In what has been cited as a top concern of investment adviser compliance officers, the Securities and Exchange Commission on Aug. 21 announced charges against a New York-based fintech investment adviser for using misleading advertisements.
Noting that the charges mark the first violation of the SEC’s amended marketing rule, the SEC charged Titan Global Capital Management USA LLC with violating the marketing rule and Advisers Act when it made misleading statements regarding the hypothetical performance of its investment strategies.
The SEC also charged Titan with multiple compliance failures that led to misleading disclosures about custody of clients’ crypto assets, the use of improper “hedge clauses” in client agreements, the unauthorized use of client signatures and the failure to adopt policies concerning crypto asset trading by employees.
Misleading Ads
According to the SEC’s order, for a period ranging from August 2021 to October 2022, Titan—which offers multiple complex strategies to retail investors through its mobile trading app—made misleading statements on its website regarding hypothetical performance, including by advertising “annualized” performance results as high as 2,700% for its Titan Crypto strategy.
The order alleges that Titan’s advertisements were misleading because they failed to include material information; for example, about how the annualized return was calculated, including that the annualized return was based on a purely hypothetical account—rather than an actual account’s performance—and that the 2,700% annualized return figure was based on the assumption that the strategy’s performance in its first three weeks would continue for an entire year. Titan also failed to provide information in its advertisements about the risks and limitations of using this hypothetical performance in making investment decisions.
The SEC’s order also finds that Titan violated the marketing rule by advertising hypothetical performance metrics without having adopted and implemented required policies and procedures or taking other steps required by the Commission’s amended marketing rule, which was finalized in December 2020.
What’s more, the SEC’s order further finds that Titan included in its client advisory agreements liability disclaimer language that created the false impression that clients had waived non-waivable causes of action against Titan—and, contrary to representations, failed to adopt policies and procedures concerning employee personal trading in crypto assets.
According to the order, Titan self-reported to the SEC staff that it failed to ensure that client signatures were obtained for certain types of transactions in client accounts and agreed to settle related charges.
Warning to Advisers
“When offering and marketing complex strategies, investment advisers must ensure the accuracy of disclosures made to existing and prospective investors,” Osman Nawaz, Chief of Enforcement’s Complex Financial Instruments Unit, said in a statement. “The Commission amended the marketing rule to allow for the use of hypothetical performance metrics but only if advisers comply with requirements reasonably designed to prevent fraud.”
Nawaz further noted that Titan’s advertisements and disclosures painted a “misleading picture” of certain of its strategies for investors. “This action serves as a warning for all advisers to ensure compliance,” he cautioned.
Cooperation and Consent
According to the SEC, Titan cooperated with the investigation and consented to the entry of the Commission’s order finding that it violated the Advisers Act. Without admitting or denying the SEC’s findings, Titan agreed to a cease-and-desist order, a censure, and to pay $192,454 in disgorgement, prejudgment interest, and an $850,000 civil penalty that will be distributed to affected clients.
The SEC in December 2020 voted to modernize rules governing investment adviser advertisements and solicitor compensation under the Investment Advisers Act. To give advisers a transition period, advisory firms had until November 2022 to come into full compliance with the rule.
