Van Eck Associates, the company behind the Social Sentiment ETF (BUZZ), will pay a $1.75 million civil penalty to settle charges for failing to disclose a social media influencer’s role in the launch of the ETF. The Securities and Exchange Commission’s order does not name the influencer, but internet celebrity and Barstool Sports founder Dave Portnoy promoted the ETF when it was launched in 2021.
VanEck, the asset management firm owned by Van Eck Associates, launched the BUZZ ETF in March 2021, tracking the BUZZ NextGen AI US Sentiment Leaders Index, which analyzes interactions across social media platforms, news articles, blog posts and other content from online sources to measure stock-specific sentiment. 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.
Its top current positions include Palantir, MicroStrategy Inc., NVIDIA, Meta, AMD, Marathon Digital Holdings, Amazon, Coinbase, SoFi and Apple.
But the SEC order claims the index provider told VanEck about its plans to use the influencer to promote the index and that it would pay them a licensing fee sliding scale linked to the size of the fund. As the fund grew, the index provider would receive a greater share of the management fee the fund paid to Van Eck. However, Van Eck did not disclose the influencer’s involvement and the sliding scale fee structure to the ETF’s board.
“Fund boards rely on advisers to provide accurate disclosures, especially when involving issues that can impact the advisory contract, known as the 15(c) process,” said Andrew Dean, co-chief of the Enforcement Division’s Asset Management Unit, in a statement. “Van Eck Associates’ 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 Van Eck Associates’ advisory contract for the fund.”
A spokesman for VanEck declined to comment.
As of Feb. 16, the ETF had nearly $76 million in assets under management. The ETF has experienced $13.1 million in net outflows in the 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 during the same period. It is up 7.2% so far in 2024.
In a piece following the launch of the ETF, ETFAction.com Editor-in-Chief Lara Crigger questioned why Portnoy was allowed to promote the ETF in the way he did. Most ETF issuers, Crigger points out, would likely not get such a video past their compliance departments.
Her conclusion was that the video came under an indexer loophole; indexers aren’t, in fact, regulated by FINRA or the SEC, so they’re not beholden to a compliance department. An index is considered intellectual property, she says: “Indexers are provided wide latitude to say whatever they want regarding their own intellectual property, so long as it isn't blatantly fraudulent or libelous.”
She also wrote that she believed the SEC would crack down on indexers soon to close those loopholes.