FINRA Fines Firm for Failing to Supervise Influencer Marketing
A firm offering self-directed trading through a mobile platform settled FINRA charges for failing to adequately supervise social media communications, and for compliance failures related to Form CRS delivery, risk management controls and market data display.
According to the AWC, during the relevant period, the firm compensated more than 400 influencers to promote the firm's trading platform. FINRA found that these influencers created posts across various platforms that were misleading, promissory, or exaggerated. FINRA cited examples of an influencer asserting that investing in a specific stock would lead to "lots of money" once it "skyrockets to quadruple the price." FINRA found posts that promoted margin trading without disclosing the risks, and posts claiming that trading was "free" without referencing fees or linking to a fee schedule. FINRA also found that Influencers failed to identify their posts as paid advertisements.
FINRA found that the firm did not review or approve the influencers' static posts prior to publication, nor did it retain copies or records of the posts or related supervisory reviews. Further, FINRA said that communications about options trading were neither reviewed by a registered options principal nor submitted to FINRA as required. FINRA said the firm also lacked a supervisory system or written procedures to oversee influencer content or ensure compliance with applicable communications and recordkeeping rules.
During the relevant period, FINRA also found that the firm failed to deliver Form CRS to approximately 5.9 million retail customers. FINRA noted that the firm filed its Form CRS and posted it on its website, but did not implement a process for delivering the form to customers opening accounts. FINRA found that the firm also failed to make and retain records showing when the form was delivered and had no written supervisory procedures to oversee Form CRS compliance.
FINRA also found violations of the "Vendor Display Rule," stating that during the relevant period, the firm's platforms displayed market data from a single source by default, without providing a consolidated display of national best bid/offer or last sale data as required.
Finally, FINRA found that the firm's price and volume thresholds were too broad, were not customized by security characteristics and lacked supporting documentation. FINRA said the firm also failed to document its rationale for setting its risk controls and did not conduct sufficient reviews of its effectiveness. As a result, FINRA determined that the firm failed to implement reasonable pre-trade risk controls to prevent erroneous orders.
The firm settled FINRA charges for violations of Rules 2210 ("Communications with the Public"), 2220 ("Options Communications"), 3110 ("Supervision"), 4511 ("General Requirements") and 2010 ("Standards of Commercial Honor and Principles of Trade"); Exchange Act Section 17(a) ("Records and Reports") and Rules 17a-3 ("Records to be made by certain exchange members, brokers and dealers"), 17a-4 and 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS"); Exchange Act Rule 15c3-5 ("Risk management controls for brokers or dealers with market access"); and Regulation NMS Rule 603(c) ("Distribution, consolidation, dissemination, and display of information with respect to quotations for and transactions in NMS stocks").
To settle the charges, the firm agreed to (i) a censure and (ii) pay a $1.6 million fine.