Keeping up with the SEC: Here’s what Kim Kardashian and your financial adviser have in common
While your financial adviser may have some clout, it’s probably not at the level where she could be seen walking the red carpet in an iconic dress once worn by Marilyn Monroe. However, that doesn’t mean she has nothing in common with Kim Kardashian.
As it turns out, Kardashian—and every other celebrity out there—is subject to Securities and Exchange Commission (SEC) rules just like your adviser. The SEC is coming for anyone they believe is not operating in consumers’ best interests—they don’t care who you are.
Looking at the Kardashian situation, she was fined $1 million, along with her $250,000 fee plus interest, for a single post to her Instagram promoting crypto security to her 330 million followers—something she is now prohibited from doing for the next three years.
The big problem with the post was that she failed to disclose that it was a paid post. Kardashian, as well as every other celebrity, is required to share this information so that followers realize their favorite stars might not be fully qualified to deliver informed financial advice.
The latest FTX fiasco has put Tom Brady and Gisele Bündchen in the hot seat for striking a deal with the crypto company for Brady to be their brand ambassador and Bündchen their social initiatives adviser for an undisclosed amount, causing regulators’ heads to turn. And while many celebrities may not actually believe in a given crypto project at all—merely touting it as a part of a paid engagement, can get them in trouble, just like any adviser.
In Kardashian’s case, concern over the massive number of followers who might have been misled by the post, and the attention that accompanied the settlement, was so great, it prompted SEC chair Gary Gensler to make a video warning about celebrity endorsements.
Financial advisers: They’re just like…celebs?
Celebrities have long realized the power of social media and digital communications for building their brands and increasing reach, but financial services organizations have been slower to join the bandwagon, in part because of SEC regulations.
Nevertheless, digital communications, and social media in particular, have become important tools for financial advisers and their firms. They enable them to connect with clients and prospects at an unprecedented scale—on channels people prefer—with a new level of immediacy and authenticity.
Through social channels, advisers cultivate trust and develop relationships that ultimately enable them to educate and guide clients appropriately, something that cannot be taken for granted, when celebs could mislead audiences without proper disclaimers.
While the SEC has evolved to accommodate the growing range of digital communications, the rules they put in place are intended to be taken very seriously. In fact, just a week before the announcement of Kardashian’s penalty, 16 Wall Street firms were charged with electronic record-keeping failures associated with texting and instant messaging. Many of these infractions were based on the actions of their advisers: All told, a whopping $1.1 billion in fines were handed down—enough to make Kardashian’s bill look rather small.
Many of the infractions could seem innocent to outside observers, such as advisers texting clients from their personal devices. Records of such communications couldn’t be preserved. No audit trail exists. So, while every one of those texts could have been on the up-and-up, there is no way to know for sure, and the client’s best interest could have been compromised.
These circumstances highlight the complexity of digital communications related to financial services. The SEC does not like to take any chances, no matter how well-meaning a celeb’s Instagram post or an adviser’s text to a client might be. The SEC is cracking down.
Regulatory clarity offers opportunities
But we’re only at the cusp of change in terms of digital communications compliance. For example, with the SEC’s Modernized Marketing Rule in effect, endorsements and other testimonials written about financial advisers and shared publicly via the advisers’ social media presence will now be treated as advertisements.
Per a risk alert issued in September, the SEC will make compliance with the rule a priority in its 2023 examinations. This could potentially set up advisers to run afoul of guidelines yet again. Firms had nearly two years to prepare for this, so the SEC’s patience for violations may be minimal.
This regulatory clarity comes with a silver lining for financial advisers. Before the marketing rule came into effect, testimonials and endorsements were completely out of reach for advisers; they were expressly disallowed. With the rule in place, firms can unlock the marketing power of testimonials and endorsements with the support of the right technology.
The government’s more active stance on rules and regulations is motivated by investor protection. The enforcement of these guidelines safeguards consumers from being misled and helps secure their finances, but it also makes things more complicated for those in the financial services sphere—from advisers to celebrity spokespeople. Ignorance is not an excuse for failing to follow the rules.
Organizations must educate every employee and contracted agent on evolving regulations, their importance, and the processes for compliance. Companies also need to put in place seamless communications and recordkeeping systems that make compliance easy to ensure that digital content falls within stated guidelines. Larger firms in particular must leverage technology solutions that enable a scalable approach to efficient and effective supervision. Otherwise, they should prepare to pay the piper.
Michael Boese is the CEO of Hearsay Systems.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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