Finfluencers: New Marketing Strategies Meet Existing Compliance Obligations

Financial social media influencers—or finfluencers—are growing in popularity as a cheap way to reach a new generation of investors. But using these individuals to promote a firm, its products or services comes with risks, as revealed by the results of a recent targeted review of FINRA member firm practices in the space.

On this episode, Ira Gluck, senior director of Advertising Regulation, and Melissa Turitz, a director with FINRA Enforcement, dig into the results of the finfluencer target review, the risks and regulatory requirements around this newer form of advertising and share some best practices for firms looking to make use of social media influencer programs. 

Resources mentioned in this episode:

Reg Notice 17-18: Guidance on Social Media and Business Communications

February 2023 Finfluencer Sweep Update

Rule 2210 – Communications with the Public

Press release – March Finfluencer Enforcement Action

April Finfluencer Letter of Acceptance, Waiver and Consent (AWC)

Gen Z and Investing: Social Media, Crypto, FOMO and Family (Research Report)

Episode 134: A Look at the Attitudes and Behaviors of the Youngest Investors

Listen and subscribe to our podcast on Apple Podcasts, Google Podcasts, Spotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 
 

FULL TRANSCRIPT 

00:01 - 00:31

Kaitlyn Kiernan: Financial social media influencers or finfluencers are growing in popularity as a cheap way to reach a new generation of investors. But using these individuals to promote a firm, its products or services comes with risks, as revealed by the results of a recent targeted review of FINRA member firm practices in the space. On this episode, we learn more about the risks and regulatory requirements around this newer form of advertising and hear some best practices for firms looking to make use of social media influencer programs. 

00:31 – 00:41

Intro Music

00:41 - 01:11

Kaitlyn Kiernan: Welcome to FINRA unscripted. I’m your host, Kaitlyn Kiernan. I am pleased to welcome two guests to the show today to discuss the outcome of FINRA’s recent targeted review of firm use of financial influencers on social media, or, as we call them, finfluencers. We are welcoming to the show for the first time, Melissa Turitz, a director with FINRA’s Office of Enforcement, and joining us for the second time this year, Ira Gluck, a senior director with FINRA’s Advertising Regulation team. Ira and Melissa, thanks for joining me. 

01:11 - 01:13

Ira Gluck: Pleasure to be here, Kaitlyn. 

01:13 - 01:14

Melissa Turitz: Good to be here. 

01:14 - 01:24

Kaitlyn Kiernan: So just to kick off can you both introduce yourselves and share a little bit about your background and your role within FINRA? Melissa, as our newcomer, can we start with you? 

01:24 - 02:03

Melissa Turitz: Sure. So, I joined FINRA’s Enforcement Department back in 2016, and I’ve been an attorney director in the department since 2020. As one of the directors, I supervise a team of five fantastic attorneys, and I work very closely with Enforcement and investigators and then colleagues from our other departments, like Advertising Regulation, the National Cause and Financial Crimes Group. Before joining FINRA, I spent about a decade working in private practice at a large law firm, specializing in internal investigations and criminal litigation. And it was there that I first learned about the important work that FINRA does to protect investors in the market. 

02:04 - 02:08

Kaitlyn Kiernan: Thanks, Melissa. And, Ira, how about you? Can you reintroduce yourself? 

02:08 - 02:45

Ira Gluck: Happy to do so. So, I’ve been with Advertising Regulation since 2011, but have been with FINRA and its predecessor since 1996. I’ve also worked in Member Supervision, Enforcement and what used to be called Emerging Regulatory Issues. I'm currently serving as a senior director in Ad Reg, and I oversee our investigative programs. These groups analyze communications that are collected by other FINRA departments, such as Enforcement and Member Supervision, in their examinations and investigations. We also conduct our own reviews where we interact with member firms directly. 

02:45 - 02:58

Kaitlyn Kiernan: Great. Thanks, Ira. So, to dig in, I wanted to start with a vocab question, Ira. So, I mentioned a finfluencer is a financial influencer. But can you tell us more about what that is? 

02:58 - 03:49

Ira Gluck: Sure. So, they’re usually internet personalities with a following of viewers or listeners and influencers use that social media presence to educate and sway their audience. And it’s the followers who firms want to reach with their marketing message. And I guess one question is, what’s in it for the influencer? Well, they’re usually compensated by the business that they are recommending or talking about. We see firms using a few different models in this sense. In some cases, the sponsor of the product pays the finfluencer directly to put out favorable content. 

And we’ve seen other models where the finfluencer is given a link to embed in their posts. When customers use that link and complete a certain task, like opening and funding a new account, the influencer gets paid. We’ve seen that payment in terms of cash or sometimes in the form of free shares of stock. 

03:50 - 04:05

Kaitlyn Kiernan: Thanks for giving us the high-level overview. And before we dig into the sweep or targeted review itself, Melissa, can you tell us what exactly a sweep or targeted review—we can use those terms interchangeably at FINRA—what is that? 

04:06 – 05:26

Melissa Turitz: So, a sweep, which is also a targeted exam or a targeted review, is a type of review that FINRA conducts to gather information about specific issues or concerns across multiple firms. FINRA uses the information that it gains in the sweep to focus subsequent examinations, to respond to emerging issues, to determine where firms might benefit from additional guidance from FINRA. So, the number of firms in any particular sweep can vary, and they’re typically selected based on factors like the nature of the firm's business activity and the relevance of that activity to the sweep’s focus. 

It may also include things like prior exam findings or things like customer complaints or regulatory history of the firm. And then after FINRA collects the information from the sweep, it usually publishes a summary about the sweep or targeted exam that highlights best practices to the firms. The information that’s learned also informs later communications, including FINRA’s Annual Regulatory Oversight Report. So, a sweep can lead to enforcement actions. But that really isn’t the goal. 

The goal is to understand areas where there may be widespread concerns, so FINRA can ensure investor protection, and it can better facilitate compliance to prevent future potential investor harm. 

05:27 - 05:44

Kaitlyn Kiernan: Thanks, Melissa. So today we’re talking about a specific sweep looking at finfluencers. And we will link to the sweep and the summary of those results in our show notes. But Ira for this particular sweep, can you tell us what the reason was for conducting it? 

05:44 - 06:16

Ira Gluck: Sure. FINRA was seeing a proliferation of affiliate referral programs, where firms were providing finfluencers with referral links and compensating them for referring new customers to the firm. We wanted to understand how firms were supervising these activities, and if the posts that were being created were in compliance with FINRA’s Communication with the Public Rules. Given that most of these communications were not subject to FINRA’s filing requirements, it was a very efficient way of getting information, and it allowed us to compare compliance and supervisory systems across firms. 

06:17 - 06:21

Kaitlyn Kiernan: And what was the scope? How many firms were involved in this sweep? 

06:21 – 07:04

Ira Gluck: We ended up going out to 15 firms. And from a Communications with the Public standpoint, the targeted exam focused on referral programs and social media influencers. And referral programs were defined as any customer or account referral program that was offered or used by the firm through which individuals received compensation for referring those new customers to open accounts. Social media influencers were any third party with whom the firm contracted or compensated to provide social media communications. 

The targeted exam also looked at how firms manage their obligations under Regulation SP, related to information they collect from customers and other individuals that may provide data to the firm. 

07:05 - 07:11

Kaitlyn Kiernan: And as you were reviewing that information gathered during the sweep, what were you looking for? 

07:12 – 08:32

Ira Gluck: The first thing we were looking for was, can customers tell that this is a paid advertisement? Clearly, it’s important for customers to understand that they are viewing a marketing communication. People evaluate information differently if they know they are being sold something. And we’ve seen a number of different methods that firms use to disclose that a communication is paid advertising. We’ve seen hashtag ad words like promoted, sponsored and the like. Another thing we were looking at was that FINRA’s rules require that communications prominently disclose the firm’s name and reflect any relationship between the firm and other entities that are named in the communication. 

And finally, what are the products and services mentioned are offered by the firm. We want customers to know who is paying for the communication and who they should reach out to if they run into problems or have any questions. Other things we were looking for were how firms were providing disclosure regarding the risks, terms and limitations of things like the free stock promotions, zero commission offers, and fractional share programs. One thing we always look at, Kaitlyn, is are there any false or misleading statements in these communications? And then we also looked at the firm’s supervisory system as it related to communications and the firm’s recordkeeping practices. 

08:32 - 08:43

Kaitlyn Kiernan: So, the focus on the influencers is relatively new. But social media has obviously been around. What kind of guidance has FINRA shared in the past related to this space? 

08:44 – 10:00

Ira Gluck: We’ve been providing guidance in this space going back at least to 2010. And the guidance that we’ve talked about is firms need to start at the analysis of when a communication that’s being made by a third party is the responsibility of the firm under the rules. And there are two main means through which this can happen. The first is adoption. And that’s where the firm endorses the content in some fashion. And that’s often through liking the post or reposting the content or linking to that third-party content. 

The other means is entanglement, and that’s where the firm is involved in the preparation of the content or pays for the creation of the post. Probably the most direct articulation of influencer-related guidance was in Regulatory Notice 17-18. What we said there was when a firm has arranged for a comment or post to be made, we would regard the firm as entangled with that resulting communication. The other thing we said was that firms should clearly identify as advertisements any communications that take the form of comments or posts by influencers. 

Finally, we also reminded firms of the need to include the broker-dealer’s name, as well as any other information required for compliance with Rule 2210. 

10:01 - 10:14

Kaitlyn Kiernan: And of course, the 17 piece of that Regulatory Notice is the year 2017. So that does go back quite a bit of time. So, coming out of the sweep, what were some of the most significant findings? 

10:15 – 11:15

Ira Gluck: We ended up reviewing over a thousand social media communications as part of the review. And eye-popping 70 percent of them were non-compliant in some substantive fashion. For example, 55 percent failed to disclose that the communication was a paid advertisement. Thirty-eight percent failed to disclose program or product risks, including about margin, securities lending, crypto and options. About 30 percent contained promissory, unwarranted, misleading or exaggerated statements and claims. 

Things like anyone who starts an IRA in their 20s will become a millionaire by the time they’re 60 or content that said, how to go from $0 to $100,000 in two years. I'd like to know the answer to that one myself. Twenty-seven percent of the communications we looked at failed to provide the terms and conditions of the rewards programs or promotions that were being offered. So, there were a wide variety of issues that we were seeing. And in fairly high proportions. 

11:15 - 11:35

Kaitlyn Kiernan: Yeah, those are some pretty high non-compliance rates. Melissa, you mentioned that the goal is not enforcement actions, but of course enforcement cases can come out of those targeted reviews. And in March, FINRA announced its first enforcement action stemming from the sweep. Can you run us through the findings in that case? 

11:36 - 12:52

Melissa Turitz: Sure. So that first March enforcement action involved findings that the respondent firm had failed to reasonably supervise communications made by its paid influencers or finfluencers to promote the firm on social media platforms. And we found those communications about the firm were not fair and balanced, or made claims that were exaggerated or unwarranted, promissory or misleading, in violation of FINRA’s Advertising Regulation rule, and in particular, FINRA determined that the firm was entangled with its influencers’ communications that promoted the firm. 

And was therefore responsible for the content of those posts and supervising those posts in accordance with FINRA rules. In that case, the firm had paid influencers who participated in its marketing program a flat fee for every new account that was opened and funded. And the firm didn’t limit the compensation influencers could earn. During the relevant period we looked at, the firm had paid approximately 1,700 influencers over $2.75 million, and it resulted in more than 39,000 new accounts that were opened, and the firm instructed its influencers to include the unique referral link in their social media posts about the firm. 

12:52 – 14:25

Melissa Turitz: The firm had also provided its influencers with graphics to use in their social media posts and had also provided a welcome guide to influencers that gave information on how influencers could make their social media posts more effective and that highlighted specific services and features that were offered by the firm. And despite entangling itself with its finfluencers’ posts, the firm didn’t have a supervisory system that was reasonably designed to supervise those posts. For example, the firm didn’t review or approve the influencers’ communications before they were posted on social media platforms, and the firm didn’t retain the communications as required by FINRA rules. 

The firm also didn’t have written supervisory procedures—we call them WSPs—that addressed the firm’s use or supervision of its influencers’ communications. And as I mentioned, when FINRA staff looked at the communications, they identified posts about the firm that weren’t fair and balanced or made claims that were exaggerated or promissory or misleading. For example, in one video, an influencer advertised the firm’s margin lending program and incorrectly stated that customers could pay margin loans back at any given time. 

And in fact, investors really aren’t entitled to any extension of time to meet the firm’s margin requirements. And the firm could, without contacting the investor, increase maintenance margin requirements on the account at any time, or force a sale of securities in the accounts and choose which securities to sell. 

14:25 - 14:37

Kaitlyn Kiernan: So, it sounds like a special margin program, but in fact it’s pretty typical of any margin account. Have you seen any other cases stemming from this influencer sweep? 

14:38 – 16:32

Melissa Turitz: So, in April 2024, we did issue a second AWC with similar findings based on another firm’s use of finfluencers to promote the firm in social media communications. The April 2024 AWC involved similar factual findings and similar violations to the March 2024 action. For example, that second, AWC found that the second firm had paid 17 influencers for promotional communications. 

It had paid those influencers in a similar fashion—a flat fee for each new account opened and funded by a customer—and FINRA found that the posts made by those finfluencers were widely distributed and that customers had opened about 775 new accounts, each funded with at least 25,000 using the unique referral links provided to those finfluencers. As in the first enforcement action, FINRA also found that the second firm was entangled with influencer communications, and that firm had an advertising agreement with each of its finfluencers, and it also provided selling points that finfluencers could use that again highlighted specific services and features of the firm. 

FINRA found that the firm’s finfluencer posts weren’t fair and balanced and contained promissory language, for example, suggesting that individuals could achieve similar results as finfluencers. And finally, FINRA found that the firm didn’t have a supervisory system that was reasonably designed to supervise the retail communications posted by the finfluencers on the firm’s behalf. The firm didn’t review the videos posted by finfluencers before their publication, and didn’t retain records of the videos or dates of use, as FINRA rules require. We do anticipate similar cases involving finfluencers to be resolved this year. 

16:33 - 16:48

Kaitlyn Kiernan: Thanks, Melissa. So that shows how specific findings from the sweep can lead to enforcement. But Ira can you share some best practices and key takeaways for firms so that they can avoid this type of situation? 

16:49 – 18:19

Ira Gluck: Happy to do so. So back in February of 2023, we published an update on the targeted exam. And in that update, we did articulate some best practices on how firms could supervise this activity. So, starting with the written supervisory procedures, we indicated that it’s a best practice for firms to clearly spell out what types of programs the firm allows and explain what controls they’ve put in place. The procedures should also explain how compensation works in the program, and if there are any limitations or restrictions, and firms should update those written supervisory procedures on a regular basis, and they should certainly do so in response to any changes in their program, changes in regulation, or any industry trends. 

Some other suggested practices that we included were firms should think about performing due diligence on social media influencers’ background and their body of work, looking for potential compliance and reputational risks. We also suggested that firms provide training and define what is permitted and prohibited conduct when they interact with social media influencers, or when they hire social media influencers. Finally, we suggested that firms make sure that they’re maintaining records of social media, influencer and referral program communications not only to comply with the recordkeeping rules in FINRA Rule 2210, but also to know what is going on in those communications and be able to supervise them effectively. 

18:20 - 18:33

Kaitlyn Kiernan: Thanks, Ira. And just to wrap up, what do you think the future of the finfluencer space looks like? Do you think firms are going to continue to use these individuals as a way to promote their business? 

18:34 - 19:20

Ira Gluck: Well, I think we’re going to see this trend continue, largely because younger investors respond well to this form of marketing, and it’s relatively inexpensive from a customer acquisition standpoint. As a matter of fact, a recent FINRA Foundation and CFA Institute study indicated that roughly a third of Gen Z investors, both in the U.S. and the UK, cited that social media influencers were a major factor in their decision to invest. And as the father of two Gen Z children, I’ve seen this in action. 

Both of my kids get the vast majority of their news and information from social media, and usually that’s their first stop when they’re considering a new purchase. And even if it’s not the determining factor, they often use that social media to validate their choice. 

19:20 - 19:43

Melissa Turitz: I totally agree with that. And the number of social media platforms that exist is increasing, and the social media space is constantly evolving. It was eye opening to see the platforms that we were looking at, where influencer posts were made and the form that those communications took in terms of video, in terms of other types of posts. 

19:44 - 20:11

Kaitlyn Kiernan: We also did a podcast about that FINRA Foundation study that you mentioned, Ira. So, for anyone who wants to learn more about that generation of investors, they are very interesting. So, we'll link to that in our show notes, as well as all of the sweep information that we mentioned and the other Regulatory Notice that IRA mentioned. But for firms that are looking at finfluencers, what’s your number one takeaway that you would like them to walk away with after listening to this episode? 

20:12 - 20:44

Ira Gluck: I think the results of this targeted exam and what we’ve seen in other cases, demonstrates that firms need to think through the impacts that new marketing strategies can have on their communications compliance. And that includes doing a thorough analysis as to the content of the messages and who the intended audience is of the communication. They also need to make sure they have a reasonable supervisory system in place to ensure they’re reviewing and capturing these communications, and that the material being used meets applicable content standards. 

20:45 - 21:10

Melissa Turitz: My takeaway is very similar. It’s that when a firm chooses to use influencers to promote the firm, it really needs to carefully consider whether it’s entangled itself with or adopted the influencers’ communications. And if it has, FINRA rules apply and the firm does need to supervise those communications, including for content, and retain those communications. 

21:10 - 21:40

Kaitlyn Kiernan: Great. Thank you, Melissa and Ira. That’s it for today’s episode of FINRA Unscripted. Thanks for joining me to talk about some of the key takeaways from this influencer sweep. Listeners, if you don’t already, be sure to subscribe to FINRA Unscripted on Apple Podcasts, Spotify or wherever you listen to podcasts. You can now also find us on YouTube, probably right alongside those influencers. Today’s episode was produced and coordinated by me, Kaitlyn Kiernan, and edited and engineered by John Williams. Until next time. 

21:40 – 21:45

Outro Music

21:45 - 22:13

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