SEC Announces First Enforcement Action of Amended Marketing Rule

As a member of the financial compliance space, FinTech Law's compliance team has been advising clients on the SEC's amended Marketing Rule since its release in 2021. Since the Marketing Rule is intricate and requires nuance and detailed review to understand, the SEC has released FAQs and guidance on some of these specific nuances. This guidance has helped registered investment advisers (“RIAs”) navigate the Marketing Rule's murky waters and, up until this week, there have been no specific enforcement actions related to the amended Marketing Rule. This changed on August 21, 2023, when the SEC released the first violation of the amended Marketing Rule and charged FinTech RIA Titan Global Capital Management USA, LLC "Titan" for “using hypothetical performance metrics in advertisements that were misleading.” In this blog, we'll review the case, break down Titan's violations, and pull insight from the enforcement action.

Titan's Marketing Rule Violations

Outside of the broad violation of “misrepresenting hypothetical performance metrics”, the SEC has charged Titan with multiple other violations related specifically to the Marketing Rule but also general compliance issues. These violations include:

• Multiple compliance failures that lead to misleading disclosures about custody of clients' crypto assets
• The use of improper “hedge clauses” in client agreements
• The unauthorized use of client signatures
• The failure to adopt policies concerning crypto asset trading by employees

Regarding the details of these violations, the SEC's order alleges that, from August 2021 to October 2022, Titan made misleading statements on its website regarding hypothetical performance, claiming that “annualized” performance results for its Titan Crypto strategy were as high as 2,700%. The SEC continued that the advertisements were clearly misleading as they failed to include material information such as noting that the hypothetical performance projections assume that the strategy's first three weeks performance would continue for a complete year. The SEC states that Titan further violated the Marketing Rule by advertising these metrics without having implemented the required policies and procedures from said rule. Speaking on this investigation and Titan's violations, Osman Nawaz, the SEC's Chief of Enforcement's Complex Financial Instruments Unit, stated, “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.”

Regarding their Marketing Rule violations and other SEC-alleged compliance failures, Titan consented to the entry of the SEC's order. While neither admitting nor denying the SEC's findings, Titan agreed to a censure, a cease-and-desist order, and the order to pay $192,454 in disgorgement, prejudgment interest, and an additional $850,000 civil penalty to be distributed to affected clients.

Key Takeaways

In the financial planning and investments space, accurate and honest disclosures are an incredibly important part of overall compliance. In the case of Titan, a firm offering and marketing specific complex investment strategies, often through their complex mobile application, accurate disclosures to both current and future investors are imperative to avoid misleading clients. Although the compliance date for the amended marketing rule was not effective until November 2022, Titan self-elected to comply with new rule requirements in June 2021. The Marketing Rule was amended by the SEC to formally allow firms to use hypothetical performance metrics in advertising and it requires these firms to abide by certain rules and requirements regarding disclosures to investors that are designed to prevent and circumvent fraud. Specifically, Titan did not adopt procedures designed to ensure that the hypothetical performance was relevant to the financial situation and investment objectives of the intended audience (which most likely included retail clients and prospects) and failed to provide certain information underlying the hypothetical performance.

The SEC's amended Marketing Rule continues to be a hot topic of discussion among investment advisers and compliance professionals alike and will likely require more guidance and discussion as time progresses and the industry changes. Firms should continue to keep the Marketing Rule and its certain requirements top of mind and revisit the abiding policies and procedures on a regular basis. Joot's compliance team can help you review your marketing pieces and ensure you are in compliance with the Marketing Rule. Reach out to learn more about FinTech Law's compliance services.