Tessquire

SEC Fines Van Eck Associates $1,750,000 for Alleged Disclosure Failures Re: Influencer’s Involvement in ETF Launch

The need to ensure proper disclosures involving business deals with influencers is making headlines again. Last week, the Securities Exchange Commission (“SEC”) announced that it would be ordering Van Eck Associates Corporation (“Van Eck Associates”) to pay $1,750,000 due to its alleged disclosure failures during the launch of an exchange traded fund, known as the VanEck Social Sentiment ETF (“BUZZ ETF”). 

The BUZZ ETF was launched in March 2021. It markets itself as tracking an index that includes stocks with “positive insights” based on social media and other data – aka it is an investment took that uses artificial intelligence to identify stocks that are being positively spoken about online.

In the age of social media, a plan was made to use influencer marketing to increase brand awareness. Van Eck Associates chose to partner with Dave Portnoy, a well-known social media influencer, to promote the index in connection with the launch of the ETF. However, according to the SEC’s findings, Van Eck Associates failed to adequately disclose the influencer’s payment structure to the Board in connection with its approval of the fund launch and of the management fee.

The SEC alleges the influencer’s planned involvement and the details of the anticipated licensing arrangement were not disclosed to the independent trustees of the VanEck ETF Trust (the “Board”) in connection with their approval to organize the BUZZ ETF and approval of the management fee. Specifically, the SEC alleges Van Eck Associates did not state that the financial arrangement included a sliding scale once certain financial thresholds for the corporation were met. 

Van Eck Associates  is the entity who has been ordered to pay the fine. It is an investment adviser registered with the Commission since May 17, 1984. As of December 31, 2022, it had $56.2 billion in regulatory assets under management. Van Eck Associates is headquartered in New York, New York, and, among other things, advises ETFs.

VanEck ETF Trust (“the Trust”), is an open-end investment management company that was organized as a statutory Delaware trust in 2001. Formerly known as VanEck Vectors ETF Trust, the Trust has several series organized as ETFs. The Trust  is also located in New York, New York

VanEck Social Sentiment ETF (“BUZZ ETF”), is an ETF that is a series in the Trust that was launched on March 4, 2021. Van Eck Associates is the investment adviser to BUZZ ETF. BUZZ ETF is a passively managed ETF that uses the BUZZ Index to buy and sell securities on a monthly basis. As of December 31, 2022, BUZZ ETF had total net assets of approximately $52 million. 

The SEC’s findings allege that the memorandum to the Board misstated the anticipated terms of the licensing fee, which was to be paid by Van Eck Associates to the Index Provider, disclosing that it would equal 20% of the net management fee. However, the memorandum allegedly failed to disclose the sliding scale, which would provide a larger share of compensation to the Index Provider if BUZZ ETF’s assets reached certain thresholds. 

The memorandum stated that Van Eck Associates was “still in [the] process of finalizing and signing the index license agreement.” According to the SEC, the Board did not have the ability to consider the economic impact of the sliding scale arrangement, which would have been a relevant factor in evaluating Van Eck Associates’ profitability and the extent to which economies of scale would be realized as the BUZZ ETF grew.

The key takeaway? Ensuring proper disclosures are made is the name of the game. Van Eck Associates consented to the entry of the SEC’s order finding that it violated the Investment Company Act and Investment Advisers Act. Without admitting or denying the SEC’s findings, it agreed to a cease-and-desist order and a censure in addition to the monetary penalty. The findings of the Commision state that they are being made pursuant to the offer to settle and are not binding on any other person or entity in this or any other proceeding. 

Xoxo, Tessquire.