February 21, 2024 A recent settlement announced by the U.S. Securities and Exchange Commission (SEC) highlights the risks of using social media influencers when marketing investments. It also underscores recent SEC scrutiny on the use of index provider services to manage funds. The case involved violations related to an exchange-traded fund (ETF) that tracked an index that included stocks receiving “positive insights” on social media. The index was licensed to the ETF’s adviser by a third-party company, which also hired a social-media influencer to market the index. The influencer would receive a variable portion of the management fees charged by the adviser to the fund, based on the amount of assets under management in the ETF. The adviser did not fully disclose the terms of the arrangement and controversies around the influencer to the fund’s board. The SEC noted in the settlement order that, among other things, the adviser’s conduct involved fraud on its client (here, the fund) under the Investment Advisers Act of 1940 (Advisers Act). The order is the most recent guidance highlighting the SEC’s concerns about statements by influencers on behalf of investment advisers and investment products. As we noted in our recent alert on marketing by fintech companies, companies should exercise caution when using social media influencers to market investment products. The order also raises questions in the context of the SEC’s 2022 request for comment on whether and how certain index providers should be regulated as investment advisers, and its proposed rule prohibiting advisers from outsourcing certain services or functions without meeting certain diligence, monitoring, reporting and recordkeeping requirements. It is possible the order presages rulemaking or other action that would directly or indirectly bring certain index providers into Advisers Act regulation, including by imposing requirements on advisers that use index provider services. It is not unusual for the SEC to pursue actions related to new regulation it is considering. For more information, please contact any member of Wilson Sonsini’s fintech and financial services practice. |
