The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

August 12, 2022


PERHAPS THE SEC HOPED TO BURY
FOUR WHISTLEBLOWER AWARD DENIALS
ON A FRIDAY IN AUGUST?

Order Determining Whistleblower Award Claims

Order Determining Whistleblower Award Claims

Order Determining Whistleblower Award Claims

Order Determining Whistleblower Award Claims

















https://www.brokeandbroker.com/6602/merrill-lynch-finra-overtime/
Early on in "Macbeth," the eponymous character famously muses about cases, bloody instructions, even-handed justice, and a poisoned chalice. Those lines are summoned up by a recent FINRA regulatory settlement barring a former Merrill Lynch employee for getting paid unearned overtime. Will FINRA be plagued by this case because the misdeed of the employee is treated far worse than the similar misdeed of the employer? Indeed, FINRA's disparate treatment of employees of FINRA's Large Member Firms and those Large Member Firms themselves is a poison that fills the regulator's chalice. Has the regulator developed an immunity to its uneven regulation?

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95486; Whistleblower Award Proc. File No. 2022-74)
https://www.sec.gov/rules/other/2022/34-95486.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

Based on the Enforcement Declaration, the OWB Declaration, and the other facts in the record-including but not limited to Claimant's prior submissions to the Commission-we find that: (1) Claimant knowingly and willfully made materially false statements in Claimant's dealings with the Commission within the meaning of Section 21F(i) of the Exchange Act and Rule 21F-8(c)(7) thereunder, and therefore is ineligible for an award;7 and (2) Claimant did not submit his/her information on Form TCR or sign the requisite whistleblower declaration in accordance with Rules 21F-9(a), (b), and (e). 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95485; Whistleblower Award Proc. File No. 2022-73)
https://www.sec.gov/rules/other/2022/34-95485.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

As an initial matter, any information that Claimant provided to the Commission for the first time prior to July 21, 2010 is not considered original information pursuant to the Dodd-Frank Act. Therefore, Claimant's submissions prior to July 21, 2010 are not original information and cannot serve as the basis for a whistleblower award. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95484; Whistleblower Award Proc. File No. 2022-72)
https://www.sec.gov/rules/other/2022/34-95484.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

First, Claimant argues for the first time in his/her Response that Claimant was the original source of information provided to the Other Agency which must have caused the Other Agency to make referrals to the Commission. However, Other Agency staff confirmed with OWB staff that Other Agency records do not indicate that the referrals were opened based upon information from Claimant or any other whistleblower. The Other Agency typically tracks if referrals originated from a tip or complaint from a member of the public. Here, Other Agency records demonstrate that the referrals originated with (1) Other Agency's own review of the price and volume activity of *** Issuer's security, and (2) Other Agency's review of Redacted Issuers promotional material. In addition, Enforcement staff assigned to the Investigation confirmed in a supplemental declaration, which we credit, that the Redacted Other Agency referrals did not mention that the Other Agency received any information from Claimant or any other whistleblower or informant. Staff assigned to the Investigation further confirmed that the staff has no recollection of an Other Agency representative identifying or mentioning Claimant as a  source of information for the referrals at issue. Therefore, the record does not show that Claimant was the original source for the referrals from the Other Agency and thus does not show that Claimant's information caused the staff to open the Investigation. 

Second, because the evidence does not establish that Claimant's information caused the staff to open the Investigation, Claimant's information can only be deemed to have led to the success of the Covered Action if it caused the staff to inquire concerning different conduct as part of a current investigation or "significantly contributed to the success of the action." While Claimant included a document in the Response indicating that Claimant was in communication with a Commission staff member, according to the staff's supplemental declaration, the staff assigned to the Investigation never received or reviewed Claimant's information from that staff member. Further, the staff supplemental declaration confirmed that staff assigned to the Investigation never reviewed or received information from Claimant or had communications with Claimant. Accordingly, we find that Claimant's information did not cause the staff to look into different conduct as part of its ongoing investigation, nor did Claimant's information significantly contribute to the success of the action.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95483; Whistleblower Award Proc. File No. 2022-71)
https://www.sec.gov/rules/other/2022/34-95483.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

Instead, the Declaration, which we credit, confirmed under penalty of perjury that although Claimant provided information to the Commission that was helpful, Claimant did not provide any information for the first time after July 21, 2010 that helped advance the Investigation, or had any impact on, the charges brought by the Commission in the Covered Action.

In response to the Motion to Dismiss the Securities Tranche Complaint, SDFL dismissed Count I's misrepresentation claim but permitted the market manipulation claims under Counts I and II. As set forth in the SDFL Order's "Introduction":

In January 2021, market volatility prompted regulators to raise deposit requirements for clearing brokers, including Robinhood, to ensure that they could cover the costs of unexecuted trades. Robinhood could not afford the new deposit requirements and sought another way to appease regulators. It succeeded after regulators agreed to waive the deposit requirements so long as Robinhood restricted its customers' access to certain stocks. 

What followed is disputed, but Plaintiffs characterize it as market manipulation. While Robinhood agreed to restrict access to certain stocks, it did not want knowledge of its lack of liquidity to become widespread because such information might undermine Robinhood's credibility with customers and investors alike. To divert the public's attention away from Robinhood's lack of liquidity, Robinhood blamed market volatility for its restrictions and vehemently denied any trouble with its own liquidity. 

Now, Robinhood asks the Court to dismiss the pleading setting forth Plaintiffs' market manipulation theory. It relies on the unconventional nature of the theory, among other reasons, as a basis for dismissal. Plaintiffs, in contrast, argue that irrespective of the theory's unconventional nature, it is sufficient that Robinhood's alleged actions artificially affected supply and demand, thereby depriving investors of an accurate picture of the market. The Court agrees with Plaintiffs and explains further below.

In rendering her Order, Judge Altonaga produced a thoughtful, compelling, and methodical 52-page document. Some will inevitably disagree with the Judge's rationale. Regardless, the effort is impressive. In part, consider some of these findings:

In sum, cancelling purchase orders, liquidating shares, and closing out options each comports with the plain meaning of "transaction," section 9(a)(2)'s statutory history, and existing decisions. The Court agrees with Robinhood that the transactions occurred in a context that hardly mirrors run-of-the-mill market manipulation claims, but the unique context is also attributable to the avant-garde nature of Robinhood's trading platform, the likes of which no court has encountered when evaluating market manipulation claims. Robinhood's cutting edge platform cannot defeat the principle that "[n]ovel or atypical methods should not provide immunity from the securities laws." A.T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2d Cir. 1967) (alteration added). 

at Page 23 of the SDFL Order

Tenev's subtle admission that Robinhood sought to avoid a major liquidity issue (see id.
¶¶ 15, 78, 80, 99), coupled with Robinhood's employees' conflicting statements, misdirections, and admissions that they intended the Affected Stocks' prices to fall (id. ¶¶ 12-14, 42, 44 n.23,52, 71-75, 102 & n.60), generate a particularized inference that Robinhood acted willfully to lower the prices of the Affected Stocks. Such an inference satisfies the heightened pleading requirements of Rule 9(b) and the PSLRA. Robinhood allegedly knew that its transactions would cause the Affected Stocks' price to drop and engaged in those transactions anyway to serve its own interests over those of its customers.

at Pages 31 - 32 of the SDFL Order

Plaintiffs thus fail to explain how Robinhood's omissions and misstatements were designed to induce investors to sell their shares. Sure, Robinhood allegedly acted dishonestly, and that dishonesty serves as circumstantial evidence that its restrictions were manipulative; but nowhere in the CCAC or Response do Plaintiffs articulate why it is "at least as compelling" that Robinhood omitted material information to induce customers to sell their shares, as opposed to prevent customers from fleeing its application. Tellabs, 551 U.S. at 324 (footnote call number omitted). The distinction is important because the former is prohibited under section 9(a)(4), and the latter is not. Because the latter is more compelling than Plaintiffs' purported inference, Plaintiffs' section 9(a)(4) claim fails.

at Pages 36 - 37 of the SDFL Order

Just as the exchanges altered the natural interplay of supply and demand when they sold products that gave firms the "ability to access market data at a faster rate, obtain non-public information, and take priority over ordinary investors' trades," Bats Global Markets, Inc., 878 F.3d at 49, Robinhood placed its thumb on the scale of supply and demand when it restricted the sales of the Affected Stocks. This conduct, irrespective of whether Robinhood purchased the Affected Stocks, constitutes a "device or contrivance[.]" 15 U.S.C. § 78j(b) (alteration added). 

In sum, Plaintiffs need not allege that Robinhood engaged in a market transaction to state a claim for market manipulation under section 10(b). To hold Plaintiffs to such a burden would undermine the text and purpose of the statute, in addition to erasing a noteworthy distinction between sections 9(a)(2) and 10(b)

at Page 43 of the SDFL Order

To summarize, the Court disagrees with Robinhood that its "conduct was openly and
accurately disclosed and thus could not be deceptive." (Reply 12). Even if Robinhood disclosed the restrictions - a premise that Plaintiffs dispute (see Resp. 20) - the disclosures were allegedly incomplete and misleading. Regurgitating "market volatility" as the basis for restrictions, while simultaneously denying any concerns about liquidity despite internal and subsequent statements to the contrary (see CCAC ¶¶ 12, 79-80, 103), can hardly be characterized as an "open[] and "accurate[] disclos[ure,]" (Reply 12 (alterations added)). Robinhood's selective disclosures allegedly misled investors, the market, and Plaintiffs, and thus, they constitute manipulative conduct under section 10(b) and rule 10b-5.

at Pages 47 - 48 of the SDFL Orders

The short squeeze stretched Robinhood thin, straining its ability to simultaneously provide unconstrained access to markets and comply with regulators. In the end, balancing the two proved too much for Robinhood, so it imposed restrictions that hampered its customers' access to markets. These restrictions, of course, impacted the natural state of supply and demand for the Affected Stocks, but they alone did not amount to market manipulation. Rather, Robinhood's allegedly opaque and conflicting statements made to hide its lack of capital, coupled with its restrictions, evince an intent on the part of Robinhood to artificially depress share prices for its personal benefit. At this stage, the Court's task is to assess whether the well-pleaded allegations, taken as true, are sufficiently particularized to satisfy heightened pleading requirements. See Fed. R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b)(2)(A). The task presented interesting legal questions, convoluted  by the novelty of Robinhood's platform, but at the end of the day, Plaintiffs' market manipulation claims clear the particularized threshold. 17
= = = = =
Footnote 17: As is, the CCAC may constitute a shotgun complaint because Count II "repeat[s] and reallege[s] each and every allegation contained in the foregoing paragraphs as if fully set forth herein." (CCAC ¶ 142 (alterations added)); see Strategic Income Fund, L.L.C. v. Spear, Leeds & Kellogg Corp., 305 F.3d 1293, 1295 (11th Cir. 2002) ("[A] shotgun complaint contains several counts, each one incorporating by reference the allegations of its predecessors, leading to a situation where most of the counts (i.e., all but the first) contain irrelevant factual allegations and legal conclusions." (alteration added)). The Court opts not to dismiss the CCAC as a shotgun complaint given the substantial overlap between Counts I and II. Both rely on the same set of factual allegations and virtually identical legal theories, thus satisfying the need to "know which allegations of fact are intended to support which claim(s) for relief." Anderson v. Dist. Bd. of Trs. of Cent. Fla. Cmty. Coll., 77 F.3d 364, 366 (11th Cir. 1996). 

at Pages 51 - 52 of the SDFL Orders

https://www.justice.gov/usao-wdwa/pr/vancouver-washington-investment-advisor-pleads-guilty-defrauding-friends-and-family
Charles Richard Burgess pled guilty in the United States District Court for the Western District of Washington to mail fraud. As alleged in part in the DOJ Release:

[I]n the mid-1990s Burgess began selling investments in an unregistered investment vehicle that Burgess called "the pool."  Burgess never became a registered or licensed investment advisor.  But between January 1995 and April 2021, he convinced 64 people to invest $13.4 million in "the pool."  He sought investments from friends and family members with whom he had a trusting relationship.  Burgess did nothing to screen the investors to see what type of risk they could tolerate, and he did not provide them with written materials about the nature of the investments.

Burgess told investors that he only took a share of the profit made by the investments and he claimed to some that he would personally absorb any losses.  Burgess provided the investors with statements indicating their account balances had grown substantially over time.  However, those statements were false.  For example, in 2016 Burgess sent investors statements indicating their investments had grown about 10 percent that year.  In fact, the investments lost money.

As early as 2013, Burgess was not able to repay all the investors' principal, let alone the profits he was falsely telling them they had earned.  In December 2013, Burgess owed investors $2.3 million in principal and represented that the value of investor accounts exceeded $4.2 million.  In fact, at that time the pool's assets were only about $711,000.  By then end of December 2015, it was even worse, with investors being told their accounts totaled over $5.2 million, when the assets totaled only about $365,000.  By the end of 2020, Burgess owed investors $4.5 million in principal and represented in year-end statements that the collective value of their accounts exceeded $10.3 million.  In fact, the Pool's assets totaled only $113,000. 

As the financial picture worsened, Burgess paid off earlier investors with money from new investors -a classic Ponzi scheme.

Despite his assurances that he only took a share of the profit from the fund, Burgess actually used investor money for his own expenses.  From 2014-2021 Burgess transferred $1.4 million to his personal account.

In all, 32 investors lost $4.3 million in principal payments that they had made to Burgess.  Under the plea agreement, Burgess will be ordered to pay $4,359,113 to the victim investors.  Prosecutors have agreed to recommend the low end of the sentencing guidelines range when Burgess is sentenced.   Judge Estudillo is not bound by prosecutors' recommendation and can impose any sentence up to the 20-year statutory maximum after considering the sentencing guidelines and other statutory factors.

https://www.justice.gov/opa/pr/former-jp-morgan-traders-convicted-fraud-attempted-price-manipulation-and-spoofing-multi-year
After a three-week jury trial in the United States District Court for the Northern District of Illinois, JPMorgan Chase & Co. precious metals traders Gregg Smith (Executive Director) and Michael Novak (Managing Director) were convicted by jury each of one count of attempted price manipulation, one count of spoofing, one count of commodities fraud; and, were further convicted, respectively,  of eight counts of wire fraud affecting a financial institution and 10 counts of wire fraud affecting a financial institution. Previously, JPM traders John Edmonds pled guilty in the District of Connecticut to one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, price manipulation, and spoofing; and Christian Trunz pled guilty in the Eastern District of New York to one count of conspiracy to engage in spoofing and one count of spoofing. In September 2020, JPMorgan admitted to committing wire fraud in connection with: (1) unlawful trading in the markets for precious metals futures contracts; and (2) unlawful trading in the markets for U.S. Treasury futures contracts and in the secondary (cash) market for U.S. Treasury notes and bonds. JPMorgan entered into a three-year deferred prosecution agreement through which it paid more than $920 million in a criminal monetary penalty, criminal disgorgement, and victim compensation, with parallel CFTC and SEC resolutions. As alleged in part in the DOJ Release:

[B]etween approximately May 2008 and August 2016, the defendants, along with other traders on the JPMorgan precious metals desk, engaged in a widespread spoofing, market manipulation, and fraud scheme. The defendants placed orders that they intended to cancel before execution in order to drive prices on orders they intended to execute on the opposite side of the market. The defendants engaged in thousands of deceptive trading sequences for gold, silver, platinum, and palladium futures contracts traded through the New York Mercantile Exchange Inc. (NYMEX) and Commodity Exchange Inc. (COMEX), which are commodities exchanges operated by CME Group Inc. These deceptive orders were intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets.

Bill Singer's Comment: Would have been a tad more professional -- perhaps even "ethical" -- if DOJ at least acknowledged in its Press Release that  JPM salesperson Jeffrey Ruffo, who was charged with racketeering and conspiracy, was acquitted of both counts. Similarly, where's the mention that the jury acquitted all three Defendants of racketeering and conspiracy charges. It's still an impressive win for DOJ but there's something very troubling about a prosecutor issuing unbalanced press releases.
For more balance, see, for example: 
https://www.reuters.com/legal/transactional/two-former-jpmorgan-metals-traders-found-guilty-landmark-spoofing-case-2022-08-10/  

For those who might be too quick to come to DOJ's defense, consider this 2019 DOJ Release replete with references to the now-missing Ruffo and the full charges: "Current and Former Precious Metals Traders Charged with Multi-Year Market Manipulation Racketeering Conspiracy" (DOJ Release / September 16, 2019)
https://www.justice.gov/opa/pr/current-and-former-precious-metals-traders-charged-multi-year-market-manipulation In today's DOJ Release, Defendant Ruffo's name has disappeared from the recent DOJ Release and there isn't even a reference to the word "racketeering."

https://www.justice.gov/usao-cdca/pr/south-bay-man-indicted-alleged-scheme-used-name-famous-television-production-company
-and-
https://www.sec.gov/litigation/litreleases/2022/lr25466.htm

In an Indictment filed in the United States District Court for the Central District of California, Charles Hensley was charged with 11 counts of wire fraud and one count of aggravated identity theft.   As alleged in part in the DOJ Release:

[F]rom August 2017 to May 2018, Hensley successfully pitched investments in companies he owned, including Desilu Studios Inc. and Migranade Inc., which he operated out of offices in Manhattan Beach and other locations in Southern California. While Hensley claimed his businesses were real and successful, in fact, the indictment alleges, they were little more than shell corporations used as part of an investment scam.

In 2016, Hensley began using the name Desilu, which was similar to the name Desilu Productions Inc., the company that produced classic television shows during the 1950s and 1960s. He then claimed he was making new content for his company, Desilu Studios.

Hensley allegedly told investors he was extremely wealthy and was backing Desilu Studios with his personal funds. In fact, according to the indictment, Hensley had few assets, and he repeatedly bounced checks and overdrew bank accounts to get cash and pay expenses.

Hensley also allegedly provided victim-investors false and misleading valuation letters that purported to show that Desilu Studios was valued at more than $11 billion and Migranade at more than $50 million. In fact, the indictment alleges, the companies had little to no assets and were worth nowhere near the represented value.

In addition to these false statements, Hensley allegedly misrepresented that his companies had acquired valuable intellectual property, distribution agreements, subsidiaries and development rights, and that they were actively developing projects and bringing products to market, including new film and television projects using the Desilu name. In reality, Hensley did not own the intellectual property and other assets he said he did, and he used misleading representations regarding new film and television productions he was supposedly producing to dupe victim-investors into giving him money.

The indictment further alleges Hensley falsely represented that Desilu Studios was about to go public and that the company's stock was worth more than its face value and more than investors were paying and would increase in value following its imminent initial public offering. In fact, according to the indictment, none of this was accurate and Hensley stole someone's identity to list as Desilu Studio's chief financial officer in offering materials.

The overall scheme allegedly impacted multiple victim-investors, including some who wired the approximately $331,000 identified in the wire fraud counts. In addition to these victims, Hensley allegedly also targeted multiple companies in the entertainment industry. In this part of the scheme, Hensley allegedly used some of the same misrepresentations to convince owners and executives to sell their companies to him in exchange for Desilu Studio's stock that, unbeknownst to them, was worthless. The indictment further alleges that Hensley touted these purchases to the individual investors, further misleading them about his purported acquisitions of valuable assets.

In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Desilu Studios and Hensley with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[F]rom June 2017 through at least July 2018, Desilu Studios and Hensley raised approximately $596,360 from at least 21 individual investors through the offer and sale of Desilu Studios stock. The SEC alleges that Hensley falsely claimed to investors that he had obtained the rights to the Desilu brand, made famous by Desilu Productions, Inc. co-founders and spouses Desi Arnaz and Lucille Ball, and their long-running television show, "I Love Lucy." According to the SEC complaint, Hensley lured investors by claiming that he was reviving the Desilu brand through Desilu Studios, which was supposed to be a modern entertainment company engaged in film and television production, merchandising, content streaming, theme parks, and cinemas. The SEC further alleges that contrary to the investment pitch, Desilu Studios never got off the ground as a working studio and did not use investor proceeds for business purposes. The SEC alleges that Hensley actually misappropriated investor funds for his personal use.


https://www.justice.gov/usao-ndoh/pr/las-vegas-man-charged-operating-sports-wagering-ponzi-scheme-stole-85-million-victims
In an Indictment filed in the United States District Court for the Northern District of Ohio, Matthew J. Turnipseede was charged with 12 counts of wire fraud and one count of mail fraud. As alleged in part in the DOJ Release:

[F]rom March 2015 to May 2021, the defendant induced victims to invest money in companies that he owned, namely Edgewize LLC, Moneyline Analytics, Moneyline Analytics Dublin Branch, and another company incorporated by Turnipseede, by falsely claiming that investor funds would be used to make sophisticated sports wagers according to an algorithm that generated double-digit returns. 

According to the indictment, none of these companies ever generated the promised profits, and instead the defendant used investor money to maintain the business, seek new sources of funds, pay off earlier investors and fund personal expenses. 

The indictment alleges that the defendant provided victim investors with operating agreements in which he claimed that all money invested would be used exclusively to place bets on sporting events and that the defendant would not be paid any compensation for placing the wagers but would retain a percentage of the winning profits.

To perpetuate the scheme, the defendant is accused of periodically emailing fraudulent financial statements to victims purporting to show substantial gains on their investments and employing an accounting firm to generate IRS forms based on fraudulent figures provided to the firm by the defendant.  The indictment alleges that the defendant's sports wagers never generated the promised profits for investors and that the information provided to the accounting firm was fraudulent.  It is alleged that if a victim sought to withdraw some or all of their investments, the defendant used money from other victims' contributions to cover the withdrawal.

In addition, it is also alleged that the defendant used investor funds to finance his personal expenses, including family vacations to Disneyland and Hawaii, spa treatments, lease payments on multiple vehicles and country club membership dues.

SEC Charges Broker-Dealer and Two Employees with Engaging in Unauthorized Securities Transactions (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25465.htm
In a Complaint filed in the United States District Court for the District of Nevada
https://www.sec.gov/litigation/complaints/2022/comp25465.pdf, the SEC charged Alpine Securities Corporation, the firm's former Chief Executive Officer Christopher Doubek, and its Chief Operations Officer Joe Walsh with violating the antifraud provisions of Sections 10(b) and 15(c)(1)(A) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder, as well as Section 17(a)(1) of the Securities Act. As alleged in part in the SEC Release:

[I]n May and June 2019, Alpine engaged in improper conduct in an attempt to force hundreds of retail customers to close their accounts. Specifically, Doubek and Walsh allegedly caused Alpine to sell approximately $268,000 in customer securities without notice or customer approval on the basis that Alpine deemed the securities "worthless." The complaint further alleges that without authorization, and contrary to how the term is defined in its customer agreements, Doubek and Walsh caused Alpine to declare 545 customer accounts "abandoned" and to transfer approximately $54 million worth of securities out of these "abandoned" accounts and into accounts that Alpine controlled.
https://www.sec.gov/litigation/litreleases/2022/lr25464.htm
https://www.sec.gov/litigation/complaints/2022/comp25464.pdf, the SEC charged  GreneCo, LLC, Gene D. Larson, and Gregory K. Womack with violating the securities registration provisions of Section 5 of the Securities Act; and, further charged Womack and Womack Investment Advisers, Inc. ("WIA") with violating the antifraud provisions of Section 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the SEC's allegations, GreneCo, Larson, and Womack agreed to be permanently enjoined from violating these statutory provisions and to pay civil penalties of $414,364, $41,440, and $186,471, respectively. Additionally, Womack agreed to pay disgorgement of $236,349 plus prejudgment interest; and WIA agreed to pay disgorgement of $160,000 plus prejudgment interest and a civil penalty of $517,955. As alleged in part in the SEC Release:

[G]reneCo, LLC and its owners, Gene D. Larson and Gregory K. Womack, raised approximately $23 million from more than 250 investors in 2017 and 2018 through four unregistered securities offerings involving conservation easements. The offerings provided investors with multiple investment options, including an election to take charitable tax deductions if the real estate acquired with their investment funds was donated to a land trust for purposes of a conservation easement. Under the Internal Revenue Code, conservation easements allow real property to be donated to qualified organizations, which may generate federal and state tax deductions for the investor.

The SEC's complaint further alleges that Womack and his investment adviser, Womack Investment Advisers, Inc. (WIA), failed to disclose compensation received from WIA clients who invested in GreneCo's offerings. According to the SEC, Womack received approximately $6 million in management fees from the GreneCo offerings, a fact not disclosed to the eight WIA clients who invested in the offerings. The complaint also alleges that WIA's annual disclosures falsely stated that it did not receive any compensation from GreneCo when, in fact, it had received $160,000 in such compensation, partly attributable to investments by WIA clients. As alleged, these fees and compensation created conflicts of interest that Womack and WIA, as fiduciaries, were required to disclose to their clients.

https://www.sec.gov/news/press-release/2022-140
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/33-11090.pdf, Angel Oak Capital Advisors, LLC and it portfolio manager Ashish Negandhi agreed to a cease-and-desist order, a Censure, and the imposition of civil monetary penalties in the respective amounts of $1.75 million and $75,000. The SEC Order finds that Angel Oak and Negandhi violated the antifraud provisions of the Securities Act; and that Angel Oak violated, and Negandhi caused Angel Oak's violation of, the antifraud provisions of the Investment Advisers Act of 1940. As alleged in part in the SEC Release:

[I]n March 2018, Angel Oak raised $90 million through a first-of-its-kind securitization of loans made to borrowers for the purpose of purchasing, renovating, and selling residential properties, also known as "fix-and-flip" loans, which were originated by an Angel Oak-affiliated entity. The deal included a provision that would accelerate Angel Oak's obligation to return funds to certain investors if delinquencies reached a pre-defined threshold. Shortly after the deal closed, loan delinquency rates increased unexpectedly.

Concerned about the reputational and financial harm its securitization business would suffer from an early repayment, Angel Oak and Negandhi artificially reduced delinquency rates by improperly diverting funds ostensibly held to reimburse borrowers for renovations made to the mortgaged properties, to instead pay down outstanding loan balances. Because Angel Oak and Negandhi did not disclose these actions, the performance data regularly disseminated to investors provided an inaccurate view of the actual delinquency rates on the mortgages in the securitization pool as well as the securitization's compliance with the early repayment trigger.

https://www.sec.gov/news/press-release/2022-141
The SEC proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds.
https://www.sec.gov/rules/proposed/2022/ia-6083.pdf.
In part the SEC Release asserts that the amendments will:

  • Enhance Reporting by Large Hedge Fund Advisers on Qualifying Hedge Funds. The proposal would enhance how large hedge fund advisers report investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure reporting, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio correlation, portfolio liquidity, and financing liquidity to provide better insight into the operations and strategies of these funds and their advisers and improve data quality and comparability.

  • Enhance Reporting on Basic Information About Advisers and the Private Funds They Advise. The proposal would require additional basic information about advisers and the private funds they advise including identifying information, assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, base currency, borrowings and types of creditors, fair value hierarchy, beneficial ownership, and fund performance to provide greater insight into private funds' operations and strategies, assist in identifying trends, including those that could create systemic risk, improve data quality and comparability, and reduce reporting errors.

  • Enhance Reporting Concerning Hedge Funds. The proposal would require more detailed information about the investment strategies, counterparty exposures, and trading and clearing mechanisms employed by hedge funds, while also removing duplicative questions, to provide greater insight into hedge funds' operations and strategies, assist in identifying trends, and improve data quality and comparability.  
CFTC Approves a Joint Rule Proposal to Amend Form PF (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8571-22
The CFTC proposed amendments to Form PF that the CFTC Release alleges in part are "designed to improve the utility of Form PF data to enhance the Financial Stability Oversight Council's ability to assess systemic risk as well as to bolster the oversight of private fund advisers in light of the growth of the private fund industry."

Statement on Proposed Amendments to Form PF by SEC Commissioner Caroline A. Crenshaw
https://www.sec.gov/news/statement/crenshaw-statement-proposed-amendments-form-pf-081022

Today's Form PF proposal would provide the SEC, CFTC, and Financial Stability Oversight Council ("FSOC") with important information to keep apace with the myriad changes in the private funds space.

Our mandate in this area is clear. In enacting Dodd-Frank, Congress authorized the Commission to require advisers to private funds to file reports regarding those funds "as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Financial Stability Oversight Council."[1] In so passing, Congress clearly and pointedly recognized the need for data on the parts of both FSOC, to assess and protect against risks to the stability of our financial systems, and the SEC to protect investors. It did not relegate or subjugate the SEC's mission of protecting investors.[2]

And today's proposed rule serves those purposes. If adopted, it would improve the quality and consistency of data collected from private fund advisers. And, in doing so, it would improve FSOC's ability to gauge systemic risk in the financial industry, and the SEC's ability to appropriately plan and resource our regulatory examination and investigative programs, and overall to better protect investors. As noted in connection with the Form PF amendments earlier this year, the private fund industry has changed dramatically in the decade since Form PF was first proposed. Since the SEC began analyzing Form PF data, the value of net assets reported has more than doubled.[3] And private fund advisers are concentrating in different spaces than they did a decade ago - such as digital assets, litigation finance, and credit, among others. In other words, more investor funds are flowing into these new or emerging spaces where our observability is significantly more limited than in the public markets. Making sure that we collect the right data to assess risk and protect our financial markets and investors is therefore paramount.[4]

The proposal sharpens our pencils. It reflects nearly a decade of learning from the data collected - to see what information has been helpful, what questions have led to inconsistent reporting, and what gaps continue to exist. It focuses on improving the quality of the data that we are collecting, which will hopefully lead to better analysis and preparedness on both a macro-scale as well as at firm-specific levels.

For example, the proposal would require all private fund advisers to provide information for each reporting fund on withdrawal and redemption rights, which would provide the Commissions and FSOC more information on funds' susceptibility to stress through redemptions. The proposal would also update the reporting of gross and net asset values, fund performance, as well as reporting on specific information relating to fund inflows and withdrawals, redemptions and distributions. These data must be accurate to assess industry trends, identify areas of market stress or fragility, compare volatility across different fund types and sectors, and verify information provided in investor disclosures. The proposal also would revise how advisers report assets and liabilities using the fair value hierarchy established under U.S. GAAP, which is a key indicator of liquidity and the complexity of a fund's portfolio. It would require the reporting of more comprehensive and comparable information on borrowings and creditors, counterparty exposure, exposure to certain classes of assets, and counterparty credit risk, which would strengthen the ability to identify areas of programmatic weakness. And, it would require further standardization of basic identifying information through Legal Entity Identifiers, or LEIs.[5] These are among other important areas where we are proposing to hone our data.

At the same time, the proposal recognizes that some information collected on Form PF has not been helpful to the Commissions or FSOC and, based on that assessment, proposes to stop requiring such information from advisers.[6]

Data collection and analysis may not be flashy, but it is foundational. I think we can all agree that, where we collect these data, it should the right data; this is the cause that we serve here today. Our effective use of data help us manage risk, preserve the integrity of the markets, and ultimately, protect investors and their lifetime savings. There is no substitute for preparedness in these areas. So, I am happy to support this proposed rule.

As always, I want to extend my gratitude to our talented staff in the Division of Investment Management, DERA and the general counsel's office. This proposal is technical and precisely drafted, and it reflects craftsmanship and expertise. Thank you for your dedication and your hard work on this. I also want to thank the Chair and his staff for their guidance in this area. And I want to thank our partners at the CFTC and FSOC, as well as the Department of Treasury and the Federal Reserve Board for working with us on this proposal. Our government works best, and provides the most effective safeguards for investors, when sister agencies and departments work together, and this proposed rulemaking is yet another example of that effective collaboration.

[1] 15 U.S.C. 80b-4(b); see also 15 U.S.C. 80b-11(e).

[2] There have been suggestions that, for purposes of Form PF, the SEC's collection of data for its regulatory program is ancillary to the collection of data for FSOC. See, e.g., SEC Proposes Amendments to Form PF to Increase Oversight of Private Fund, The National Law Review, Vol. XII No. 40 at n.4 (Feb. 9, 2022). The congressional text, however, undermines this argument.

[3] Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers ("Proposed Release") Rel. No. IA-6083 at 8, n.7 (comparing net assets reported from 2013 to Q3 2021).

[4] See Financial Stability Oversight Council Statement on Nonbank Financial Intermediation (February 4, 2022) ("The Hedge Fund Working Group also ascertained that gaps exist in the availability of data related to hedge funds, and Council member agencies are taking steps to address these gaps.").

[5] Proposed Release at 22-24; see also FSOC 2021 Annual Report at 170-171 ("Broader adoption of the LEI by financial market participants continues to be a Council priority.").

[6] E.g., Proposed Release at 12 (removing certain requirements to report parallel managed accounts, which may reduce the quality of data while imposing additional burdens on advisers); id. at 74-77 (eliminating the requirement for large hedge fund advisers to report certain aggregated information about the hedge funds they manage under current Section 2a relating to hedge funds advised by large private fund advisers).

Enhancing Private Fund Adviser Reporting Data (Statement by SEC Commissioner Jaime Lizárraga)
https://www.sec.gov/news/statement/lizarraga-statement-enhancing-private-fund-adviser-reporting-data-081022

Today, the Commission is proposing amendments that would improve our oversight and investor protection efforts over the $20 trillion private fund adviser industry. These amendments will also help better assess trends and enhance a key resource for identifying financial stability risks.

Prior to enactment of the landmark Dodd-Frank Act, empirical regulatory data on hedge funds and private funds was not systematically collected. The Act filled that glaring gap by requiring the collection of private fund data that financial regulators now use to identify trends and potential risks to our financial markets. Congress recognized the value of this data for anticipating and addressing future crises.

The Commission created Form PF to serve as the primary reporting source of this data. The data, in turn, assists the Financial Stability Oversight Council ("FSOC") in meeting its Congressional mandate of identifying risks and responding to emerging threats to U.S. financial stability, and in promoting market discipline that eliminates any expectations of taxpayer bailouts. Today's proposal would improve the collection of that data and inform our and FSOC's understanding of potential systemic risks in the private fund industry.

Form PF has brought transparency to a previously opaque yet economically significant sector of our financial markets. Around the time of the Dodd-Frank Act's enactment, a common yet unreliable estimate of hedge fund assets under management prior to the 2008 financial crisis was in the neighborhood of $2 trillion. Two years after enactment, Form PF filers reported an approximate $8 trillion figure. And, by the fourth quarter of 2021, the gross asset figure reached $20 trillion - an astounding increase over the years.

The data also show a significant increase in the exposure to private funds by U.S. individuals, non-profits, and state and municipal government pension plans. For example, in the first quarter of 2013, beneficial ownership of all private funds by U.S. individuals was reported at $588 billion. By the fourth quarter of 2021, it was reported at nearly $1.4 trillion. This exposure has significant implications for the integrity of our financial markets, particularly for retail investors who invest for their retirement, home ownership, and their children's education. Which is why today's proposal to further refine Form PF data collection would be so essential for a more comprehensive evaluation of these implications.

There are two specific areas of the proposal where public feedback will be critical. First, the proposal would enhance data collection on private funds' use of trading vehicles - which can incur leverage - to provide greater clarity on the risks they present. Second, the proposal would require all private fund advisers - not just advisers to qualifying hedge funds - to report whether the funds provide investors with withdrawal or redemption rights, and if so, how often. This information would be critical to understanding private funds' susceptibility to stress during unforeseen or volatile market events.

These are two of several proposed changes to the form that are designed to better identify trends in the private fund industry and help the Commission better protect investors. Bearing in mind FSOC's congressional mandate of monitoring potential systemic risks and the Commission's mandate of overseeing private fund advisers, I also encourage public comment on all aspects of the proposal.

Lastly, I would like to emphasize the importance of cross-agency collaboration. Investor protection is most effective when there's clear, strong, and meaningful regulation. This proposal illustrates how two financial regulators that share the common responsibility of protecting investors are able to work together so that financial stability risks can be assessed and addressed effectively.

The proposed amendments to Form PF are thoughtfully tailored and informed by more than a decade of experience with the form. I am pleased to support today's proposal, and I'd like to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their hard work and dedication to investor protection.

Thank you, Mr. Chair. Although I have called for changes to Form PF, neither the changes we are considering today, nor the ones we proposed on January 26th, are what I had in mind. Today's amendments-which the Commodity Futures Trading Commission ("CFTC") is joining us in proposing-would expand Form PF by adding questions of the nice to know, rather than need to know variety.[1] Why we need the new information and what we plan to do with it are questions left to the reader's imagination. Accordingly, I am unable to support the proposal.

Form PF's primary purpose is to serve the Financial Stability Oversight Council ("FSOC"), the systemic risk regulator created by Dodd-Frank. As I explained in January, when we were proposing the first round of changes, "the Commission's use of Form PF information in conducting its regulatory program is ancillary to the underlying purpose of facilitating FSOC's monitoring for systemic risk."[2]

Just as the January proposal did, today's proposal stretches a very limited data collection tool beyond its intended purpose. Many commenters on the January proposal noticed the shift in purpose.[3] As before, I find our stated reasons for today's overreach inadequate and unconvincing.

Regulatory bingo players should include "granular" on their bingo cards for this proposal. The release repeatedly reminds the reader that the SEC, the CFTC, and FSOC need more granularity to assess systemic risk and investor protection issues. For instance, the proposal would require advisers to disclose more granular strategy categories, more granular information about the value of long and short-positions, more granular information about beneficial owners, more granular insight into redemption rights,[4] more granular return information, and more granular data about inflows and outflows.

"Systemic risk" also ought to be on that bingo card. As an homage to Form PF's overriding purpose, the release frequently cites "systemic risk" to legitimize the proposed harvesting of data relating to individual fund characteristics or actions. The FSOC, however, does not need to have this kind of detailed knowledge of individual private funds' activities to fulfill its mandate to identify risks to financial stability, promote market discipline, and respond to emerging financial stability threats.

The release avoids grappling with the line between the risks an individual fund may pose to its own investors and systemic risk. As one example, the release asks for more granular information on listed equities. The release explains that "single equity positions may be more vulnerable to short squeezes."[5] True enough. The release further explains that "the level of granularity the proposal would obtain with respect to this information" would help identify "entities that may be affected during a short squeeze event."[6] While high profile short squeezes in recent years have affected certain hedge funds, nothing in the release suggests these short squeezes created systemic risk. Nor does the release explain what proactive measures we or FSOC intend to take should we have such data. Would regulators step in to prevent funds from taking short positions or to prevent other market participants from buying the securities these funds have sold short? Neither intervention would aid financial stability. In fact, they could do the opposite. Better data around aggregate short positions might be helpful, but we are working on other ways to get those data.[7]

The regulatory implications are equally troubling if the purpose of the more granular information is to protect investors. Private fund investors-typically, institutional investors, such as insurance companies, university endowments, pension funds, and high income and net worth individuals[8]-are capable of making their own risk assessments. The SEC should not step in to protect them when their investments do not work out as hoped. As one commenter on the January proposal observed:

[T]he Commission appears to conflate investment protection with mitigation of investment risk. For example, investment losses or losses resulting from market stresses are typical investment risks inherent in this - and indeed all - types of investments. We do not believe that the Commission's investor protection mission should extend to protecting investors from fully-disclosed investment risk.[9]

Acquiring every missing piece of data about private funds is not necessary for us to do our jobs. Mandating the provision of more detailed information, of course, would provide FSOC and the two Commissions with a more detailed picture of private funds. We do not need every detail. We should be asking consistently throughout the release whether the unreported pieces of data prevented FSOC from identifying systemic risks, and based on that experience, how these new filing requirements would materially enhance FSOC's oversight. More basic still: what specifically do we intend to do with the information we are so eager to have?

Also fundamental: Will we be able to protect the data we collect? One industry trade group, concerned about cybersecurity threats, urged the Commission in a 2018 letter to substitute the use of alphanumeric identifiers for names when populating Form PF.[10] Whether or not alphanumeric identifiers are the right way to do it, we need to protect the data we collect. The more information we demand and store, the more tempting a target it becomes and the greater the obligation we have to ensure that we are keeping it safe. Stolen data could become a systemic threat.

Perhaps the blossoming of Form PF into a tool to scrape detailed information about private funds is simply part of a larger effort to ramp up regulation of the private markets. That campaign is proceeding at a pretty good clip these days. As a result, however, costs for private fund advisers-and their investors-will increase and barriers to entry will grow higher, to the detriment of potential innovation, would-be new entrants, and investor returns. Retail investors may pay a different kind of price; if SEC staff are focused on watching the private markets, retail investors, who are generally excluded from private funds, will get less SEC time and attention.

Worse yet, by making Form PF more granular, the proposal contributes to a tired narrative, yet one that is popular among our FSOC colleagues: namely that a systemic risk shadow lurks behind every hedge fund activity. The Commission should reject this narrative not to protect its regulatory prerogatives, but because the narrative is false and because any new authority exercised at the behest of the FSOC would likely look a lot like bank regulation. Increasing bank-like regulation on private funds would impair their ability to serve the broader economy and eat away at one of their most important features-their ability to fail when the investment decisions they make do not pan out.

Form PF is more than ten years old, so revisiting it in light of intervening events and our experience with the data makes sense. In isolation and with proper justification, some of today's proposed amendments might be worthwhile. In fact, staff has recommended a number of changes to streamline and rationalize the form and reporting process, and eliminate redundancies. Although the comment period is regrettably short, I urge commenters to suggest other ways to right-size Form PF.

I offer my thanks to our sister agency, the CFTC, for collaborating with us on this project. Thank you also to the staff of the Divisions of Investment Management, Economic and Risk Analysis, and Examinations, the Office of the General Counsel, and other offices throughout the Commission. Although I am unable to support today's proposal, I appreciate all of the work and effort staff have expended. I am particularly grateful for the attempts you made to streamline Form PF in certain areas and for your discussions with me about the proposal and about your experiences with Form PF. As always, I look forward to hearing from commenters, whose insights about which data we should collect and how we can use it will inform my thinking on both this proposal and January's proposal.

[1] Former CFTC Commissioner Brian Quintenz's observations on the CFTC's Form CPO-PQR, which was modeled on Form PF, come to mind: "In my view, many of the questions on the existing form are more academic than pragmatic in nature - information that may be nice for the Commission to have, but data that is certainly not necessary for the Commission to effectively oversee commodity pools and the derivatives markets." Brian D. Quintenz, Former Commissioner, CFTC, Supporting Statement from Commissioner Brian D. Quintenz on Final Rule to Amend Compliance Requirements for Commodity Pool Operators on Form CPO-PQR (Oct. 6, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement100620. .

[2] See Hester M. Peirce, Commissioner, SEC, Statement on Proposed Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers (Jan. 26, 2022), https://www.sec.gov/news/statement/peirce-form-pf-20220122#_ftnref1 (citing Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)], https://www.sec.gov/rules/final/2011/ia-3308.pdf., at p.17 ("Form PF is primarily intended to assist FSOC in its monitoring obligations under the Dodd-Frank Act, but the Commissions may use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers.")).

[3] See, e.g., Comment letter from TIAA, March 21, 2022 ("[w]e find the Commission's proposed requirements to be overbroad, lacking in specificity, and poorly designed to balance the costs of reporting with the potential benefits to investors, regulators, and the market as a whole"), https://www.sec.gov/comments/s7-01-22/s70122-20120745-272909.pdf; Comment letter from New York City Bar, March 21, 2022 ("It is not clear to the Committees, however, that this enhanced reporting requirement would enhance monitoring capabilities, yet the Proposal would seem to enhance the Commission's regulatory and enforcement function. The Committees question whether more data is in fact necessary. What will the FSOC or the Commission do with the extra information, as it is unclear how it would be used to help investors?"), https://www.sec.gov/comments/s7-01-22/s70122-20120727-272885.pdf; Comment letter from SIFMA, March 21, 2022 ("We do not believe the Commission has established sufficient regulatory need for the additional proposed reporting. Nor do we believe that the Commission has demonstrated that such reporting would provide the Commission or the [FSOC] with meaningful information for their monitoring of investor protection or systemic risk concerns."), https://www.sec.gov/comments/s7-01-22/s70122-20120725-272884.pdf; Comment letter from the Real Estate Board of New York, March 21, 2022 ("Unfortunately, the SEC has provided no adequate analysis demonstrating how the new information required by the proposal would benefit investors or reduce systemic risk."), https://www.sec.gov/comments/s7-01-22/s70122-20120678-272850.pdf; Comment letter from U.S. Chamber of Commerce, March 21, 2022, ("This expansion of Form PF is not consistent with the original motivation for developing Form PF under the Dodd-Frank Act. We are concerned that the scope of new reporting and requirement for one-business day reporting would enable the Commission to unnecessarily interfere with private fund management and make inappropriate or inaccurate inferences about isolated events affecting a private fund."), https://www.sec.gov/comments/s7-01-22/s70122-20120670-272845.pdf.

[4] Currently only large hedge fund advisers are required to report whether qualifying hedge funds provide investors with withdrawal or redemption rights. We are proposing to expand this reporting obligation to all funds, for the stated reason that it will "inform the Commissions and FSOC better of all reporting funds' susceptibility to stress through investor redemptions." Proposing Release at 32.

[5] Proposing Release at 94.

[6] Ibid.

[7] See Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313, (Feb. 25, 2022) https://www.sec.gov/rules/proposed/2022/34-94313.pdf and Hester M. Peirce Commissioner, SEC, Statement on Proposal to Require Short Position and Short Activity Reporting by Institutional Investment Managers (Feb. 25, 2022) https://www.sec.gov/news/statement/peirce-statement-proposal-require-short-position-022522.

[8] See, e.g., Private Equity Funds, SEC Investor Bulletin https://www.investor.gov/introductioninvesting/investing-basics/investment-products/private-investment-funds/private-equity (discussing who can invest in private funds).

[9] See IAA Comment letter, Comment letter from Investment Adviser Association, March 21, 2022, https://www.sec.gov/comments/s7-01-22/s70122-20120729-272886.pdf.

[10] See MFA Letter to Chairman Clayton, Sept. 17, 2018, https://www.managedfunds.org/wpcontent/uploads/2020/04/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf ("To enhance protections for registrant data, we think the Commission should require the use of alphanumeric identifiers within Form PF to obscure the identity of the registrant and its funds to anyone who gains access to the filings without authorization.").

Thank you, Chair Gensler. Who benefits from investments in private funds and alternative investments? In many cases, they are the pensioners in a retirement plan or a university student who benefits from an endowment. In other words, Americans of all types benefit from a robust market for private funds that is diverse and provides sophisticated institutional investors and their advisers with choices to address different risk tolerances, investment strategies, and time horizons.

Since the enactment of the Dodd-Frank Act, advisers to private funds have been required to file Form PF,[1] which was adopted in 2011 and amended in 2014. As the title of Section 404 of that Act indicates, the requirement was to facilitate the "Collection of Systemic Risk Data."[2] Yet today's proposed amendments to Form PF, which come on the heels of an existing proposal to amend Form PF issued earlier this year[3] - would impose additional and more granular disclosures, with effects that could potentially reshape an industry that is already dominated by large fund advisers[4]

Form PF is intended to assist the Financial Stability Oversight Council (FSOC) in assessing systemic risk in the U.S. financial system.[5] When we consider a rulemaking proposal, one of the key steps is to identify the need for the rulemaking and explain how the proposed rule will meet that need.[6] Although the 303 page draft release, encompassing 103,223 words, sent to the Commissioners on Monday evening references "systemic risk" a total of 118 times, plus two additional references to "system risk," the release largely does not describe or define what is meant by that term.[7] Merely stating over and over that the proposed amendments will help to monitor and assess systemic risk and provide additional information does not make it so. This shortcoming makes it difficult to evaluate the appropriateness of the proposed disclosures.

I am also concerned with footnote 156 of the proposing release, which asserts that exchange-traded funds present systemic risks, when it states, without any supporting references or explanation, that "we believe that activity in exchange traded products may present different systemic risks than traditional listed equities and other instruments that might be used to obtain exposure to underlying assets owned within an ETF."[8] This is a rather bold statement and a conclusion that should have been subject to robust discussion and evaluation, rather than merely dropped into a footnote.

Each change to Form PF imposes additional costs on private fund advisers. The Commission fails to consider the cumulative costs of its proposed changes. According to the release, "[t]he SEC anticipates that the proposed amendments aimed at improving data quality and comparability would impose limited direct costs on advisers given that advisers already accommodate similar requirements in their current Form PF reporting."[9] While costs may be limited when viewed in isolation, they can be significant when considered along with the costs of complying with pending rules that will affect private fund advisers.

Unfortunately, I fear the 60-day comment period for a proposal of such significance is too short to permit a thorough assessment of the costs of today's proposal, when considered collectively with the costs imposed on private fund advisers by the other proposals. I am concerned that the effects of the cumulative costs will predominantly fall on the smaller private fund advisers.[10] The result will be an industry that becomes concentrated in large private fund advisors because they are the ones that can bear the increased regulatory costs.

Investors are likely to bear some, if not all, of these costs. The release acknowledges this when it states that "[a]ny portion of these costs that is not borne by advisers would ultimately be passed on to private funds' investors."[11] If there are fewer competitors as a result of higher costs, the remaining funds are more likely to pass these costs on to investors. Small pension funds and other cost-sensitive investors may be foreclosed from investing in private funds altogether.

Today's proposal to require increasingly granular information from the private fund advisers with respect to their private funds raises additional dangers as well. The information to be collected on Form PF is proprietary and highly confidential in nature. Inadvertent disclosure of such information could cause significant damage.[12] In addition, it is simply not possible for the many employees of the Commission, Office of Financial Research, and member agencies of the FSOC who have access to Form PF data to unlearn what they have seen when they leave federal employment and pursue positions in the private sector.[13] An extensive collection of granular information by the Commission means that even if limited information is publicly disclosed, a fund strategy could be compromised.

Today's proposal further blurs the line between the regulation of public and private funds and I am unable to vote in favor of it. Nevertheless, I look forward to the public's comments on the proposed Form PF amendments and also on the impact of this proposal when considered together with the pending rulemaking targeting private funds. I thank the staff in the Divisions of Investment Management, Economic and Risk Analysis, Examinations, Enforcement, and Trading and Markets, the Offices of the General Counsel and International Affairs, and the Strategic Hub for Innovation and Financial Technology for their efforts on this proposal. I also appreciate the efforts from the CFTC, Treasury, and other member agencies of FSOC that contributed to this proposal. I do not have any questions for the staff.

[1] 17 CFR 279.9.

[2] Public Law No. 111-203 (2010).

[3] Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Release No. IA-5950, 87 FR 9106 (Feb. 17, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-02-17/pdf/2022-01976.pdf.

[4] U.S. Securities and Exchange Commission Annual Staff Report Relating to the Use of Form PF Data (Dec. 3, 2021), at 22, available at https://www.sec.gov/files/2021-pf-report-congress.pdf (Annual Staff Report).

[5] Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Release No. IA-3145, 76 FR 71127 (Nov. 16, 2011), available at https://www.govinfo.gov/content/pkg/FR-2011-11-16/pdf/2011-28549.pdf.

[6] RSFI and OGC, Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), at 1, available at https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.

[7] The proposal does describe specific systemic risk concerns with counterparty exposures of hedge funds with the broader financial services industry as well as trading and clearing mechanisms. Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers, Release No. IA-6083 (Aug. 10, 2022), at 59, 67, 169, available at https://www.sec.gov/rules/proposed/2022/ia-6083.pdf (Proposal).

[8] Id. at 85, n. 156.

[9] Id. at 172.

[10] Investment Adviser Association Comment Letter on Proposed Amendments to Form PF (Mar. 21, 2022), at n. 7, available at https://investmentadviser.org/resources/iaa-comment-letter-on-proposed-amendments-to-form-pf/ (IAA Letter).

[11] Proposal at 171.

[12] IAA Letter at IV.B.

[13] See, e.g., Annual Staff Report, at 8 ("Before beginning an examination of an investment adviser, staff reviews applicable regulatory filings, such as Form ADV. For advisers that manage private funds, Form PF filings may also be reviewed as part of a routine pre-examination evaluation for risk identification and scoping.").
As a U.S. financial markets regulator and a member of the Financial Stability Oversight Council (FSOC), the Commission has a critical responsibility to monitor, identify, and respond to systemic risks and emerging threats to U.S. financial stability.  I support the proposed amendments to Form PF because they will enhance one of the Commission's tools to fulfill that critical responsibility and facilitate our regulatory oversight of private funds.[1]

One lesson from the financial crisis was the risk of contagion to U.S. financial markets from private-fund activities, strategies, and exposures, including those related to novel or complex derivatives.  This was evident with the failure of Bear Stearns' structured credit funds in the lead-up to the financial crisis, and more recently, with the failure of Archegos Capital Management.  These examples, and others, highlight the necessity for U.S. financial regulators to have visibility into funds' activities and exposures to fulfill their regulatory responsibilities and ultimately, to prevent or mitigate the buildup of systemic risk in the U.S. financial system.

This proposal marks important coordination with the Securities and Exchange Commission (SEC) to enhance joint reporting requirements and guard against hidden risks in the U.S. financial system.

The CFTC and SEC embark on this proposed rulemaking after nearly a decade of experience of private fund reporting.[2]  It is particularly appropriate to revisit our reporting framework given that, as U.S. financial markets have evolved over the past decade, the private fund space has grown and evolved in tandem.  This is why we seek public comment on new or revised areas of data-including those intended to provide further insight into complex structures, new types of instruments, identification data, redemption and withdrawal rights, ownership, and counterparty exposures, among other subjects.  It is also important that we collect information on fund exposure to digital assets in order to understand evolving market risk.

Our objective is to increase the usefulness of the data collected; to ensure that it is actually used as Congress intended to bring transparency to risk previously hidden.  I look forward to reviewing public comment on whether the proposal would meet our objective.

Thank you to Commission staff for working with my office to improve the proposal to facilitate effective oversight by the CFTC.  I commend staff from both agencies on this proposal, and on future information sharing, that will promote the financial stability of U.S. financial markets.
 
[1] The data collected also supports the CFTC's supervision, examinations, enforcement investigations, and customer protections.

[2] The Dodd-Frank Wall Street Reform and Consumer Protection Act, section 112, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the Dodd-Frank Act), required the SEC and CFTC to establish joint rules in furtherance of the FSOC's critical mission to monitor systemic risk through the creation of Form PF.  See Section 406 of the Dodd-Frank Act.  Since 2012, private fund advisers, including certain commodity pool operators and commodity trading advisors that are dually-registered with both the CFTC and SEC, have been required to file reports regarding their operations and holdings through Form PF.  See also Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. 71128 (Nov. 16, 2011)

Dissenting Statement of CFTC Commissioner Summer K. Mersinger Regarding Proposed Amendments to Form PF
https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement081022b

I am respectfully voting to dissent on the joint SEC/CFTC proposed rulemaking to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds.  The class of registered investment advisers required to submit Form PF includes those that also are registered with the CFTC as commodity pool operators or commodity trading advisors. 

As I previously stated in my concurrence to the CFTC's recent Request for Information on Climate-Related Financial Risk ("Climate RFI"),[1] I support efforts to engage market participants, industry, and the general public in our policy-making process.  And I agree that after a decade of experience with Form PF, it is appropriate to evaluate possible amendments.  If improvements can be made that would enable us to collect more efficiently data that we truly need to fulfill our responsibilities, while reducing unnecessary burdens on those required to supply that data, we should consider them.

However, I do not support this particular proposal.  Data and information that federal regulators request from market participants should be narrowly tailored to the purpose intended under our governing statutes, and unfortunately, that does not appear to be the overall approach in this proposal.  I am even more concerned that constructive input the agencies already have received over the years from market participants that actually complete Form PF receives little attention in the proposal.

I look forward to receiving the public's comments, which I hope will inform the Commissions' consideration of final amendments to Form PF that provide for the collection of necessary data as efficiently as possible.
 
[1] See Concurring Statement of Commissioner Summer K. Mersinger Regarding Request for Information on Climate-Related Financial Risk (June 2, 2022), available at Concurring Statement of Commissioner Summer K. Mersinger Regarding Request for Information on Climate-Related Financial Risk / CFTC.

https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement081022

I respectfully dissent from the proposed amendments to the Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors (Form PF).  The proposed joint amendments, an action of the CFTC as well as the SEC, seem to impose overly broad obligations that would be unnecessarily burdensome and would present potentially significant operational challenges and costs without a persuasive cost-benefit analysis under the Commodity Exchange Act (CEA).[1]  In a time of economic challenges, including rising inflation, we must be careful when considering proposals that could inhibit positive economic activity that supports American businesses and jobs.  I look forward to hearing from commenters as to the proposed amendments, including practical implementation issues and the relative costs and benefits of the proposal.

[1] 7 U.S.C. § 19.

https://www.finra.org/sites/default/files/fda_documents/2020068870301
%20LPL%20Financial%20LLC%20CRD%206413%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, LPL Financial LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that LPL Financial LLC has been a FINRA member firm sine 1973 with 25,000 registered persons at 15,000 branches.  In accordance with the terms of the AWC, FINRA imposed upon LPL a Censure and $300,000 fine, and an undertaking to certify its implementation of compliant supervisory procedures/systems. As alleged in the "Overview" portion of the AWC:

Between at least December 2018 and April 2020, Respondent failed to accurately calculate its required customer reserve, resulting in two hindsight deficiencies, totaling approximately $162 million. As a result, Respondent violated § 15(c) of the Securities Exchange Act of 1934, Exchange Act Rule 15c3-3(e), and F1NRA Rule 2010. The firm's failure to accurately calculate its customer reserve obligations caused the firm to maintain inaccurate books and records and to file at least 17 Financial and Operational Combined Uniform Single (FOCUS) reports that inaccurately reported its customer reserve. As a result, Respondent violated Exchange Act § 17(a), Exchange Act Rules 17a-3 and 17a-5, and FINRA Rules 4511 and 2010. In addition, Respondent's supervisory system, including written procedures, was not reasonably designed to achieve compliance with  customer reserve requirements. Asa result, Respondent violated FINRA Rules 3110 and 2010.

https://www.brokeandbroker.com/6601/legend-fusco-bankruptcy/
It's not that rare a scenario. An investor is victimized by fraud and suffers significant financial losses. The victim seek out a lawyer to sue the brokerage firm, the stockbroker, and anyone else with a pocket. At some point, the investor learns that the brokerage firm and stockbroker filed for bankruptcy -- and maybe the Director of Compliance, the Chief Executive Officer, the President, and the part-time janitor (all of whom were named in the lawsuit). Now what? Can the victimized investor sue a firm or individual who had filed for bankruptcy? The answer is that it depends. Consider a recent case to see how some of these issues actually play out.

Parietti's Predicament And Prosecutors' Puzzling Principles (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6600/parietti-black-connolly-libor/
Imagine that Joe, Jack, and Jim are charged with a criminal conspiracy, but Joe and Jack refuse to plead guilty. In contrast, Jim fully cooperates against Joe and Jack. After getting their days in court, Joe and Jack are convicted and sentenced to prison. Although Jim becomes a convicted felon via his plea, he serves only one-day in prison but has to pay a $1 million fine. On appeal, Joe and Jack's convictions are reversed. Is Jim still guilty of being part of conspiracy despite the fact that the other two co-conspirators are not guilty of fraud? Does Jim have his felony plea dismissed? Does Jim get his $1 million fine back?

FINRA Small Firms Face Existential Crisis. VOTE Stephen Kohn for Small Firm Governor (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6579/stephen-kohn-finra/
If you are a FINRA Small Firm you don't need me to tell you how dire things have become in 2022. Year after year, the numbers of small firms have dwindled to the point where there are now more FINRA employees than FINRA member firms. In response to that changing landscape, the FINRA Large Firms have consolidated their grip on FINRA and continue to socially engineer their small competitors out of business. Each year, candidates for one of the three FINRA Small Firm seats seek your vote and promise to speak out and speak up on your behalf.  Once elected, however, your purported champions become complacent -- some might even say compliant. I have known Stephen Kohn for many years. Stephen has owned his own small firm. He has been in our biz for decades. Stephen sees the crisis that is upon us, and he knows that it's now or never.  He will take his seat at the FINRA Board, but he will not be told to sit down and shut up. VOTE FOR STEPHEN KOHN! 

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