The Securities and Exchange Commission (SEC) announced that registered investment adviser Van Eck Associates has agreed to pay a $1.75 million to settle charges that it failed to disclose a social media influencer’s role in the launch of an exchange-traded fund (ETF) in 2021.
According to the SEC’s order, in March 2021, Van Eck Associates launched the VanEck Social Sentiment ETF to track an index based on “positive insights” from social media and other data. The ETF launched on the New York Stock Exchange under the ticker BUZZ. The provider of that index told Van Eck Associates that it planned to retain a well-known and controversial social media influencer to promote the ETF. While the SEC did not name the influencer, several media sources claim that Van Eck partnered with Dave Portnoy, founder of the popular sports and pop culture website Barstool Sports, to help launch the fund.
To incentivize the influencer’s marketing and promotion efforts, the proposed licensing fee structure included a sliding scale linked to the size of the fund so, as the fund grew, the influencer would receive a greater percentage of the management fee the fund paid to Van Eck Associates. However, as the SEC’s order finds, Van Eck Associates failed to disclose the influencer’s planned involvement and the sliding scale fee structure to the ETF’s board when seeking approval for the fund’s launch and management fee.
The Investment Company Act
Section 15(c) of the Investment Company Act prohibits all registered investment companies from entering into or renewing “any advisory contract unless the terms of the contract are approved by a majority of the independent directors of the investment company.” As a result, Section 15(c)” imposes a duty on an adviser to furnish, such information as may reasonably be necessary for the directors to evaluate the terms of the adviser’s contract.”
The Commission stated that from December 2020 to June 2021, Van Eck did not disclose key details to the ETF’s board regarding the licensing agreement, the influencer’s participation, compensation, and other related controversies.
“Fund boards rely on advisers to provide accurate disclosures, especially when involving issues that can impact the advisory contract, known as the 15(c) process,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit. “Van Eck Associates’ disclosure failures concerning this high-profile fund launch limited the board’s ability to consider the economic impact of the licensing arrangement and the involvement of a prominent social media influencer as it evaluated Van Eck Associates’ advisory contract for the fund.”
Van Eck Associates consented to the SEC’s finding that it violated the Investment Company Act and Investment Advisers Act. Without admitting or denying the SEC’s findings, Van Eck Associates agreed to a cease-and-desist order and a censure in addition to the $1.75 million fine. 