Last week, CNBC Awaaz managing editor Anuj Singhal busted a fake Telegram channel with thousands of subscribers. It is managed in the name of the channel. At the same time, he took up the cudgels about the threat of false performance reporting via photoshopped profit and loss statements on Twitter. This caused pandemonium in the world of Twitter financial gurus.

An unregistered research analyst/investment advisor, who is known to be very aggressive, panicked and offended mass sensibilities by tweeting a distasteful post. Around the same time, it became known that the Securities and Exchange Board of India (SEBI) was investigating the market activity of this adviser.

SEBI’s actions have exacerbated panic among dull financial gurus. SEBI also ordered an unregistered advisory called Fingravy Wealth Creation to refund fees it received for advisory services, which amounted to nearly Rs 6 crore. The tens of thousands of unqualified, inexperienced, incompetent and therefore unregistered financial gurus have since erased their online footprints.

This single act of SEBI exercising its powers to investigate unregistered analysts and advisers proves that power is powerless unless exercised! SEBI must allocate resources to strictly enforce the rules it is empowered to lay down.

To curb the use of social media by unregistered analysts and advisors to issue misleading and false trading tips and investment advice, SEBI should work on a two-pronged strategy of investor empowerment and enforcement of regulations.

Investor empowerment must include the following:

a) Investor education: SEBI can direct all registered market intermediaries ranging from stock exchanges, brokerage firms, portfolio management service providers, mutual funds, alternative investment funds, investment advisory, research analysts and others registered with it to donate 1-2 percent of their profit to the National Institute of Securities Markets (NISM) as a mandatory contribution to corporate social responsibility. The NISM should use these funds to generate investment empowerment educational content.

b) Redressal of grievances: SEBI should warn all that dealing with unregistered market entities is a crime and that grievances cannot be redressed by way of orders to refund any fees paid to such entities. Yet SEBI may penalize such unregistered entities by disgracing all the ill-gotten gains made by them by way of orders to transfer such profits to the proposed Sebi/NISM Investor Education Fund. However, investors who have been wronged by registered and regulated entities must be provided with timely redress.

The application of regulations must include the following:

a) Encourage and financially reward whistleblowers for providing timely, accurate information about offenders. Recent comments by SEBI Chairman Madhabi Puri Buch to encourage auditors to use third-party validation tools is a welcome positive change in attitude to involve all possible resources at the top of market governance. Still, this should not be taken out of context to imply that self-appointed third-party screenshot verification providers add any value.

b) Take help from the Financial Intelligence Unit and Serious Fraud Investigation Office, both of which are multi-disciplinary bodies with access to data from tax authorities, exchanges and custodians to identify unregulated service providers. If necessary, help can be sought from the local police to arrest and prosecute offenders.

c) Combat menace of misinformation on social media by making it mandatory for registered service providers to enter their social media accounts on the SEBI registration portal and only accounts so registered may be allowed to carry out investment, trading or post related information. Social media companies like Twitter can be provided with an application program interface (API) connection to this SEBI database of authorized social media profiles. Any complaint to social media platforms to delete or suspend unauthorized accounts must be processed in a time bound manner.

d) Establish performance measurement and reporting standards according to the CFA Institute’s Global Investment Performance Standards (GIPS). Statutory performance audits should be made mandatory by SEBI for those entities using social media to influence investors.

The narrative must be set by the regulator, not by the self-proclaimed financial gurus who manipulate investors on social media. The turf must be owned in its entirety by the regulator to keep it clean. The rules must be determined by the regulator. This is necessary to prevent market participants from creating the mood to suit their goals or from ruining the atmosphere by discrediting competitors. This recent Twitter fracas is yet another testimony to the age-old truth that media will always be the most effective petitioner for the welfare of people and the regulator will be the most effective enforcer of fair play rules.