By VARUN MATLANI and Vaibhav Gupta, THIRD-year students at GNLU, GANDHINAGAR
The massive growth of social media influencers coupled with high internet penetration for a country with the world’s youngest population, particularly in the earning age bracket has given birth to the rise of a new segment of financial influencers or popularly known as ‘FinFluencers’. These FinFluencers claim to advise and teach people about making quick bucks through stock markets. This article examines the legal liability of their advice, to what extent they should be bound by relevant Securities and Exchanges Board of India (‘SEBI’) regulations and what accountability they have for their content to their followers who rely on them and are frequently their source of income from commercials, stock broker affiliate marketing, and the sale of their courses. Further, the article compares the newly evolving jurisprudence internationally especially in Netherlands and Germany by comparing their regulations and guidelines for FinFluencers with that of SEBI in India.
Are FinFluencers bound by SEBI?
The majority of FinFluencers operate outside of SEBI’s purview and prima facie do not adhere to its regulations, operating in a grey space or on a thin line of difference of definition as research analysts. SEBI, staying committed to its tagline “strength of every investor” has voluminous regulations binding those giving investment advices in order to protect the gullible and first-time investors from falling into dubious schemes. The author contends that these FinFluencers would fall within the ambit of definition of ‘Research Analyst’ under Regulation 2(u) of SEBI (Research Analysts) Regulation, 2014 making them accountable for their content as per the relevant regulations.
The definition holds a person to be considered as Research Analyst if they prepare or publish content of research report or provide research report or offer an opinion with regards to a public offer or give price targets also. These regulations also require them to be technically qualified and pass National Institute of Securities Market (‘NISM’) exams, providing a safety net for investors and fulfilling the fundamental purpose of SEBI.
Interestingly, the word ‘Research Report’ under Regulation 2(w) includes any kind of electronic communications and generally exempts opinion on overall market trends or generalised opinions. Therefore, the videos and posts of these FinFluencers does not escape the definition of report.
In light of these regulations, one may scrutinize the “top FinFluencers” (in terms of their follower base on social media platforms), and can broadly ascertain a pattern of content that is posted by them, i.e., giving analysis on IPOs, fundamental analysis of stocks, recommending stocks for long term or short term. A major problem that arises here is that till the time the end user watches the video, the information can be converted into misinformation due to time variation gaps (for instance, an Instagram reel being uploaded today and end user considering it relevant when it reaches him/her, but the substantial time has elapsed for the user to act correctly) and information asymmetry causing heavy losses to the viewers. SEBI Regulations provide for regulation(s) for publication of report public media whereby the said regulations are directly applicable in literal manner. Electronic communication which is perceived through various social media with a massive reach to the audience may also be categorised similar to appearance before public media whereby too, as per Regulation 21, there exists a requirement for disclosure and assurance of reasonableness and fairness in creation of such report.
Liability if FinFluencers are made to register as Research Analyst
Many of the “top FinFluencers” would not qualify under technical requirements (for example, possessing the 5-year experience, professional qualification, or postgraduate degree) for education under the regulation. Further, NISM exam mandate would ensure not anyone with access to the internet can start giving opinions on the internet.
The contents of the research report would need more precision in terms of rating and time horizon benchmarking (i.e., the validity of such advice) along with a disclaimer and persuasive liability on publishers to ensure reliable facts and information forming part of their research as per Regulation 20.
Regulation 24 makes research analysts responsible for maintaining an arms-length distance from taking up promotional activities and ensuring that the members involved in publishing of such content are complying with Regulation 7 (with regards to technical qualifications).
Regulation 25 would require keeping a record of all their research along with the rationale of providing so, thereby preventing any escape by any deletion of such reports and also subjecting these records for inspection.
International Comparative Analysis of Existing Regulatory Frameworks for Social Media Influencers Pertaining to Financial Information
In this segment, the regulatory frameworks of Germany’s German Federal Financial Supervisory Authority (also known as BaFin) and Netherland’s Authority for Financial Markets (Autoriteit Financiële Markten – AFM) – the SEBI’s counterparts of their respective countries, are analysed with respect to their regulations and evolving legal framework with administrative actions for FinFluencers.
The Dutch authority, AFM, conducted exploratory study to understand the legal landscape of FinFluencers and has even adopted the term FinFluencers for referring to those giving financial advice on social media platforms. The study found that FinFluencers lack neutrality and transparency, promoting risky products, and thereby keeping their own interests first. AFM also flagged the risk of non-compliance of regulations in Dutch that require influencers/finfluencers/third-party advertisers for license (s)/registration with AFM which can be drawn parallel to SEBI’s regulations in India.
There is a Dutch ban on third-party inducements, which further prohibits FinFluencers from charging referral fees or advertisement fees. It was also noted that merely posting a disclaimer does not allow an escape route from regulations if they provide such services de facto. In the recent case of Grinta Invest, AFM issued notices to the company as well as FinFluencers for not holding appropriate licenses and promoting highly risky instruments such as foreign exchange and CFDs.
The German authority ‘BaFin’ too requires FinFluencers to comply with the ‘Unfair Competition Act’ in terms of advertising products within the ambit of competition law and secondly, to comply with Market Abuse Regulation along with specific requirements from Delegated Regulations on the Market Abuse Regulations which directs any person recommending investment or investment strategy and presents himself as financial experts to comply with transparency, disclosures, fairness and other relevant provisions of Market Abuse Regulations. Non-compliance with these regulations can lead to fine and other punishment within the ambit of German Securities Trading Act. Unfair practices with regards to these regulations can also make the financial companies directing FinFluencers liable.
Evolving Jurisprudence in India
SEBI has taken note of the the impact of social media influence on stock markets, price discovery, and losses of the gullible new investors falling for “tips” or recommendations. Lately Telegram groups, which were the biggest direct contributor to these factors have been cracked down upon. In Re: Stock Recommendations using Social Media Channel (Telegram) (SEBI) it was held that those running the channel were not registered as Research Analysts or Investment Advisors and had unfairly charged fees. The number of members and quantum of tips/recommendations did have an impact though for a short time since there was a spike in trading of a particular scrip which also involved Prevention of Unfair Trade Practices regulations. This has been a leading step against social media influence on Indian traders and stock markets. But, deliberation on indirect harm to the new/gullible investor community by FinFluencers needs to be done at the earliest.
Conclusive Analysis with Indian Regulations
In light of international regulatory framework, the authors opine that SEBI must draw inspiration from international bodies in terms of conducting research and identifying the impact of these FinFluencers on Indian markets and the stakeholders. The SEBI regulations already in place are an example of an effective and well thought rule of law, but its implementation intertwined with the rapidly growing social media needs to be closely examined. It must be also noted that SEBI, to a great extent, has been successful in introducing changes with regards to telegram tips and trades, but cognisance of these FinFluencers and their growing popularity must be taken.
Interestingly, in the Telegram case, SEBI took note of how a huge subscriber base can lead to manipulation of stock prices and has been actively taking steps (like imposing a ban on Telegram channels, issuing show-cause notices to offenders, etc. to prevent practices promoting unhealthy and unfair trade practices. In contrast, the US markets have lately faced a lot of such manipulations which went uncontrolled by the Securities Exchange Commission (SEC) in cases such as Reddit’s WallStreetBets’ pump and dump of particular scrips, which is an appreciative comparison of the effective management of SEBI to keep up with the objective of securing Indian investors.
Further, though cryptocurrency hasn’t been a domain of SEBI, the dark reality of FinFluencers can be quantitatively examined. For example approximately Rs. 5 Lakhs almost all the famous Indian Finfluencers promoted Crypto-FD, a highly risky product of Vauld, which lately stopped all withdrawal activities, a close look into the functioning would have made it evident, that the product they promote has fundamental flaws, especially in uncertain crypto markets.
More often than not their target audience is the first-time investor, who can lose faith in markets forever with one such instance, and these are usually those who themselves have a little safety net of earnings. This example must be boldly noted to examine the ill impact that FinFluencers have the power to bring about.