SEC Charges VanEck for ETF Marketing Fraud

VanEck Pays US$1.75 M Penalty Over Undisclosed Social Media Influencer in ETF Launch

VanEck, a registered investment adviser and one of the largest providers of exchange-traded funds (ETFs) in the world, has agreed to pay a US$1.75 million civil penalty to settle charges that it failed to disclose a social media influencer's role in the launch of its new ETF. The Securities and Exchange Commission (SEC) announced the settlement on February 16, 2024, after finding that VanEck violated the Investment Company Act and Investment Advisers Act.

According to the SEC's order, VanEck launched the VanEck Social Sentiment ETF (NYSE: BUZZ) in March 2021, to track an index based on "positive insights" from social media and other data. The index was provided by a third-party vendor, who informed VanEck 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. The influencer, who had millions of followers and was known for his outspoken views on stocks and cryptocurrencies, was expected to generate significant publicity and attention for the ETF.

However, VanEck failed to disclose the influencer's anticipated role and the sliding scale fee structure to the ETF's board when it approved the fund's launch and management fee. The fee structure was designed to incentivize the influencer's marketing and promotion efforts, as it linked the percentage of the management fee that the index provider would receive to the size of the fund. As the fund grew, the index provider would receive a greater share of the fee that the fund paid to VanEck.

The SEC's order found that VanEck's disclosure failures limited the board's ability to consider the economic impact of the licensing arrangement and the involvement of the influencer as it evaluated VanEck's advisory contract for the fund. The order also found that VanEck's disclosures to the public and the investors were incomplete and misleading, as they did not mention the influencer's role or the fee structure.

Fund boards rely on advisers to produce correct disclosures, particularly when concerns that may affect the advising contract, known as the 15(c) procedure, according to Andrew Dean, Co-Chief of the Enforcement Division's Asset Management Unit. VanEck's disclosure failures concerning this high-profile fund launch limited the board's ability to consider the economic impact of the licensing arrangement and the involvement of a prominent social media influencer as it evaluated VanEck's advisory contract for the fund.

Without admitting or denying the SEC's findings, VanEck consented to the entry of the SEC's order, which imposed a cease-and-desist order, a censure, and a US$1.75 million civil penalty. VanEck also agreed to review and update its policies and procedures to prevent similar violations in the future.