(Article from Registered Funds Regulatory Update, April 2024)
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The SEC settled charges against an RIA for failing to disclose a social media influencer’s role and the related fee arrangement with an index provider in connection with the board of trustees’ approval of the management fee and launch of a new ETF.
According to the Order, the RIA and the proposed index provider initially agreed that the RIA would pay the index provider a licensing fee equal to 20% of the management fee it received from the ETF in exchange for an exclusive license for the index. Thereafter though, the index provider made plans to partner with a well-known and “controversial” social media influencer known for commenting on “sports, investing, and other topics” and proposed new terms to the licensing agreement whereby the index provider would receive a sliding 20% to 60% of the RIA’s net management fee from the ETF depending on the ETF’s assets under management within 18 months of the ETF’s launch. Additionally, the influencer would receive an ownership interest in the index provider for his promotion activities.
At the ETF’s organizational meeting, the ETF as well as the investment management agreement were approved by the board. However, according to the Order, the independent trustees were not fully informed of the anticipated economic terms of the licensing arrangement or the planned involvement of the influencer, the compensation to be paid to the influencer, and the controversies surrounding the influencer.
Based on the foregoing, the SEC found that the RIA willfully violated Section 15(c) of the Investment Company Act, which imposes a duty on an investment adviser to furnish such information as may reasonably be necessary for the trustees to evaluate the terms of the investment adviser’s contract. Furthermore, the SEC found that the RIA violated the Advisers Act and the rules thereunder by failing to adopt and implement adequate policies and procedures related to furnishing the board with accurate information reasonably necessary for the board to evaluate the terms of the advisory contract, as well as material information related to a proposed fund launch.
Without admitting or denying the findings, the RIA agreed to a cease-and-desist order, censure, and $1.75 million civil monetary penalty.
In the Matter of Van Eck Associates Corporation, SEC Admin. File No. 3-21857 (Feb. 16, 2024), available at: https://www.sec.gov/files/litigation/admin/2024/ic-35132.pdf.