A distinct subset of social media influencers called “finfluencers” (short for “financial influencers”) has emerged in the recent past. According to the Advertising Standards Council of India (“ASCI”), “finfluencers” are individuals who disseminate information and advice on various financial topics, ranging from securities investment to personal finance and insurance, via social and digital media platforms.
A large chunk of finfluencers’ audience is comprised of retail investors, looking for accessible and convenient sources of advice in the interests of their investment goals. This concerns market regulators, such as the Securities and Exchange Board of India (“SEBI”) since such claims may not always be a result of transparent or prudent advice backed by sound market research, qualification or expertise. This article aims at analysing the attempts that the SEBI has made to regulate the activities of finfluencers and what it has approved currently in this regard.
SEBI Board Meeting dated June 27, 2024: An (In)direct Approach?
The 2023 consultation paper titled “Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)” (“2023 Consultation Paper”) aimed at regulating finfluencers on three fronts namely obligations regarding registration & disclosures, penalties against misleading claims and obligations on regulated entities with respect to associating with unregulated ones (in this context, finfluencers).
The 206th SEBI Board meeting held on June 27th, 2024, broadly approved the recommendations outlined in the 2023 Consultation Paper. According to the SEBI’s press release bearing number PR No. 12 /2024, the proposals approved by the SEBI Board include the following:
- Persons and associations of persons regulated by the SEBI and their representatives must refrain from having any form of association with any person who provides direct or indirect advice/recommendation or makes an explicit claim of return/performance regarding securities. The type of associations that regulated entities should refrain from include, inter alia, financial transactions, client referrals and sharing of IT systems.
- This restriction does not apply to individuals permitted by the SEBI to carry out the aforementioned activities, and to associations with individuals solely dedicated to investor education including those who refrain from offering advice, recommendations, or making claims about returns or performance related to securities.
- The restriction also does not apply to associations through specified digital platforms having preventive or curative mechanisms to ensure that the platform is not used for providing advice, claims of returns/performance in place.
Finfluencers as Investment Advisers
The SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) define “investment adviser” as any person who, for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called. Since finfluencers do not receive direct consideration from their audience (depending on ad-revenue and endorsements/sponsorships as their sources of income), prima facie, it may seem like they don’t fall under the definition of “investment adviser”. However, a lot of finfluencers also offer personalized courses that disperse investment advice with respect to trading in the securities market. Such courses are often endorsed on their social media handles as providing a more dedicated and personalized approach to their potential subscribers, unsurprisingly, on payment of a subscription amount. The aspect of “consideration” in the form of a subscription amount gets covered in this context such that it may bring finfluencers within the definition of “investment adviser” under the IA Regulations.
SEBI’s Interim Order cum SCN in the matter of unregistered investment advisory activities of Mohammad Nasiruddin Ansari/ Baap of Chart[1] provides some insight on the issue elucidated above. The order deals with a complaint against a popular finfluencer who allegedly induced investors to subscribe to his courses/workshops through his social media presence. Further, investors/clients were assured that upon payment of the subscription amount, the subscribers will be given dedicated support/personal guidance. The SEBI held that such activities are covered under the definitions of “investment advice” and “investment adviser” under the IA Regulations.
The SEBI has aimed to ensure that regulated entities only enter into commercial relationships with finfluencers permitted by the SEBI to disseminate investment advice. In order to continue their association with finfluencers as sponsors of their content, registered entities may compel unregistered finfluencers to get registered with the SEBI. Effectively, finfluencers seeking to maintain their revenue streams through sponsorships from regulated entities will need to meet the regulatory, professional and ethical standards set by the SEBI.
Conclusion
The imposition of these obligations on regulated entities could also aggravate their diligence requirements, directly as well as incidentally. The press release uses the expression “any other association of similar nature or character” to be avoided by regulated entities. Thus, the restriction on associating with finfluencers is not only with respect to a finfluencer’s social media presence, but also with respect to “any other association” that the regulated entity might have or might want to have with them.
The on-ground implementation of the proposed obligations on regulated entities also might pose certain challenges. Firstly, regulated entities like stockbrokers or mutual fund companies might have to exercise a superlative degree of vigilance while onboarding customers to use their platforms. To put it simply, regulated entities will have to make sure if a potential customer is a finfluencer or not. This might prove especially difficult if an individual is a finfluencer operating on platforms that grant anonymity (such as Telegram, Reddit etc.). Secondly, if a potential customer happens to be a finfluencer and their identity is verified as one, the regulated entity will have to ensure that these finfluencers are registered with, or permitted by, the SEBI to give investment advice. Such an increase in diligence requirements has the potential to increase regulated entities’ operational costs which may end up have a detrimental commercial effect on their operations. Requisite updates and clarifications regarding this proposed regime will provide a better understanding of the degree of diligence that regulated entities should undertake and ultimately, aid them in deciding whether associating with a particular individual would be compliant with the proposed regime.
For further information, please contact:
Sara Sundaram, Partner, Cyril Amarchand Mangaldas
sara.sundaram@cyrilshroff.com
[1] WTM/AN/MIRSD/MIRSD-SEC-6/29693/2023-24
