Securities Industry Commentator by Bill Singer Esq

SEC Order Approving a Proposed Rule Change, to Modify the Provisions Relating to Direct Listings on NYSE

Securities Trader Sentenced to 18 Months in Prison for Market Manipulation Scheme that Netted more than $17 Million in Illicit Profits (DOJ Release)

SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering (SEC Release)

SEC Charges Former IIG Consultant for Role in IIG's Fraud (SEC Release)

Comptroller Pleads Guilty To Embezzling From Manhattan Financial Publishing Company (SEC Release)

SEC Awards Over $1.6 Million to Whistleblower (SEC Release)

Federal Court Orders North Carolina Man to Pay Over $255,000 in Futures and Forex Fraud Scheme (CFTC Release)

FINRA Fines and Suspends Rep For Role as Estate Beneficiary

In the Matter of Beth L. Klein, Respondent (FINRA AWC)

SEC Adopts Modernized Marketing Rule for Investment Advisers (SEC Release)

Statement on the Investment Adviser Marketing Final Rule by SEC Commissioner Hester M. Peirce

Statement on the New Marketing Rule for Investment Advisers by SEC Commissioner Elad L. Roisman

Investment Adviser Marketing - Past Proposals are Not Necessarily Indicative of Future Adoptions (Statement by SEC Commissioner Allison Herren Lee and Commissioner Caroline A. Crenshaw)

The Commission finds that the proposed rule change is consistent with the protection of investors. First, the Commission disagrees with the concerns raised by commenters that direct listings would "rip off" investors, reduce transparency, or involve reduced offering requirements or accounting methods that are not "up to code with the public markets." The proposed rule change will require all Primary Direct Floor Listings to be registered under the Securities Act, and thus subject to the existing liability and disclosure framework under the Securities Act for registered offerings. Among other disclosures, these registration statements will require both bona fide price ranges103 and audited financial statements prepared in accordance with either U.S. GAAP or International Financial Reporting Standards as issued by the International Accounting Standards Board. 

Second, Petitioner's concerns regarding shareholders' ability to pursue claims pursuant to Section 11 of the Securities Act due to traceability issues are not exclusive to nor necessarily inherent in Primary Direct Floor Listings. Rather, this issue is potentially implicated anytime securities that are not the subject of a recently effective registration statement trade in the same market as those that are so subject.  . . 

From 2014 to 2016, Taub and others conspired to manipulate the securities prices of numerous public companies by coordinating trading in dozens of brokerage accounts he secretly controlled. Taub used "straw accounts" that were held in the names of others to conduct much of his trading. Taub funded many of these straw accounts and used the straw account holders to conceal the scheme from regulators and law enforcement.

To manipulate securities prices, Taub engaged repeatedly in a series of contemporaneous transactions designed to artificially influence the market price of the securities of various publicly traded companies, and induce other market participants to trade in those securities based on the false impression that there was real market interest in the securities, using Run Based Manipulation and Order Based Manipulation.

Run Based Manipulation is a type of securities manipulation in which a manipulator takes either a long or a short position in a security, enters orders or trades in a manner designed to inflate or deflate the price of the security while attracting others to trade the security and finally reverse their position at the inflated or deflated price. A common feature of Run Based Manipulation is that the manipulator profits directly from the manipulated market by exploiting investors who bought at inflated prices or sold at depressed prices. Order Based Manipulation is a type of securities manipulation involving orders, sometimes but not always accompanied by trades, that are intended to give other market participants a false signal about the security's demand or supply.

Taub also admitted defrauding the United States by hiding from the brokerage firms and the IRS the identities of those who actually controlled the straw accounts and who reaped the majority of the profits from the scheme. As a result, the profits from the straw accounts were taxed at the lower tax rates applicable to the straw account holders instead of the higher tax rates applicable to Taub, which allowed Taub to avoid $394,424 in taxes.

[R]ipple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide. Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services. According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company's business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.

[S]amel assisted IIG's principals in concealing the fraudulent nature of a loan asset in the fund's portfolio. The complaint alleges that when auditors asked questions about the prospects that the fake loan would be repaid, Samel helped prepare a sham agreement falsely documenting the sale of the fake loan by the fund. The sham agreement was allegedly provided to the auditors to resolve their concerns about the loan and, as a result, no issues about the loan were raised in the audit report that was sent to the fund investors.

From at least in or around 2015 through in or around 2020, WHITEHEAD used wire transfers and cash deposits from the victim Company to benefit himself without authorization from the Company.  Specifically, WHITHEAD used Company assets to pay for personal credit card expenses, overpay personal credit cards to receive cash balance refunds, write checks to cash for deposit into personal bank accounts, and purchase precious metals to sell for his own profit.  WHITEHEAD consistently embezzled Company funds from in or around 2015 through in or around 2020, for a total loss amount of approximately $1.3 million.

The consent order finds that from at least April 2017 to February 2019, Pyatt accepted $276,850 from pool participants to trade commodity futures and forex. The consent order also finds that Pyatt misappropriated most of pool participants' funds for business expenses and personal use, and to make Ponzi-like payments to other pool participants, while using only a fraction of the funds to trade. In addition, despite overall net trading losses, Pyatt sent reports to investors claiming profits of between 18.8 percent to 86.5 percent per month.

On September 3, 2019, Janney filed a Uniform Termination Notice of Securities Industry Registration (Form U5), which the firm amended on October 28, 2019, stating that Respondent had been discharged for "[v]iolation of company policy regarding serving as a fiduciary."

On December 7, 2015, Janney customers A and B, a married couple who were not members of Friedman's family, designated Friedman as a beneficiary of their trust and as one of their successor trustees. On that same day, Friedman became aware that the customers had named her as a beneficiary and successor trustee. However, Friedman did not notify the firm that she had been named as a beneficiary. 

In addition, Friedman falsely stated on Janney's annual compliance questionnaire for 2016 that she had not been named as any customer's beneficiary. 

Janney's 2016 annual compliance questionnaire also asked representatives to confirm that they had identified any appointments as a successor trustee. However, rather than disclosing her appointment as successor trustee for A and B, Friedman falsely stated on the 2016 questionnaire that the firm's list of her appointments was complete, even though the list did not include her appointment as successor trustee for A and B. 

During November 2017, Janney discovered that the customers' trust designated Friedman as a beneficiary and a successor trustee. Janney informed Friedman that she must either be removed from the trust as a beneficiary or resign from the firm. On February 21, 2018, Friedman signed a Letter of Education that Janney issued to her, which stated that  Friedman's beneficiary status was a conflict of interest and that Friedman had decided to be removed from the trust as a beneficiary. 

By April 2018, with Friedman's assistance, A and B closed their Janney account and transferred their assets to a new account at a different firm, such that A and B were no longer Janney customers. Therefore, Janney's policy prohibiting Friedman from being named as a customer's beneficiary no longer precluded her from being a beneficiary of A and B, and Friedman remained their beneficiary. 

However, Janney's policies also prohibited employees from serving as a fiduciary, including as a power of attorney or trustee, for any third party who was not an immediate family member, whether or not the third party was a customer of the firm. 

On December 20, 2018, after A passed away, Friedman accepted fiduciary appointments as a power of attorney and trustee for B. On that same day, the firm informed Friedman that she must either relinquish these fiduciary roles or resign her employment with Janney. Friedman immediately informed the firm that she would relinquish her fiduciary roles, rather than resigning her employment. 

However, despite this agreement, Friedman subsequently continued to serve as a power of attorney and trustee for B, while remaining employed with Janney. In March 2019, Friedman submitted a request to the firm's compliance group, seeking reconsideration of the firm's position that she could not remain employed by Janney while serving in her fiduciary roles. However, the firm denied her request. Friedman nevertheless continued to serve in those roles while employed at Janney, without disclosing those continued roles to the firm, until August 2019.¹

= = = = =

FOOTNOTE 1: To date, Friedman has not obtained any payments from A or B for her service as a fiduciary and has not received any inheritance from their estate.   

The Securities and Exchange Commission (the "Commission" or the "SEC") is adopting amendments under the Investment Advisers Act of 1940 (the "Advisers Act" or the "Act") to update rules that govern investment adviser marketing. The amendments will create a merged rule that will replace both the current advertising and cash solicitation rules. These amendments reflect market developments and regulatory changes since the advertising rule's adoption in 1961 and the cash solicitation rule's adoption in 1979. The Commission is also adopting amendments to Form ADV to provide the Commission with additional information about advisers' marketing practices. Finally, the Commission is adopting amendments to the books and records rule under the Advisers Act.

The Marketing Rule Under the Act

The amendments to Rule 206(4)-1 will replace the broadly drawn limitations and prescriptive or duplicative elements in the current rules with more principles-based provisions, as described below.

Amendments to the Books and Records Rule and Form ADV

In connection with the marketing rule amendments and merger of the current advertising and cash solicitation rules, the Commission also adopted amendments to the books and records rule. In addition, the Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices to help facilitate the Commission's inspection and enforcement capabilities.

In other areas, the rule may not be clear enough, which could cause advisers, erring on the side of caution, to curtail their communications with investors.  What falls within the scope of "advertisement"?  What exactly does it mean to provide a "fair and balanced treatment of any material risks or material limitations associated with the potential benefits" of services being advertised?  How can an adviser meet the parameters of the rule without producing a muted, watered-down communication of little value to investors?  How can an adviser be confident that required disclosures are as "clearly and prominently" displayed as a testimonial or endorsement? 

The release accompanying rule 206(4)-1 is replete with examples and attempts to guide advisers in applying the rule's requirements, but I anticipate a steady flow of requests for interpretation and clarification as advisers work to implement the rule.  If we are not careful, we could find ourselves right back where we started: regulatory obligations understood as much or more by reading the swelling corpus of staff interpretations than by reading the regulatory text itself. 

Along with my praise, I will note that there are certain aspects of this final rule that give me pause.  One that I would be remiss not to mention is that, unlike the current advertising rule, this rule will explicitly extend to communications made by private funds advisers to private fund investors.  The rule sets forth prescriptive requirements for how such advisers must describe their funds' performance, including potentially in private placement memoranda ("PPMs").  Several commenters noted that PPMs are not advertisements, but legal documents reviewed by sophisticated and well-resourced parties.  While the final rule carves out offering information discussed in PPMs, other information in a PPM may be captured.  So, to me, this aspect of our rule goes beyond its purported focus on advertising.

Last year, the Commission unanimously supported a recommendation from our expert staff to modernize the Commission's regulatory framework for investment adviser marketing. While there are many elements of today's final rule that reflect improvements to the outdated and patchwork advertising regime, there are also numerous provisions and guidance throughout the Release that retreat from commonsense elements that we proposed last year. Thus, today's unanimous vote does not reflect a consensus about how best to protect investors from the risks of misleading adviser marketing, but rather our support of many of the rule's provisions coupled with a concern that the final rule not shift even further from the wisdom of the proposal.

• Securities Industry Commentator
• Bill Singer