The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

January 26, 2022




















http://www.brokeandbroker.com/6253/jpm-tro-solicitation/
It's another day and, not surprisingly, another erstwhile wirehouse brokerage firm asks a court for a temporary restraining order ("TRO") against one of its former employees. In today's iteration, we got J.P. Morgan Securities ("JPMS") alleging that Timothy Logsdon needs to be restrained from disclosing confidential information and soliciting the firm's clients. 

https://www.justice.gov/usao-sdtx/pr/texan-admits-smuggling-people-coffin
Zachary Taylor Blood pled guilty in the United States District Court for the Southern District of Texas to one count of alien smuggling. Ummm . . . seriously, ya gotta read this one. We got a guy named Blood -- yeah, "Blood" -- and he's smuggling allegedly dead folks -- yeah, put the emphasis on the "allegedly" part of the dead folks. That's like, what, out of Central Casting in Hollywood? In part, the DOJ Release explains that: 

On Oct. 26, 2021, Blood drove a grey van modified to transport caskets into the primary inspection lane of the Border Patrol (BP) checkpoint near Falfurrias. 

Authorities observed a coffin in the back of the van and asked what he was transporting. He replied "Dead guy, Navy guy." However, the coffin was in poor condition and the American flag was taped to the top with packing tape.

Law enforcement then referred him to secondary inspection. There, they discovered two Mexican nationals, both unlawfully present within the United States, concealed inside the coffin. 

The two men admitted to paying a smuggler to get them to San Antonio. They claimed that after crossing the river into the United States, they were taken to a parking lot where Blood was waiting for them. He had them get into the coffin and began driving north. 

Bill Singer's Comment: You could make this stuff up but no one would believe you. Two guys pay another guy (named "Blood") to drive them from Mexico to Texas while they're hidden in a flag-draped coffin. After Law Enforcement asked Blood what he was carrying and he said "dead guy," the guys with the badges apparently expressed some skepticism given the poor condition of the coffin (as in how "poor" was it?) and because the flag atop the coffin was taped with packing tape (you couldn't spend and extra buck or two for the real-deal coffin tape?). 
   In my breath-taking screenplay, Blood is angered by being called a liar, and he rips off the bargain basement packing tape, and, then, after flinging the lid open and sending the flag flying, he points to the two men in coffin, and snarls at the Law Enforcement folks: "If you don't believe me, ask these guys, they'll tell you that they're dead -- go ahead, guys, tell 'em!!!" Of course, the two dead guys in the now-opened dilapidated coffin attempt to convince the authorities that they are really, truly, seriously dead, and do so by nodding and shaking their heads in earnest agreement with Blood. Maybe, for added effect and dramatic shadowing, they cross their arms over their chest and close their eyes. 
   I have the perfect title for the film: "Dia de los Muertos." On second thought, I may do a re-write, and, as I see it, we hire a bunch of folks, form a parade, and carry the aliens over the border in a coffin. Now that has some pizzazz!! Maybe we call the film "Coffin Dance." Gonna be a big hit. I may crowdfund it. Maybe opt to do some NFT merchandising. Call me if you're interested. Have your people call my people. Ciao!


https://www.sec.gov/news/press-release/2022-10
The SEC proposed rules to place Alternative Trading Systems ("ATS") that trade Treasuries and other government securities under the regulatory umbrella by extending Regulation ATS https://www.sec.gov/rules/proposed/2022/34-94062.pdf to include systems that offer the use of non-firm trading interest and provide protocols to bring together buyers and sellers for trading any type of security. These Communication Protocol Systems would be required to either register as exchanges or register as broker-dealers and comply with Regulation ATS. As set forth in part in the SEC Release:

"In 2020, the Commission put out a request for comment on a proposal to enhance transparency and oversight over ATSs that trade government securities," said SEC Chair Gary Gensler. "Today's proposal includes the core elements of the 2020 proposal, including registration of certain interdealer brokers (IDBs) in the Treasury markets. It would bring Treasury trading platforms with significant volume under Regulation Systems Compliance Integrity (SCI), a rule that protects for the resiliency of technology infrastructure. It also would require these platforms to comply with the Fair Access Rule, which provides for fair access to platforms and would prohibit platforms from making unfair denials or limitations of access. Beyond that, today's amendments build upon the 2020 proposal and on feedback from the public."

With ATSs becoming increasingly important to government securities trading, the proposal would expand the investor protections of Regulation ATS to those that trade government securities or repurchase and reverse repurchase agreements on government securities. Additionally, the proposal would expand Regulation SCI to government securities to help increase investor protections and address technological vulnerabilities while improving the SEC's oversight of the core technology of key entities in the markets for government securities. 

Thank you Chair Gensler, and thank you to my fellow Commissioners for their thoughtful remarks.  I want to join my colleagues in thanking the staff of the Division of Trading and Markets, Division of Economic and Risk Analysis, and the Office of the General Counsel for the hard work that went into this release.  I'd also like to thank Sai Rao in the Chair's Office, and the other counsels, for all their assistance in getting the proposal to this open meeting.

When Congress amended the Exchange Act in 1975, it found it to be in the public interest to assure "fair competition…among exchange markets, and between exchange markets and markets other than exchange markets."[1] The Commission quoted that language when it adopted Regulation ATS in 1998, more than 20 years ago,[2] and has reiterated the principle in subsequent releases relating to alternative trading systems (ATSs).[3]  Assuring fair competition has been, and continues to be, an important objective for the SEC's regulation of exchanges and ATSs.

The amendments we are proposing today would advance that objective in two important ways.  First, fair competition requires entities performing similar functions to be regulated similarly.  However, under our current framework, there is a disparity among similar markets.[4]  Specifically, entities that offer the use of protocols and non-firm trading interest to bring together buyers and sellers of securities are not currently subject to our exchange regulatory framework, despite performing a similar function to ATSs and registered exchanges.  These trading venues have become increasingly popular for fixed income and government securities, and in the U.S. Treasury market in particular, account for approximately 50% of total electronic trading volume on multilateral trading venues.[5] This has both competitive effects and negative implications for investor protection, as these systems are not subject to SEC oversight or the SEC's requirements related to transparency or fair and orderly markets.

I am pleased that today we are proposing to address this disparity by bringing these Communication Protocol Systems under our exchange regulatory framework.[6]  We are proposing to do this by updating the definition of exchange to include systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities.  This should help ensure that there is a level playing field for entities performing similar functions, as well as providing important investor protections, including requiring these entities to establish written safeguards and procedures to protect confidential subscriber trading information, meet the operational transparency requirements of Form ATS-N (for entities that trade National Market System (NMS) stocks or government securities or repos), and comply with fair and orderly markets provisions under the Fair Access Rule.[7]

Furthermore, as far back as 1998, the Commission was concerned that system providers might label trading interest that is firm in practice as non-firm, in order to avoid registering as an exchange or complying with Regulation ATS.[8]  This amendment would remove that potential loophole and ensure that the distinction between firm orders and non-firm trading interest is not used to evade our rules.   I look forward to hearing from commenters on the scope of these amendments, and whether they may be over- or under-inclusive.  However, as our former colleague Commissioner Roisman put it, the failure to regulate these significant venues is "obviously a gap,"[9] and I am pleased that today, we are taking steps to close it.

Turning to the second way in which this proposal helps advance the objective of fair competition, competition among venues requires customers to have the ability to evaluate and compare them in order to determine which best meets their needs.  However, ATSs trading government securities are not currently subject to the operational transparency rules that apply to ATSs that trade NMS stocks, including the obligation to file public disclosures.  In addition, ATSs that trade government securities are exempt from the Fair Access Rule and the requirements of Regulation SCI, and ATSs that trade only government securities are exempt from the requirements of Regulation ATS altogether.

As Commissioner Lee noted, it is hard to overstate the importance of the government securities markets, and the U.S. Treasury market in particular, to the U.S. and global economies.  Recent disruptions, such as the flash rally of October 2014, the sudden spike in repo rates in September 2019, and the Covid-related market disruption in March 2020 triggered extensive interventions by the Federal Reserve and are a reminder of how critical these markets are to the financial system.  And ATSs and Communication Protocol Systems together represent over half of the trading activity in those markets.[10] The proposed extension of Regulation SCI and the Fair Access Rule to those venues is an important and overdue step that should enhance market stability, resiliency, and integrity.[11] 

Additionally, and critically, we are proposing to extend certain operational transparency requirements to ATSs that trade government securities.[12] If adopted, these amendments will provide more transparency to market participants about the operations of these ATSs, including how trading interests are handled, fee structures, the ATS's interaction with related markets, liquidity providers, activities the ATS undertakes to surveil and monitor its market, and any potential conflicts of interest that might arise from the activities of the broker-dealer operator or its affiliates. This should enhance competition among these ATSs by allowing investors to compare different venues using standardized, publicly available information, and to choose the one that best suits their trading objectives.  Additionally, it would help shrink the disparity between the regulation of ATSs and exchanges by requiring a greater share of ATSs to make public disclosures related to their operations, which would be subject to the Commission's review and effectiveness process.

Finally I want to highlight that in this release, we are soliciting comment on other ways to improve the ATS framework.  For example, we are soliciting comment on the possibility of extending the operational transparency requirements of Rule 304 to all categories of ATSs, including ATSs that trade corporate debt securities, municipal securities, and equity securities other than NMS stocks.  Many of the same concerns that motivate the proposal to extend transparency requirements to government securities ATSs are present in these other markets, which have also become increasingly electronic.  Extending these transparency requirements to all ATSs, and making them subject to the Commission's review and effectiveness process, may present another opportunity to advance the objective of fair competition, as well as the protection of investors and market transparency, resiliency, and stability.  We are also soliciting comment on whether to prohibit certain practices that present potential conflicts of interest, including the disclosure of confidential subscriber information and trading by the broker-dealer operator and its affiliates in the ATS.  I look forward to hearing commenters' views on these issues, other potential reforms to the ATS regulatory structure, and all aspects of the proposal.

Thank you again to the staff for all your hard work.  I am pleased to support the proposal.

 
[1] 15 U.S.C. 78k-1(a)(1)(C)(ii).

[2] See Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998).

[3] See Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. 76474 (November 18, 2015) at 11; Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. 83663 (July 18, 2018) at 52-53.

[4] Several commenters highlighted this disparity in response to the 2020 concept release regarding electronic trading in the fixed income markets. See Letter from Robert Laorno, General Counsel, ICE Bonds Securities Corporation, dated March 15, 2021 at 2-4; Letter from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel, dated March 1, 2021 at 2; Letter from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs, Managed Funds Association, dated March 1, 2021 at 6.

[5] Letter from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel, dated March 1, 2021 at 1-2.

[6] Amendments to Exchange Act Rule 3b-16 Regarding the Definition of "Exchange"; Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stocks, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities, Securities Exchange Act Release No. 34-94062 (January 26, 2022) ("Release").

[7] The Fair Access Rule currently applies to entities that meet specified volume thresholds in NMS stocks, equity securities that are not NMS stocks and for which transactions are reported to an SRO, municipal securities, and corporate debt securities.  See 17 CFR 242.301(b)(5).  The proposal would extend the Fair Access Rule to platforms that meet certain thresholds in government securities. Release at 102.  In addition, registering as a broker-dealer would subject a Communication Protocol System to Commission and Financial Industry Regulatory Authority ("FINRA") oversight. As a FINRA member, a Communication Protocol System would also be subject to FINRA's investor protection and examination and market surveillance programs and would be required to comply with FINRA's trade reporting rules. Release at 27.

[8] See Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998).

[9] Commissioner Elad L. Roisman, Remarks at U.S. Treasury Conference (September 29, 2020).

[10] Release at 377-78, 392 (noting that ATSs accounted for approximately 32 percent of U.S. Treasury Securities trading volume in the first half of 2021, and that Communication Protocol Systems account for approximately 30 to 40 percent of the total trading volume in U.S. Treasuries).

[11] The proposal would apply the Fair Access Rule and Regulation SCI to platforms that exceed certain volume thresholds. Release at Sections III.B.4, Section III.C.

[12] The requirements would apply to current ATSs that trade government securities as well as Communication Protocol Systems that register as ATSs as a result of the amendments to the definition of exchange. These requirements currently apply only to ATSs that trade NMS stocks.


Thank you, Chair Gensler.

Events in the U.S. Treasury market (as well as the related repo market) over the past several years strongly suggest that the market for government securities suffers from inadequate levels of intermediation, liquidity, and transparency that in times of stress can dramatically decrease its ability to function properly and significantly increase risks to market participants.[1]  Commentators have suggested a number of possible reforms,[2] and, although I am skeptical of some of these suggestions, I agree that the Commission should be considering carefully how it might use its authority to make changes that could relieve some of these pressures and help ensure that the market continues to perform its vital functions in the U.S. and global economy.

Careful consideration of fundamental issues of market structure is particularly important in the government securities market.  It performs a central role in fiscal and monetary policy, as well as in our financial markets more broadly.  The market is enormous, with over $22 trillion in U.S. Treasuries outstanding as of December 2021 and with over $600 billion in average daily trading volume.[3]  Any efforts to reform this market must take into account the potentially cataclysmic risks of inadvertently making things worse through sloppy or rushed rulemaking that introduces uncertainty for market participants or that deprives the public and the Commission of the opportunity to devote careful attention to thinking through the full implications of the proposed rules.

The proposal we are considering today is certainly not sloppy, but at the same time it is too wide-ranging and, given its length, too unwieldy to facilitate careful consideration.  The document weighs in at a hefty 650 pages, contains over 220 separate comment requests (with many requests containing multiple questions), and addresses about a dozen significant issues, several of which affect trading venues of all types (including currently unregulated communication protocol systems).  And the release goes well beyond government securities, or even fixed-income securities; key parts of the proposal affect trading venues that make any type of security available for trading. 

Notwithstanding the literal and figurative bulk of this release, the Commission has determined that it is appropriate to provide the public with 30 days to read, understand, consider, consult, identify, model, assess, and discuss these rules and how they are likely to affect trading venues for every type of security that is traded in our markets.  It would have been an irresponsible abdication of our role as the primary overseer of the U.S. capital markets to limit the public to a 30-day comment period on fundamental changes to the $22 trillion Treasury market; it is unconscionably reckless to do so for a proposal the effects of which will reverberate through all of the markets that we regulate, in ways that we cannot foresee. 

I cannot comprehend why we insist on blindfolding ourselves, rather than embracing the notice-and-comment process that has been so valuable in unearthing issues for our consideration. Our self-imposed unrealistic time constraint will prevent us from thinking seriously about the possible effects-intended and otherwise-of our rules by refusing to give the public sufficient time to provide us with informed comment.  We face no emergency in these markets that compels us to limit comments to 30 days; indeed, the Commission's precipitous rush to plow through the comment period-almost as if it were a mere formality in our process-presents a greater immediate risk to the market than any of the issues that have led to this recommendation.

I could have voted for this proposal had the Commission provided a period long enough to enable market participants and others to engage in a considered analysis of the proposed rules and their likely consequences.  Ninety days would have been a reasonable period, given the breadth of issues and the potential effects of the proposed rule.  Any shorter period would not be sufficient to give me the confidence that the Commission was receiving sufficient public analysis and comment to enable us to proceed to adoption in a manner consistent with our responsibilities to the market, to the law, or to the American people.

I regret this outcome.  Much of today's proposal, in its broad outlines, seems reasonable.  The staff has spent a lot of time thinking about how we might make incremental changes to the government securities market, and it shows.  The proposed rules would bring venues that facilitate the trading of government securities and repos within our regulatory ambit, effectively forcing venues that make these securities available for trading to become ATSs.  These ATSs would need to file an amended version of Form ATS-N, which should help market participants better understand where and how they can trade these securities.  The rules would also subject the larger ATSs to the Fair Access Rule, which could ensure access to liquidity for a larger proportion of market participants.  Because more venues would be operating as ATSs, trades executed on these venues would be reported to TRACE, which should increase transparency in the market.  Although I do not agree with every policy line that the proposal draws or every deadline that it sets, I could have supported this proposal if it allowed for careful consideration and informed comment that would have helped me evaluate whether the changes staff is recommending would work in the real world.

The staff is also recommending an amendment to the definition of "exchange" in Exchange Act Rule 3b-16.  Unexpectedly for me-and perhaps for many in the market-this proposed amendment goes far beyond the scope of the concept release that was issued with the initial September 2020 proposal.  What the staff is recommending for our consideration today is an expansion in the definition of exchange that would apply to any trading venue, including so-called communication protocol systems, for any type of security, not just for government or fixed-income securities.  This change could deter innovation and dissuade new entrants from entering into the market for trading venues and execution services, but communication protocol services have become more sophisticated and now play a significant role in the trading of certain types of securities.  I could have supported a proposal that allowed for careful consideration and informed comment on how this change would affect innovation and competition in this space.

The staff is also recommending a wholesale revision to Form ATS-N that will require all NMS Stock ATSs with currently effective forms to file amendments to the Commission.  This part of the proposal would likely impose significant burdens and could lead to a replay of some of the difficulties that ATSs and our staff encountered when we adopted Form ATS-N just a few years ago.  Many of these changes flow from the proposed amendments to the definition of exchange and thus are understandable, but it is unclear whether it is reasonable to expect these ATSs to repeat this process so soon after expending considerable resources on filing these forms in the very recent past.  Nevertheless, I could have supported a proposal that allowed for careful consideration and informed comment on how these revisions would affect these venues.

A final message to those who operate any service that is designed to facilitate any communication between potential buyers and sellers of any type of security:  Read this release.  Even if you have nothing to do with government securities or even fixed-income, or with traditional securities, read this release.  Preferably as soon as it is published on the Commission's website.  It covers a lot of ground, and you should not assume that it has nothing to do with you, because it probably does.

In closing, I would like to thank the staff in TM and DERA for the time-a lot of it-they spent on the phone with my counsel and with me, walking me through the many issues covered in the release and answering my many questions.  A special shout out to Tyler Raimo, who exhibited in our conversations his characteristic great patience and inexplicable good cheer.  I appreciate the team's hard work on this document and know that you will engage with the public proactively to make the most of this exceedingly short comment period.

[1] See, e.g., SIFMA, Improving Capacity and Resiliency in US Treasury Markets: Part I, March 24, 2021, available at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-1/. 

[2] See, e.g., Group of Thirty Working Group on Treasury Market Liquidity, U.S. Treasury Markets: Steps Toward Increased Resilience. Group of Thirty (2021), available at https://group30.org/publications/detail/4950; SIFMA, Improving Capacity and Resiliency in US Treasury Markets: Part II (March 30, 2021), available at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-2/; Nellie Liang and Patrick Parkinson, Enhancing the Liquidity of U.S. Treasury Markets Under Stress (Dec. 16, 2020), available at https://www.brookings.edu/research/enhancing-the-liquidity-of-u-s-treasury-markets-under-stress/.  

[3] BNY Mellon, Future-Proofing the U.S. Treasury Market (2021), available at https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/future-proofing-the-us-treasury-market.pdf.coredownload.pdf.

https://www.sec.gov/news/press-release/2022-9
The SEC proposed amendments to Form PF (used by SEC-registered investment advisers to private funds) https://www.sec.gov/rules/proposed/2022/ia-5950.pdf for the alleged purpose of enhancing the Financial Stability Oversight Council's ("FSOC") ability to assess systemic risk as well as to bolster the Commission's regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry. As set forth in part in the SEC Release:

"Since the adoption of Form PF in 2011, a lot has changed," said SEC Chair Gary Gensler. "The private fund industry has grown in size to $11 trillion and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures. The Commission and Financial Stability Oversight Council now have almost a decade of experience analyzing the information collected on Form PF. We have identified significant information gaps and situations where we would benefit from additional information. Among other things, today's proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events. I am pleased to support it."

The proposed amendments would require current reporting for large hedge fund advisers and advisers to private equity funds. These advisers would file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. The proposed amendments would provide the Commission and FSOC with more timely information to analyze and assess risks to investors and the markets more broadly.

The proposal also would decrease the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. Lowering the threshold would result in reporting on Form PF that continues to provide robust data on a sizable portion of the private equity industry. Finally, the proposal would require more information regarding large private equity funds and large liquidity funds to enhance the information used for risk assessment and the Commission's regulatory programs. 

https://www.sec.gov/news/statement/lee-form-pf-20220126

Today's proposed amendments to Form PF contain key enhancements to investor protection for private fund investors as well as better tools for monitoring systemic risk. The private fund space continues to grow with the latest aggregated data from Form PF showing over 3300 reporting fund advisers, overseeing or managing over 37,000 funds, with an aggregate net asset value of $11.7 trillion that is more than double the amount from just seven years ago.[1] 

Form PF provides critical data to assist the Commission in understanding - both at the firm and industry-wide levels - significant information about this vast and growing market, such as overall size, investment concentration, leverage, liquidity, and counterparty exposures. This data may also serve to inform the work of the Financial Stability Oversight Council in monitoring for activities that may pose systemic risk to financial markets.[2] 

Today's proposed current reporting requirements, in particular, would further that goal by requiring certain advisers to timely report significant events such as deep losses, counterparty defaults or the inability to meet margin calls. These kinds of events raise not only investor protection concerns, but in some cases may also implicate systemic risks of the type that the FSOC was designed to address.

Form PF data has informed policy-making and delivered much-needed transparency in this area to the public.[3]  However, while we have worked to bolster our oversight program since the first filing requirements over a decade ago, we now know more tools are needed to effectively examine and monitor the private fund space.[4] 

Today's proposal would provide critical tools to help the Commission and the FSOC, including its reconvened Hedge Fund Working Group,[5] in making timely determinations as to whether certain events could pose systemic risks.[6]   

Monitoring for systemic risk is a key pillar of the FSOC's mission, and it is important to support that mandate.[7]  I hope the recent reinvigoration of the FSOC[8] will continue apace so that financial regulators can work together within our complex financial ecosystem to maintain a laser focus on financial stability for investors and the broader American economy.[9] Given the growth and complexity of private funds, ensuring we have the data we need in this space is an important component of that work.   

I'm happy to support today's proposal, and I'd like to thank the staff in the Division of Investment Management for their pragmatic and forward-looking approach to today's recommendations. I also want to thank staff in the Division of Economic and Risk Analysis and the General Counsel's office for their hard work. Thank you.

 
[1] Private Fund Statistics, First Calendar Quarter 2021, U.S. Securities and Exchange Commission: Division of Investment Management (Nov. 1, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q1.pdf.  See also Annual Staff Report Relating to the Use of Form PF Data, U.S. Securities and Exchange Commission: Division of Investment Management (Dec. 3, 2021), at n.1, available at https://www.sec.gov/files/2021-pf-report-to-congress.pdf (noting that "[r]eported net assets of private funds have more than doubled since this data collection began, growing from about $5 trillion as of the end of the first quarter of 2013") [hereinafter "Annual Report"]; Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Investment Advisers Act Release No. IA-5950 (Jan. 26, 2022) [hereinafter "Proposing Release"].

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), at section 111 (establishing the Financial Stability Oversight Council ("FSOC")). See also Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)], available at https://www.sec.gov/rules/final/2011/ia-3308.pdf. 

[3] See, e.g., Annual Report, supra footnote 1, at Section III (noting how Form PF data "promotes the ability of the Commission staff to . . . evaluate existing regulatory policies and programs directed to private fund advisers [and] evaluate the impact of policy choices on private funds' activities"); Private Fund Statistics, U.S. Securities and Exchange Commission: Division of Investment Management, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.

[4] See Proposing Release, supra footnote 1.

[5] Readout of Financial Stability Oversight Council Meeting on March 31, 2021, U.S. Department of the Treasury (Mar. 31, 2021), available at https://home.treasury.gov/news/press-releases/jy0093 (stating that "[a]t the request of Chairperson Yellen, the Council will reconvene its Hedge Fund Working Group, which last reported to the Council in 2016, to enhance interagency data sharing and improve the Council's ability to identify, assess, and address potential risks to financial stability related to hedge funds").

[6] See, e.g., Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11, 2011)], at text accompanying n.56 (noting that "high levels of leverage, can increase the likelihood that the [hedge] fund will experience stress or fail, and amplify the effects on financial markets"); Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management, Report of the President's Working Group on Financial Markets (April 1999), available at https://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf, at 23 (noting that "highly leveraged investors have the potential to exacerbate instability in the market as a whole").

[7] Pub. L. No. 111-203, 124 Stat. 1376 (2010), at section 112 (stating that the purposes of the FSOC include "to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace" and "to respond to emerging threats to the stability of the United States financial system").

[8] Year in Review: Treasury's Top Accomplishments During Year One of the Biden-Harris Administration, U.S. Department of the Treasury Press Release (Jan. 20, 2022), available at https://home.treasury.gov/news/press-releases/jy0563 (noting Secretary Yellen's reinvigoration of the FSOC). See also Remarks by Secretary Janet L. Yellen at the Open Session of the meeting of the Financial Stability Oversight Council (Mar. 31, 2021), available at https://home.treasury.gov/news/press-releases/jy0092 (stating that the FSOC's "task is to guard the nation's financial system").

[9] See, e.g., Report on Climate-Related Financial Risk, Financial Stability Oversight Council (Oct. 21, 2021), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.
Last year, I gave a speech about assessing the unknown.[1] My thesis was that we should proactively try to anticipate the risks that may arise and proliferate in our financial markets. If we continuously evaluate the threats that our markets and investors may face, it should help us promote market resilience and appropriate investor protections, even when destabilizing events inevitably occur.

That process is critical, but must begin with reviewing and analyzing accurate and sufficient data.   With regard to the private funds market, the Commission historically has had little data about the economic activities of private funds and any risks they may present to both investors and to the larger financial   system.[2]  Consequently, as part of the Dodd-Frank Act reforms, the Commission adopted Form PF.  It was a good step forward, providing both the Commission and the Financial Stability Oversight Council (FSOC) with data about private funds to help assess risks.

And while Form PF information has been helpful to our understanding of private funds, the past ten years also have highlighted shortcomings and gaps in the data.[3]  These gaps in visibility are compounded by the simultaneous growth in the size of the private funds market and these funds' increasingly complex structures, strategies, and exposures.[4]

The Commission must keep pace with the market evolution, and Form PF updates are fundamental to providing the Commission with high-quality and meaningful disclosures. This includes requiring more granular and timely disclosures and updates[5] that will improve our understanding of the private fund industry and the potential risks within it.  Accordingly, today's rule proposes to amend Form PF in a variety of ways.  I'll briefly address three of those important changes.   

First, the proposal would require advisers to certain large funds to notify the Commission when there are signs of stress at those funds that could result in acute risks to investors and markets.[6]   The more timely updates should advance the Commission's oversight role. It is much harder to effectively plan for or mitigate risks when the information we're getting is already stale.  

Second, the proposal requires more detailed information from some of the biggest advisers to liquidity funds.[7]  These new data are essential to understanding these funds' characteristics, including their susceptibility to runs.[8]

Finally, the proposal would require more specific disclosures from all advisers to private equity funds. The private equity fund market in particular has grown dramatically in the last decade and private equity advisers have expanded the scope of their investment strategies and the types of their offerings, including a significant increase in credit strategies. In other words, they could be investing more heavily in risky debt, such as collateralized loan obligations ("CLOs")[9].  

This proposal is an important step that seeks to put the Commission and FSOC in a better position to understand, assess, and take action regarding significant developments at private funds, potential stresses to the broader financial markets, and practices that raise potentially significant investor protection concerns.

Thank you to the Chair's office, the staff in the Division of Investment Management, the Office of the General Counsel, and the Division of Economic and Risk Analysis for their thoughtful work on today's proposal. I look forward to reviewing the comment letters and working with the staff as we move toward a final rule.

 
[1] Caroline A. Crenshaw, Commissioner, Sec. & Exch. Comm'n, Assessing the Unknown (Sept. 24, 2021).

[2] See Proposed Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Release No. IA-5950 [hereinafter Proposing Release] at 82.

[3] See id. at 83-91.

[4] There were 6,910 funds with $1.60 trillion in gross assets in first quarter of 2013 and 15,584 funds with $4.71 trillion in gross assets in the fourth quarter of 2020. Div. of Investment Mgmt., Sec. & Exch. Comm'n, Private Fund Statistics (Aug. 21, 2021).

[5] Instruction 9 to Form PF directs large hedge fund advisers file within 60 calendar days of their first, second and third fiscal quarters.  Large liquidity fund advisers file within 15 calendar days of their first, second and third fiscal quarters.  All other advisers file their annual updates within 120 calendar days after their fiscal year ends. These filing deadlines result in the delay of timely information being provided to the Commission.

[6] Reporting events for large hedge funds include: extraordinary investment losses; certain margin events; counterparty defaults; material changes in prime broker relationships; changes in unencumbered cash; operations events; and certain events associated with redemptions. Reporting events for all private equity funds include: execution of an adviser-led secondary transaction; implementation of a general partner or limited partner clawback; and removal of a fund's general partner, termination of a fund's investment period, or termination of a fund. 

[7] Form PF defines "liquidity fund" broadly to include any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value or minimize principal volatility for investors. See Form PF Glossary. Liquidity funds follow similar investment strategies as money market funds, but are unregistered.

[8] See Proposing Release at 67-68, 105-106.

[9] See Crenshaw, supra note 1. Collateralized Loan Obligations (CLOs) are structured investment vehicles that hold pools of leveraged loans. Leveraged loans refer to loans made to highly levered or non-investment grade debt. See S.P. Kothari et al., Sec. & Exch. Comm'n., U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 2020). CLOs share some key characteristics with Collateralized Debt Obligations (CDOs). Namely, both are highly complex products that involve high-risk debt that have been structured into a set of securities with AAA-rated tranches, which are marketed to investors as higher-yielding safe debt. See, e.g., Profs. Elizabeth DeFontenay & Erik Gerding, Meeting of the Securities and Exchange Commission Investor Advisory Committee (Sept. 19, 2019); Frank Portnoy, The Looming Bank Collapse: The U.S. Financial System Could be on the Cusp of Calamity. This Time, We Might Not Be Able to Save It, Atlantic (July/Aug. 2020). I am continuing to think about the risks such structured products can pose, including how deteriorating loan documentation, "covenant-lite" loans that result in fewer protections for lenders, and lower expectations of recoveries in default increase the risks attendant to CLOs.
I want to begin by offering my thanks to the staff of the Divisions of Investment Management and Economic and Risk Analysis, and the Offices of the Chief Accountant and General Counsel.  Although I am unable to support today's proposal, I appreciate all of the work and effort staff put into the proposal, including fielding numerous comments and questions from me.

My objections to the proposed changes to Form PF, however, are fundamental.  As we described at the time of its adoption in 2011, Form PF "is primarily intended to assist [the Financial Stability Oversight Counsel (also known as FSOC)] in its monitoring obligations under the Dodd-Frank Act."[1]  As the Commission made clear in the release accompanying Form PF's finalization, the Commission's use of Form PF information in conducting its regulatory program is ancillary to the underlying purpose of facilitating FSOC's monitoring for systemic risk.[2]  Congress did not conceive of Form PF to facilitate the Commission's desire to inoculate well-heeled investors against downturns, losses, or fund failures.  Today's proposal disregards these facts and represents a fundamental shift in Form PF's scope and purpose.

Although the release cites monitoring and, where possible, mitigating or forestalling, market-wide disruptions as rationales for the proposed changes in reporting, the release provides scant evidence that the amendments to Form PF would enhance FSOC's ability to monitor for systemic risk.  Rather, the enhanced reporting seems intended primarily to provide the Commission with additional information to support its regulatory and enforcement programs.  A regulator's desire for data is insatiable, but more data is not always better.  Before we seek additional information through Form PF, we must show what we have done with the information we already require and show that it is insufficient to allow FSOC to monitor for systemic risk.  I do not think we have done that.  Merely citing gaps in data is not enough.  There will always be gaps-or at least I hope there will always be gaps-in just what information the government can access on private activities.  But we must ask: is our desire to fill these gaps born of necessity or curiosity?  I judge it to be the latter.

If finalized, large hedge fund advisers and all advisers to private equity funds would have one business day to report to the Commission the particulars surrounding certain "key events."  These reportable events include: extraordinary investment losses; significant margin and default events; and large withdrawals and redemptions for large hedge fund advisers; and, in the case of private fund advisers, the execution of an adviser-led secondary transaction, implementation of general or limited partner clawbacks, and the removal of a fund's general partner.

Requiring almost immediate reporting of localized events would distend Form PF into a tool for government to micromanage private fund risk management.  A hedge fund suffering losses equal to or greater than 20 percent of its net asset value over the course of ten days is unquestionably a significant turn of events for that hedge fund and its investors, but why is it appropriate or even wise for the Commission to insist on being notified of this within one business day?  Surely the fund adviser will have its hands full in such a fraught period and will have little time to spare to fill out government forms.  What makes this information so critical to us at the Commission, let alone FSOC?  If the losses are localized to a single fund, or even a handful of funds, why involve either government entity on a real-time basis? 

Form PF's purpose is to facilitate FSOC's monitoring of system-wide stability, not to inform the Commission about isolated trigger events affecting individual private funds.  Sure, isolated events can be indicative of systemic or potentially broader downstream disruptions, but what is the limiting principle here?  Merely asserting that isolated particular events could potentially indicate system-wide vulnerabilities, without any hard data-driven analysis, seems inadequate to justify the enhanced reporting.  Will FSOC and the Commission really be blind to system-wide threats absent these real-time reports of one-off events? 

Whether it is twenty percent losses or general or limited partner clawbacks, what does the record tell us concerning the correlative links between certain noteworthy events at one or a handful of funds and the wider market?  We owe the public a clearer understanding of the objective or subjective calculus or metric we have in mind when we say that contemporaneous reports from advisers concerning one or a handful of key events are significant enough to justify this added reporting burden for hundreds of advisers.  Saying that an otherwise isolated problem in a hedge fund could be indicative of a more global concern just is not good enough.  What will FSOC and the SEC do with this information?  Jump in to protect private fund investors from losses?

We are also proposing to change the reporting threshold for large private equity advisers.  But rather than raise a threshold that is now more than a decade old, we are proposing to reduce it from the current $2 billion to $1.5 billion private equity assets under management.  The reasoning behind this proposed reduction is unsatisfying and potentially harmful.  

When the current threshold was established, approximately 75% of the private equity market based on committed capital was covered.  In the intervening years, the private equity market has grown, such that with the increased number of smaller private equity funds operating below the $2 billion threshold, only 67% of that market is represented.  By this logic, if the industry continues to grow, we have set the precedent that we will continue to reduce the threshold again and again as the addition of smaller advisers means a smaller percentage of advisers meet the reporting threshold.  What is so magical about 75% of the industry falling within the ambit of Form PF?  Was the current $2 billion threshold chosen to reach 75%, or was 75% nothing more than the result of a $2 billion dollar threshold? 

Moreover, reducing the threshold seems to fly in the face of the Commission's thinking in 2011, when we said that "[t]hese thresholds are designed so that the group of Large Private Fund Advisers filing Form PF will be relatively small in number, but represent a substantial portion of the assets of their respective industries."[3]  By anyone's definition, a form that continues to gather data on the activities of 67% of the private equity market based on committed capital is substantial, so what has changed?  Why are we no longer concerned about costs to smaller private fund advisers and, relatedly, are we in danger of putting the brakes on an otherwise dynamic and competitive industry?  Changing the threshold is a good idea: but I urge my fellow Commissioners to put their support behind increasing it, not reducing it.

I look forward to hearing from commenters as they evaluate the merits of this proposal.  Thank you in advance, commenters, for your insights and wisdom, which will inform my determination about how to vote on any adopting release.  Again, my thanks go to the agency's staff who worked so hard on this proposal. 

 
[1] See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)] ("2011 Form PF Adopting Release") at p.17.    https://www.sec.gov/rules/final/2011/ia-3308.pdf.  See also, Advisers to Hedge Funds and Other Private Funds, https://www.sec.gov/spotlight/dodd-frank/hedgefundadvisers.shtml.

[2] See 2011 Form PF Adopting Release at p.17. ("Form PF is primarily intended to assist FSOC in its monitoring obligations under the Dodd-Frank Act, but the Commissions may use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers.").

[3] Id at p.31.

https://www.justice.gov/usao-sdfl/pr/former-ubs-financial-advisor-charged-defrauding-over-5-million-dollars-his-ubs-clients
-and-
https://www.sec.gov/news/press-release/2022-8

In an Information filed in the United States District Court for the Southern District of Florida, former UBS Financial Services Inc. advisor German Nino was charged with defrauding over $5 million from a family who maintained several accounts at UBS. As alleged in part in the DOJ Release:

[F]rom about 2012, and continuing to 2020, Nino, a resident of Broward County, was a financial advisor working at a branch office of UBS Financial Services Inc. in Miami.  Nino oversaw and managed UBS investment accounts for various customers, including three victims who were related and who had various investment accounts at UBS.  Nino was the financial advisor assigned to oversee and manage the victims' money in the accounts.

It is alleged that from about May 2014 to February 2020, Nino made a total of 62 unauthorized transfers from three UBS accounts belonging to the victims, which totaled $5,833,218.59.  To accomplish the wire fraud scheme, Nino made materially false and fraudulent statements to his victims and concealed and omitted material facts including misrepresenting the true performance, balance, and rate of return of the accounts he managed; forging the signature of his clients on documents purporting to authorize transfers out of the accounts; preparing a fraudulent land purchase contract and forging a victim's signature on the land purchase contract to make it appear that the victim was purchasing land in Colombia by using money from the victim's account; removing one of the victim's email from the victim's UBS email account profile so that the victim would not receive email notifications from UBS about unauthorized transfers; and preparing fraudulent UBS account statements and client review statements, which falsely inflated the balance and value of the victims' accounts, says the information.  

The SEC's complaint alleges that Nino, of Weston, Florida, stole the investment funds from his client's accounts over nearly a six-year period and used the majority of the money, $4.2 million, on gifts for several women with whom he had romantic relationships. Nino allegedly employed various methods to conceal his misconduct from his client, including creating fake account statements, forging signatures on letters of authorization, and altering UBS's records for an affected account to prevent electronic notifications of wire transfers.

"As a financial advisor, Nino was entrusted with millions of dollars belonging to his client," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "As alleged in our complaint, Nino took advantage of that trust by abusing his access to his client's accounts for personal gain."

In addition to spending the money on vacations, luxury cars, and private school tuition for his romantic partners, Nino also allegedly used the remaining $1.6 million to repay funds he had taken from another client.

https://www.justice.gov/usao-me/pr/texas-man-sentenced-investment-fraud-scheme
Russell Hearld pled guilty in the United States District Court for the District of Maine to conspiring to commit wire fraud, and he was sentenced to 29 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

[I]n 2017 and 2018, Hearld participated in a scheme to defraud involving investments in Standby Letters of Credit (SBLCs). Investors were promised that they could receive a portion of the value of an SBLC, worth millions of dollars, for a much smaller initial investment. Investors were promised returns equal to many times the amounts of their initial investments in a matter of weeks. They were also promised that their money would remain in the attorney trust account of a co-conspirator-who at the time was a licensed attorney in Florida-until confirmation was received that the SBLC had been issued.

Contrary to these representations, Hearld routinely directed the co-conspirator attorney to withdraw investor funds as soon as they were deposited into the attorney's trust account. For example, in March 2017, an investor wired $500,000 from his bank account in Maine to the attorney's trust account in Florida. On the previous day, Hearld had sent the attorney an email, directing the attorney to disburse the investor's funds. At Hearld's direction, the attorney wired $200,000 to Hearld's bank account; $150,000 to the account of the attorney's law firm; $100,000 to the account of another co-conspirator; and $40,000 to the attorney's personal account.

While discussing the reasons for his sentence, Judge Woodcock noted that Hearld took the victims' money for "completely selfish reasons." He also noted that Hearld owed over $13,000 in past due child support, and said it was "just disgraceful" that Hearld had failed to meet his support obligations despite personally receiving over $2 million in the fraud scheme.

https://www.justice.gov/usao-me/pr/arizona-man-pleads-guilty-role-investment-fraud-scheme
Arthur Merson pled guilty in the United States District Court for the District of Maine to conspiring to commit wire fraud. As alleged in part in the DOJ Release:

[I]n 2017 and 2018, Arthur Merson, 67, of Scottsdale, Arizona, participated in a scheme to defraud involving investments in Standby Letters of Credit (SBLCs). Investors were promised that they could receive a portion of the value of an SBLC, worth millions of dollars, for a much smaller initial investment. Investors were promised returns equal to many times the amounts of their initial investments in a matter of weeks. They were also promised that their money would remain in the attorney trust account of a co-conspirator-who at the time was a licensed attorney in Florida-until confirmation was received that the SBLC had been issued.

In his role as an intermediary between investors and the principal members of the conspiracy, Merson falsely represented to investors that the investment was not risky and that he had been involved in similar successful deals in the past. In fact, he had not been involved in prior successful transactions of this sort, nor had he made any significant amount of money from them.

After co-conspirators fraudulently transferred investor funds, Merson relayed a variety of excuses from other members of the conspiracy for why the transactions had not occurred. He also falsely represented that he was an independent consultant who was only going to receive a small finder's fee, and claimed not to know the details of the transaction or the payouts the clients could expect. In fact, he had a significant independent financial interest in the investment transaction that he failed to disclose, and affirmatively misled investors about, as he responded to investor inquiries.

https://www.sec.gov/litigation/litreleases/2022/lr25315.htm
Without admitting or denying the allegations in an Complaint filed by the SEC in the United States District Court for the Eastern District of New York, Heidi Mao consented to the entry of a Judgment, which permanently enjoins her from violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act, the anti-fraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the broker-dealer registration provisions of Section 15(a) of the Exchange Act.  Also, Mao agreed to conduct-based injunctions that prohibit her from participating in an illegal pyramid scheme disguised as a multi-level marketing program. Further, the Judgment orders Mao to pay disgorgement of $449,729 and a civil penalty of $335,000. In related SEC administrative proceedings, Mao was permanently barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock. As alleged in part in the SEC Release:

The SEC's complaint, filed on October 9, 2013, charged 16 defendants, including Mao, with perpetrating a worldwide pyramid scheme. According to the SEC's complaint, through the efforts of three CKB executives who live overseas and top promoters living in the U.S., including Mao, the scheme ensnared investors in New York, California, and other areas with large Asian-American communities. The executives and promoters collectively raised tens of millions of dollars from investors in the United States, Canada, Taiwan, Hong Kong, and other countries in Asia.

. . .

The SEC has now obtained judgments of liability against all the individual defendants. The five corporate defendants have defaulted. The SEC continues to litigate to obtain final judgments against the remaining non-settling defendants and the corporate defendants.

https://www.sec.gov/litigation/litreleases/2022/lr25314.htm
The United States District Court for the Southern District of Florida granted a Judgment
https://www.sec.gov/litigation/litreleases/2022/judgment25314.pdf to the SEC against Justin W. Keener d/b/a "JMJ Financial."  As alleged in part in the SEC Release:

The SEC's complaint alleged that Keener failed to register as a securities dealer with the SEC, or to associate with a registered dealer, when he bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018. Keener obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.

The court ruled that Keener met the statutory definition of dealer because he operated a regular business of buying and selling securities for his own account.  The court found that his failure to register as a dealer, or associate with a registered dealer, violated the dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934. The court also denied Keener's cross motion for summary judgment. The court ordered the parties to propose a briefing schedule for remedies.

https://www.sec.gov/litigation/litreleases/2022/lr25313.htm
The United States District Court for the Eastern District of Michigan entered a Final Judgment enjoins Viktor Gjonaj from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. In light of a prior criminal conviction and 53-month-prison-sentence in a parallel matter, although Gjonaj was found liable for disgorgement and prejudgment interest of $21,128,466, that amount satisfied by the forfieture/restitution order in the parallel criminal matter. As alleged in part in the SEC Release:

[F]rom at least mid-2016 to 2019, Gjonaj raised approximately $26.4 million through the fraudulent offer and sale of investment contracts to at least 24 investors, most of whom were members of the Albanian-American community in Detroit. As alleged, Gjonaj falsely represented to investors that their money would be used to purchase, develop, and sell real estate projects. Instead, Gjonaj allegedly used at least $10 million of the investors' funds to play the Michigan State Lottery, at times buying as much as $1 million worth of lottery tickets in a single week. Gjonaj also allegedly directed millions of dollars of investors' money to his personal checking account. As further alleged, in order to maintain the fraud, Gjonaj repaid investors with lottery winnings, which Gjonaj falsely claimed were proceeds from real estate investments. According to the complaint, by August 2019, Gjonaj had lost all of his own and his investors' money, and owed the investors approximately $19 million.

https://www.finra.org/sites/default/files/fda_documents/2019060991102
%20BLV%20Securities%20CRD%2035205%20AWC%20sl.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, BLV Securities submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that BLV Securities has been a FINRA member firm since 1994 with two registered representatives at one office.  As alleged in part in the AWC's "Overview":

From May 2018 through December 2019, BLV Securities failed to establish and implement anti-money laundering (AML) policies and procedures reasonably expected to detect and cause the reporting of suspicious activity, in violation of FINRA Rules 3310(a) and 2010. The firm also failed to conduct an independent AML test in 2019, in violation of FINRA Rules 3310(c) and 2010. 

Additionally, from May 2018 to December 2018, BLV Securities opened customer accounts without obtaining the signature of a firm principal approving the accounts' opening. As a result, BLV Securities violated FINRA Rules 4512(a)(1)(D) and 2010. 

In accordance with the terms of the AWC, FINRA imposed upon BLV Securities a Censure, $20,000 fine, and an undertaking to certify its compliance with the AML and Bank Secrecy Act issues cited.

https://www.finra.org/sites/default/files/fda_documents/2021070337201
%20Joseph%20LaScala%2C%20Jr.%20CRD%203070261%20AWC%20sl.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joseph LaScala, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joseph LaScala, Jr. was registered in 1998 and by February 2012, he was registered with Aegis Capital Corp.  As alleged in part in the AWC's "Overview":

Between July 2014 and April 2016, LaScala violated FINRA Rules 2111 and 2010 when he engaged in excessive and quantitatively unsuitable trading in his customer's Aegis account. 

Between January 2015 and April 2016, LaScala also violated NASD Rule 2510(b) and FINRA Rule 2010 when he exercised discretionary authority to effect 139 trades in the same customer's firm account without having obtained prior written authorization from the customer or approval from Aegis to treat the account as discretionary. 

In accordance with the terms of the AWC, FINRA imposed on LaScala a $7,500 fine and a four-month suspension from associating with any FINRA member in all capacities.

https://www.finra.org/sites/default/files/fda_documents/2020067572701
%20Joshua%20D.%20Nicholas%20CRD%206529944%20AWC%20sl.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joshua D. Nicholas submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joshua D. Nicholas entered the industry in 2016, and he was first registered in February 2020 with Merrill Lynch, Pierce, Fenner & Smith Inc. As alleged in part in the AWC's "Background":

In April 2021, a National Futures Association (NFA) Hearing Panel accepted a settlement offer from Respondent and JDN Capital LLC, his wholly-owned limited liability company, to resolve a complaint in which the NFA alleged that Respondent and JDN Capital failed to cooperate with the NFA in connection with an investigation regarding investment funds OBA Customers A and B had entrusted to JDN Capital. The settlement barred Respondent from NFA membership with a right to reapply after eight years, and ordered Respondent not to act or become a principal of an NFA member at any time in the future.1
= = = = =
Footnote 1: The Hearing Panel imposed a deferred fine of $125,000, payable if Respondent applies for NFA membership or reapplies for NFA associate membership after the expiration of the eight-year period. 
 
As further alleged in the AWC's "Overview":

In May 2020, Respondent induced OBA Customers A and B3 to enter into a promissory note with his wholly-owned entity JDN Capital LLC, pursuant to which the customers lent JDN Capital $300,000 to invest in securities on their behalf. Instead of investing the funds as required, Respondent converted $58,000 of the funds to pay for his own personal expenses in violation of FINRA Rule 2010. 

In July 2020, the OBA customers asked Respondent to provide a copy of an account statement showing that JDN Capital had invested the proceeds of the promissory note in securities as it was obligated to do. In response, Respondent provided them with a fabricated account statement for a non-existent account containing material misrepresentations, in violation of FINRA Rule 2010. 

Respondent also failed to provide prior written notice to his member firm that he was engaging in an outside business activity through JDN Capital, in violation of FINRA Rules 3270 and 2010. Finally, Respondent failed to provide prior written notice or receive prior written permission from his member firm prior to participating in the note transaction with OBA Customers A and B, in violation of FINRA Rules 3280 and 2010. 

In accordance with the terms of the AWC, FINRA imposed upon Nicholas a Bar from associating with any FINRA member in all capacities.

Bill Singer's Comment: Compliments to FINRA on a superbly drafted AWC replete with sufficient content and context so as to render the regulator's case compelling and its sanctions justified.

https://finra-unscripted.simplecast.com/episodes/deep-learning-the-future-of-the-market-manipulation-surveillance-program-rymxtpfn
As set forth in the "Episode Notes":

FINRA's Market Regulation and Technology teams recently wrapped up an extensive project to migrate the majority of FINRA's market manipulation surveillance program to using deep learning in what is perhaps the largest application of artificial intelligence in the RegTech space to date. 

On this episode, we hear from Susan Tibbs, senior vice president of Market Manipulation in the Market Regulation Quality of Markets group, and from C.K. Chow, principal developer with the Technology team, about how the use of deep learning is making FINRA's market surveillance data more digestible and increasing the efficiency and flexibility of the program. 



(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/6252/finra-bequest-widow/
It is always disconcerting when elderly customers change their wills in order to leave eye-opening bequests to their stockbrokers or financial advisors. There are many decent men and women on Wall Street, and they often service their elderly customers with affection and unimpeachable rectitude. On the other hand, there are many predators on the Street. In a recent FINRA regulatory settlement, we seem to have a swirl of considerations involving a stockbroker and an elderly widow. Frankly, it's next to impossible to reconcile FINRA's allegations with FINRA's sanctions, which raises many questions. 

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