SEC Brings First Marketing Rule Action; Firm to Pay $1M

In its first action related to its new Marketing Rule, the Securities and Exchange Commission has ordered Titan Global Capital Management USA LLC, a New York-based fintech RIA, to pay more than $1 million for using hypothetical performance metrics in advertisements that were misleading, among other violations.

In its order, 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.”

For a period ranging from August 2021 to October 2022, Titan, which offers 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,” according to the SEC.

The order alleges that Titan’s ads 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” as required.

The rule was amended in December 2020 and became effective in May 2021, but firms didn’t have to comply with it until Nov. 4, 2022.

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

“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,” Nawaz said. “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 further finds that Titan:

• Made conflicting disclosures to clients about how Titan custodied crypto assets.
• 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.
• 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.