A Texas-based online brokerage app that offers self-directed trading to retail investors has been shut down by FINRA enforcers, paying $200,000 to settle charges that it failed to oversee paid social media influencer advertising.
Settlement with Cobra Trading comes a few weeks after FINRA fined M1 Finance for similar alleged compliance errors. The M1 settlement was the first enforcement action stemming from targeted examinations investigating firms' oversight of paid social media influencers.
Cobra Trading employs 12 registered representatives in Carrollton, Texas. FINRA's settlement with Cobra focuses on the time between November 2019 and October 2023. In that period, Cobra Trading paid 17 influencers for “promotional communication” on social media, including forums and video-sharing platforms.
The firm gave each influencer a unique link to share with potential clients and offered a flat fee for each new account opened. During that time, customers opened 775 new accounts using such links, each funded with at least $25,000. As part of Cobra's agreements with influencers, they would specify the number and frequency of communications the firm required influencers to post.
The firm also offered “selling points” that influencers could use in promotion. However, some of the influencer posts were not fair or balanced, according to FINRA.
In one case, an influencer posted that they “took a $30K account and turned it into $133K in less than 30 days” with a Cobra account; in other posts, the same influencer said he made more than $2.4 million in net profit for the year through Cobra and said it “wasn't bad (as) for just ONE HOUR of trading a day!”
“Such posts did not provide a balanced discussion of the risks involved in investing and improperly suggested that individuals could achieve similar results,” the letter said. “Furthermore, the majority of influencer posts promoting the firm failed to disclose that they were advertising.”
In addition, Cobra never had a “properly registered qualified director” review influencer videos before they were posted and kept no records of influencer videos or when they were posted, according to FINRA. The ib/d regulator also slammed Cobra for failing to set up surveillance systems designed to oversee these types of retail communications.
Cobra did not admit or deny the allegations, but agreed to a censure in addition to a fine. The firm also agreed to establish supervisory systems to meet the needs detailed in the settlement within 180 days.
Representatives from Cobra Trading did not respond to a request for comment prior to publication.
In 2021, FINRA revealed that “target trials” had begun on how firms recruit social media influencers, followed by action to implement M1 Finance earlier this month. The allegations against M1 were similar to those of Cobra Trading, with some influencers claiming the firm's services were free without disclosing that fees might apply, among other mischaracterizations.
FINRA also issued a series of advisories for broker/dealers working with social media influencers, including evaluating potential influencers' backgrounds and previous social media activity for compliance and reputational risks (although some criticized the advice to be “borderline inappropriate” for firms).