Background

M1 Finance provides self-directed trading to retail investors through a mobile app on its website. For more than three years between January 2020 and April 2023, M1 Finance paid approximately 1,700 social media influencers more than $2.75 million to promote the firm by posting promotional information online to potential retail customers on various platforms resulting in more than 39,400 new accounts with the firm. M1 Finance paid the influencers a set fee for each new account opened with no limit on the total any influencer could earn from generating new accounts. In furtherance of this arrangement, M1 Finance directed the influencers to include in their social media posts a hyperlink to the firm’s website through which potential retail customers could open and fund a brokerage account with the firm. M1 Finance also provided graphics to include in posts and a “Welcome Guide” for influencers highlighting specific services the firm offered, like its margin lending program, and touting the lack of commissions or management fees associated with the firm’s products. The Welcome Guide even invited influencers to contact M1 Finance with their own promotional ideas.

The Social Media Influencers’ Posts Violated FINRA Rules 2210 and 2010

FINRA found the incentives resulted in multiple influencers creating posts promoting the firm that: (i) were misleading, (ii) not fair and balanced, or (iii) promised investment outcomes without a balanced discussion of investment risks. For example, one influencer posted that customers could “pay [margin loans] back at any given time [because] there is no set time period.” But that was not true. Another claimed that “with M1 Finance, you can trade for free . . . [and] every dollar you are putting into the platform is actually going into that ETF or that stock or bond.” This, too, was misleading because fees applied to some of the firm’s services. And another influencer stated that “anyone who starts a ROTH IRA . . . in their 20s will become a millionaire by the time they’re 60,” without any mention of the risks inherent in investing.

M1 Finance Failed to Comply with Safeguards Designed to Prevent These Violations

FINRA Rules impose specific requirements on member firms designed to protect retail customers from the above practices. Specifically, member firms must designate a qualified registered principal to approve retail communications (like the above social media posts) prior to (i) its use or (ii) filing with FINRA’s Advertising Regulation Department, whichever comes first. Member firms must also supervise retail communications and implement a system to supervise its associated persons (and the firm’s businesses) to achieve compliance with applicable securities laws, regulations, and FINRA rules. There are also record-keeping requirements associated with retail communications. M1 Finance failed to meet these obligations between January 2020 and April 2023, however, because the firm did not: (i) have a qualified registered principal reviewing its influencers’ posts prior to publication; (ii) supervise the retail communications (i.e., the social media posts); (iii) establish, maintain, or enforce a reasonably designed supervisory system (with written supervisory procedures that applied specifically to the influencers’ posts; or (iv) maintain proper records of the social media posts its influencers were creating.

FINRA’s targeted exam of member firms’ social media practices will remain a priority. Firms should be sure to implement effective supervisory systems and practices designed specifically to comply with FINRA Rules and applicable securities laws prior to engaging with retail consumers on social media. Faegre Drinker will continue to monitor enforcement and regulatory developments in this space.