SEC fines robo-advisor $1M in first case under new marketing rule

The distinction of becoming the first advisory firm to run afoul of the SEC's new marketing rule will cost robo-advisor Titan Global Capital Management more than $1 million.

According to an SEC order dated Aug. 21, the New York-based fintech firm used misleading metrics in its advertising from August 2021 to October 2022. Titan made statements on its website regarding hypothetical investment gains , including the promotion of annualized performance results as high as 2,700% for its Titan Crypto strategy, according to SEC charging documents.

But investigators said Titan's advertisements failed to include material information. For example, the hypothetical performance projections assumed that the strategy's performance in its first three weeks would continue for an entire year. 

The SEC order also found that Titan violated the marketing rule by advertising the metrics without adopting or implementing required policies and procedures, "or taking other steps required by the Commission's marketing rule, which was amended in December 2020." The rule officially took effect on May 4, 2021, but then advisors received 18 months to come into compliance no later than Nov. 4, 2022.

The SEC further alleged that Titan made conflicting disclosures to clients about how Titan custodied crypto assets; included liability disclaimer language in its client advisory agreements that created the false impression that clients had waived non-waivable causes of action against Titan; and failed to adopt policies and procedures concerning employee personal trading in crypto assets. 

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, the settlement order shows. 

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Without admitting or denying the SEC's findings, Titan will pay $192,454 in disgorgement and prejudgment interest and an $850,000 civil penalty that will be distributed to affected clients. The first also agreed to a cease-and-desist order and a censure.

Financial Planning has reached out to Titan for comment. 

"When offering and marketing complex strategies, investment advisors must ensure the accuracy of disclosures made to existing and prospective investors. The commission amended the marketing rule to allow for the use of hypothetical performance metrics, but only if advisors comply with requirements reasonably designed to prevent fraud," Osman Nawaz, chief of the SEC enforcement division's complex financial instruments unit, said in a statement. "Titan's advertisements and disclosures painted a misleading picture of certain of its strategies for investors. This action serves as a warning for all advisors to ensure compliance."

The new marketing rule allows for the use of testimonials from current clients and endorsements from third parties like celebrities, adopts new standards for reporting the performance of past investments and places firms under a greater obligation to police their promotions for false or misleading information. 

The rule's complexity led the SEC to issue a risk alert in March warning advisors of the ways they might be falling short. In the alert, the SEC called on firms to remember their obligation to provide support for any claims about investment performance they make in marketing materials. Firms are responsible for monitoring statements made on their behalf and for weeding out misleading or false information.