The Financial Industry Regulatory Authority (FINRA) is conducting an exam sweep on broker-dealer practices related to the acquisition of customers through social media channels. The sweep focuses on how firms supervise activities and communications related to paid social media influencers.
The broker-dealer self-regulator is looking for communications via any website or application that enables users to create and share content or participate in social networking, including TikTok, Facebook, Instagram, YouTube, Twitter, Stocktwits, Reddit and Twitch.
This news comes shortly after the securities and exchange commission (SEC) released a request for comment about the “digital engagement practices” used by investment advisers and broker-dealers. Specifically, the SEC is looking into ways that advisers use tools that appeal to investors’ behavioral tendencies — such as game-like features known as gamification — to shape their activities on websites, portals and mobile apps.
The FINRA examination covers social media communications from Jan. 1, 2020, through a date this year that is specific to each firm being affected by the sweep. While a sweep is typically limited to “a small number of firms, FINRA declined to say how many are being targeted for the social media exam.
For those unfamiliar with the term, a social media “influencer” is someone who has built a reputation for their knowledge and expertise on a specific topic. They make regular posts about that topic on their preferred social media channels and generate large followings of enthusiastic, engaged people who pay close attention to their views.
Companies or brands will then partner with social media influencers to encourage their followers to buy the products/services they promote. FINRA’s definition is much broader and simply includes “any third party with whom the firm contracts or compensates to provide Social Media Communications.”
The regulator also is examining referral programs in which firms pay individuals to send them new customers. FINRA is asking firms to detail how they find and pay influencers and to provide all social media communications that influencers have disseminated for them.
FINRA is also interested in items related to Regulation S-P and Usage Information. The self-regulator is asking firms to provide their written supervisory procedures concerning its compliance with the SEC’s Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information (Regulation S-P), as well as the collection of Cookies obtained from customers, or individuals who provide NPI but are not onboarded as customers.
To read the complete sweep letter, click here.