M1 Finance will pay $850,000 to settle FINRA charges that social media influencers paid by the firm made misleading or exaggerated claims to entice investors, the broker/dealer regulator announced.
The settlement is the first enforcement action resulting from a previously announced targeted exam probing firms’ oversight of paid social media influencers.
“As investors increasingly use social media to inform their financial decisions, FINRA’s rules on communicating with the public are especially critical,” FINRA EVP and Head of Enforcement Bill St. Louis said in a statement about M1 Finance’s alleged violations.
The Chicago-based M1 Finance was formed in 2016 and runs a self-directed trading app and website for retail investors. According to the settlement letter, from January 2020 through April 2023, M1 Finance paid influencers to promote the firm on social media.
The firm chose influencers based on the size of their online following and how relevant they were to its business. M1 paid the influencers a flat fee for every account opened via a unique link in their posts. The firm never limited how much an influencer could earn through this process, but during this time, M1 paid about 1,700 influencers more than $2.75 million, with 39,400 new accounts opened through this process.
However, those social media influencers went over the line on occasion, and M1 Finance wasn’t supervising them as they should, according to FINRA.
In one instance, an influencer created a video touting the firm’s margin lending program, claiming investors could pay margin loans back at any time they wanted (in reality, investors didn’t have any special extension of time on these loans). Other influencers claimed the firm’s margin interest rates were low but didn’t reveal how the rates could fluctuate over time.
Other influencers claimed that M1 Finance’s services were free without revealing that fees could sometimes apply (one influencer claimed the service includes “no fees”). In another case, an influencer showed investors how to open a Roth IRA via the M1 Finance app.
“The influencer stated, ‘it is a general principle that anyone who starts a ROTH IRA early on (let’s say in their twenties) will become a millionaire by the time they’re 60. In fact, you’ll probably have a lot more than a million bucks by that age if you contribute $6,000 per year,’” the order read. “The post did not have a balanced discussion of the risks involved in investing.”
During this time, M1 Finance never had an “‘appropriately qualified registered principal” reviewing influencers’ content before they posted. The firm also didn’t maintain records of the posts influencers created or the dates they were posted, according to FINRA. Until 2023, M1 Finance did not have a supervisory system to oversee influencers’ content.
M1 Finance did not respond to a request for comment as of press time.
Starting in April 2023, the firm revised its policies, mandating that a registered principal review influencers’ posts about the firm before they were made public. They also instituted a system to retain influencers’ posts about the firm. In addition to the fine, M1 Finance agreed to censure without admitting or denying the regulator’s claims.
In 2021, FINRA revealed they were undertaking a targeted exam on how firms decide to recruit social media influencers (the term “finfluencers” describes social media personalities concentrating on financial services). At the time, Jennifer DiValerio, then Foreside’s managing director, said that if a firm is working with an influencer, they are, for all intents and purposes, “an extension of their firm.”
FINRA also released a set of tips for broker/dealers working with finfluencers, including evaluating potential influencers’ backgrounds and prior social media activity for compliance and reputational risks and maintaining records of their public communications. The tips struck some brokerage regulation experts as borderline unworkable.