Influencers, crypto, and warnings from Finra's advertising conference

Thinking of hiring an influencer to help sell products or attract new clients? Finra has a few words of caution – and the agency suggests educating any social media stars on what exactly they’re pitching.

On the first day of Finra’s Advertising Regulatory Conference Thursday, staff pointed to widespread failures they uncovered during a sweep on firms’ uses of social media influencers. Among 15 firms and 1,300 communications the agency examined, 70 percent were out of compliance, said Stephanie Gregory, associate director of the complex review team in Finra’s advertising regulation department.

“Over half, about 55 percent of them, did not disclose that the advertisements were paid,” Gregory said.

As part of that sweep that started in 2021, Finra looked at the two ways firms work with influencers – hiring them for specific content or paying them for referrals. The latter of which is a bigger concern and is the area where the agency has focused its efforts.

“The sweep really did focus on the acquisition of customers by firms through the use of social media influencers,” Gregory said. “As a result, they had hundreds of thousands of new accounts opened… And they paid some influencers millions of dollars. There was a lot of money involved.”

A common theme was videos that touted risky products or investment strategies ranging from crypto assets to margin trading, she said.

“We saw TikTok videos on security lending, options communications – it’s really hard to do a 30-second options video and be compliant,” she said.

If it’s hard for viewers to understand, it’s likely that the influencer also may not be very educated on the topics. A useful step would be to train them, including letting them know what they can and can’t say in their pitches to viewers, Gregory said.

“Firms should consider vetting influencers. Do your due diligence to avoid any compliance or regulatory risk down the line. If they have a lot of followers, maybe additional controls should be in place,” she said. “Maybe they should be educated to understand what they are talking about. A lot of these people have no experience.”

Keeping a record of all communications with influencers is also critical, she said.

This year, Finra has brought three actions against firms over the subject, with the biggest fine being $850,000 paid by Chicago-based M1 Finance.

Separately, Finra this year has been focused on advertising and disclosures in trendy new products that focus on crypto assets, use leverage, or focus on single stocks.

While product innovations can benefit consumers, they can be a regulatory headache, particularly as the types of communications investment providers are making don’t lend themselves to lengthy disclosures, panelists said.

That’s been the case with nontransparent or semitransparent ETFs, as well as crypto exchange-traded products that require exemptions granted by the Securities and Exchange Commission.

“I can’t really tell you the last time something came across my desk in a traditional format,” such as a print newspaper or periodical, said Joseph DeAngelis, associate general counsel at Fidelity Investments. “That’s just not where Fidelity is today. It’s more digital. It’s social media.”

Working with regulators and having a good relationship with the firm’s marketing team is important in having healthy dialog, he noted.

“You also shouldn’t be afraid of pushback from them,” he said. “Sometimes that back and forth and that deliberation and working through the problems… it usual ends up where you get to a place where you’re going to have a communication that’s more effective.”

Amid stock market volatility over the past few years, there has been more interested in “buffered” products, and Finra has concerns about the products being difficult to understand.

“We need to think about all these various terms we’re seeing in communications – buffer, barrier, spread, participation rate – these are terms not familiar to retail investors,” said Derek Ashworth, assistant director Finra. “With respect to these options strategies seeking high distributions, you need to be thinking about, are there factors that contributed to this high distribution that may not continue? That’s usually a material fact [that] investors need to understand.”

Another area of product development is the pairing of target date mutual funds or collective investment trusts with annuities that provide some type of guarantee. Those are two entirely different products packaged together, and even if designed to feel like one, customers should be able to have a good understanding of the separate nature of the accumulation and income pieces, DeAngelis said.

“What you do, how you disclose it, how clear you are with your message – it matters. When markets are doing well and people are making money, people don’t really complain that much. They’re happy. But I harken back to 2007,” he said.

Across the industry, savers whose target date assets plummeted during the financial crisis – especially those at or near retirement – often didn’t know how the products were designed, he said. That’s worth noting today, he said.

“It was amazing, the number of customers where we would hear complaints regarding target date funds that they were surprised, one – by how much equity they had even though they were in their 60s, and even though it was in the advertising – it was in the prospectus. Nobody was hiding it,” he said. “And then two, people being confused and thinking they had some sort of an annuity product and thinking, ‘How could we lose money? I thought it was guaranteed.’… Markets sometimes dictate investor perception … Maybe you have to plan for when the markets go sideways.”