Sebi may bar intermediaries from aligning with errant finfluencers

We have no problem with someone educating investors but it should not involve inducements: Buch

The Securities and Exchange Board of India (Sebi) is close to firming up guidelines for financial influencers (finfluencers) in order to curb spread of misinformation and manipulative practices.

As these individuals are not registered with the markets regulator, direct action against them may fall outside the purview of the watchdog. However, Sebi plans to issue diktats to market intermediaries like mutual funds, stock exchanges, brokers etc. to not associate with the finfluencers seen flouting market regulations or indulging in the practice of dolling out stock tips.

After its board meeting on June 28, Sebi chairperson Madhabi Puri Buch said that the regulator was formulating rules for regulated entities and their association with unregistered entities for referrals and promotions.

“There have been discussions on the functioning of financial influencers in the last few meetings. Our thinking on it is now crystallising. We will bring a consultation paper in a few months. One important element will be on restricting regulated entities like exchanges, brokers, mutual funds, etc. on tie up with unregistered entities through any form like advertising, equity, profit-sharing, or referral fee,” said Buch.

Finfluencers have different fee structures for endorsements which could either be a one-time payment for a content and promotion, or include a referral fee from the advertiser based on the clients or business gained by them. Many such influencers, specifically in Futures and Options trading, also offer specified courses for other investors and traders. Social media has been abuzz with cases where some players have been seen sharing fake or manipulated screenshots of exceptional gains to lure others.

Though the consultation paper is not ready yet, the Sebi chairperson highlighted the thought process and gave an indication of the direction into which the regulator is looking at.

She said that the regulator was cognizant of the role of financial influencers in investor education and may develop guidelines around courses offered by them.

“We have no problem with someone educating investors generally. In fact, it is good as our objective is also towards investor awareness. But, it should not involve inducements like trading would yield lakhs and crores. Market has no guarantee like this, there are losses. If you are an expert and telling people that this is a guaranteed way to make money, then it will be considered an inducement and will be called fraudulent, misleading or misrepresentation,” the Sebi chairperson said.

Sources with the knowledge of the initial discussions on the guidelines said that the engagement between regulated entities with finfluencers could be based on certain criteria like Sebi registration, qualification or certification of finfluencers, net worth, a cap on potential earnings or number of tie-ups at a given time, among others.

What will the new framework look like?

• Regulated entities like exchanges, stock brokers, mutual fund will not be able to tie up with unregistered players
• Referrals, income-sharing, profit-sharing, pay in equity, or advertisement to be restricted
• Finfluencers will have to sanitise their courses and classes to safeguard themselves against inducements
• Sebi to take note of misleading, misrepresenting or fraudulent claims in such courses
• Qualification, cap on number of tie-ups or potential earnings being looked at, say sources

The reliance on such content creators for brokers and fintechs has increased over the years due to a higher impact than other forms of advertisements and a rise in interest towards the stock market and finance products. Many such firms have income-sharing arrangements.

However, industry experts are of the opinion that the new rules should be uniform for all and should create a level playing field.

 “There is rampant use, misuse and abuse (all three) of social media influencers. It's good to have some ground rules being set for this ever-increasing tribe. Just hope that the rules will be uniform for all entities and market participants,” said Mohit Gang, founder, Moneyfront.

Last year, Sebi whole-time member Ananth Narayan had first indicated that the regulator was looking at the issues and working towards formulating norms.

The market watchdog has passed several orders in the last few months over pump and dump schemes operated with the help of Youtube videos or even bulk SMS circulations to investors for luring them with speculative claims.

The step towards consultation comes at a time when the advertising code for registered investment advisors (RIAs) and research analysts have been tightened. 

Under the new code effective April, RIAs and RAs are required to get such communication approved by a Sebi-authorised body and also pay a fee in the process. Moreover, the new code restricts usage of certain testimonials, technical language, past performance etc. in the advertisement.