SEC Fines IA for Failing to Disclose Licensing Arrangements to ETF Board

Steven Lofchie Commentary by Steven Lofchie

An investment adviser settled charges with the SEC for failing to disclose to the Board of an ETF managed by the adviser, the terms of a contract with a social media influencer.

According to the SEC Order, the adviser planned to launch an ETF that included stocks with "positive insights" based on social media and other data. The SEC said the adviser obtained a license to use an index in connection with the ETF. The SEC said the provider of the index informed the adviser that it planned to retain a well-known and controversial social media influencer to promote the Index in connection with the launch of the ETF and negotiated a change to the proposed licensing fee agreement that would pay the influencer more as the ETF grew in size. The SEC found that the influencer’s planned involvement in the marketing of the ETFs and the details of the licensing arrangement, including the fees to repaid to the influencer, were not fully disclosed to the independent trustees of the ETF in connection with the Board's approval of the advisory and licensing fee.

The SEC found that the adviser violated Section 15(c) of the Investment Company Act ("Contracts of advisers and underwriters"), Section 206(2) and Section 206(4) of the Advisers Act ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices.")

To settle the charges, the adviser agreed to (i) cease and desist violations of Section 15(c) of the Investment Company Act, Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7, (ii) a censure and (iii) pay a civil monetary penalty of $1,750,000. In determining an appropriate penalty amount, the SEC took into consideration the company's remedial efforts.


Two interesting points about the enforcement action. First, while there was a disclosure violation, the failure was to disclose to the ETF Board, rather than to the public.  

Second, the SEC says that it went light on the adviser because of its remedial efforts. However, the settlement agreement does not describe the remedial efforts and it is not obvious how the adviser would correct a past failure to disclose. While it is good that the SEC rewards remedial efforts, the reward does not have as much beneficial impact if the market does not know what activity was being rewarded.

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