The FTX bankruptcy is heightening global and domestic scrutiny of the use of paid celebrities to endorse investment opportunities and platforms.
Recently, the FTX cryptocurrency exchange platform filed for bankruptcy, with the accompanying fraud being likened to the Ponzi scheme pulled off by Bernie Madoff. Customer assets worth over $8 billion were deemed missing and had to be recovered.
See
“CFTC Charges Sam Bankman-Fried, FTX Trading and Alameda with Fraud and Material Misrepresentations” (December 13, 2022).
What makes the FTX case especially interesting is the company’s use of social media influencers and celebrities who were paid enormous sums to promote its platform. With the fallout of FTX, regulators are increasingly turning their eyes toward these finfluencers, who had an enormous impact on the FTX customer acquisition model. Their influence provided an air of legitimacy for the FTX platform and helped it overcome the novelty of trading crypto-assets.
Many other platforms, including broker-dealers, use similar customer acquisition models. These broker-dealers include large players that also offer a platform for trading cryptoassets, such as Robinhood, Interactive Brokers, Public, and Webull.
Global Response.
A number of countries have issued guidance, regulations, or court rulings that affect finfluencers.
Other sovereigns such as China, Singapore, New Zealand, Germany, and the United Kingdom are also beginning to scrutinize the activities of brokerage firms and finfluencers.
Domestic Regulation. While the U.S. has been slower to adopt regulations and rules regarding finfluencers, states such as Oregon and Virginia have put out warnings against finfluencers.
Also, FINRA has issued a guidance letter that asks brokerage firms to examine their marketing practice with finfluencers by maintaining written supervisory procedures (WSPs) that focus on social media influencer and referral programs, including:
- differentiating between social media influencer and referral programs, including considering additional controls for social media influencers with a relatively large social media presence, as well as any additional requirements for programs managed by member firms, affiliates or marketing agencies;
- updating their WSPs on a regular basis and in response to program developments, regulatory changes or industry trends; and
- addressing program participants’ compensation.
The FINRA guidance letter also urges brokerage firms to:
- evaluate potential social media influencers’ backgrounds and prior public social media activities for compliance and reputational risks before admitting them into their social media influencer programs;
- provide training and defining permitted and prohibited conduct for social media influencers;
- maintain records of social media influencer and referral program communications with the public consistent with applicable U.S. Securities and Exchange Commission (SEC) and FINRA recordkeeping obligations; and
- address social media influencer- and referral program-related compliance and reputational risks and concerns.
See
“FINRA Provides Update on Sweep: Social Media Influencers, Customer Acquisition and Related Information Protection” (February 28, 2023)
In short, brokerage firms must evaluate the social media influencers with whom they cooperate to ensure there is no “compliance risk.”
To date, there is no benchmark for finfluencers to follow to avoid compliance risk. For example, if a finfluencer offers investment advice and subsequently gets paid to tells their followers to sign up for Robinhood, are they actually reaching into the activities of a registered representative?
How is a finfluencer who tells their followers to buy some Tesla stocks at Robinhood different from a registered representative offering investment advice that may or may not be suitable?
Both brokerage firms and finfluencers want to keep their relationship as a simple referral scheme, but the nature of the content that finfluencers puts out blurs the line.
