M1 Finance will pay $850,000 to settle FINRA allegations that social media influencers paid by the firm made misleading or exaggerated claims to lure investors, the broker/dealer regulator announced.
RESIDENCE is the first enforcement action resulting from a previously announced targeted examination of 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,” said FINRA EVP and Chief Enforcement Officer St. Louis in a statement regarding M1 Finance's alleged violations.
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 to April 2023, M1 Finance paid influencers to promote the firm on social media.
The firm selected influencers based on the size of their online following and how important they were to its business. M1 paid influencers a flat fee for each account opened through a unique link on their posts. The firm never limited how much an influencer could earn through this process, but during this time, M1 paid around 1,700 influencers more than $2.75 million, with 39,400 new accounts opened through this process.
However, those social media influencers went online on occasion and M1 Finance was not properly supervising them, according to FINRA.
In one case, an influencer created a video promoting the firm's margin lending program, claiming that investors could repay the margin loans at any time they wanted (in reality, investors had no specific time extension for these loans ). Other influencers claimed the firm's margin interest rates were low, but did not reveal how the rates might fluctuate over time.
Other influencers claimed that M1 Finance's services were free, without disclosing that fees may sometimes apply (one influencer claimed that the service includes “no fees”). In another instance, an influencer showed investors how to open a Roth IRA through the M1 Finance app.
“The influencer stated, 'it's a general rule of thumb that anyone who starts a ROTH IRA early (say in their twenties) will be a millionaire by age 60. In fact, you will probably have well over a million dollars by that age if you contribute $6,000 a year,'” the order said. “The post lacked a balanced discussion of the risks involved in investing.”
During this time, M1 Finance never had a “properly qualified registered manager” who reviewed influencers' content before they posted. According to FINRA, the firm also did not keep records of posts created by influencers or the dates they were posted. Until 2023, M1 Finance did not have an oversight system to oversee influencer content.
M1 Finance did not respond to a request for comment by press time.
Starting in April 2023, the firm revised its policies, mandating that a key registered executive review influencers' posts about the firm before they are made public. They also created a system to keep influencers' posts relevant to the firm. In addition to the fine, M1 Finance agreed to censure without admitting or denying the regulator's claims.
In 2021, FINRA found that they were doing a targeted exam on how firms decide to recruit social media influencers (the term “finfluencers” describes social media personalities who focus on financial services). At the time, Jennifer DiValerio, then managing director of Foreside, said that if a firm is working with an influencer, they are, for all intents and purposes, “an extension of their firm.”
FINRA also issued a series of advisories to broker/dealers working with finfluencers, including evaluating potential influencers' backgrounds and previous social media activity for compliance and reputational risks and keeping records of their public communications. Tips struck some brokerage regulation experts as an impotent limit.