Finra fines M1 Finance in landmark social media enforcement

Finra slapped online brokerage firm M1 Finance with an $850,000 fine for violations related to its social media influencer program.

In its first formal enforcement action against a firm over its supervision of finfluencers, the Financial Industry Regulatory Authority Inc. issued the fine following its targeted examination of firms’ use of social media to attract new customers. That investigation revealed that between January 2020 and April 2023, M1 Finance engaged social media influencers to create content promoting the company.

According to Finra, the online brokerage firm told the influencers to use a unique hyperlink for new customers to open and fund new accounts on its website. It provided the influencers with infographics and welcome guides, as well as compensation for each new account opened.

“The firm paid influencers who participated in its program a flat fee for every new account that was opened and funded by the customer,” Finra said. “The firm did not limit compensation influencers could earn.”

All told, the program led to more than 39,400 new accounts being opened and funded during the period, driven by roughly 1,700 influencers working on behalf of M1 Finance. But Finra’s regulatory sweep revealed that some of the content the influencers produced did not comply with regulatory standards, presenting messages that were unbalanced or misleading.

In one case, an influencer said customers in M1 Finance’s margin lending program could “pay [their margin loans] back at any given time … there is no set time period.”

In reality, investors in that program aren’t entitled to ask for more time, and M1 Finance can raise their margin requirements, trigger a forced sale of securities in their accounts, or choose which securities to divest if a margin call were to take place. That message and others like it, Finra said, breached Finra Rules 2210 and 2010.

According to Finra, M1 Finance did not review or approve the content by the social media army it had put together and had no reasonable system or written procedures to supervise those communications. That violated Finra Rules 2210, 2010, 3110 and 4511, as well as the Securities Exchange Act of 1934 and the Exchange Act Rules.

"As investors increasingly use social media to inform their financial decisions, Finra’s rules on communicating with the public are especially critical," Bill St. Louis, executive vice president and head of enforcement at Finra, said in a statement.

Without admitting or denying the charges, M1 Finance agreed to Finra’s findings and committed to remedy the issues, which includes setting up a supervisory system with written procedures on social media influencer programs, in a letter of acceptance, waiver, and consent.

In December, M1 Finance was caught up in another Finra crackdown on securities lending programs that lent out securities from customers’ fully paid or excess margin securities for a fee, without giving them a cut of the revenue from that business.

And just last month, the SEC slapped VanEck with a whopping $1.75 million fine over its failure to disclose a social media influencer’s role in marketing BUZZ, its social sentiment ETF, in 2021.