The One With Buzz

If you can grab the trading symbol “BUZZ” you should be able to make some money with it. Right? A company that owns beehives? or sells honey? or sells honey products? Or social buzz? VanEck Associates wanted to ride the social media wave and created an ETF that would

“Track the performance of the 75 large cap U.S. stocks which exhibit the highest degree of positive investor sentiment and bullish perception based on content aggregated from online sources including social media, news articles, blog posts and other alternative datasets.”

The investment thesis is that “Investor sentiment has proven to be an important factor in stock performance”. Sure. Why not. The tracker is the BUZZ NextGen AI US Sentiment Leaders Index. That index targets the most mentioned stocks online, determines whether the mention is positive or negative and then takes the 75 large cap stocks that have the most positives.

The initial proposal was that VanEck would license the BUZZ index for the ETF in exchange for 20% of the management fee it earned from the ETF. Then the BUZZ index provider decided to partner with an “Influencer” who would promote the ETF.

The “Influencer” goes unnamed in the SEC complaint, but it was fairly easy to find out that it was Dave Portnoy, the founder of BarStool Sports and “bro-influencer-in-chief.”

Before the launch of the ETF, a new agreement was struck with Mr. Portnoy getting a sliding scale of the ETF fees depending on how big the ETF grew in AUM. It would go up to 60% if the ETF reached $1.25 billion in AUM in 18 months.

All of that seems fine, as long as its disclosed. That is where VanEck came up short according to the SEC order. VanEck didn’t fully disclose the terms of the license agreement with the Buzz index to the ETF board. Van Eck didn’t tell the ETF board about Mr. Portnoy involvement or the details about the planned fee structure of the fund.

Under the Investment Company Act, the adviser needs to provide the board information about the advisory contract, including the following (see Form N-1A, Item 27(d)(6)(i))

“the extent to which economies of scale would be realized as the [f]und grows,”
“whether fee levels reflect these economies of scale for the benefit of [f]und investors.”
“the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates from the relationship with the [f]und.”

Under the Investment Advisers Act, VanEck was tagged with a failure to have adequate policies and procedures about furnishing the ETF board with accurate information reasonably necessary for the ETF board to evaluate the terms of the advisory contract, as well as material information related to a proposed ETF launch.

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