Navigating the Digital Minefield: How SEC and FINRA Fines for AI-Washing and Influencer Marketing Impact Financial Advisors

Navigating the Digital Minefield: How SEC and FINRA Fines for AI-Washing and Influencer Marketing Impact Financial Advisors

Uncover the shocking fines imposed by SEC and FINRA on financial firms for AI-washing and influencer marketing malpractices. As a financial advisor, learn how to adapt to the digital age while steering clear of compliance pitfalls. Protect your firm's reputation and client trust with our expert insights on leveraging new technologies and digital partnerships the right way.

Jack Casady

Practice Management
March 19, 2024

The SEC and FINRA have recently imposed two significant fines that all financial advisors should take note of regarding #AI and #influencermarketing

These two fines cover the misuse of social media financial influencers ('fin-fluencers') to engage with the retail investing audience and firms engaging in 'AI-washing' on their promotion of AI tools and use to add "buzz" to their firm.

This represents a crucial moment to be mindful of how firms are using new technologies and digital partnerships to engage with new customer segments as financial services adapt to the digital age.

FINRA’s Fine to “Finfluencers”

🤳 The fine from FINRA involved a firm, M1 Finance, leveraging fin-influencers across social media platforms to produce content to interact with end investors about the firm's capabilities to drive them to invest.

The firm had interacted and paid more than 1,700 influencers more than $2.75 million during a three year period from 2020 to 2023. During this time, M1 did not have any monitoring or post-approval tools in effect and let creators generate content without supervision, and did not have a record-keeping process in place for all posts generated.

This led to a rise in misleading claims, unbalanced discussion of risks involved in investing, and the wrong information being shared about a host of investor-related topics.

M1 had to pay $850,000 to settle the fine levied by FINRA.

A first for the SEC, targeting “AI-Washing”

🤖 The second fine was issued by the SEC for AI-washing, where two firms claimed to use advanced AI technologies to drive investment decisions, misleading investors about the true nature of their AI capabilities.

This incident highlights the critical need for honesty in marketing tech-driven services and the risks of overstating technological capabilities.

One firm claimed in marketing materials and on their website that they used AI and machine learning capabilities when they in fact did not use any AI techniques or tools in their process.

The other firm misrepresented their use of AI on their website and social media platforms but since has clarified across their materials on how they use AI.

The fines to both firms totaled $400,000.

New fines, new buzzwords, same compliance issues

While issuing fines for mislabeled, "washed" statements and claims, and biased information is nothing new, the extension of fines across topics of AI and influencer marketing is something to take note of as Advisors test and try new ways to interact with the next generation of clients.

Additionally, these fines underscore the perpetual need for:

1. Clear, transparent, and compliant communication with the end investors.

2. A process in place to review, approve, and monitor social media accounts and partnerships to ensure balanced and properly disclosed content is produced 100% of the time.

3. Accurate representation of technological capabilities and the use of AI in any and all work.

Points 1 and 2 should be commonplace at this point with any marketing review process, these fines serve as a contestant reminder to review processes and policies with your compliance teams and have a system of checks and balances in place.

Point 3 however is similar to the rise in "green-washing" a few years ago. It reminds me of the BNY-Mellon fine from a couple of years ago, where the main takeaway was, that if you say something is a part of your process, have a system in place to prove it.

As we all navigate the complexities of new technologies and marketing strategies, it’s important not to lose sight of how new technologies fit into traditional compliance rules and, as always, ensure that proper disclosure is used, facts can back statements, and a record-keeping system is put in place for every piece of material.

That is the secret to navigating the digital minefield.

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