Failure to effectively monitor statements made by social media influencers has resulted in a $350,000 fine for New York-based online brokerage Open to the Public Investing. According to the Financial Industry Regulatory Authority (FINRA), the fine has been issued after the company settled the matter without admitting or denying the findings.
FINRA said communications from the so-called “finfluencers” were not fair and balanced and included misleading or unwarranted statements. FINRA also said that Public Investing also failed to review and maintain records of all retail communications disseminated on the firm’s behalf by its influencers, and failed to establish, maintain, and enforce a reasonably designed supervision system with respect to such communications.
Specifically, FINRA found that, “from January 2020 to at least September 2022, Public Investing paid individuals with followings on social media sites, commonly known as ‘influencers,’ to promote the firm in social media communications,” according to the settlement. Specifically, the company paid 110 individuals to promote the firm through social media platforms, including in static posts (such as videos).
“Some of those communications included statements that were not fair and balanced or made claims that were misleading or unwarranted,” FINRA alleged.
Rules violated
FINRA Rule 2210 addresses FINRA member communications with the public and includes content standards that apply to all member communications, including retail communications. FINRA Rule 2210(d)(1)(A) requires that all member communications be based on principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts regarding any particular security, industry, or service. In addition,
no member may omit any material fact or qualification if the omission, considering the context of the material presented, would cause the communication to be misleading.
FINRA Rule 2210(d)(1)(B) states that no member may make any false, exaggerated, unwarranted, promissory, or misleading statements or claims in any communication. In addition, no member may publish, circulate, or distribute any communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
Violations of FINRA Rule 2210 also are violations of FINRA Rule 2010, which requires member firms to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.
In Regulatory Notices 10-06 and 17-18, FINRA stated that third parties’ social media posts would constitute retail communications subject to FINRA Rule 2210 if a member firm either (1) paid for or was involved in the preparation of the content prior to posting (which FINRA referred to as “entanglement”) or (2) explicitly or implicitly endorsed or approved the content (which FINRA referred to as “adoption”). Regulatory Notice 17-18 also stated firms should clearly identify as advertisements any communications that take the form of comments or posts by influencers, as well as any other information required for compliance with FINRA Rule 2210.
Finfluencers and social media monitoring
In September 2021, FINRA launched a targeted exam (sweep) to review firms’ practices related to their acquisition of customers through social media channels, as well as firms’ sharing of customers’ usage information with affiliates and non-affiliated third parties. The first part of the review focuses on firms’ use of social media influencer and referral programs to promote their products and services and recruit new customers. The second part of the review addresses firms’ privacy notices (and options to opt-out) regarding the collection and sharing of their usage information.
In February 2023 the agency issued a summary of selected practices FINRA had observed in firms in that sweep.
That summary included recommendations for compliance, including maintaining records of social media influencer and referral program communications with the public consistent with applicable SEC and FINRA recordkeeping obligations and maintaining written supervisory procedures on finfluencer retainment that are updated regularly and in response to program developments, regulatory changes or industry trends.
In March 2024, FINRA fined M1 Finance, a firm offering a robo-advisory investment platform, $850,000 to settle charges that social media influencers paid by the firm made misleading or exaggerated claims to entice investors. The announcement came the day before FINRA CEO Robert Cook told the audience at SIFMA’s annual conference in Orlando, Florida, that the thing that gave him most pride during his eight-year tenure was his agency’s efforts to protect investors – especially those who are vulnerable and those more easily influenced by persuasive marketing and scams.
And during its own annual event earlier this month, FINRA panelists pointed to widespread failures they uncovered during that sweep on firms’ uses of social media influencers. The panelists noted that many firms did not review and maintain records of all retail communications disseminated on the firm’s behalf by its influencers, and failed to establish, maintain, and enforce a reasonably designed supervision system with respect to such communications.
