SEBI invites public comments in bid to clamp down on finfluencers & their undeclared revenue streams

SEBI invites public comments in bid to clamp down on finfluencers & their undeclared revenue streams
SEBI headquarters in Mumbai
SEBI headquarters in Mumbai

New Delhi | Markets regulator Securities and Exchange Board of India (SEBI) has sought public comments on a proposed set of rules that will clamp down on the activities of financial influencers or ‘finfluencers’ who make investment recommendations in return for undeclared kickbacks.

This Friday, SEBI made public a consultation paper on ‘Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including finfluencers)’. These rules, if implemented, form yet another attempt by the government and regulators to rein in the proliferation of such influencers. 

Finance Minister Nirmala Sitharaman had earlier spoken  about the issue, and advertising self-regulatory body Advertising Standards Council of India (ASCI) has also updated its code to include social media influencers as ‘celebrities’, who the rules say have to be more careful about what they endorse. SEBI itself in March cracked down on a nexus of finfluencers who were allegedly conning their followers. 

Under the proposed rules, only finfluencers registered with SEBI would be able to dispense investment advice or enter into any arrangements for the promotion of particular investment products. 

“Besides undertaking enforcement action against unregistered finfluencers who breach SEBI regulations, this paper proposes to disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce,” the consultation paper said. 

“No SEBI registered intermediaries/regulated entities or their agents / representatives shall, directly or indirectly, have any association / relationship in any form, whether monetary or non-monetary, for any promotion or advertisement of their services / products, with any unregistered entities (including finfluencers),” the paper added. 

The proposed rules further say that finfluencers registered with SEBI or stock exchanges or the Association of Mutual Funds in India (AMFI) would have to display their registration number, contact details, investor grievance redressal helpline, and make appropriate disclosures and disclaimers on their posts.

The proposed rules also say that SEBI-registered entities would have to quickly make it clear they have nothing to do with any unregistered entities that might be impersonating them.

“SEBI-registered intermediaries shall take active measures to dissociate themselves from any unregistered entity using their name, product or service,” the rules said.

“They shall take necessary action to bring it to the notice of the enforcement agency concerned to take appropriate action, including filing a case under Section 420 of the Indian Penal Code, 1860 for impersonation and fraud, etc. as may be applicable.”

The consultation paper is available on SEBI’s website and comments are open till 15 September, 2023.  

Making undisclosed incomes 

The consultation paper defines finfluencers as “persons who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social/digital media platforms/channels, and have the ability to influence the financial decisions of their followers”.

In its paper, SEBI said that while finfluencers often attract prospective investors through their content on various social media platforms such as Instagram, Facebook, YouTube, LinkedIn, Twitter [X], etc., many may not have the requisite qualifications or expertise on the subject. 

“Worse, not being formally subject to a financial sector regulator’s code of conduct, they may not disclose any potential conflict of interest such as their association with or interest in the products, services or securities that they promote,” it added.

SEBI also enumerated some of the common ways finfluencers can benefit from making investment recommendations, including a referral fee system, non-cash benefits such as free usage of products or services, compensation from the social media platform where they share their content, and profit-sharing with the underlying product, channel, platform, or services.

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