Introduction
The advent of social media has brought about significant behavioral change in its users. One is more likely to follow the advice of influencers on YouTube or Instagram before making a decision on travel or purchase of electronic gadgets, than to look up detailed reviews on the same. Consumer behavior seems to have radically changed in terms of processing information and making decisions on account of the convenience and accessibility to opinions of individuals on social media platforms.
In such circumstances, it was only a matter of time before people started providing advice on how one should invest their money. Enter, FinFluencers! Financial influencers a.k.a. FinFluencers are individuals or a group of people who enjoy significant popularity on social media platforms and utilize the social media platform to reach out to their followers and recommend investment ideas. Given their sizable following, FinFluencers are in an enviable position to influence financial decisions made by multitudes of their followers who are amateur investors, while being an important medium for financial literacy. This is further compounded by the fact that FinFluencers can use social media tools to widely disseminate information in a very short span of time.
FinFluencers and financial advice
At the outset, it is difficult to find fault with a bunch of individuals who utilize the social media platform to spread awareness about trading and investment in securities market. If nothing else, this will lead to targeted engagement with their followers and increase awareness about the securities markets.
However, there is a flipside to this. Given their reach, if FinFluencers provide incorrect financial advice, it may lead to grave consequences for investors who have invested their monies based on the FinFluencer’s “post” on social media. The situation is exacerbated when the FinFluencer has a conflict of interest vis-à-vis the recommendation.
The risk increases several notches if the unsolicited advice comes from a celebrity. For instance, in October 2022, Ms. Kim Kardashian, one of the highest trending social media influencers, was charged by the Securities and Exchange Commission (SEC), the American securities market regulator, for endorsing a crypto asset security offered by EthereumMax without disclosing that she had received a payment of USD 250,000 for its promotion. Ms. Kardashian ended up settling the dispute by paying a penalty of USD 1.26 million and undertaking to cooperate with the investigation. Ms. Kardashian further undertook to not promote any crypto asset securities for three years.
Who can provide investment advice as per SEBI laws?
The Securities and Exchange Board of India (SEBI) is the chief regulator for protection of investor interests in the Indian securities market. In 2013, SEBI issued the regulations governing investment advisers (IA Regulations). The IA Regulations define ‘investment advice’ as advice relating to dealing in securities and advice on investment portfolio containing securities through written, oral, or other means of communication. However, the IA Regulations clarifies that advice through newspaper, magazine or other electronic or broadcasting or telecommunications medium to the public at large is not covered by it. Thus, FinFluencers fall outside the ambit of the IA Regulations since the advice provided by them is through electronic means to the public at large.
FinFluencers and Fraud
Section 12A of the Securities Exchange Board of India Act, 1992 (SEBI Act) prohibits persons from directly or indirectly engaging in any manipulative or deceptive trading of securities. Further, the SEBI regulations prohibiting fraudulent and unfair trade practices (PFUTP Regulations) provide for certain categories of trade practices which are prohibited by SEBI. The PFUTP Regulations, which was amended in January 2022 (2022 Amendment) introduces the concept of prohibition of dissemination of information or advice in a reckless or careless manner. This reckless or careless manner standard is well established in the USA. The US Courts of Appeal in Sundstrand Corporation v. Sun Chemical Corporation has categorized ‘recklessness’ as where the disseminator is not responsible on the basis of ‘intent’ but rather for his extreme lack of care which has led to clear-cut risks. The 2022 Amendment now similarly empowers SEBI to punish disseminators for recklessness or carelessness which presents a danger of misleading buyers or sellers of securities.
Subsequent to this 2022 Amendment, the SEBI in Stock Recommendations using Social Media Channel (Telegram) case took action against the self-proclaimed ‘Research analysts’ who used telegram to disseminate stock recommendations and dupe investors. The order was passed for violation of the SEBI Act and PFUTP Regulations.
FinFluencers and conflict of interest
FinFluencers, owing to their popularity, are in a position to effect substantial trading volumes in securities in a short period of time. For instance, a FinFluencer might advise millions of his followers to purchase a stock where he has already invested, and this may drive up the price of the stock. The fact that FinFluencer stands to gain from the change in stock price creates a conflict of interest. Case in point being the GameStop short squeeze episode. Further, in Stock Recommendations using Social Media Channel (Telegram), SEBI noted that the noticees had taken a buy position for the stocks that they had recommended to their followers and once the stock price went up, the noticees would off-load their shares and thereby making substantial gains.
Also, there may be instances where FinFluencers are paid by companies or investors to propagate information about a certain stock. It may be possible that the information put out by the FinFluencer is not necessarily false. But a simple recommendation may cause amateur investors to invest in the stock recommended by FinFluencer.
Recently, a whole-time director of SEBI, has stated in an open forum that the regulator is working on introducing guidelines for FinFluencers. SEBI will be required to adopt a balancing stand in regulating FinFluencers so as to not impinge on their freedom of speech or adversely affect the financial literacy effected by them. However, that is not to say that FinFluencers have a right to state whatever they deem fit, especially in cases where there is a conflict of interest or where the advice is fraudulent in nature.
The guidelines proposed to be introduced by SEBI will require considering the scenario of conflict of interest vis-à-vis the recommendations made by the FinFluencer. For instance, the European Securities and Markets Authority (ESMA), which is the securities market regulator in European Union, requires those who post investment recommendations on social media to disclose all conflict of interests along with the subject recommendation. In India, Advertising Standard Council of India (ASCI) has released guidelines, which are not mandatory, prescribing upfront disclosures by influencers on brand collaborations or sponsorships especially with the focus on cryptocurrencies. However, the guidelines fall short on the field covering stock tips and recommendations. SEBI could also place a similar mandate on FinFluencers.
Our thoughts
SEBI’s decision to issue guidelines for regulating FinFluencers giving investment advice is a welcome step. Ever since the pandemic, there has been a significant rise in the number of share trading accounts opened by investors. Further, with the advent of new age trading platforms (such as Zerodha and Groww) and super-fast information exchange platforms, there are considerable risks posed to the general public who have suddenly been attracted to the potential returns from a dynamic but volatile stock markets. In such circumstances, SEBI will certainly put in place regulations to safeguard the investor’s interests.
It is our submission that any regulations governing FinFluencers should take a balanced approach as FinFluencers are important for improving financial literacy in the country. While guidelines will be a good step towards curbing financial advice content creation by those ill-equipped with such financial know-how, very stringent and blanket regulations for all FinFluencers would deprive people of a source of knowledge on personal finances and thereby curtail the growth of broader public participation in investing in publicly traded companies. It is essential that the guidelines consider this fine line and provide a clear definition of ‘financial influencers’ and make the rules robust enough to discourage the ‘fakes’ and encourage the ‘genuine’ to spread the positives of investing long term in Indian markets leading to wealth creation!
Authors: Souvik Ganguly, Renjith Nair and Niyati Bhogayta
The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.