SEC Fines Adviser Under New Marketing Rule

On August 21, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order imposing civil monetary penalties against Titan Global Capital Management USA LLC (“Titan”) for violations of the new investment adviser Marketing Rule, Rule 206(4)-1. The new rule had a mandatory compliance date of November 4, 2022, but advisers could voluntarily adopt the rule sooner. 

Titan elected to comply with the new rule in June 2021; however, the firm did not adopt new policies and procedures or adapt its practices as required by the new rule. Between August 2021 and October 2022, Titan violated the new Marketing Rule by advertising hypothetical performance without adopting policies and procedures reasonably designed to ensure the hypothetical performance was relevant to client’s or prospective client’s financial situation and investment objectives and also by failing to provide information underlying the hypothetical performance as required by the new rule. 

Titan also violated the new rule by making misleading statements regarding hypothetical performance on its website. The SEC noted a particular violation in marketing materials related to a product offered by Titan, Titan Crypto, wherein the firm advertised “annualized” performance results. The advertisement did not include information about how the annualized return was calculated, particularly that the annualized return was based on a hypothetical account and that the “annualized” performance results assumed that the strategy’s performance shown in the first three weeks would apply for a year.  

The SEC also found that Titan failed to provide sufficient information in the hypothetical performance advertisement about risks and limitations of using hypothetical performance when making investment decisions. While Titan embedded links within the advertisement to “Disclosures” and “Track Record” that investors could click on, the SEC emphasized that there was no language in the advertisement itself alerting investors that they should click the links for more information about the risks and limitations of the advertised hypothetical performance. 

Based on these violations and taking remedial measures made by Titan into account, the SEC ordered Titan to pay disgorgement and prejudgment interest of approximately $200,000 and a civil monetary penalty of $850,000. 

Prior to this order being issued, the SEC published a Risk Alert in June noting focus areas for its examination of investment advisers related to the new marketing rule. In the risk alert, the SEC reiterated focus areas from a previous September 2022 Risk Alert, which include policies and procedures, compliance with the substantiation requirements, compliance with performance advertising requirements, and books and records compliance. The June Risk Alert added areas of focus, including testimonials and endorsements, third-party ratings, and Form ADV. 

The June Risk Alert specified that the SEC will focus on the use of testimonials and endorsements, including whether adequate disclosures are provided, oversight conditions are met, written agreements are entered into where required, and ineligible persons have been compensated for the testimonials or endorsements as needed. The SEC will also focus on the use of third-party ratings, including whether the adviser provides the requisite clear and prominent disclosures related to third-party ratings and whether questionnaires or surveys used to prepare third-party ratings meet the conditions required by the new rule. Finally, the SEC will also review with the adviser has accurately completed the new advertising questions included in the Form ADV when filing annual amendments.  

Investment advisers should take note of the recent enforcement action, as well as the June 2023 and September 2022 Risk Alerts issues by the SEC when adopting and implementing policies and procedures pursuant to the new marketing rule.  

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information. 

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