The Financial Industry Regulatory Authority's update on its targeted sweep of firms’ dealings with social media influencers includes suggestions that seem borderline unworkable, according to one securities attorney.
“If I was a chief compliance officer, and I read this, and went to a C-suite meeting, I’d say, ‘run in the other direction,’” Sander Ressler, a managing director of Essential Edge Compliance Outsourcing Services, said in an interview with WealthManagement.com. “This is a complete setup for regulatory actions.”
The update released this week follows the announcement of the sweep in September 2021, which focused on how firms use social media to find new business. Specifically, the initial letter asked firms to detail their agreements with third-party individuals or vendors contracted for social media activity.
Additionally, FINRA asked firms to show how they recruited social media “influencers,” as well as the content that influencer posted about them (the letter and recent update define an influencer as “any third party with whom the firm contracts or compensates to provide social media communications”).
FINRA’s update summarized some practices regulators had observed during the sweep so far, believing their findings could help other firms determine whether their actions were “reasonably designed” to catch risks related to influencers.
FINRA laid out five practices for firms to weigh as they refined their social media influencer policies. These included “evaluating potential social media influencers’ background and prior public social media activities for compliance and reputational risks before admitting them into their social media influencer programs,” and “maintaining records of social media influencer and referral program communications with the public” to meet FINRA and SEC obligations.
But Ressler questioned how firms could fulfill these suggestions, especially considering that influencers are not necessarily registered or in the industry, could be famous in vastly disparate fields like sports, fashion or the arts, and may be relatively young. Ressler wondered how a firm should judge the “compliance risk” of someone independent from the industry.
“You’re supposed to take a skateboarder or a fashion person and ask ‘what’s their compliance or reputational risk?’” he asked. “You’re supposed to do the background on some skateboarder who has 50,000 followers?”
FINRA also suggests firms provide “training and defining permitted and prohibited conduct for social media influencers,” a request that Ressler found unrealistic. In the case of a third-party vendor, it may be easier to offer training, but Ressler asked how this would work with individual influencers who are famous in their own right.
Additionally, he wondered how firms were supposed to monitor influencers’ “communications with the public,” when they could be operating on numerous platforms to support (or as a sole source of) their income, covering topics not concerning financial services.
“Now you’re supposed to monitor six or seven different social media platforms?” he asked. “How’s that going to work?”
In the past year, the SEC fined several celebrities, including Kim Kardashian and former NBA player Paul Pierce for touting crypto assets, securities and tokens offered and sold by EthereumMax while failing to disclose the compensation they received for doing so. Pierce was also accused of making “false and misleading promotional statements” about the EthereumMax assets.
Francois Cooke, the managing director in ACA Compliance Group’s Broker/Dealer Services Division, considered the diligence firms would need to follow “very basic from a business perspective.” Firms should start with the “baseline” that influencers are legitimate and their communications would meet FINRA’s requirements.
“As far as diligence, the broker/dealer industry has been doing this for quite a number of years now,” he said. “Start with a basic Google search of these individuals. Do they have a disciplinary history? Are you dealing with a reputable person?”
While firms do need to oversee third parties’ social media usage if they begin a relationship, Cooke said there are vendors who understand the industry and its regulatory environment (and indeed, some vendors will market that industry expertise to firms). But the decision to plot that course comes down to a b/d’s particular business model.
“‘Am I looking at a particular age group and how innovative do I want to be in approaching that?’ Each b/d has a different risk profile,” Cooke said. “If you do want an innovative way of getting customers, these practices are things you should do to manage regulatory risk.”
If firms feel uncertain, Ressler suggested they treat comments from social media influencers as if they’re testimonials when judging how to follow regulatory guidance. Since firms would only work with influencers as a means to drum up business, Ressler found it sensible to view such arrangements through the lens of guidance for testimonials.
“I think it gives you a framework in which to defend your own actions,” he said. “Instead of guessing what regulators mean by these terms and likely being wrong in terms of regulators in hindsight, at least you can say ‘we treat comments made by social media influencers as testimonials and that’s our internal regulatory framework.’"
