Securities Industry Commentator by Bill Singer Esq

Parietti's Predicament And Prosecutors' Puzzling Principles (BrokeAndBroker.com Blog)

2Cir Vacates SDNY Jury Verdict Against UBS for Whistleblower Retaliation

Trevor Murray, Plaintiff/Appellee/Cross-Appellant, v. UBS Securities, LLC, UBS AG, Defendants/Appellants/Cross-Appellees (2Cir Opinion)

SEC Proposes Rules to Improve Clearing Agency Governance and to Mitigate Conflicts of Interest (SEC Release)

Dissenting from Stakeholder Governance for Clearing Agencies by SEC Commissioner Hester M. Peirce

Statement on Clearing Agency Governance and Conflicts of Interest by SEC Commissioner Mark T. Uyeda

Another Pissin' Contest at the SEC?

In the Matter of Gary Edward Haynes (SEC Order)

Weymouth Man Pleads Guilty to Market Manipulation Conspiracy / Defendant conspired with manipulative stock traders in China and United States (DOJ Release)

Los Angeles Man Pleads Guilty to Insider Trading Conspiracy (DOJ Release)

CFTC Charges Nevada Metals Trader with Spoofing in Gold and Silver Markets (CFTC Release)

Digital Signatures / FINRA Reminds Firms of Their Obligation to Supervise for Digital Signature Forgery and Falsification  (FINRA Regulatory Notice 22-18)

FINRA Small Firms Face Existential Crisis. VOTE Stephen Kohn for Small Firm Governor (BrokeAndBroker.com Blog)

Plaintiff Trevor Murray claims that UBS Securities, LLC and UBS AG (together "UBS") fired him in retaliation for reporting alleged fraud on shareholders to his supervisor. Murray sued UBS under the whistleblower protection provision of the Sarbanes-Oxley Act ("SOX"), 18 U.S.C. § 1514A, and he ultimately prevailed at trial. The district court (Failla, J.), however, did not instruct the jury that a SOX antiretaliation claim requires a showing of the employer's retaliatory intent. Section 1514A prohibits publicly traded companies from taking adverse employment actions to "discriminate against an employee . . . because of" any lawful whistleblowing act. 18 U.S.C. § 1514A(a). We hold that this provision requires a whistleblower-employee like Murray to prove by a preponderance of the evidence that the employer took the adverse employment action against the whistleblower-employee with retaliatory intent-i.e., an intent to "discriminate against an employee . . . because of" lawful whistleblowing activity. The district court's legal error was not harmless. We thus vacate the jury's verdict and remand to the district court for a new trial.

Clearing agencies and other clearinghouses play a central role in our financial markets. That role continues to increase as market participants and regulators look to these entities to mitigate and manage risk. Accordingly, as the proposing release recognizes, how clearinghouses are governed and managed matters. The proposal takes an overly prescriptive, regulator-knows-best approach to these matters that risks diluting the duties of directors to the clearing agency and depriving clearing agencies of the flexibility and expertise needed for effective governance.

The Commission's approach manifests a common regulatory tendency: market participants set up an effective market infrastructure on their own initiative because it will improve the market; the government, noticing the efficacy and importance of this private infrastructure, pulls it into the regulatory fold and forces all market participants to use it; regulatory mandates displace the market incentives that used to drive risk management and may sow the seeds for a shift away from member ownership; and the regulatory mandates get more prescriptive over time, or, as the proposing release puts it, an "incremental evolution of the . . . regulatory framework"[1] happens.

That evolution continues today with a proposed set of governance requirements. The proposal would require in most cases that a majority of a registered clearing agency's directors be independent.[2] A director generally would be independent under the proposed rules if she has no material relationship with the registered clearing agency, or any affiliate thereof. The proposal would require each registered clearing agency to have a nominating committee composed of a majority of independent directors and to have in place a written process for evaluating nominees against written fitness standards. The proposal also would require each registered clearing agency to have a risk management committee that may need to meet the independence requirements,[3] also has owner- and participant-affiliated members, is regularly reconstituted, and is "able to provide a risk-based, independent, and informed opinion on all matters presented to it for consideration in a manner that supports the safety and efficiency of the registered clearing agency."[4]

In addition to board composition requirements, the proposal would impose requirements intended to address other governance concerns. The proposal would require each registered clearing agency to have written policies to identify conflicts of interest so that the clearing agency can reduce or eliminate them. Directors would have a corresponding obligation to report potential conflicts without a materiality threshold. The proposal also would require each registered clearing agency to establish, implement, maintain, and enforce policies regarding critical service provider risk management. Each registered clearing agency would also have to implement, maintain, and enforce written policies and procedures reasonably designed to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders of the registered clearing agency regarding material developments in its governance and operations on a recurring basis.

The proposal is puzzling for a number of reasons. First, in 2016, when the Commission finalized rules establishing standards for a subset of clearing agencies, it expressly rejected the suggestion from several commenters that it impose a director independence requirement.[5] It acknowledged that including public or independent directors on the board "could be one way" or "one possible approach" to achieve the fair representation requirement set forth in Section 17A of the Exchange Act but concluded that it was unnecessary to further specify requirements for the composition of clearing agency boards, noting that "these topics . . . are already addressed" in that paragraph (b)(3)(C) of that section.[6] Today's proposing release, attempting to explain the change, notes that:

given the growing concentration of clearing and settlement participants among a small number of firms and the concentration of differing perspectives into distinct groups of clearing agency stakeholders, the Commission believes it is appropriate to propose requirements on independent representation to facilitate the consideration and management of diverse stakeholder interests in the decision-making of the clearing agency.[7]

It is unclear what this observation means or how it relates to the proposed requirements. Moreover, the reference to facilitating the board's "consideration and management of diverse stakeholder interests" is ominous. An independent director mandate sounds good because it resembles what we require in many other contexts, but clearing agencies operate best when a visceral awareness of the consequences of failed risk management drives the board's decisionmaking. Focusing on stakeholder interests sounds expansive and inclusive, but an embrace of diffuse interests might distract the board from the dry but extremely important task of risk management. The Commission asserts that "The appearance of conflicts of interest can reduce confidence among direct and indirect participants, other stakeholders, and the public in the functioning of the clearing agency, particularly during periods of market stress when general confidence in market resilience may be low,"[8] but it seems more likely that a board distracted by a cacophony of stakeholders and hobbled by a lack of expertise will reduce market confidence during periods of market stress.

Second, Exchange Act Section 17A(b)(3)(C) suggests that the Commission's role with respect to the composition of the board extends to ensuring "fair representation of its shareholders (or members) and participants."[9] The proposed rule would impose requirements that go well beyond those contemplated by the statute while not even ensuring that clearing agencies satisfy the fair representation standard set out in Exchange Act Section 17A(b)(3)(C). Although an employee of a participant could serve as an independent director, the rule does not guarantee that any owners or participants have affiliates on the board.[10] The proposal turns what seems to be the statutory focus-ensuring that owners and participants are both key players in overseeing management-on its head by making it possible that directors drawn from owners and participants will represent only a minority of directors.

Third, the proposal would send boards running off in multiple directions, rather than keeping them singularly focused on the clearing agency's well-being. The proposal seems to expect that directors will make decisions to further the interests of a constituency that they represent.[11] That notion seems at odds with the fiduciary duty of a director to the entity on the board of which she sits. Just as with any company, a director of a clearing agency should not be "motivated by the needs of" any stakeholder other than the clearing agency. The proposal also explicitly would require clearing agencies "to obtain and consider the views of a diverse cross-section of their participants and stakeholders, who will likely bear any of the losses incurred as a result of the clearing agency's decisions with respect to its governance and operations."[12] The release identifies participants' customers and securities issuers as stakeholders that should be consulted.[13] The Commission likewise requires that "the nominating committee consider[] the views of other stakeholders who may be impacted by the decisions of the registered clearing agency, including transfer agents, settlement banks, nostro agents, liquidity providers, technology or other service providers."[14] As already noted, Exchange Act Section 17A(b)(3)(C) appropriately focuses on governance by those who have a direct interest in effective operation of the clearing agency-its "shareholders (or members) and participants." The Commission's attempt to "complement"[15] the statute with its solicitude toward "stakeholders" blurs this appropriately narrow focus established by Congress by insisting that the boards look to the interests of a diffuse group of stakeholders who may be only indirectly affected-if they are affected at all-by clearing agency operations.

Finally, compliance with the requirement that risk management committees be able to provide risk-based, independent, and informed opinions will be difficult to examine and enforce. A better way to facilitate the formation of competent risk management committees would be to avoid constraining unnecessarily boards' ability to constitute their risk management committees. As one example, the proposed requirement to reconstitute the risk management committee periodically could be dropped.

Designing effecting clearinghouse governance is a difficult task. While I do not support the proposal, I welcome the thoughts of commenters on the proposal and the issues I have raised. I will take the comments into account as I continue to think about what effective clearinghouse governance looks like and what the role of the Commission should be in shaping it. These questions are not easy to resolve and have been a matter of debate for many years.

Thank you to staff throughout the Commission. In addition to their hard work on the proposal, the staff in the Office of Clearance and Settlement in the Division of Trading and Markets and the Division of Examinations work hard every day to ensure that registered clearing agencies are fulfilling their important function in the markets.

[1] Clearing Agency Governance and Conflicts of Interest, Exchange Act Rel. No. 95431 (Aug. 8, 2022) ("Release"), at 23.

[2] The proposed rules would establish a lower threshold for the number of independent directors for clearing agencies that are majority owned by participants. See Release at 56.

[3] The policy discussion in the release and the proposed rule text are not entirely clear on this point. Proposed Rule 17Ad-25(c) clearly requires a majority of the nominating committee to be independent directors, and the release discusses these requirements. See Release at 66-67. Paragraph (d) of the proposed rule addresses requirements applicable to the risk management committee, but the only requirement related to composition of the committee is that it must "include representatives from the owners and participants of the registered clearing agency." Paragraph (e) imposes a minimum independent director threshold on any committee that "has the authority to act on behalf of the board of directors." Request for Comment 24 asks whether the Commission should exclude the risk management committee from paragraph (e) "so that a registered clearing agency would not be required to include independent directors on the committee." Release at 81.

[4] Release at 73.

[5] Standards for Covered Clearing Agencies, Exchange Act Rel. No. 78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) ("CCA Standards").

[6] CCA Standards, 81 FR at 70804.

[7] Release at 36.

[8] Id. at 40.

[9] In 2016, the Commission concluded that a clearing agency could fulfill the requirements of this provision in part by including public or independent directors on its board, but as noted above it did not assert that the statute required their inclusion. See CCA Standards, 81 FR at 70804.

[10] The release is silent on this question, but the proposed rule does include a provision, as noted above, that would require owner and participant representation on the risk management committee. See proposed Rule 17Ad-25(d)(1).

[11] See, e.g., Release at 46 ("As long as a majority of directors are not solely motivated by the needs of one category of stakeholders, this structure can help ensure that the board addresses the full set of owners and participants, even smaller participants, in fulfilling these statutory objectives.").

[12] Id. at 100.

[13] See id.

[14] Id. at 64.

[15] Id. at 69

Clearing agencies form critical components of the U.S. financial market infrastructure by facilitating the securities transaction lifecycle. The 2017 U.S. Department of the Treasury Report on Capital Markets emphasized that clearing agencies, and financial market utilities generally, serve a core function in financial market infrastructure:

[b]ecause of the level and concentration of financial transactions handled by [financial market utilities] and their interconnectedness to the rest of the financial system, [financial market utilities] represent a significant systemic risk to the U.S. financial system. Much of this systemic risk is the result of inherent interdependencies, either directly through operational, contractual, or affiliation linkages or indirectly through payment, clearing, and settlement processes.[1]

The Commission's challenge is achieving the appropriate regulatory framework for clearing agencies.[2] The potential systemic implications flowing from these marketplace functions and financial interdependencies of participants means that a reactive regulatory approach is insufficient. The Commission must proactively identify current and future marketplace risks and work to build a regulatory framework designed to mitigate such risks.

An effective regulatory framework is particularly important given that clearing agencies impact, directly or indirectly, each element of the Commission's tripartite mission.[3] Earlier this year, the Commission proposed to shorten the standard settlement cycle for equity transactions in the United States to one business day, down from two business days, to further mitigate risks in the clearance and settlement process.[4]

Any clearing agency governance rules, however, should foster competition, promote entry of new firms, reduce concentration of risk, accommodate any differentiating factors between types of clearing agencies, and provide appropriate flexibility for each clearing agency to tailor aspects of its governance provisions to its specific business model. I have concerns that the proposal does not achieve these goals.

First, the rules may limit competition. The release's economic analysis acknowledges that "registered clearing agency activities exhibit high barriers to entry and economies of scale. These features of the existing market, and the resulting concentration of clearing and settlement services within a handful of entities, informs the Commission's examination of the effects of the proposed rules on competition, efficiency, and capital formation."[5] However, the rules proposed today may have the effect of fostering an environment that further limits the number of firms providing clearing and settlement services. The proposed rules may disincentivize new firms from entering this market due to their cumulative effects. For example, the proposed rules include prescriptive provisions related to board composition, risk management functions, and how boards of clearing agencies oversee relationships with service providers for critical services.[6]

Second, the proposal may further increase market concentration risks. The release notes that "registered clearing agencies currently feature specialization and limited competition" and that "there is only one registered clearing agency serving as a central counterparty for each of the following asset classes: exchange-traded equity options (OCC), government securities (FICC), mortgage-backed securities (FICC), and equity securities (NSCC)."[7] To the extent that the proposed rules, if implemented, deter new entrants, then the sole clearing agency handling a particular asset class will be required to take on additional risk as trading volumes grow and become enshrined as a "too big to fail" institution.

Third, the proposal appears overbroad. The proposed rules would generally set governance requirements for all registered clearing agencies, irrespective of status as a covered clearing agency.[8] The proposal supports this approach by stating "[b]ecause all clearing agencies would face these [governance] tensions, the Commission believes it is appropriate to have this governance proposal apply to all registered clearing agencies."[9] The Commission could have proposed a bifurcated approach with more stringent requirements on the dominant incumbents, while providing more scaling and flexibility for new entrants. This approach, however, was not considered in the release.

Fourth, the prescriptive nature of the proposal does not adequately reflect differences in a clearing agency's organizational structure or services provided. I am concerned that a "one size fits all" approach to corporate governance, by mandating specific governance structures for all registered clearing agencies, may not take into account current or future differences in the underlying business models of these firms. I am concerned that the proposal rules will result in a "check the box" approach to clearing agency governance that does not effectively address the underlying concerns.

While I am unable to support the proposal, I look forward to the public's comments, including responses regarding the economic analysis, and whether we can reduce potential systemic risks associated with clearing agencies through governance structural requirements. I thank the staff in the Division of Trading and Markets, Division of Economic and Risk Analysis, Division of Examinations, Division of Corporation Finance, Division of Investment Management, and the Office of the General Counsel for their efforts on the proposal.

[1] U.S. Department of the Treasury, A Financial System that Creates Economic Opportunity: Capital Markets (Oct. 2017), at 152, available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf. The Treasury Report provides a historical perspective into the development of clearing houses: "[t]he existence of clearinghouses dates back to the late 19th century when they were used to net payments in commodities futures markets. In the United States, the New York Stock Exchange (NYSE) established a clearinghouse in 1892; outside the United States, securities exchanges established clearinghouses later in the 20th century. Central securities depositories, which facilitate the safekeeping of securities, have existed in the United States since at least the 1970s." Id.

[2] Certain of these challenges were identified in a recently published article tackling the challenges associated with clearinghouse governance, noting that clearing members are the ultimate risk bearers of the business, but could be a different group than the clearinghouse shareholders for large publicly-listed for-profit financial infrastructure groups. See Paolo Saguato, Financial Regulation, Corporate Governance, and the Hidden Costs of Clearinghouses, 82 Ohio State L.J. 1071 (2022), available at https://moritzlaw.osu.edu/sites/default/files/2022-03/18.%20Saguato_v82-6_1071-1140.pdf.

[3] The mission of the SEC is to (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. See https://www.sec.gov/about.shtml.

[4] Shortening the Securities Transaction Settlement Cycle, Release No. 34-94196, 87 FR 10436 (Feb. 24, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-02-24/pdf/2022-03143.pdf.

[5] Clearing Agency Governance and Conflicts of Interest, Release No. 34-95431 (Aug. 08, 2022), at 109 (Clearing Agency Governance Proposal).

[6] Id. at 4.

[7] Id. at 109.

[8] Covered clearing agencies are a subset of registered clearing agencies that provide the services of a central counterparty or central securities depository. See 17 CFR 240.17Ad-22(a)(5).

[9] Clearing Agency Governance Proposal, at 11.

The Division's brief acknowledges that the OIP contains an error, as Haynes was convicted of several counts of violating Michigan Compiled Laws ("MCL") § 750.174a, whereas the OIP erroneously alleges he was convicted of several counts of violating MCL § 750.174. ⁴ We note that the OIP also describes these convictions as being for "Embezzlement From a Vulnerable Adult,"⁵ even though MCL § 750.174a does not discuss embezzlement.⁶ 

Regardless, the Division argues that amendment of the OIP is unnecessary because the error in referencing MCL § 750.174 rather than MCL § 750.174a was merely typographical and does not prejudice Haynes. However, in making this argument, the Division does not cite the Rules of Practice or any opinions or orders of the Commission. ⁷ Instead, the Division cites federal court cases and treatises that seem to explicitly or implicitly rely on Federal Rule of Civil Procedure 60(a), which provides federal district courts with explicit authority to "correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record." The Division does not point to any authority suggesting that Federal Rule of Civil Procedure 60(a) applies to administrative proceedings before the Commission or that any similar provision appears in our Rules of Practice. ⁸  

= = = = =

Footnote 4: See Haynes, 2020 WL 5766754, at *1.

Footnote 5:  Id. 

Footnote 6: The Division points out that both the criminal information and the judgment against Haynes referred to the convictions as "embez[zlement]" from a vulnerable adult. However, in the opinion affirming Haynes's convictions, the Michigan Court of Appeals stated that Haynes had been convicted of several counts of "obtaining or using a vulnerable adult's money or property through fraud, deceit, misrepresentation, coercion, or unjust enrichment (exploiting a vulnerable adult)," in violation of various provisions of MCL § 750.174a. People v. Haynes, __ N.W.2d __, No. 350125, 2021 WL 3573029, at *1 (Mich. Ct. App. Aug. 12, 2021). This shorthand description of the convictions as "exploiting a vulnerable adult" more closely tracks the language of MCL § 750.174a. However, we need not and do not address whether amendment of the OIP would be warranted if the OIP had provided the correct statute of conviction but had described the convictions as "Embezzlement From a Vulnerable Adult." 

Footnote 7: Cf. Rule of Practice 200(d), 17 C.F.R. § 201.200(d) (describing amendments to OIPs). 

Footnote 8 We note that the situation at issue here involves a known, substantive error in the OIP, which has been identified prior to the Commission's issuance of an opinion and order resolving the case. A different analysis may well apply in a different situation.

From approximately 2013 through at least 2018, Wang participated in the manipulative trading activity of a group of securities traders located in China and, at times, in Massachusetts. Specifically, Wang and his co-conspirators used multiple brokerage accounts in their names, and in the names of others with whom Wang had a relationship, to artificially depress or inflate the prices of thinly traded securities. They did so by repeatedly placing relatively small sell (or buy) orders designed to send a false signal about a security's supply (or demand) and to depress (or inflate) the security's price. Wang and his co-conspirators then immediately placed relatively large buy (or sell) orders on the other side of the market to take advantage of their manipulations. Once the large orders executed, Wang and his co-conspirators cancelled their outstanding manipulative orders.

[B]eginning in January 2018 through at least August 2020, he and co-defendants Doron "Ron" Tavlin, 66, of Minneapolis, and David Gantman, 56, of Mendota Heights, willfully engaged in an insider trading conspiracy. The conspiracy involved nonpublic information about the acquisition of Company B, an Israeli-based company that specialized in robotics for spinal procedures, by Company A, an Ireland-based medical device company that primarily operated from its executive headquarters in Minneapolis. Tavlin, a former vice president of Company B, learned material, nonpublic information about Company A's potential acquisition of Company B. In violation of his duty to the company, Tavlin tipped this information about the acquisition to his friend, Farahan, who then tipped the information to Gantman and instructed him to keep the information secret. Farahan knew that Company A's imminent acquisition of Company B would likely result in an increase in Company B's stock price. Farahan and Gantman used the nonpublic information to quickly purchase substantial amounts of Company B securities throughout August and September 2018.  Specifically, between August 13, 2018, and September 17, 2018, Farahan purchased approximately $1,031,359 in Company B securities.  On September 21, 2018, the day after Company B publicly announced its acquisition by Company A, Farahan and Gantman each sold all of their Company B securities for a combined profit of more than $500,000. Farahan's total share of the profit was approximately $247,500.

According to court documents, Farahan further admitted that, after the acquisition occurred, Tavlin learned that the Financial Industry Regulatory Authority (FINRA) was investigating certain trades of Company B securities that occurred prior to the publicly announced acquisition. As part of its inquiry, FINRA asked insiders who knew about the secret acquisition negotiations, which included Tavlin, whether they knew any of the parties who traded in Company B securities leading up to the public announcement. In January 2019, Tavlin responded to FINRA's inquiry by falsely denying that he recognized any names on a list of persons and entities that purchased Company B securities, which included Farahan and Gantman's names.

According to court documents, Farahan also admitted that it was part of the insider trading conspiracy that Tavlin and Farahan agreed that Farahan would pay money to Tavlin in exchange for the material, nonpublic information that Tavlin provided to him. For example, in October 2019, Farahan gave Tavlin a $25,000 check in exchange for the information that Tavlin had provided about Company B leading up to the acquisition.

[F]rom February 2015 through March 2018, Shak repeatedly engaged in manipulative or deceptive acts and practices by spoofing-bidding or offering with the intent to cancel the bid or offer before execution-while placing orders for and trading gold and silver futures contracts on the Commodity Exchange, Inc. On hundreds of occasions, Shak entered large orders for gold or silver futures that he intended to cancel before execution, while placing orders on the opposite side of the gold or silver futures market. By placing the spoof orders, Shak intentionally or recklessly sent false signals of increased supply or demand that were designed to trick market participants into executing against orders on the opposite side of the market, which he actually wanted filled. Shak's spoof orders allowed him to fill orders on the opposite side of the market sooner, at a better price, and/or in larger quantities than they otherwise would have been filled.

FINRA has received an increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. Firms have, for example, identified signature issues involving a wide range of forms, including account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions. 

These types of incidents underscore the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification. To help firms address the risks these signature forgeries and falsifications present, FINRA is sharing information in this Notice about: 

• relevant regulatory obligations; 
• forgery and falsification scenarios firms have reported to FINRA; and 
• methods firms have used to identify those scenarios. . . .
  
  

• Securities Industry Commentator
• Bill Singer