FINRA targets impact of social media influencers in review letter

The Financial Sector Regulatory Authority review letter published last week targets how businesses use social media to attract news President Robert Cook’s assurance earlier this year such a concentration was to come as a result of market volatility accelerated by GameStop races and other “meme” stocks earlier this year.

According to targeted review letter, the agency will examine how businesses acquire customers through social media, as well as how businesses manage their compliance obligations “related to information collected from these customers and others who may provide data to businesses.” .

Specifically, the review letter asks companies to disclose whether they are contracting with people or external vendors for their social media activity. In the letter, FINRA says companies will be asked to provide engagement letters, contracts and written (or unwritten) agreements in which the company has compensated anyone in exchange for their social media activity. Additionally, companies would be asked to describe how they decide to recruit social media “influencers”, as well as any social media posts and content related to an influencer bragging about that business.

The targeted letter defines “social media influencers” as “any third party with whom the company contracts or pays to provide communications on social media.” This can compare to how companies have regulated their own marketing practices in the past, according to Jennifer DiValerio, managing director of Foreside, a compliance consultancy for the wealth and asset management industries.

“If a business uses an influencer, it’s really an extension of their business,” she said. “It’s an extension of their marketing program itself. Therefore, they have an obligation to ensure that their communications are not misleading or false, but that they are fair and balanced.

But unlike third-party marketing consultants, social media influencers strike a deal with a high number of dedicated followers. For DiValerio, this “fanbase” is what makes the influencer / business relationship unique from previous marketing reviews. In this case, the information that an influencer touts may reflect what’s on a company’s website, but it is conveyed to an audience with a different relationship with the messenger.

“Businesses just need to be careful about navigating communications and making sure they have the required disclosures, whether it’s compensation or anything related to the content or material promoted by the company. influencer, ”she said.

The effort in the wake of the GameStop saga is a sign of the evolving role of regulators in response to the impact of social media on the market. Recently, the Secretary of the Commonwealth of Massachusetts, William Galvin MassMutual fine of $ 4 million for not overseeing the social media practices of Keith Gill, a registered representative who has become one of the central figures in the saga by touting GameStop actions through his online nickname “Roaring Kitty”.

For Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services, FINRA’s authority over these people (and companies’ relationships with them) could have unintended consequences. A situation like Gill and MassMutual was clear, and platforms and chat rooms like Reddit were just the newest places for the old market manipulation problem. But he warned FINRA to be cautious.

“If they decide that their only way to affect this community is through the regulated platforms they trade on, it’s almost a martyrdom situation. These people could revolt and they are the next generation of investors, ”he said. “If they don’t believe in market transparency, and the markets are fair and they are treated the same as a hedge fund manager, when they become the backbone of the investing public (and it’s not going to be long) their distrust of the system could end up being catastrophic.

During a panel at the annual meeting of the North American Securities Administrators Association this week, William A. Rivera, senior vice president of litigation at the AARP Foundation, argued that the role of regulators in overseeing communications on social media raises “all kinds of First Amendment issues.” While certain types of behavior (like misrepresenting yourself to pump or lower a stock’s price) were clearly examples of market manipulation, Rivera wondered if this is the case when online investors have pursued actions to harm short sellers.

“It’s not misleading, it’s Babe Ruth calling his shot in a very dark way. It’s hard to say it’s misleading, but it’s clearly about trying to manipulate or influence the direction of a stock’s price, ”he said. “It’s really a brave new world in what these influencers can do with stock.”