CUBE RegNews:
22^nd August

SEC charges fintech investment adviser Titan for misleading hypothetical performance and other violations 

The Securities and Exchange Commission (SEC) has charged Titan Global Capital Management USA LLC, a New York-based FinTech investment adviser, with using hypothetical performance metrics in advertisements that were misleading. The SEC has 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 unauthorised use of client signatures and the failure to adopt policies concerning crypto asset trading by employees. 

The SEC’s order finds that Titan violated the Investment Advisers Act of 1940 by: 

• Advertising hypothetical performance metrics without having adopted and implemented policies and procedures reasonably designed to prevent fraud, as required by the Commission’s marketing rule, which was amended in December 2020. 
• Making misleading statements on its website regarding hypothetical performance, including by advertising “annualised” performance results as high as 2,700 percent for its Titan Crypto strategy without disclosing that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year. 
• Making conflicting disclosures to clients about how Titan kept custody of crypto assets. 
• Including in its client advisory agreements liability disclaimer language that created the false impression that clients had waived non-waivable causes of action against Titan. 
• Failing to adopt policies and procedures concerning employee personal trading in crypto assets. 
• Failing to ensure that client signatures were obtained for certain types of transactions in client accounts. 

Titan cooperated with the investigation and without admitting or denying the SEC’s findings, has 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. 

This case is a reminder to investment advisers of the importance of complying with the marketing rule and other requirements of the Advisers Act. Advisers must ensure that their disclosures are accurate and complete, and that they do not mislead investors. 

SFC fines Changjiang Corporate Finance $20 million for serious sponsor failures 

The Securities and Futures Commission (SFC) has fined Changjiang Corporate Finance (HK) Limited (CJCF) $20 million for serious and extensive failures in discharging its duties as a sponsor in six listing applications. 

The SFC’s investigation found that CJCF had failed to conduct all reasonable due diligence, properly advise and guide the applicants, and ensure disclosure of all material information in the listing applications. 

Specifically, CJCF had failed to: 

• Conduct any due diligence on a legislative bill that would have prohibited Pacific Infinity’s core business. 
• Conduct proper due diligence on the Debt Restructuring Arrangements of Van Chuam. 
• Advise Perpetual Power to submit its listing application even though it did not meet the requirements for listing because it lacked Title Certificates. 
• Ensure that AsiaPac disclosed the material information about its supplier discounts and True Pricing Strategy. 
• Ensure that Rising Sun disclosed material information about its Prolonged Credit Period and Subsequent Settlement. 
• Maintain proper records of the due diligence work it claimed to have done. 

The SFC’s investigation also found that CJCF had a number of systemic weaknesses in its due diligence and disclosure processes. These weaknesses included: 

• A lack of senior management oversight of the due diligence process. 
• A lack of training and guidance for staff on the due diligence requirements. 
• A lack of systems and controls to ensure that due diligence work was properly documented and maintained. 

The SFC has taken steps to address these weaknesses by requiring sponsors to: 

• Establish a due diligence committee with senior management oversight. 
• Provide training and guidance to staff on the due diligence requirements. 
• Implement systems and controls to ensure that due diligence work is properly documented and maintained. 

The SFC’s disciplinary action is a strong reminder to sponsors of their important role in ensuring the quality and integrity of the stock markets. Sponsors must conduct thorough due diligence, provide accurate advice, and ensure that all material information is disclosed to investors.