How Should SEBI Regulate Financial Influencers?

A recent comment by SK Mohanty, whole-time member at the Securities and Exchange Board of India, has sparked a debate around what would be an ideal way to regulate social media influencers.

Several social media influencers on YouTube, Twitter, Telegram and other platforms are disseminating financial advice without any requisite qualification to do so, which has resulted in instances detrimental to the market, Mohanty said.

BQ Prime asked experts what the potential guidelines for financial influencers could look like.

How should SEBI regulate financial influencers?

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The key question we should ask before regulating financial influencers is whether they are doing something dishonest, Sandeep Parekh, managing partner at Finsec Law Advisors, said.

While there are individuals on these platforms who peddle information for their own benefit, separate regulations aren't required since the existing anti-fraud regulations sufficiently cover them, he said.

The fact that this is happening on public forums makes it easily trackable. There is no need for a new law, but a much closer enforcement action to prevent such mischief. Also, people who have honest opinion about stocks should be free to express their views.

Sandeep Parekh, Managing Partner, Finsec Law Advisors

Shruti Rajan, partner at Trilegal, said that the problem of financial influencers misleading investors can be dealt with in two ways.

One, existing advertising guidelines can be amended to say if an influencer is doing a paid promotion, and sufficient disclaimer to that effect must be made.

Two, intermediaries—who are using influencers or using social media platforms to push their products or services—should ensure that those people are putting in the necessary caveats to make sure that consumers who are using it and relying on it know that these are paid promotions.

''The aim is not to bring market fraud into the purview as there are already regulations for the same.''

This is more about advertising, baiting people to purchase something without having the adequate caveat. Any effort to otherwise legislate would bring us to the question of defining finfluencers, which might result in bringing persons with genuine market insight into the purview of regulation, preventing free flow of such knowledge.

Shruti Rajan, Partner, Trilegal

Parekh categorised the issue that could be worrying SEBI into two buckets.

First, the issue of rampant frauds, which he said are easily detectable and punishable with the existing regulatory and surveillance mechanism. Enforcement even in 10 cases on this front will act as a deterrent, he said.

Second, the determination of breach of fiduciary duty. He highlighted the SEC vs Capital Gains case in the U.S., where the Supreme Court had held that a financial adviser may be required by the SEC, without a showing of intent to deceive, to reveal self-dealing that may affect clients.

In this case, the court had held that self-dealing by an investment adviser regarding suggested investments at the very least allows for a strong possibility for conflicts of interest and so should be disclosed.

This could be made applicable to financial advisers or influencers in India as well. The regulations are going to centre around disclosures.

Sandeep Parekh, Managing Partner, Finsec Law Advisors

Rajan said that it's understandable that SEBI wants to regulate individuals who are benefitting from their own social media presence. The regulator would want full disclosures from them, she said, but any prescription beyond that is not desirable.

The aim is to ensure that consumers have sufficient data points to determine whether they like or dislike a particular product. Anything beyond that would result in infantilising the investors, Rajan said.

''Also, there could be people from all over the world doing this. If we have a law, we should be able to enforce it. Widening the scope of regulations would take us to a situation where enforcement is a bigger hurdle than the problem itself.'' 

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