Van Eck Associates, the company behind it Social Sentiment ETF (BUZZ), will pay a $1.75 million civil penalty to settle charges that it failed to disclose a social media influencer's role in the ETF's launch. The SEC order does not name the influencer, but the internet celebrity and founder of Barstool Sports Dave Portnoy promoted the ETF when it launched in 2021.
VanEck, the asset management firm owned by Van Eck Associates, launched the BUZZ ETF in March 2021, tracking the US BUZZ NextGen AI Sentiment Leaders Index, which analyzes interactions on social media platforms, news articles, posts on blog and other content from online sources to measure specific sentiments of shares. The fund invests in the 75 most talked about large-cap stocks. The portfolio is constantly rotating based on the most positive sentiment. The fund has an expense ratio of 75 basis points.
His current major holdings include Palantir, MicroStrategy Inc., NVIDIA, Meta, AMD, Marathon Digital Holdings, Amazon, Coinbase, SoFi and Apple.
But The order of the SEC claims the index provider told VanEck of its plans to use the influencer to promote the index and that it would pay them a licensing fee tied to the size of the fund. As the fund grew, the index provider would receive a larger portion of the management fee the fund paid Van Eck. However, Van Eck did not disclose the influencer's involvement and the sliding scale fee structure on the ETF board.
“Fund boards rely on advisors to provide accurate disclosures, particularly when they involve matters that may affect the advisory contract, known as the 15(c) process,” said Andrew Dean, co-head of the Asset Management Unit of Enforcement Division, in a statement. . “Van Eck Associates' disclosure failures regarding the launch of this high-profile fund limited the board's ability to consider the economic impact of the licensing agreement and the involvement of a prominent social media influencer while evaluating Van's advisory contract Eck Associates for the fund.”
A spokesman for VanEck declined to comment.
As of February 16, the ETF had almost $76 million in assets under management. The ETF experienced $13.1 million in net outflows last year, according to data from YCharts.com. Total returns for the ETF are up 31.5%, outpacing the 23.2% total returns for the S&P 500 over the same period. It has grown by 7.2% so far in 2024.
In one part after the start of the ETFETFAction.com Editor-in-Chief Lara Crigger asked why Portnoy was allowed to promote ETF the way he did. Most ETF issuers, Crigger points out, likely won't get one video past their compliance departments.
Her conclusion was that the video was under an indexer loophole; Indexers are not, in fact, regulated by FINRA or the SEC, so they are not subject to a compliance department. An index is considered intellectual property, she says: “Indexers are afforded wide latitude to say whatever they want about their intellectual property, as long as it is not patently misleading or defamatory.”
She also wrote that she believed the SEC would soon crack down on indexers to close those loopholes.