The Securities Exchange Board of India’s (SEBI) plan to formulate guidelines to regulate social media influencers on finance a.k.a. finfluencers, is welcome. In recent years, SEBI has substantially raised the regulatory bar on individuals and firms offering professional investment advice. Commission-earning mutual fund distributors are expressly barred from giving product advice. All individuals and firms dispensing advice on mutual funds or listed securities are required to register with SEBI either as Research Analysts or Registered Investment Advisers (RIAs), adhering to minimum academic qualifications and eligibility criteria.
Registered advisers are subject to regulations that prevent front-running such as public disclosures of personal holdings and relationships with financial firms. But influencers on social media, who produce content on everything from stocks to bonds and derivatives trading, dole out financial advice without adhering to any of these ground rules. While SEBI frowns upon conflicts of interest for registered intermediaries, social media influencers often re-purpose paid-for plugs as ‘free’ educational content and monetise their large follower base by taking hefty fees from financial firms. Some influencers have lured unwary retail folk into unregulated products such as cryptocurrencies, non-fungible tokens and crypto ‘deposits’ .
While it is desirable for SEBI to turn its attention to financial advice on social media, monitoring megabytes of content across multiple platforms can be a tall ask. SEBI can perhaps take a targeted approach. One, for products under its ambit such as stocks, bonds, mutual funds or derivatives, it can require all social media influencers offering recommendations or advice to register with it, subject to the same qualification criteria as RIAs. Two, for SEBI-registered RAs or RIAs who are also on social media platforms, transaction and disclosure rules that apply to offline recommendations should apply to social media content too. Influencers found to be in violation of SEBI’s insider trading and PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) regulations or indulging in front-running, should be subject to the same stringent enforcement actions meted out to mainstream market players. Of course, on more generic content that doesn’t constitute specific advice, caveat emptor must apply. SEBI can run its own complaint handles on social media to encourage users to directly report violations to it.
That said, social media influencers provide content beyond listed securities and so reining them in cannot be SEBI’s remit alone. The Finance Ministry and RBI need to co-ordinate their efforts to curb this menace. Youngsters flock to social media platforms for financial knowledge because they find the content presented there more attractive compared with official investor awareness seminars or articles. SEBI and other financial regulators need to keep this in mind while framing plans for investor education.