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SEC’s Fine on Celebrity Kim Kardashian A Step Towards Alerting Crypto Endorsers on Disclaimer Compliance

08 October 2019 US Reality TV star Kim Kardashian poses for a photo as she arrives at World Congress On Information Technology (WCIT). Shutterstock/Asatur Yesayants

Every celebrity, whether it is Kim Kardashian or anyone else, is subject to the rules of the US Securities and Exchange Commission (SEC). The SEC goes after anyone it believes is not operating in the best interests of consumers. While many celebrities may not believe in a particular crypto project at all, simply advertising it for money engagement can land them in hot water, just like any advisor.

Kim Kardashian was fined $1 million, plus her $250,000 fee plus interest, for promoting crypto security to her 330 million followers in a single post-something she is now barred from doing for the next three years.

The main issue with the post was that she did not disclose that it was a paid advertisement. Kardashian, like every other celebrity, is required to disclose this information so that fans understand that their favorite stars may not be fully qualified to provide informed financial advice.

The latest FTX saga has landed Tom Brady and Gisele Bündchen landed in hot water after they struck a deal with the crypto company. The deal was that Brady would be brand ambassador and Bündchen their social initiatives advisor. The fee remained undisclosed; the very aspect that started ringing a bell in the regulators’ heads. Concerns about the large number of followers who may have been misled by the post, as well as the attention that accompanied the settlement, prompted Gary Gensler, Chair of SEC, to create a video that warns people about celebrity endorsements.

While celebrities have capitalized on digital communications and social media power to build their brands and spread their nets, financial services organizations have tread more carefully because of SEC regulations.

Digital communications and social media advertising have become now become important tools for financial advisors for their ability to connect with clients and business prospects, providing people with not only authenticity but also higher levels of immediacy. Financial advisors cultivate and nurture trust, develop relationships and boost sales. Among all this, celebs could easily mislead audiences in the absence of proper disclaimers.

The SEC’s rules need to be taken seriously. Just before Kardashian’s penalty was announced, 16 Wall Street firms were charged with failure of electronic record-keeping related to texting and messaging. Many of these violations were based on their advisors’ actions. Regardless of how well-intended a celebrity’s Instagram post or an advisor’s text to a client may be. The SEC is taking action.

With the SEC’s Modernized Marketing Rule in effect, for example, endorsements and other testimonials written about financial advisors and publicly shared via the advisors’ social media presence will now be treated as advertisements.

According to a risk alert issued in September, the SEC will prioritize rule compliance in its 2023 examinations. Investor protection motivates the government’s more active stance on rules and regulations. The enforcement of these guidelines protects consumers from being misled and helps them secure their finances, but it also complicates things for those in the financial services industry, from advisors to celebrity spokespeople. Ignorance is not an excuse for breaking the rules.

Organizations must educate every employee and contracted agent on the importance of evolving regulations and the processes for compliance. Companies must also implement seamless communications and recordkeeping systems that make compliance simple in order to ensure that digital content adheres to stated guidelines. Larger companies, in particular, must use technology to enable a scalable approach to efficient and effective supervision. Otherwise, they will have to pay the piper.

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