Sebi, SEC vs finfluencers: How global regulators are dealing with online wealth advisors

Indian capital markets regulator Securities and Exchange Board of India (Sebi) recently came out with a discussion paper proposing ways in which concerns related to the growing community of financial influencers or finfluencers can be addressed.  

But, Sebi is not the only regulator facing the challenge posed by unregistered financial advisors especially finfluencers.  

“This is a problem that every regulator across the globe is facing. When we met at IOSCO (The International Organization of Securities Commissions), it was a very hot subject. I think we are all trying to find the right approach,” Sebi Chairperson Madhabi Puri Buch had said in December 2022.  

Interestingly, just days before Sebi chairperson made this statement, the Securities and Exchange Commission (SEC) of the US charged eight social media influencers in a $100-million stock manipulation scheme, and seven of them were charged with securities fraud.  

More importantly, the US regulatory body sought permanent injunctions, disgorgement, prejudgment interest, and civil penalties against the influencers while also filing criminal charges against all eight individuals as part of a parallel action by the Department of Justice’s Fraud Section and the US Attorney’s Office for the Southern District of Texas.  

The SEC probe found that seven influencers were promoting themselves as successful traders since January 2020, based on which they managed to build a follower network of lakhs of people.  

Thereafter, they took positions in certain stocks and then recommended the shares to their followers by way of price targets etc.  

“… when share prices and/or trading volumes rose in the promoted securities, the individuals regularly sold their shares without ever having disclosed their plans to dump the securities while they were promoting them,” said a statement by the SEC.  

In another instance in August 2022, the SEC said that fraudsters often use social media to scam investors and that investors should never make investment decisions solely on the basis of social media platforms.  

“Investors increasingly rely on social media for information about investing.  While social media can provide many benefits to investors, it also creates opportunities for fraudsters.  Social media allows fraudsters to contact many people quickly, cheaply, and without much effort – and it is easy for fraudsters to post information on social media that looks real and credible,” said the SEC statement.  

The SEC is also not alone in taking such actions or initiatives.  

The Financial Conduct Authority (FCA), the independent financial regulatory body of the UK, has joined hands with the Advertising Standards Authority (ASA) to create a checklist to let finfluencers check if they are the right person to promote a particular product.  

One of the clauses of the checklist states: “Are you authorised by the FCA or has your post been approved by an FCA authorised person? Seek legal advice if you are unsure.”  

Similarly, rules of the Australian Securities & Investments Commission (ASIC) state that influencers who give financial product advice must have an Australian financial services (AFS) licence, the absence of which could attract up to five years imprisonment for an individual.  

Interestingly, the ASIC has clearly stated that one can still share content related to a product design and structure – simply put, content aimed at investor education and awareness -- without giving a financial advice as such but any kind of advice or recommendation would require a licence.  

“… if you present factual information in a way that conveys a recommendation that someone should (or should not) invest in that product or class of products, you could breach the law by providing unlicensed financial product advice,” states a so-called Information Sheet by the ASIC while adding that influencers who receive benefits or payments for their content are more likely to be providing advice to influence their followers.  

So, it would be safe to say that the issue related to finfluencers and monitoring and regulating them is indeed a global one and the Indian policy makers are not the only one grappling with the matter.