The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

June 16, 2022

















https://www.brokeandbroker.com/6495/regulate-or-aggrieved/
In 2007, NASD Regulation and the New York Stock Exchange combined and morphed into the Financial Industry Regulatory Authority ("FINRA"). Rather than continue as an "association" from the progenitor National Association of Securities Dealers ("NASD"), the progeny called itself an "Authority," as if it is somewhat quasi-governmental and is thus eligible for certain special privileges. As a practical matter, FINRA members are effectively not members of the Authority, nor are they members of a national securities association. In some respects, the members are being relegated to the dustbin of history. 

https://www.sec.gov/news/press-release/2022-110
In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2022/comp-pr2022-110.pdf, the SEC charged Western International Securities, Inc. and five of its registered representatives: Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan, with violating Best Interest Obligation regulations. As alleged in part in the SEC Release:

[B]etween July 2020 and April 2021, Western and the brokers recommended and sold L Bonds to retail customers, many of whom were on fixed incomes and had moderate risk tolerances, despite the issuer, GWG Holdings, Inc., stating the L bonds were high risk, illiquid, and only suitable for customers with substantial financial resources. The defendants allegedly failed to comply with Reg BI's "Care Obligation" both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds, and also because they recommended L Bonds to at least seven particular customers without a reasonable basis to believe the bonds were in their customers' best interests. The complaint also alleges Western failed to comply with Reg BI's "Compliance Obligation" because it did not adequately establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.

SEC Charges "Millionaire Maker" Author with Selling Securities in Unregistered Oil and Gas Offerings (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25425.htm
https://www.sec.gov/litigation/complaints/2022/comp25425.pdf, the SEC charged Loral L. Langemeier and Live Out Loud, Inc. ("LOL") with violating Sections 5(a) and 5(c) of the Securities Act, Section 15(a) of the Securities Exchange Act, and Section 206(2) of the Investment Advisers Act of 1940. As alleged in part in the SEC Release:

[F]rom at least 2016 through 2018, Langemeier held herself out as a financial expert and, through LOL, developed a roster of clients - mainly small business owners and retirees - who paid fees of up to $30,000 in exchange for Langemeier's supposedly objective financial advice. Langemeier allegedly convinced many of these clients to liquidate relatively conservative investments, transfer their funds to self-directed IRAs, and purchase securities in risky and unregistered oil and gas securities offerings sponsored by Resolute Capital Partners LTD, LLC and Homebound Resources, LLC. These companies and their principals were the subject of a prior SEC enforcement action, In the Matter of Resolute Capital Partners, LTD, LLC, et al., AP File No. 3-20597 (Sept. 24, 2021). The complaint further alleges that Langemeier received hundreds of thousands of dollars in undisclosed compensation in the form of sales commissions when her clients purchased the oil and gas securities and that she held undisclosed equity interests in certain of the issuers of the securities. According to the SEC's complaint, defendants breached their fiduciary duties as investment advisers by failing to disclose these conflicts of interest to their clients.

https://www.sec.gov/litigation/litreleases/2022/lr25424.htm
In a Complaint filed in the United States District Court for the Eastern District of Louisiana
https://www.sec.gov/litigation/complaints/2022/comp25424.pdf, the SEC charged Hollis P. Day, Jr. with violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Securities Exchange Act. As alleged in part in the SEC Release:

[F]rom at least 2016 through 2020, Day hosted a weekly radio show called "Sage Money Radio" that promoted alternative investments. The SEC also alleges that Day marketed and sold securities in unregistered oil and gas offerings to retail investors. As alleged in the complaint, Day targeted his existing insurance clients and also used his weekly radio show to reach a larger audience and solicit additional investors. Day allegedly made hundreds of thousands of dollars in commissions selling securities in the unregistered offerings sponsored by Resolute Capital Partners LTD, LLC and Homebound Resources, LLC. These companies and their principals were the subject of a prior SEC enforcement action, In the Matter of Resolute Capital Partners, LTD, LLC, et al., AP File No. 3-20597 (Sept. 24, 2021).

https://www.sec.gov/litigation/litreleases/2022/lr25423.htm
In a Complaint filed in the United States District Court for the Northern District of Texas
https://www.sec.gov/litigation/complaints/2022/comp25423.pdf, the SEC charged Blake Robert Templeton; Boron Capital, LLC; BC Holdings 2017, LLC; and United BNB Fund 2018, LLC with violating the securities-registration provisions of Sections 5(a) and 5(c) of the Securities Act and 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. The Court issued a temporary restraining order halting the offering, as well as orders freezing defendants' assets, appointing a receiver, and granting other emergency relief; and a  hearing for June 28, 2022 is scheduled on the SEC's motion for preliminary injunction. In part, the SEC Release alleges that:

[T]empleton has raised more than $18.7 million since 2011 by selling securities issued by Boron, BC Holdings, and United in unregistered offerings. In the United offering, which began in 2018, Templeton allegedly promised investors that they would receive 8% annualized returns secured by a UCC-1 lien and a mortgage on real estate. The complaint alleges, however, that Templeton never filed the UCC-1 lien and failed to file a deed of trust to secure United's interest in the real estate until 2021. The complaint further alleges that, before filing the deed of trust, Templeton, in undisclosed transactions, granted a prior deed of trust to a large BC Holdings investor and signed an agreement subordinating United's interest in the real estate to that of the large investor. The complaint also alleges that Templeton falsely represented to investors that United would provide audited financial statements annually and that a renowned business consultant served on Boron's board of directors.

In the BC Holdings offering, which began in 2021, Templeton allegedly represented to investors that their investments-on which he promised returns ranging from 10% to 12.5%-would be secured by real estate. But as alleged, these investments too were subject to the large BC Holdings investor's undisclosed priority deed of trust and subordination agreement. The underlying real estate purportedly securing the investments of the United and BC Holdings investors allegedly produced insufficient revenue to satisfy promised investor returns, so Templeton made Ponzi payments to some investors.

The complaint further alleges that the note for the large BC Holdings investor matured on December 15, 2021, and the note's extension periods expired on March 15, 2022. With penalties, BC Holdings allegedly now owes the large investor more than $4 million, secured by this investor's superior deed of trust on the property. However, the complaint alleges that tax-assessor records show an appraised market value of just $2.15 million for the property, leaving investors at substantial risk of losing their entire investments.

SEC Obtains Final Judgments Ordering Payment of Over $75 Million in Stock Manipulation Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25421.htm
The United States District Court for the District of Massachusetts entered Final Judgments against 16 defendants and 10 relief defendants, all based in China. As alleged in part in the SEC Release:

On October 15, 2019, the SEC charged eighteen traders in the scheme. The SEC's complaint alleged that the traders manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices. For example, according to the SEC's complaint, the traders used multiple accounts to place several small sell orders to drive down a stock's price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the complaint alleged, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices. On November 12, 2019, the court entered a preliminary injunction and continued an asset freeze against all defendants and relief defendants. On December 23, 2019, the SEC amended the complaint to add two defendants and eight additional relief defendants to those originally charged.

On June 9, 2022, the Court granted the SEC's motion for default judgment against sixteen defendants: Shuang Chen, Wenwen Du, Lirong Gao, Jing Guan, Tonghui Jia, Xuejie Jia, Honglei Shi, Lujun Sun, Huailong Wang, Jiadong Wang, Jiafeng Wang, Linlin Wu, Lin Xing, Yong Yang, Jiancheng Zhao, and Forrest (HK) Co., Limited, permanently enjoining each from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Court also determined that all of these defendants are jointly and severally liable for disgorgement of ill-gotten gains of $35,603,447 plus $5,989,769 in prejudgment interest thereon, and each must pay a civil penalty of $2,000,000. Also on June 9, 2022, the Court granted the SEC's motion for default judgment against relief defendants Weiguo Guan, Jingquan Liu, Rishan Liu, Weigang Yang, Jingru Zhai, Song Geng, Qinghua Ren, Jixiang Teng, Xiangjia Yang, and Xiuchun Zhang, ordering disgorgement individually in amounts ranging from $3,505 to $533,713, plus prejudgment interest, for a total of $1,512,333.

Previously, in September 2021, the SEC secured a judgment by consent against trader defendant Xiaosong Wang, who agreed to be permanently enjoined from violating the antifraud provisions of Section 17(a) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder, with disgorgement, prejudgment interest, and a civil penalty to be determined by the court at a later date. The SEC also continues to pursue fraud charges against trader defendant Jiali Wang.

The topic of today's event is "regulating the new crypto ecosystem." It is a hot topic of conversation in Washington, DC. The conversation reminds me of a book for toddlers, Are You My Mother?[1] In that book, a newly hatched bird searches for his mother. He asks a cat, dog, hen, cow, and front-end loader, each of which disappoints the baby bird with the news that it is not the baby bird's Mom. Rest assured, baby bird and his actual mother are finally reunited. The crypto industry seems to be on a similar journey; only it is not looking for a mother, but is out looking for its regulator. In a bureaucratic twist on the story in the children's book, in our story, every agency claims to be the regulator. So crypto is looking to Congress to decide who ought to regulate it. A bipartisan bill announced last week attempts to answer that question.[2] Some people in the crypto industry are celebrating the allocation of certain authorities to the Commodity Futures Trading Commission ("CFTC") instead of the Securities and Exchange Commission ("SEC"). This view is likely rooted in a disappointment that the SEC has not used more proactively the authorities it already has to sensibly regulate crypto. I understand and share that disappointment, but I am hopeful that we can change course and use our existing and any prospective authorities wisely.

Watching the SEC refuse over the past four years to engage productively with crypto users and developers has prompted feelings of disbelief at the SEC's puzzling, out-of-character approach to regulation. The Commission, of course, occasionally has explained its actions-or inaction-but those explanations often have been confusing, unhelpful, and inconsistent. I have communicated my discomfort with the Commission's behavior to my colleagues and the public, though the results to date seem to be underwhelming: the agency continues to brush off crypto products and services seemingly without consideration for the consequences. A concrete example, and the one on which I will dwell for a few minutes today, is the Commission's persistent refusal to approve a spot bitcoin exchange-traded product.

Before going any further, let me give you a few important disclaimers. First, the views that I am expressing are my own views and not necessarily those of the SEC or my fellow Commissioners. Second, this speech is not an endorsement of bitcoin, bitcoin exchange-traded products, or any other crypto-related asset. People-exercising skepticism great enough to quell the dangerously seductive fear of missing out-should choose what to put in their portfolios when and in what quantities. Whether assisted by a financial professional or flying solo, investors should invest based on factors such as their own present and anticipated future circumstances, informed risk assessments of the asset they are considering buying and the portfolio of assets in which it will sit, and a candid gut-check of their stomach for market volatility and financial loss. They should be aware, as recent events illustrate, that past performance of an asset is no guarantee of future performance. People should not look to regulators to make investment decisions for them, and regulators should not seek to play that role. Third, although many of the early bitcoin exchange-traded product denials were issued by the staff under authority delegated from the Commission, my criticisms about these denials and other policy choices are leveled at the Commission, not the staff. The staff appropriately is following the Commission's lead, and the Commission has not been leading well.

I. It is time for the Commission to stop denying categorically spot crypto exchange-traded products.

The Commission's resistance to a spot bitcoin ETP is becoming almost legendary. "When is the Commission going to approve a bitcoin exchange-traded product?" is one of the most frequent questions I get. For the last four years, my answer has been approximately the same, "I have no idea," tinged with a note of disbelief. Although bitcoin is a new asset, the concept of affording access to commodities through an exchange-traded product is not new. The Commission long has allowed investors to gain exposure to a number of non-securities instruments through these pooled investment vehicles, which have been a boon to investors, as their shares trade continually on national stock exchanges at market prices, much as a regular stock would. Through a process of creating and redeeming shares of the fund, institutional traders called authorized participants help to keep the price of these shares in line with the price of the assets in the investment pool.

The Commission has added crypto-specific hurdles to what used to be fairly straightforward processes for approving these pooled investment vehicles-whether exchange-traded funds (ETFs) under the Investment Company Act of 1940 (1940 Act) or commodity-based exchange-traded products (ETPs) under the Securities Act of 1933 (Securities Act). Indeed, although in the past eight months both ETFs and ETPs based on bitcoin futures have begun trading, the Commission has continued to disapprove ETPs based on the spot bitcoin market.

The reasons for this resistance to a spot product are difficult to understand apart from a recognition that the Commission has determined to subject anything related to bitcoin-and presumably other digital assets-to a more exacting standard than it applies to other products. In a 2018 letter, for example, the Division of Investment Management expressed a willingness to engage with 1940 Act fund sponsors interested in incorporating crypto assets into their funds, but outlined "significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules."[3] Those questions related to custody, valuation, liquidity, the arbitrage mechanism for ETFs, and manipulation and other risks. Asking these questions is not inherently problematic and might even be characterized as positive because it sparked important thought on these issues. The Commission, however, gave few external indications of progress on grappling with, let alone resolving, these issues.

Retail funds that tried to incorporate exposure to bitcoin into their portfolios encountered a series of challenges. The disclosure review process plays an important investor protection role, but the Commission has many subtle ways of exercising merit regulation, often without a clear legal basis for doing so. Certain funds looked for ways to get exposure to bitcoin, such as holding over-the-counter products, investing in companies with crypto exposure, or putting small sleeves of bitcoin futures in their portfolios. Closed-end funds, which do not provide daily redemption, were the first to incorporate bitcoin futures. But even as late as May 2021, the staff reminded closed-end funds "seek[ing] to invest in the Bitcoin futures market to consult with the staff, prior to filing a registration statement, about the fund's proposed investment, anticipated compliance with the Investment Company Act and its rules, and how the fund would provide for appropriate investor protection."[4] The statement acknowledged that some open-end funds "are investing or seek to invest in Bitcoin futures and these funds believe they can do so consistent with" the securities laws, but warned that the staff would be watching their regulatory compliance and the effect of these funds' "investments in Bitcoin futures on investor protection, capital formation, and the fairness and efficiency of markets."[5] Review to ensure that funds clearly disclose risks is an important Commission function, as is watching what is happening in the markets, but when we attempt to step into the shoes of the marketplace to assess whether a fund's holdings are unacceptably risky, we have gone too far. The Commission appropriately works with fund sponsors to ensure that they disclose what kinds of assets funds are holding and the associated risks, but we have no authority to tell funds that they cannot hold particular assets.

Although a number of funds managed to hold bitcoin futures, many sponsors wanted to provide exposure to bitcoin in an exchange-traded form. The Commission continued to signal to would-be sponsors of such products that it would not look favorably if they sought to register such products. In October 2021, however, the SEC finally allowed futures-based bitcoin ETFs to begin trading. Enabling the change was a clear signal from Chair Gary Gensler, who pointed to the 1940 Act protections, along with the CFTC's oversight of the futures markets, as a key basis for his comfort with such products.[6] These funds proved popular, but demand for a spot-based product remains because futures products are more expensive to manage and may not as closely track the spot price.

Until this year, all of the futures-based exchange-traded products that were approved fell under the 1940 Act. In April of this year, however, the Commission approved the first non-1940 Act ETP holding bitcoin futures for listing and trading on an exchange. This approval implicitly acknowledged that the protections afforded by the 1940 Act are not relevant to the question of whether approval under the Securities Exchange Act of 1934 (Exchange Act) is appropriate. The protections the 1940 Act affords are, as industry commenters have highlighted, "designed and intended to protect investors against self-interested managers."[7] In other words, as another commenter described, "the 1940 Act's protections do not address and thus are not relevant to the concern the Commission has repeatedly invoked to deny [Exchange Act] Rule 19b-4 applications for spot Bitcoin ETPs . . . : market manipulation and fraud in the underlying Bitcoin market."[8] Some observers found this development notable because spot-based bitcoin products would likewise be Securities Act products that would need to be approved by the Commission for listing and trading on an exchange under the Rule 19b-4 process. The Commission still has not approved any ETP based on the spot bitcoin market.

Despite the success of futures-based ETP applicants over the past eight months, using the same tired reasoning, the Commission keeps denying spot bitcoin ETPs. The Commission requires an applicant, which is the exchange on which the ETP will be listed, to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and in particular, the requirement that the rules of a national securities exchange be "designed to prevent fraudulent and manipulative acts and practices" and "to protect investors and the public interest."[9] In demonstrating consistency with Section 6(b)(5), the exchange applying to list the ETP has a choice-show a surveillance agreement or a unique resistance to manipulation.[10]

The first option is for the exchange to show that it has a comprehensive surveillance-sharing agreement with a regulated market or group of markets of significant size. An acceptable surveillance-sharing agreement would provide for the unimpeded sharing of information about market trading activity, clearing activity, and customer identity. Significant market size is determined, for example, by showing a reasonable likelihood that a person attempting to manipulate the ETP would have to trade on that market to successfully manipulate the ETP. Only then would a surveillance-sharing agreement assist in detecting and deterring misconduct. One way that a market could count as being significant in size is if it is reasonably likely that a person seeking to manipulate the ETP would also have to trade on that market to succeed in doing so and if trading in the ETP would be unlikely to be the predominant influence on prices in that market.[11]

Alternatively, the exchange seeking to list the ETP can show that the underlying bitcoin markets are uniquely resistant to fraud and manipulation. The standard requires a level of resistance higher than what exists in traditional commodity markets or equity markets.

According to a majority of the Commission, no exchange successfully has made the case using either approach. An ETP disapproval order issued last month embodies the now standard denial rationale. The exchange here opted for alternative two-showing that the bitcoin markets are uniquely resistant to fraud and manipulation:

As with the previous proposals, the Commission here concludes that the Exchange's assertions about the general liquidity, growth, and acceptance of the bitcoin market do not constitute other means to prevent fraud and manipulation sufficient to justify dispensing with the requisite surveillance-sharing agreement. While the Exchange states that the significant liquidity in the spot market and resultant minimal impact of market orders on the overall price of bitcoin mitigates the risk associated with potential manipulation, such assertion is general and conclusory.[12]

The reasoning underlying the Commission's denials of spot bitcoin ETPs is itself general and conclusory, which makes it difficult to know how approval could be achieved. The Commission does not grapple seriously with important characteristics of these products and the underlying spot markets, including the widely distributed nature of trading in bitcoin and the methods used by these ETPs to calculate their net asset value. It does not take into account the evidence from other jurisdictions where regulators have approved similar products. Absent a wholesale rejection of its now standard analysis, how does the Commission put itself in a position where it could approve these products? With each new disapproval, the SEC doubles down on its reasoning.

The continuing refusal of the SEC to approve a spot bitcoin ETP is puzzling to many agency observers. The bitcoin market has grown, matured, become more liquid, and attracted more, and more sophisticated (in the traditional financial market sense of the word), participants. At thirteen years old and as of about an hour ago, bitcoin has a market cap of approximately $430 billion and is trading at around $22,500.[13] Bitcoin investors comprise natural persons and institutions, including regulated market participants. Many insurance companies, asset managers, university endowments, pension funds, large banks, and public companies have invested in bitcoin or are considering doing so. Increasingly sophisticated infrastructure has built up around bitcoin and crypto markets more generally. Like the traditional finance landscape, the crypto terrain is dotted with trading platforms, trading firms, venture capital firms, hedge funds, law firms, and accounting firms. In contrast to 2018 when the Division of Investment Management wrote that "we are not aware of a custodian currently providing fund custodial services for cryptocurrencies,"[14] custodians now compete to offer their services.[15] A cornerstone of institutional participation, bitcoin futures have been trading in the United States since late 2017. The daily notional value of open interest in the Chicago Mercantile Exchange ("CME") bitcoin futures market hovers around $1.7 billion.[16]

Spot ETPs have launched in other countries without incident and with great investor interest. In Canada, for example, the first spot bitcoin ETP reached $1 billion Canadian dollars in assets under management a month after launch in 2020.[17] Spot crypto ETPs are also popular in Europe, where there are more than 70 crypto ETPs with an estimated total of $7 billion in assets.[18] ETPs in these other jurisdictions have functioned, even in volatile markets.[19]

Why is the SEC a holdout? At what point, if any, does the increasing maturity of the bitcoin spot markets and the success of similar products elsewhere tip the scale in favor of approval? Of course, the facts and circumstances of each application matter, but will I ever stop hearing that well-worn question: "When a spot bitcoin ETP?"

The approval of futures-based products first under the 1940 Act and more recently of a similar Securities Act product for listing and trading under the Exchange Act might appear to open a door to changing course on spot-based products, but the language of these orders provides precious little basis for optimism that the Commission will approve a spot bitcoin product. The futures-based approvals turn on the regulated nature of the futures market, the CME, which is where the assets held by the ETP themselves trade. The Commission explains, somewhat tautologically, that the CME "can reasonably be relied upon to capture the effects on the CME bitcoin futures market caused by a person attempting to manipulate the proposed futures ETP by manipulating the price of CME bitcoin futures contracts."[20] This reasoning obviously does not apply to spot-based products, and it is difficult to see how it is even relevant for an instrument that trades on hundreds of exchanges worldwide.

It is true that, in these approvals, the Commission reiterated its position that its concerns about the lack of a surveillance-sharing agreement in filings seeking to list and trade spot-based ETPs could be addressed "by demonstrating that there is a reasonable likelihood that a person attempting to manipulate the spot bitcoin ETP would have to trade on the CME,"[21] but the Commission also went out of its way to state that the evidence does not demonstrate this type of connection between the two markets-an observation that was not necessary to the Commission's approval of the futures-based ETPs.[22] Perhaps the Commission could be persuaded that the similarity of pricing mechanisms for the futures-based product and the spot-based product undermines its rationale for treating them differently. The Commission's willingness to be persuaded, though, turns on whether the Commission's primary concern is legal and logical coherence with our approvals of bitcoin futures products and other commodity-based products and not, say, using the prospect of a spot bitcoin ETP approval as an inducement to get exchanges to come in and register.

Why does this matter? Investors might prefer a spot bitcoin ETP to other options, and we ought to care about what investors want. This kind of product, depending on how it is designed, could enable retail investors to gain exposure to bitcoin through a securities product that, because of the effective ETF arbitrage mechanisms, likely would track the price of spot bitcoin closely. It likely would be inexpensive to manage such a fund, so fees likely could be low. It could sit conveniently in investors' brokerage accounts alongside other securities. It would allow investors to buy and sell their bitcoin exposure the same way they buy and sell other exchange-listed products. Investment advisers too would find it easier to assist clients seeking exposure to bitcoin if a straightforward spot-based ETP were available.

Some people might object to retail exposure to bitcoin, and thus might oppose a product that makes it easier for retail investors to get exposure to bitcoin. Making it harder to access bitcoin, however, does not mean investors will not find other ways of doing so. Some do and will continue to hold bitcoin directly. For the reasons I mentioned above, however, many investors want to get exposure to bitcoin through US securities markets. They have several options for doing so, but these methods can be a less direct and more expensive way to get exposure to bitcoin. They include holding shares of a fund that has bitcoin futures exposure, buying an over-the-counter product that lacks the arbitrage mechanism to keep prices in line with underlying bitcoin prices; buying a foreign spot-based ETPs, which are generally unavailable to U.S. retail investors;[23] or buying a bitcoin futures-based ETP, which is unlikely to track spot bitcoin exactly and may be more costly given the complexities in managing such a fund. Are we really serving investors by keeping them in products that only approximate the exposure they are trying to get and might cost more? The Commission has deemed this question as irrelevant in its consideration of ETP applications.[24]

Other people might object to a spot ETP on the grounds that its advocates stand to gain a tremendous amount when a spot ETP launches. Many advocates of a spot ETP are bitcoin investors who want to see the price go up. An ETP certainly could influence the price of bitcoin, but bitcoin markets do not always perform as people anticipate. A spot-based ETP, because of the ease with which it can be bought and sold, would be a way for more voices to weigh in on the value of bitcoin. Other types of ETPs have helped markets more efficiently incorporate information. Detractors of underlying ETP assets, therefore, can take comfort in the contribution that liquid, efficient markets play in working out the real value of those assets, whether they are shares of company, gold, or bitcoin.

Some bitcoin "hodlers" might themselves object to the introduction of a bitcoin ETP. One feature of a non-sovereign, censorship resistant mechanism for storing and transferring value is its ability to function outside of the traditional financial system. Why drag it inside tradfi and thus expose it to the meddling of incumbent financial firms and incumbent governmental regulators? To these people I say, the concern for liberty and personal autonomy that drives you to prefer "we-at" to fiat ought also cause you to reject a government that arbitrarily limits people's investment options.

II. It is time for the Commission to embark on a more productive path to crypto regulation.

The Commission's reluctance to approve a spot bitcoin ETP is of a piece with its more general reluctance to build a regulatory framework for crypto using standard regulatory processes. Instead the Commission has tried to cobble together a regulatory framework through enforcement actions. Enforcement is the appropriate tool to address the rampant fraud in the crypto space. One-off enforcement actions that represent the first time the Commission has addressed a particular issue publicly, however, are not the right way to build a regulatory framework. For that, Congress gave us other tools, including the authority to craft tailored exemptions and notice-and-comment rulemaking.

Enforcement actions short-cut the regulatory process. Consider the recent $100 million BlockFi settlement with the SEC and 32 states.[25] BlockFi is one of a number of companies that offers crypto lending products, which were determined to be securities products. The Commission, in its settlement, set out a path pursuant to which BlockFi could register under the Securities Act and register or take steps to qualify under an Investment Company Act exemption from registration. The specific path laid out in settlement agreement crafted between BlockFi and the SEC, if successful, is likely to become the standard for regulation of crypto lending. Other crypto lenders, users of those services, consumer advocates, and other interested parties were not part of those negotiations, but the results affect them.[26] A preferable approach would have been, once we identified crypto lending as implicating the securities laws, to commence a rulemaking or invite crypto lenders and other members of the public to come in and discuss the appropriate path forward through careful use of our exemptive authority. We might similarly consider, rather than a reactive enforcement approach, a proactive regulatory approach with respect to non-fungible tokens, stablecoins, decentralized exchanges, decentralized autonomous organizations, and other crypto innovations.

People doing things in crypto need to consider whether the laws, including the securities laws, govern their behavior. For this to happen in a more efficient and comprehensive way, the Commission needs to provide a level of clarity that heretofore has been absent. The SEC could think through issues with people in the crypto community with an eye toward achieving our regulatory objectives pragmatically. By doing so, we could both facilitate good actors' compliance and inhibit bad actors much more effectively than we do through resource-intensive and delayed enforcement actions.

We have a number of suggestions and examples of how to proceed. My colleague Commissioner Caroline Crenshaw set up a special mailbox through which she solicited commentary about regulatory issues related to DeFi.[27] Why not make that a Commission-wide request for input? Similarly, J.W. Verret, in a recent petition to the Commission, recommended opening a comment file so that people could discuss open questions about how to reconcile our securities laws with today's technology.[28] The Financial Accounting Standards Board, having heard a lot of concern about the current accounting standards for digital assets, recently opened a project to improve financial reporting for digital assets, including recognition, measurement, presentation, and disclosure.[29] A group of crypto lawyers has put together a number of concrete proposals-an iteration on my safe harbor proposal[30] and an exempt offering framework for digital assets[31]-that could be starting points for Commission regulatory action in this space. CFTC Commissioner Caroline Pham and I recently called for the two agencies to conduct joint roundtables.[32] Our two agencies have worked effectively in the past in areas where our jurisdictions are closely linked, and we can do so here also. Finally, a recent rule proposal that seems to implicate crypto platforms generated a number of comments from people and organizations willing to work with us on crafting an appropriate regulatory approach.[33] People stand ready to work through the myriad questions and regulatory concerns around crypto. Now all we have to do is extend them a hand.

III. Conclusion

Although, in today's remarks, I have been quite critical of the SEC's approach, I remain optimistic that we can change course. The agency just celebrated its 88th birthday last week, and there is no better age than 88 to start grappling with difficult, interesting regulatory questions around crypto to keep the agency's mind sharp.

Regardless of what one thinks of crypto, it is in both investors' and the SEC's interest to take a more productive approach. Using the tools Congress has given us and drawing on public input, we can provide regulatory clarity, facilitate iterative experimentation, and pursue bad actors in the crypto space. I am looking forward to the upcoming panel, which I hope will include discussion of ways in which we can make substantive progress on regulating crypto responsibly.

[1] P.D. Eastman, Are You My Mother? (1960).

[2] A bill to provide for responsible financial innovation and to bring digital assets within the regulatory perimeter, S. 4356, 117th Cong. (2022).

[3] Letter from Dalia Blass, Div. of Inv. Mgmt. Dir., SEC to Paul Schott Stevens, President and CEO, Inv. Co. Inst. and Timothy W. Cameron, Asset Mgmt. Grp. Head, Sec. Indus. and Fin. Mkt. Ass'n (Jan. 18, 2018) (https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm).

[4] Div. of Inv. Mgmt. Staff, Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market, SEC (May 11, 2021), https://www.sec.gov/news/public-statement/staff-statement-investing-bitcoin-futures-market.

[5] Id.

[6] See Gary Gensler, Chair, SEC, Remarks before the Aspen Security Forum (Aug. 3, 2021), (https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03) ("I anticipate that there will be filings with regard to exchange-traded funds (ETFs) under the Investment Company Act ('40 Act). When combined with the other federal securities laws, the '40 Act provides significant investor protections. Given these important protections, I look forward to the staff's review of such filings, particularly if those are limited to these CME-traded Bitcoin futures."). See also SEC Off. of Inv. Educ. and Advoc. and CFTC Off. of Customer Educ. and Outreach, Funds Trading in Bitcoin Futures - Investor Bulletin, SEC (June 10, 2021), https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_fundstrading ("Funds regulated under the Investment Company Act of 1940 and its rules ('funds') are required to provide important investor protections. For example, funds must comply with legal requirements related to valuation and custody of fund assets, and mutual funds and ETFs must comply with liquidity requirements.").

[7] See Letter from Kristin Smith, Exec. Dir. and Jake Chervinsky, Head of Pol'y, Blockchain Ass'n, to Vanessa Countryman, Sec'y, SEC (Nov. 29, 2021), at 3 (https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-9411437-263052.pdf).

[8] See Letter from Davis Polk & Wardwell, to Vanessa Countryman, Sec'y, SEC (Nov. 29, 2021), at 4 (https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-9410842-262990.pdf).

[9] 15 U.S.C. § 78f(b)(5).

[10] The discussion of these two options is based on the analysis first set forth in Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust, Exchange Act Release No. 83723, 83 Fed. Reg. 37579 (published July 26, 2018).

[11] See, e.g., Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin Futures Fund under NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts), Exchange Act Release No. 94620, 87 Fed. Reg. 21676, 21678 (published April 6, 2022) [hereinafter Order Granting Approval to List and Trade Shares of the Teucrium Bitcoin Futures Fund].

[12] Order Disapproving a Proposed Rule Change to List and Trade Shares of the One River Carbon Neutral Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Exchange Act Release No. 94999, 87 Fed. Reg. 33548, 33553 (published May 27, 2022).

[13] Real-time Bitcoin Price, CoinDesk, https://www.coindesk.com/price/bitcoin/ (last visited June 14, 2022).

[14] See Letter from Dalia Blass, Div. of Inv. Mgmt. Dir., SEC to Paul Schott Stevens, President and CEO, Inv. Co. Inst. and Timothy W. Cameron, Asset Mgmt. Grp. Head, Sec. Indus. and Fin. Mkt. Ass'n (Jan. 18, 2018) (https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm).

[15] Tomio Geron, Companies Compete to Be Cryptocurrency Custodians, The Wall Street Journal (Sept. 17, 2019), https://www.wsj.com/articles/companies-compete-to-be-cryptocurrency-custodians-11568772060.

[16] CME Bitcoin Futures Report (Jun. 3, 2022), https://www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_Futures_Liquidity_Report.pdf.

[17] Purpose Investments Bitcoin ETF Crosses $1 Billion in Assets Under Management on One-Month Fund Anniversary, GlobeNewswire (Mar. 18, 2021), https://www.globenewswire.com/news-release/2021/03/18/2195821/0/en/Purpose-Investments-Bitcoin-ETF-Crosses-1-Billion-in-Assets-Under-Management-on-One-Month-Fund-Anniversary.html.

[18] Tanzeel Akhtar, Crypto Exchange-Traded Products Are Blossoming in Europe, CoinDesk (Mar. 1, 2022, 2:57 PM), https://www.coindesk.com/markets/2022/03/01/crypto-exchange-traded-products-are-blossoming-in-europe/; Submission by the Sponsor to the Commission in connection with a meeting between representatives of the Sponsor, BZX, and Commission staff on September 8, 2021, https://www.sec.gov/comments/sr-cboebzx2021-039/srcboebzx2021039-250110.pdf [hereinafter Sponsor Submission] (comparing numbers with the with btc-focused analysis from the SEC).

[19] See Letter from Paul Grewal, Chief Legal Officer, Coinbase to Vanessa Countryman, Sec'y, SEC (Mar. 3, 2022) (https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20118548-271429.pdf) (noting Figures 10-16 presenting data on foreign spot-based ETPs). Our statutory authority is unique, but the foreign experiences with bitcoin ETPs are nevertheless helpful windows into how a US ETP might perform.

[20] Order Granting Approval to List and Trade Shares of the Teucrium Bitcoin Futures Fund, supra note 11, at 12.

[21] Order Granting Approval to List and Trade Shares of the Teucrium Bitcoin Futures Fund, supra note 11, at n.46.

[22] Order Granting Approval to List and Trade Shares of the Teucrium Bitcoin Futures Fund, supra note 11, at n.47. The Commission has repeatedly suggested that this connection could be demonstrated by using a lead-lag analysis showing that futures prices consistently lead prices in the spot market. See, e.g., Order Disapproving a Proposed Rule Change to List and Trade Shares of the NYDIG Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Exchange Act Release No. 94395, 87 Fed. Reg. 14932, 14938 n.91 (published March 10, 2022) (stating that "[t]he Commission considers [lead-lag] analysis to be central to understanding whether it is reasonably likely that a would-be manipulator of the ETP would need to trade on the CME bitcoin futures market").

[23] The Canadian Purpose Bitcoin ETF, for example, offers a class of units that is U.S. dollar denominated. See Initial Public Offering, Purpose Bitcoin ETF at 18 (Feb. 11, 2021), https://documents.purposeinvest.com/Docs/BTCC/prospectus/en/Purpose
%20Bitcoin%20ETF%20Prospectus%202021-02-11.pdf. See also Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Exchange Act Rel. No. 93822, 86 Fed. Reg. 73360, 73365 (published Dec. 17, 2021) (noting that "several U.S. exchange-traded funds are using Canadian bitcoin ETPs to gain exposure to spot bitcoin.").

[24] See Order Granting Approval to List and Trade Shares of the Teucrium Bitcoin Futures Fund, supra note 11 at 21682 (dismissing access to purportedly preferable investment options as a basis for approval of listing and trading new products).

[25] Press Release, SEC, BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product (Feb. 14, 2022) (https://www.sec.gov/news/press-release/2022-26).

[26] See Hester M. Peirce, Commissioner, SEC, Statement on Settlement with BlockFi Lending LLC (Feb. 14, 2022), https://www.sec.gov/news/statement/peirce-blockfi-20220214.

[27] Caroline A. Crenshaw, Commissioner, SEC, Remarks at SEC Speaks: Digital Asset Securities - Common Goals and a Bridge to Better Outcomes (Oct. 12, 2021), https://www.sec.gov/news/speech/crenshaw-sec-speaks-20211012.

[28] Petition from J.W. Verret, to Vanessa Countryman, Sec'y, SEC (via email) (2022) (https://www.sec.gov/rules/petitions/2022/petn4-782.pdf).

[29] Accounting for exchange-traded digital assets and commodities, Fin. Acct. Standards Bd. (May 11, 2022), Topic 1, https://fasb.org/page/PageContent?pageId=/meetings/pastmeetings.html&isStaticpage=true#vc.

[30] SafeHarbor2.0, GitHub (Apr. 13, 2021), https://github.com/CommissionerPeirce/SafeHarbor2.0; Statement, Hester M. Peirce, Commissioner, SEC, Token Safe Harbor Proposal 2.0 (Apr. 13, 2021), https://www.sec.gov/news/public-statement/peirce-statement-token-safe-harbor-proposal-2.0.

[31] Reg-X-Proposal-An-Exempt-Offering-Framework-for-Token-Issuances, Github (Apr. 26, 2022), https://github.com/LeXpunK-Army/Reg-X-Proposal-An-Exempt-Offering-Framework-for-Token-Issuances; SafeHarbor X, Github (Jan. 8, 2022), https://github.com/lex-node/SafeHarbor-X.

[32] Caroline D. Pham & Hester M. Peirce, Making progress on decentralized regulation - It's time to talk about crypto together, The Hill (May 26, 2022 5:30 PM), https://thehill.com/opinion/congress-blog/3503277-making-progress-on-decentralized-regulation-its-time-to-talk-about-crypto-together/.

[33] See, e.g., Letter from Michelle Bond, Chief Exec. Officer, Ass'n for Digit. Asset Mkts. (ADAM) to Vanessa Countryman, Sec'y, SEC (Apr. 18, 2022) (https://www.sec.gov/comments/s7-02-22/s70222-20124008-280142.pdf) ("ADAM and its members are committed to working with lawmakers and regulators to promote responsible innovation in the digital asset space in a manner that expands the availability of financial services."); Letter from Renata K. Szkoda, Chair, Glob. Digit. Asset & Cryptocurrency Ass'n to SEC (Apr. 18, 2022) (https://www.sec.gov/comments/s7-02-22/s70222-20123954-280109.pdf) ("it is not too late for the SEC to study and consult with the industry and the CFTC about how exchange and ATS rules might be applied to platforms that trade what the SEC might seek to classify as investment contracts as well as non-security commodities."); Letter from Sheila Warren, Chief Exec. Officer, Crypto Council for Innovation to Vanessa Countryman, Sec'y, SEC (Apr. 18, 2022) (https://www.sec.gov/comments/s7-02-22/s70222-20124040-280166.pdf) ("We look forward to collaborative and constructive engagement to move closer toward a clear and effective regulatory environment for crypto-one that not only protects investors and furthers the remainder of the SEC's mission, but that also preserves the competitive edge of the United States as the leading innovator of financial technologies that will drive the world through the 21st century.").
The Securities and Exchange Commission today announced that it is requesting information and public comment on matters related to the activities of certain "information providers," including whether, under particular facts and circumstances, information providers are acting as "investment advisers" under the Investment Advisers Act of 1940 ("Advisers Act"). The Request specifically focuses on index providers, model portfolio providers, and pricing services.

"In recent decades, the use of information providers has grown, changing the asset management industry," said SEC Chair Gary Gensler. "The role of these information providers today raises important questions under the securities laws as to when they are providing investment advice rather than merely information. In order to help the Commission determine when-and under what facts and circumstances-these providers are giving investment advice, the Commission seeks information and public comment to help guide our approach."

Investment adviser status has regulatory implications, including questions related to registration under the Advisers Act and questions under the Investment Company Act of 1940. The Request will facilitate consideration of whether regulatory action is necessary and appropriate to further the Commission's mission.

Statement on Request for Comment on Certain Information Providers Acting as Investment Advisers by SEC Commissioner Caroline A. Crenshaw
https://www.sec.gov/news/statement/crenshaw-statement-request-comment-certain-information-providers-061522

Today, we have issued a request seeking comment on the activities of "information providers" - namely, index providers, model portfolio providers, and pricing service providers - and how our framework for registering and regulating investment advisers should apply to those providers (if at all). I want to encourage market participants to comment.

Index providers, model portfolio providers, and pricing services have come to play prominent roles in today's asset management industry.[1] Take index providers as an example. In 2020, there were approximately 3 million indexes, ranging in type, from broad-based and widely-used, to narrow, customized or bespoke indices for specific users.[2] With the dramatic ascent of index funds, some have noted that index providers are responsible for directing trillions of dollars' worth of investments.[3] And, the indexes that they create and maintain often form the benchmarks that serve as the measuring stick for fund or manager performance or compensation, or as guideposts in academic research.[4]

Many information providers appear to exercise significant discretion in the performance of their services.[5] As an example, index providers may exercise significant discretion by determining what securities go into the bucket of an index, what weight each should be given, and how often those buckets should be reconstituted or rebalanced. Ultimately, what index providers choose to include (or not include) in their index often determines what securities go into a fund, or how investors perceive manager or fund performance. Model portfolio providers similarly may exercise significant discretion in creating investment models for their users, making adjustments to those models, reconstituting or rebalancing the portfolios, and by providing varying degrees of customization. And, pricing services, in providing valuations to their users, appear to exercise discretion in determining what valuation methodology to use, what weight to give various inputs, how and whether to adjust valuations based on market color.

The growing prominence of information providers in the industry adds import to our consideration of whether and how the framework for registering and regulating investment advisers should apply in the context of information providers.[6]

Today we are only asking questions. But, they are important questions and I urge the public to comment.

[1] Request for Comment on Certain Information Providers Acting as Investment Advisers, Release Nos. IA-6050, IC-34618, at 3 (June 15, 2022) ("Request for Comment" or "RFC"); see generally John C. Coates, "The Future of Corporate Governance Part I: The Problem of Twelve," Harvard Public Law Working Paper No. 19-07 (discussing the rise of indexation).

[2] See Index Industry Association, Fourth Annual IIA Benchmark Survey Reveals Significant Growth in ESG Amid Continued Multi-Asset Innovation & Heightened Competition (Oct. 28, 2020) (noting that in 2020, the overall number of indexes climbed by approximately three percent to 3.05 million); see also RFC at 5. That number grew by an additional 5% in 2021. See Fifth Annual Benchmark Survey Shows Record Growth in Number of ESG Indices, Alongside Broadening of Fixed Income Indices (Oct. 25, 2021).

[3] See, e.g., Adrianna Z. Robertson, "Passive in Name Only: Delegated Management and 'Index' Investing," 36 Yale Journal on Regulation 795, at 2 (2019); cf. Coates, "The Future of Corporate Governance Part I," at 13 ("The bottom line is that indexed funds now own more than 20% and perhaps 30% or more of nearly all U.S. public companies.").

[4] Robertson, "Passive in Name Only," at 7-8.

[5] RFC at 4-5 and n.4 (citing Paul G. Mahoney & Adriana Robertson, "Advisers by Another Name," Virginia Law & Economics Research Paper No. 2021-01 (Jan. 2021)).

[6] The Advisers Act defines an "investment adviser" as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities . . . ." 15 U.S.C. 80b(a)(11).

https://www.cftc.gov/PressRoom/PressReleases/8546-22
https://www.cftc.gov/media/7391/enfhewkoconsentorder060722/download or a permanent injunction, $500,000 in restitution, $107,500 in civil monetary penalty, and a permanent registration ban and a 10-year trading ban against Daniel Hewko. A CFTC action against Daniel Adam Hewko (the son) and Main & Prospect Capital, LLC continues. As alleged in part in the CFTC Release:

The order finds that since at least August 2014, Hewko solicited funds from investors for a pooled investment vehicle marketed to prospective investors as the Global Opportunity Fund (Fund). Hewko transferred more than $1.1 million in investor funds into a futures trading account which was used to trade a limited amount of futures contracts including crude oil and E-mini S&P 500 futures contracts, both of which were traded on designated contract markets. According to the order, from approximately January 2016 through approximately October 2018, Hewko emailed investors account statements for the Fund, which reported investment gains. However, all of the purported investment returns contained in the account statements were false. What little futures trading the Fund did resulted in losses, and proceeds were not invested in any other manner that generated any returns at all for investors.

The order also finds that Hewko made payments of the Fund assets to various entities and individuals who were not entitled to such payments. According to the order, Hewko also made statements to investors about their investments that were not true, including telling investors their withdrawal requests could not be satisfied because the Fund assets were "in a trade" (when, in reality, the Fund assets were not "in a trade" but rather had been dissipated) and telling at least one investor the investor's funds were not lost or gone, which also was not true.

Further, the order finds that Hewko solicited funds for participation in a commodity pool but failed to register with the CFTC as an Associated Person of a Commodity Pool Operator.

https://www.finra.org/sites/default/files/fda_documents/2020068283601
%20Denise%20S.%20Sobczak%20CRD%203078128%20AWC%20lp.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, Denise S. Sobczak submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Denise S. Sobczak entered the industry in 1994 and by 2009, she was registered with Raymond James Financial Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Morales a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Sobczak Forged Signatures on Firm Document

From April 2016 through July 2020, Sobczak forged 38 firm documents by cutting and pasting customers' initials and signatures from previous documents onto new documents and by cutting a pasting her branch manager's signature on firm documents. These documents included, among others, new account forms, money movement letters of authorization, ACH setup requests, IRA beneficiary designations, and cash distribution requests. Sobczak's branch manager did not give prior permission for the use of his signature. Although Sobczak's customers did not give prior permission for the use of their initials or signatures, they authorized the activity set forth on the forms in question. 

Therefore, Sobczak violated FINRA Rule 2010. 

Sobczak Falsified Firm Documents 

From July 2018 through May 2020, Sobczak falsified 34 firm documents by obtaining the customers' signatures on blank or incomplete documents. After the customers initialed or signed the blank or incomplete forms, Sobczak added and/or corrected previously missing or incorrect information without having the customer re-execute the form. These documents included, among others, customer account transfer instructions, cash distribution requests, IRA beneficiary designations, and ACH setup requests. Although Sobczak falsified the documents in question, the customers authorized the underlying activity.

Therefore, Sobczak violated FINRA Rule 2010. 

Sobczak Caused Raymond James to Maintain Inaccurate Books and Records 

By forging and falsifying the new account forms and other documents set forth above, Sobczak caused Raymond James to maintain inaccurate books and records. 

Therefore, Sobczak violated FINRA Rules 4511 and 2010. 

https://www.finra.org/sites/default/files/fda_documents/2020068693101
%20Victor%20Morales%20CRD%206552148%20AWC%20lp.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, Victor Morales submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Victor Morales was first registered in  2015 with Wells Fargo Clearing Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Morales a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From November 2019 until October 2020, while registered through Wells Fargo, Morales owned a towing and transportation business. Morales operated the business as a sole proprietorship and received compensation from the business. 

The above-described business activity was outside the scope of Morales' relationship with Wells Fargo. Morales did not provide prior notice to Wells Fargo, written or otherwise, of his involvement in the outside business activity. On the contrary, from 2019 through 2020, Morales falsely attested in annual compliance questionnaires provided to Wells Fargo that he had not engaged in any unapproved outside business activities. 

Therefore, Morales violated FINRA Rules 3270 and 2010. 

. . .

In 2020, the federal government initiated several programs to assist small businesses adversely impacted by the COVID-19 pandemic, including the Economic Injury Disaster Loan program, which was administered by the SBA. On July 8, 2020, Morales applied to the SBA for an Economic Injury Disaster Loan on behalf of his transport business, but he failed to carefully review the loan application before submitting it. Morales, then a registered representative of Wells Fargo, negligently overstated in his application the amount of gross revenue his transport business had generated for the period of January 31, 2019, to January 31, 2020. 

Based on Morales's misrepresentation, the SBA approved his loan application, and separately approved Morales for an advance payment. On July 9, 2020, before he received the loan and advance, Morales signed a loan agreement with the SBA, affirming that the representations in his loan application were correct. Morales did not review the information he had provided in the loan application prior to certifying its accuracy. On July 14, 2020, the SBA provided Morales with a $16,500 loan and $10,000 advance (both of which Morales repaid in full in August 2021). 

Therefore, Morales violated FINRA Rule 2010.

In the Matter of Ramiro Luis Colon, Respondent (FINRA AWC 202006627580)
https://www.finra.org/sites/default/files/fda_documents/2020066275801
%20Ramiro%20Luis%20Colon%20III%20CRD%201868710%20AWC%20gg.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, Ramiro Luis Colon submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ramiro Luis Colon was first registered in 1998, and by 2006, he was registered with UBS Financial Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Colon a $5,000 fine and a 30-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

At all times during the relevant period, UBS's written supervisory procedures provided that electronic business communications could only be transmitted through firm sponsored and authorized systems in order to facilitate the firm's preservation and supervision of such communications. Colon did not have authorization to communicate with any customer through WhatsApp Messenger, and UBS did not preserve or capture any such communications. From September 2018 through April 2020, however, Colon exchanged hundreds of communications with a customer on WhatsApp Messenger about securities-related business. 

Through this conduct, Colon violated FINRA Rules 4511 and 2010. 

   In a FINRA Arbitration Statement of Claim filed in October 2020, associated person Claimant Cabrera asserted defamation; tortious interference with prospective economic advantage; and unjust enrichment/quantum meruit in connection with information placed by Respondent Wells Fargo on his Form U5 upon the termination of employment. Claimant Cabrera sought over $4 million in compensatory damages, over $4 million in punitive damages, attorneys' fees, and the expungement of the his Central Registration Depository record ("CRD"). Respondent Wells Fargo generally denied the allegations and asserted affirmative defenses.
   In response to Claimant's March 25, 2022, Motion for Sanctions, which Respondent opposed, the Panel ruled:

The Panel heard Claimant's Motion for Sanctions as a preliminary matter prior to the hearing on the merits of Claimant's petition for expungement of his Amended U5 and his defamation claim. Claimant represented that all issues had been resolved, except Respondent's failure to comply with the Panel's Discovery Order compelling the production of information responsive to Information Requests 10 and 11. These requests sought the production of records and information, maintained in Respondent's compliance department, identifying all financial advisors who Wells Fargo prohibited from placing clients in Advisor and Customer Choice accounts, with or without approval. Respondent represented that Wells Fargo could not comply with the Order because the records sought were not maintained by its Compliance department. The Panel reserved a ruling on the motion, pending the conclusion of the formal hearing. After full consideration of the parties' arguments and the Panel's discovery Order, Claimant's Motion for Sanctions is granted, and the Panel finds it appropriate to draw an adverse inference in the favor of Claimant that he was unfairly denied the opportunity to invest his clients in Respondent's Asset Advisor and Customer Choice accounts. 

   The FINRA Arbitration Panel found Respondent Wells Fargo liable to and ordered the firm to pay to Claimant Cabrera $75,000 in compensatory damages, $4,393.50 in attorneys' fees, $750 in filing fees, and recommended the expungement of two occurrences from Cabrera's CRD based upon a finding that they were defamatory.

https://www.brokeandbroker.com/6494/finra-jpm-zoom/
Way back in 2019, former J. P. Morgan Securities customers filed a FINRA Arbitration Statement of Claim against the brokerage firm seeking about half a million dollars in damages. You remember 2019, that was just before the Covid pandemic. Of course, once the pandemic got under way, the customers found their case in limbo and, go figure, but, gee, JPMS just didn't seem in all that much of a rush to expedite things by videoconferenced hearings. 

From Stephen A. Kohn, Candidate for 2022 FINRA Small Firm Governor:

THE BULLIES ARE OUT TO GET US . . . And they're doing a good job of it!

I've been in this business for a long, long time; just under four decades. With the exception of a few months at a wire-house, I've always been a small firm guy. And, in all that time, one would think things would change, get better, or at least, stay the same.  But the mantra has NEVER changed, "GET RID OF THE SMALL FIRMS."

And, between the large firms, FINRA and the SEC, the bullies are unrelenting and keep whittling away at our sisters and brothers.

So, where are we? The small firm community is on its death bed.  Biased regulators are trying to engineer us out of existence through overblown rulebooks and biased regulation.  Given that FINRA is a membership organization, one would have hoped for some energetic opposition to the inevitable decline of some of the 90% of FINRA's membership -- look it up, the so-called FINRA Small Firms account for 90%-plus, and dwindling of the total number of member firms.  Where is the voice of the FINRA Board of Governors?  Sadly, it is a whisper if anything at all.  The Board seems beholding to the anti-Small Firm agenda of large firms, FINRA and the SEC.  Almost no Governor appears to have the inclination or the guts to take a stand that offers some relief to the little guys.

I have served you before and now, I need to get back on the Board of Governors, to again be your voice and to finish my work.

I am asking for your petition.  Get me on the ballot in this upcoming BOG election.

I make no promises to change what's been done.

My goal is to stop things from getting worse!

Please click the PandaDoc link below and sign my petition, get me on the ballot and back on the BOG to work for our common survival. 


Let me be your voice.

Stephen Kohn 
(303) 880-4304  Cell Phone

Stephen Kohn has been employed in the financial services industry since 1984. In 1996, he founded FINRA member firm Stephen A. Kohn & Associates, Ltd. ("SAKL")  On January 2, 2020, he passed ownership of SAKL to DMK Advisor Group, Inc. ("DMK"), still a small, Independent broker/dealer, catering to the needs of forty-one independent representatives and their clients, with office locations in five states, registered in forty-one and Puerto Rico.  
 
Stephen holds Series 7, 24, 53, 63, 72, 73, 79 and 99 registrations. He has the honor of having been elected to the FINRA Board of Governors in 2017, representing the Small Broker/Dealer Community.  He was also twice elected to the National Adjudicatory Council ("NAC") in 2009 and 2014. He serves as an Industry Arbitrator and has been elected to the District 3 Committee. 
 
Stephen graduated from C.W. Post College in 1964 with a BA degree. He has the distinction of having served in the United States Coast Guard.
 
Well known to those in the NASD and now FINRA small-firm community as a passionate and persistent advocate for small broker/dealers, who comprise more than 90% of FINRA membership, Stephen continues to speak out on behalf of his industry constituents and colleagues. He intends to remain active in the FINRA reform movement and urges all like-minded industry participants to reach out to him in full confidence concerning any and all matters.  

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