United States SEC Fines FinTech Investment Advisor Titan Global $1 Million for Misleading Advertising of 2,700% Hypothetical Returns from Titan Crypto Strategy
24th August 2023 | Hong Kong
The United States Securities & Exchange Commission (SEC) has fined fintech investment advisor Titan Global a total of $1 million for misleading advertising of 2,700% hypothetical returns from Titan crypto strategy. United States SEC: “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 percent for its Titan Crypto strategy. The order alleges that Titan’s advertisements were misleading because they failed to include material information, for example, that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year. The 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 marketing rule, which was amended in December 2020 … … The SEC’s order further finds that Titan (1) made conflicting disclosures to clients about how Titan custodied crypto assets; (2) 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 (3), contrary to representations, failed to adopt policies and procedures concerning employee personal trading in crypto assets. The order also states that 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.” See below for United States SEC full statement:
“ United States SEC Fines FinTech Investment Advisor Titan Global $1 Million for Misleading Advertising of 2,700% Hypothetical Returns from Titan Crypto Strategy “
Osman Nawaz, Chief of Enforcement’s Complex Financial Instruments Unit: “When offering and marketing complex strategies, investment advisers must ensure the accuracy of disclosures made to existing and prospective investors. 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. 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.”
United States SEC Fines FinTech Investment Advisor Titan Global $1 Million for Misleading Advertising of 2,700% Hypothetical Returns from Titan Crypto Strategy
- SEC Charges FinTech Investment Adviser Titan for Misrepresenting Hypothetical Performance of Investments and other Violations
- These charges mark the first violation of the SEC’s amended marketing rule
21st August 2023 – The Securities and Exchange Commission today announced charges against Titan Global Capital Management USA LLC, a New York-based FinTech investment adviser, for using hypothetical performance metrics in advertisements that were misleading. 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.
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 percent for its Titan Crypto strategy. The order alleges that Titan’s advertisements were misleading because they failed to include material information, for example, that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year. The 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 marketing rule, which was amended in December 2020.
The SEC’s order further finds that Titan (1) made conflicting disclosures to clients about how Titan custodied crypto assets; (2) 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 (3), contrary to representations, failed to adopt policies and procedures concerning employee personal trading in crypto assets. The order also states that 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.
Titan cooperated with the investigation and consented to the entry of the SEC’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 investigation was conducted by Kelly Rock and Elisabeth Goot and was supervised by Armita Cohen and Osman Nawaz of the Complex Financial Instruments Unit, with assistance from Alexander Lefferts of the Enforcement Division’s Office of Investigative and Market Analytics and Ling Yu and Carolyn O’Brien from the Division of Examinations.
United States SEC Adopts Modernized Marketing Rule for Investment Advisers
22nd Dec 2020 – The Securities and Exchange Commission today announced it had finalized reforms under the Investment Advisers Act to modernize rules that govern investment adviser advertisements and payments to solicitors. The amendments create a single rule that replaces the current advertising and cash solicitation rules. The final rule is designed to comprehensively and efficiently regulate investment advisers’ marketing communications.
In the decades since the adoption of the current rules, advertising and referral practices have evolved. The technology used for communications has advanced, the expectations of investors seeking advisory services have changed, and the profiles of the investment advisory industry have diversified. The new marketing rule recognizes these changes and the Commission’s experience administering the current rules. The reforms will allow advisers to provide investors with useful information as they choose among investment advisers and advisory services, subject to conditions that are reasonably designed to prevent fraud.
“The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” said Chairman Jay Clayton. “This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors. The new rule provides for an extended compliance period intended to provide advisers with a sufficient transition period, including to enable consultation with the Commission’s expert staff.”
The rule replaces the current advertising rule’s broadly drawn limitations with principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice, and includes tailored requirements for certain types of advertisements. For example, the rule will require advisers to standardize certain parts of a performance presentation in order to help investors evaluate and compare investment opportunities, and will include tailored requirements for certain types of performance presentations. Advertisements that include third-party ratings will be required to include specific disclosures to prevent them from being misleading. The rule also will permit the use of testimonials and endorsements, which include traditional referral and solicitation activity, subject to certain conditions.
Finally, the Commission adopted related amendments to the investment adviser registration form and the books and records rule. The staff of the Division of Investment Management also expects to withdraw no-action letters and other guidance addressing the application of the advertising and cash solicitation rules. A list of the letters will be available on SEC.gov.
Highlights
On Tuesday, Dec. 22, 2020, the Commission announced it had finalized reforms to modernize rules that govern investment adviser advertisements and compensation to solicitors under the Investment Advisers Act of 1940. Neither rule has been amended significantly since its adoption over forty years ago.
The amendments create a single rule that draws from and replaces the current advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The final rule is designed to comprehensively and efficiently regulate advisers’ marketing communications. The Commission has also made related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule.
The Marketing Rule Under the Act
The amendments to Rule 206(4)-1 will replace the broadly drawn limitations and prescriptive or duplicative elements in the current rules with more principles-based provisions, as described below.
- Definition of Advertisement. The amended definition of “advertisement” contains two prongs: one that captures communications traditionally covered by the advertising rule and another that governs solicitation activities previously covered by the cash solicitation rule.
- First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.
- Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).
- General Prohibitions. The marketing rule will prohibit the following advertising practices:
- making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
- making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
- including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
- discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
- referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
- including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
- including information that is otherwise materially misleading.
- Testimonials and Endorsements. The marketing rule prohibits the use of testimonials and endorsements in an advertisement, unless the adviser satisfies certain disclosure, oversight, and disqualification provisions:
- Disclosure. Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest. There are exceptions from the disclosure requirements for SEC-registered broker-dealers under certain circumstances. The rule will eliminate the current rule’s requirement that the adviser obtain from each investor acknowledgements of receipt of the disclosures.
- Oversight and Written Agreement. An adviser that uses testimonials or endorsements in an advertisement must oversee compliance with the marketing rule. An adviser also must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
- Disqualification. The rule prohibits certain “bad actors” from acting as promoters, subject to exceptions where other disqualification provisions apply.
- Third-Party Ratings. The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclosures and satisfies certain criteria pertaining to the preparation of the rating.
- Performance Information Generally. The rule prohibits including in any advertisement:
- gross performance, unless the advertisement also presents net performance;
- any performance results, unless they are provided for specific time periods in most circumstances;
- any statement that the Commission has approved or reviewed any calculation or presentation of performance results;
- performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
- performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
- hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and
- predecessor performance, unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.
Amendments to the Books and Records Rule and Form ADV
In connection with the marketing rule amendments and merger of the current advertising and cash solicitation rules, the Commission also adopted amendments to the books and records rule. In addition, the Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices to help facilitate the Commission’s inspection and enforcement capabilities.
Withdrawal of Staff Guidance
The staff of the Division of Investment Management will withdraw no-action letters and other guidance addressing the application of the advertising and cash solicitation rules as those positions are either incorporated into the final rule or will no longer apply. A list of the letters will be available on the Commission’s website.
What’s Next?
The marketing rule, amended books and records rule, and related Form ADV amendments, will be published on the Commission’s website and in the Federal Register. All will be effective 60 days after publication in the Federal Register. The Commission has adopted a compliance date that is 18 months after the effective date to give advisers a transition period to comply with the amendments.
The Commission recognizes that this amended rule replaces an outdated and patchwork regime on which advisers have relied for decades. While the rule reflects current best practices in marketing, it may result in practice changes for advisers, including private fund advisers. In order to assist advisers with planning for compliance with this new rule, we encourage advisers to actively engage with Commission staff as questions arise in planning for implementation. You may send your questions by email to [email protected].
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