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SEC’s Kardashian Case, Marketing Rule Aim to Reveal Paid Ads

Oct. 7, 2022, 5:06 PM

The SEC’s case against Kim Kardashian, its most high-profile move to make sure the public knows when a celebrity is paid for a social-media endorsement, comes on the eve of new disclosure rules on some marketing deals.

On the same day the Securities and Exchange Commission announced the charges against Kardashian, the agency posted a video in which Chair Gary Gensler warned the public against listening to endorsements for investment advice. “Celebrity endorsements don’t mean that a product is right for you or even, frankly, that it’s legitimate,” he said.

The $1.26 million enforcement action against Kardashian preceded the SEC’s new marketing rule, which takes effect Nov. 4. The rule requires that paid testimonials and endorsements for investment advisers include disclosures to clients, while also expanding the definition of allowable advertising and marketing to new channels like social media.

Investment advisers were not previously able to use testimonials or endorsements in their marketing materials and elsewhere, but the new rules are a sign of the SEC keeping up with the times, said Eliza Fromberg, a partner at Day Pitney in New York. The SEC’s efforts to ensure paid ads are disclosed—as seen through its repeated warnings over celebrity endorsements, and the new marketing rule—reflect its core function to protect investors, she said.

“It says something more about our celebrity culture that people are likely to buy anything whether it’s a car or sneakers or a financial product upon the endorsement of a celebrity,” said Fromberg, whose clients include investment advisers. “For some time, the financial world was a bit shielded from those kind of promotions because the [SEC] rules didn’t permit it and it was disfavored.”

The new rule mainly targets smaller promotions, including client reviews appearing on a firm’s website, but it also covers new channels such as social media, blogs and podcasts. Now, there’s the potential for high-profile ads for investment advisers, because the new rule allows such endorsements—with proper disclosures to clients.

Fromberg described the potential scenario of a celebrity with a reputation for being environmentally conscious being paid to promote an environmental, social and governance fund.

Warning Signal

The SEC’s case against Kardashian accused her of touting the cryptocurrency EthereumMax in an Instagram post without disclosing a $250,000 payment she received for the ad. The case, which homed in on Kardashian’s immense influence and 225 million Instagram followers, is expected to put both celebrities and companies on edge about similar endorsement deals, lawyers said.

The action “heightens everyone’s awareness about the disclosures” said Sarah Krissoff, a partner at Day Pitney.

“You want to make sure you personally have done everything appropriate,” said Michael Rivera, a member at Bass Berry Sims, speaking about how companies might react to the Kardashian case.

The SEC isn’t alone in its pursuit of endorsements: the Federal Trade Commission sent a warning to hundreds of businesses in October last year about deceiving consumers with fake online reviews or other deceptive promotions, including on social media.

And Kardashian herself has also faced scrutiny from Food and Drug Administration over a 2015 Instagram post that the agency said said gave misleading information about a drug.

In the crypto space, the SEC brought charges in 2018 against professional boxer Floyd Mayweather Jr. and music producer DJ Khaled for promoting initial coin offerings without properly disclosing their financial ties to the coin issuers.

The SEC also put out guidance in November 2017 urging caution around celebrity-backed ICOs that may appear unbiased but could actually be part of a paid promotion.

‘Flexing Their Muscles’

The SEC’s order against Kardashian said she violated the anti-touting provision of federal securities laws. Without admitting or denying the SEC’s findings, Kardashian agreed to pay $260,000 in disgorgement—which represents her promotional payment plus interest, and a $1 million fine.

The SEC and counsel to Kardashian did not immediately respond to requests for comment.

The Kardashian case mainly demonstrates that the SEC staff are “flexing their muscles” in the cryptocurrency space, as part of efforts to regulate digital assets as a security, Krissoff said. EthereumMax has lost almost all of its value since it was promoted by Kardashian in June 2021, and she also faces a class action accusing her of artificially inflating the digital currency.

Lawyers said there are reputational concerns for companies using such endorsements, even though the SEC is unlikely to bring aiding and abetting cases against them.

“Influencers are at risk of serious penalties for failing to disclose their compensation,” said Nick Morgan, a lawyer at Paul Hastings. “And that may impact the reputation of the company being promoted.”

Companies might feel more comfortable including a provision in a contract with a celebrity or influencer that they’re responsible for disclosing the payment over the securities in their post.

“Clearly there’s a risk to everyone in this scenario,” said Chris Robertson, a partner at Seyfarth.

To contact the reporter on this story: Clara Hudson at

To contact the editors responsible for this story: Michael Ferullo at; Keith Perine at