SEC Charges Adviser for Misrepresenting Hypothetical Performance

August 23, 2023

What happened?

On August 21, 2023, the SEC charged Titan Global Capital Management USA LLC (“Titan”), a FinTech investment adviser, with violations of the new Marketing Rule, among other violations. Titan did not admit or deny the SEC’s findings, but the firm agreed to a cease-and-desist order and a censure. Titan also agreed to pay $192,454 in disgorgement, prejudgment interest, and an $850,000 civil penalty to clients that were impacted. Titan was also charged with other compliance failures including misleading disclosures on 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 assets.

“When offering and marketing complex strategies, investment advisers must ensure the accuracy of disclosures made to existing and prospective investors,” Osman Nawaz, the Chief of Enforcement’s Complex Financial Instruments Unit, said according to the SEC’s press release. “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.”

The SEC’s order alleged that Titan made misleading claims to retail investors about hypothetical performance and violated the new Marketing Rule:

• Failure to include material information about the assumptions underlying the hypothetical performance presented on its website;
• Inadequate disclosure of the risks and limitations of relying on hypothetical performance; and
• Failure to adopt and implement required policies and procedures to comply with the new Marketing Rule, despite continuing to use performance information in its advertising.

What does this mean for me?

Almost one year after the new Marketing Rule’s compliance date, the August 2023 order against Titan represents the SEC’s first enforcement action concerning violations of the amended rule. With this enforcement, the SEC has made clear that firms must adopt and implement policies and procedures that facilitate compliance with the Marketing Rule, including for the use of performance information in advertising.

Fairview provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review and complete examination support.  Contact Fairview Investment Services for additional information about maintaining your compliance program in an ever-changing regulatory environment.