[By Aashi Goyal]
The author is a student of National Law School of India (NLSIU), Bengaluru.
Introduction
On 27 June 2024, SEBI published a press release regarding its 206th Board Meeting. As per the press release, SEBI has approved the recommendations regarding restricting the association of SEBI-regulated entities with persons who directly or indirectly provide advice or recommendations without being registered with SEBI or make any implicit or explicit claim of return or performance in respect of or related to security. Moreover, the ASCI, on 17 August 2023, published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.
In this context, this paper argues that the current regulatory framework is inadequate to deal with the unique challenges finfluencers pose and therefore there is a need for the development of a distinct regulatory framework tailored to these unique challenges. Firstly, the paper establishes the current regulatory framework seeking to regulate finfluencers. Secondly, it argues that the current ex-ante approach limits finfluencers to existing regulatory categories that do not fully encompass their activities. Thirdly, it argues that the ex-post approach requires proving intention and knowledge of dissemination of misleading or false information, which is a difficult standard to meet.
Current Regulatory Framework
The Advertising Standards Council of India (“ASCI”) defines influencer as a person who has access to an audience and the power to affect their audience’s purchasing decisions or opinions because of the influencer’s knowledge and relationship with their audience. Therefore, a finfluencer refers to an influencer that provides advice or comments on merits/demerits on aspects related to commercial goods and services, in the field of banking, financial services and insurance (“BFSI”).
Currently, a specific legal regime does not exist that regulates finfluencers. However, a finfluencer may be implicated under section 12A of the Securities and Exchange Board of India Act (“SEBI Act”) and Rule 4(2)(k) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). This is the existing ex-post approach in the regulation of finfluencers. In an effort to take an ex-ante approach, the SEBI Board in its 206th meeting approved the recommendations in the Consultation Paper titled “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)”. As per the consultation paper, a SEBI registered intermediary shall not have any association or relationship in any form, for promotion or advertisement of their products and services with any unregistered entities including finfluencers. Echoing similar sentiment, ASCI published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.
It is pertinent to note that the requirement of registration of finfluencers with SEBI has essentially restricted them to the category of Research Analysts (“RA”) and Investment Advisers (“IA”). The class of finfluencers has not been notified as a separate category of intermediaries as per Rule 1(2) of SEBI (Intermediaries) Regulations, 2008. Therefore, the only category they may be registered under is that of an RA or an IA. This is further indicated by the Consultation Paper’s conflation of the issue of unauthorised and unregistered IAs and RAs and the issue of regulation of finfluencers.
Gaps in the Ex Ante Approach
SEBI and ASCI have erred in confining the finfluencers to the category of RAs and IAs. In the current framework, SEBI and ASCI are essentially regulating RAs and IAs that are utilising social media platforms and not the category of finfluencers as a whole. The SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) excludes from its scope, the investment advice that is disseminated through any electronic or broadcasting medium, which is widely available to the public.i Therefore, by definition, a finfluencer providing investment advice on social media platforms such as YouTube, Instagram, Facebook, etc. does not come under the purview of IA regulations.
Although the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”) do not bar from its purview, communication through public media, it does exclude comments on general market trends, economic and political conditions, technical analysis, etc.ii This implies that a finfluencer that does not provide advice on which particular shares to sell, buy, hold or makes claims as to the future performance of specific sharesiii is not regulated by RA regulations. A finfluencer may create hype around a particular industry such as the psychedelics industry by analysing the general market trends surrounding the industry. As a result, the followers of the finfluencer may start buying shares of psychedelic companies leading to an increase in the price of the shares. At this stage, the finfluencer might sell his or her shares at a significant profit. Further, there is a possibility of the creation of price bubbles in this scenario. However, the same cannot be regulated under RA regulations as mere speculation as to general market trends and market conditions are not within its purview.
Gaps in the Ex-Post Approach
Rule 4(2)(k) of PFUTP Regulations states “Disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities.” From the bare reading of the provision it is evident that for one to be liable, there has to be knowledge as to the falsity or the misleading nature of the information. This belief is further backed by the Report of the Committee on Fair Market Conduct (“Report”), on the basis of which amendment to the PFUTP regulations was passed in 2019.
Prior to the 2019 amendment, Rule 4(2)(k) considered the publication of misleading advertisements or advertisements containing distorted information as manipulative, fraudulent and/or an unfair trade practice. The action of publication of misleading advertisement was not qualified by any requirement of intention or knowledge. This meant inadvertent mistakes could be penalised. Subsequently, the Report recommended that the action of “knowingly” influencing the decision to invest in securities should be included within the meaning of “dealing in securities”, as Rule 4 prohibits certain trade practices while dealing in securities. It was within the broader context of this recommendation that several sub-rules of Rule 4(2), which had the ability to influence the decision of an investor, were amended to include a knowledge and intention requirement through the inclusion of the word “knowingly”.iv
It is pertinent to note that the dissemination of information through social media i.e., the scenario covered under Rule 4(2)(k), has the power to influence an investor’s decision regarding investing in securities. Therefore, it would be consistent with the scheme of Rule 4(2) which is intended to be realised by the 2019 amendment, to read the intention and knowledge requirement into Rule 4(2)(k) despite the provision using the word “knows” instead of “knowingly”. This would further explain the rule being amended from using merely the phrase misleading to knows to be false or misleading.
As a consequence, Rule 4(2)(k) requires the finfluencer to have the intention and knowledge that the information that is being disseminated is false or misleading for it to constitute a fraudulent, manipulative and/or unfair trade practice in dealing with securities. This standard of intention and knowledge cannot deal with situations wherein the finfluencers merely act as a tool for the dissemination of false or misleading information but do not have the knowledge and intention. This is evident from the distinction created, by the Securities Appellate Tribunal in Mani Oommen v. SEBI, between the duty of care owed and the existence of intention and knowledge.
In Mani Oommen, the tribunal was of the opinion that gross negligence or recklessness does not invite the assumption of the existence of knowledge and intention. Here, the Chartered Accountants were merely a tool for committing fraud due to their negligence however, no intention or knowledge was found on their part, therefore, they cannot be made liable under Rule 4 of PFUTP regulations. The only liability that befalls them is that of professional negligence amounting to misconduct and the same would be dealt with by the Institute of Chartered Accountants of India. In the case of a finfluencer, a regulatory body such as ICAI does not exist.
To further demonstrate the inadequacy of Rule 4(2)(k) in dealing with the category of finfluencers that do not form part of RAs and IAs, attention needs to be drawn to the illustration of psychedelic industries again. Finfluencers may create hype around psychedelics industries and unsophisticated investors will be influenced to buy shares of companies in the industry. Due to a large number of shares being bought in the industry, it will lead to an increase in prices, which will in turn incentivise sophisticated investors to buy the shares. When prices reach an optimal level, the finfluencers can sell their shares and make a profit. For this process, the finfluencers do not necessarily need to make false or misleading statements and therefore, these actions would not come within the ambit of Rule (4)(2)(k).
Conclusion
The current regulatory framework reveals significant gaps in both ex-ante and ex-post approaches. The ex-ante approach of SEBI and ASCI to regulate finfluencers by categorizing them as RAs or IAs fails to address the full spectrum of finfluencer activities. On the other hand, the ex-post approach is limited by the requirement to prove knowledge and intention of disseminating misleading information. The unique issues posed by finfluencers cannot be dealt with, solely by the existing legal regime. This is also in line with the sentiment expressed by the Committee on Fair Market Conduct that Rule 4(2) of PFUTP regulations should be updated regularly to keep up with the changes in the securities market environment. Regulation of finfluencers requires distinct norms and regulations that are capable of dealing with the challenges posed by finfluencers.