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Vedder Thinking | Articles SEC Settles Charges Against Adviser for Alleged Section 15(c) Violations from Failure to Disclose Index License Fee Structure to ETF's Board


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On February 16, 2024, the SEC announced that it had settled charges against a registered investment adviser for alleged violations of Section 15(c) of the Investment Company Act of 1940 as well as provisions of the Investment Advisers Act of 1940 and the rules thereunder.

According to the SEC’s order, the adviser, which manages ETFs, failed to inform the independent trustees of the ETF board of the terms of the licensing agreement between the adviser and the index provider for a new ETF the adviser proposed to launch.  According to the order, the licensing fee was structured so that the adviser would pay the index provider at least 20% of the adviser’s net unitary management fee, and as much as 60% of the net management fee if the new ETF exceeded $1.25 billion in assets under management within 18 months of the ETF’s launch.  The SEC alleged that the sliding scale of the licensing fee was based on the index provider’s partnership with a well-known and controversial social media influencer who would promote the ETF’s underlying index and receive compensation from the index provider.  The SEC alleged that the information the independent trustees received in connection with the adviser’s proposed organization and launch of the new ETF disclosed a 20% licensing fee but not the sliding scale under which the licensing fee would increase if the ETF’s assets reached certain thresholds.  According to the order, the independent trustees were not able to evaluate the adviser’s forecasted profitability from managing the ETF or evaluate the extent to which economies of scale would be realized as the ETF grew because they did not have the information needed to consider the economic impact of the sliding scale arrangement. The SEC further alleged that the adviser did not have adequate written policies and procedures about furnishing the ETF’s board with accurate information reasonably necessary for the board to evaluate the terms of the advisory agreement.

The SEC found that the adviser willfully violated Section 15(c) of the 1940 Act, which requires a fund’s investment adviser to furnish such information as may reasonably be necessary for the fund’s directors to evaluate the terms of the fund’s advisory agreement; Section 206(2) of the Advisers Act, which makes it unlawful for any adviser to engage in a transaction, practice or course of business that operates as a fraud or deceit upon a current or prospective client; and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder which require registered investment advisers to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.  Without admitting or denying the SEC’s findings, the adviser consented to cease and desist from future violations and to censure, and agreed to pay a civil penalty totaling $1.75 million.

The SEC’s order is available here. A related press release is available here.

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