The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 15, 2022
































= = =
9/15/2022

Federal Court Denies JPMorgan TRO Against Former Employee But Grants Expedited Discovery (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6660/jpm-chamberlain/
In this blog, I have often mused -- often lamented --  that Wall Street doesn't always play nice. It's not a street where former employers and former employees tend to shake hands and amicably part ways. Far too often, when someone leaves a brokerage firm, even after a decade's of employment, what ensues is akin to hardball. In today's version of the post-Wall-Street-employment-gauntlet, JPMorgan alleges that a former employee violated his Non-Solicitation Agreement by trying to persuade former clients to transfer their account to his new shop.

https://www.justice.gov/usao-ednc/pr/wilmington-investment-advisor-pleads-guilty-charges-related-7-million-scheme-defraud
Shawn Edward Good pled guilty in the United States District Court for the Eastern District of North Carolina to wire fraud and money laundering. As alleged in part in the DOJ Release:

[G]ood was employed as a registered representative and investment advisor for Morgan Stanley Smith Barney, LLC in Wilmington.  From 2012 to February 2022, Good executed a scheme to obtain money through investment fraud, commonly known as a Ponzi scheme.  Specifically, Good solicited investments from business clients and others for purported real estate projects and tax-free municipal bonds, touting these opportunities as low-risk investments that would pay returns of between 6% and 10% over three- or six-month terms.

To effectuate these investments, Good caused some clients to obtain a liquid asset line of credit (LAL) secured by their Morgan Stanley investment or retirement accounts.  Good directed clients to transfer the LAL funds to their personal bank accounts and then wire the funds directly to Good's personal bank account.  Other victims paid Good by paper check and wire transfers using funds derived from sources other than Morgan Stanley accounts. 

At least 12 victims invested approximately $7,246,300 based on false statements and misrepresentations made by Good.  Instead of investing in land development or bonds, Good used the money for personal expenditures including his Wilmington residence; a condominium in Florida; luxury vehicles including a Mercedes Benz, a Porsche Boxster, a Tesla Model 3, an Alpha Romeo Stelvio, and a Lexus RX350; fine dining; and vacations to Paris, France; Cinca Terra, Italy; Jackson, Wyoming; Las Vegas, Nevada; and other destinations.  To lend credibility to the Ponzi scheme and to elude detection, Good also used a portion of investor funds to make payments to earlier investors.

Queens Man Sentenced to Prison and to Pay $842,000 Restitution for Foreign Exchange Fraud and Money Laundering / Defendants' Schemes Targeted the Korean American Community in Queens (DOJ Release)
https://www.justice.gov/usao-edny/pr/queens-man-sentenced-prison-and-pay-842000-restitution-foreign-exchange-fraud-and-money
After a jury trial in the United States District Court for the Eastern District of New York, John Won, 53, was convicted on all counts including securities fraud, wire fraud and money laundering conspiracy' and he was sentenced to a year and a day in prison and ordered to pay $842,076.81 in restitution.  Co-defendant Tae Hung ("Kevin") Kang, 57,  pled guilty to securities fraud conspiracy and was sentenced to two years in prison. As alleged in part in the DOJ Release;

Between October 2010 and December 2013, Won conspired with co-defendant Tae Hung Kang and others in a scheme to defraud victims, who were largely members of New York's Korean-American community, into investing in foreign exchange trading accounts and in their company, called ForexNPower.  In furtherance of this scheme, the conspirators issued advertisements in Korean-language newspapers and on Korean-language radio stations claiming that ForexNPower had a secret algorithmic trading method used to trade in the foreign exchange market that guaranteed investors 10% monthly returns at no risk of loss.  In reality, ForexNPower had no successful trading method and their customer accounts suffered substantial losses.

The conspirators also induced investors to purchase stock issued by ForexNPower, by falsely claiming that the invested funds would be used to expand the business to a new location in New Jersey or pooled and used to trade foreign currencies.  In truth, the defendant and his co-conspirators misappropriated a substantial portion of the funds, spending the remainder on, among other things, the fraudulent advertisements described above. 

https://www.sec.gov/news/testimony/gensler-testimony-housing-urban-affairs-091522

Good morning, Chairman Brown, Ranking Member Toomey, and members of the Committee. I'm honored to appear before you today as Chair of the Securities and Exchange Commission. I'd like to thank this Committee for helping to confirm our two new Commissioners, Mark Uyeda and Jaime Lizárraga. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

The Gold Standard of Capital Markets
I'd like to open by discussing two key years in policymaking: 1933 and 1934.

It was the middle of the Great Depression. President Franklin Delano Roosevelt and Congress addressed this crisis through a number of landmark policies.

Amongst them, Congress and FDR came together to craft the first two federal securities laws. Additionally, in 1933, President Roosevelt formally suspended the use of the gold standard. The next year, institutions were prohibited from redeeming dollars for gold.

In other words, in those two key years, one could say we replaced one gold standard with another gold standard: the securities laws.

I believe the core principles of the securities markets have contributed to America's economic success and geopolitical standing around the globe.

Our $100-trillion capital markets - the largest and most innovative in the world -represent about 40 percent of the globe's capital markets, exceeding our 24 percent share of the world's GDP.[1] The U.S. has been known for decades as the destination of choice for large issuers around the globe.

Though no other country's capital markets currently match our own, we cannot take our leadership for granted. Even gold medalists - especially gold medalists - constantly train to stay ahead of the competition.

Further, the nature of finance itself will constantly challenge even a gold standard. In recent years, we've seen as much - whether the market events of March 2020, the meme stock-related volatility, or the collapse of Archegos Capital Management, among other events. New financial technologies and business models, from predictive data analytics to crypto, continue to change the face of finance.

As markets have evolved, our rules have continued to evolve as well. That helps us maintain the gold standard. That helps us sustain our geopolitical edge on the world stage. I think it also supports the standing of the U.S. dollar around the globe.

I think we should do everything we can to maintain and enhance that gold standard of our capital markets.

Maintaining the Gold Standard
There are two broad ways to do that, in my view.

One is to ensure that the SEC is adequately resourced so we can remain the cop on the beat protecting investors and promoting trust in our capital markets. The SEC is deficit-neutral, collecting fees on securities transactions at a rate intended to fully offset our appropriation.

The other way is to work with the Commission and staff both to drive efficiencies in our capital markets and to modernize our rule sets for today's markets and technologies as we execute our mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.[2] We must remain vigilant to opportunities to enhance competition, transparency, fairness, and resiliency.

Last year, in my testimony before this Committee, I covered some of the broad areas from the SEC's policymaking work,[3] along with that of our Divisions of Enforcement and Examinations and our resources. Today, I will provide an update on those items.

Market Structure
In every generation, we have to look at how we can revisit our rule sets to better enhance the efficiency of our markets. Markets work best when they are transparent and competitive. Issuers and investors alike benefit from that competition because it lowers the cost of capital and increases returns.

Technology has transformed and continues to transform our markets. This has led to many good things. For example, retail investors have greater access to markets than in any time in the past.

This technological transformation, though, also has led to challenges, with respect to efficiency, competition, transparency, fairness, market integrity, and resiliency.

Thus, I have asked staff to take a look market structure-based projects across our $100 trillion capital markets: the bond markets, equity markets, security-based swaps markets, and crypto asset markets.

Bond markets
Let me begin with the $50 trillion-plus U.S. bond markets.

The bond markets are incredibly important to individuals, companies, and governments in the U.S. and around the world. U.S. fixed income markets, particularly Treasury markets, money markets, and repurchase agreements ("repos"), are integral to how the Federal Reserve and other banks around the globe administer monetary policy. As individual investors start to approach retirement, they often turn to fixed income as a lower-risk investment.

The $24 trillion Treasury market[4] - the deepest, most liquid market in the world - is the base upon which so much of our capital markets are built. Treasuries are embedded in money market funds; myriad other markets and financial products are priced off of Treasuries; and they are integral to monetary policy. They are how we, as a government and as taxpayers, raise money: We are the issuer.

During the start of the Covid crisis, liquidity conditions in the Treasury market deteriorated significantly. This wasn't the first time we observed challenges in this market, though. Back in October of 2014, there was the Treasury "Flash Rally." In the fall of 2019, we had significant dislocations in Treasury funding markets, called the Treasury repo market.

The SEC's staff have worked, in consultation with our colleagues at the Department of the Treasury and the Federal Reserve, on proposals designed to enhance competition and resiliency in these markets. These proposals include:
  • Ensuring that certain significant Treasury market platforms, including certain interdealer brokers, come into oversight and register;[5]
  • Further defining certain activities that would cause someone engaging in those activities to register as a dealer; thus, principal trading firms engaging in important liquidity-providing roles in the securities markets, including in the U.S. Treasury market, would have to register with the SEC;[6]
  • Ensuring that some of the most active participants in our markets be required to become a member of a national securities association;[7]
  • Enhancing standards for clearing agencies of Treasuries regarding their membership requirements and risk management, and amending the broker-dealer customer protection rule regarding margin held at Treasury clearing agencies;[8] and
  • Strengthening the governance of clearing agencies.[9]

I believe that, all told, these rules would enhance the resiliency, risk management, efficiency, transparency, and competition of our capital markets.

I also support consideration of work undertaken by the Financial Industry Regulatory Authority (FINRA) to bring greater efficiency and transparency to the nearly $30 trillion non-Treasury fixed income markets.[10] These critical markets are more than 2.5 times larger than the commercial bank lending market. America turns more to bonds than to banks to fund their projects. Thus, it's worth considering how to ensure these markets are as efficient, competitive, and transparent as possible.

Equity markets
Next, I believe it's appropriate to look at ways to freshen up the SEC's rules to ensure that our equity markets are as efficient and competitive as they can be.

We haven't updated key aspects of our national market system rules, particularly related to order handling and execution, since 2005. Think about that. When you reach into your pocket, you likely will find a phone that did not exist 17 years ago. How would you fare in your work and life if you still were using the latest technology from 2005?

Right now, there isn't a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges.[11] Further, the markets have become increasingly hidden from view. In 2009, off-exchange trading accounted for approximately one-third of U.S. equity volume.[12] On February 9, 2021, during the height of the meme stock events, the percent of shares traded-off exchange was greater than 50 percent.[13] The average daily portion of shares traded off-exchange over the period from January 4, 2022, through February 26, 2022, was 47 percent.

Thus, last year I asked staff to take a cross-market view of how we might update our rules and drive greater efficiencies in our equity markets, particularly for retail investors.

So far, the Commission has voted to propose rules to strengthen the transparency of short positions for the investing public and regulators.[14] We also proposed rules for the public's feedback around enhancing central clearing, including shortening the settlement cycle to one day.[15]

Furthermore, staff is considering possible recommendations related to best execution; disclosure of order execution quality; the National Best Bid and Offer; minimum price increments ("tick size"); exchange access fees and rebates; payment for order flow; and order-by-order competition.[16] I think we should continue efforts to make our equity markets as fair, efficient, and competitive as possible for investors.

Security-based swaps markets
The security-based swaps market is not a large market compared to the fixed income and equity markets, but it was at the core of the 2008 financial crisis. More recently, total return swaps were at the heart of the failure of Archegos Capital Management, a family office. Since I was with you last year, security-based swap dealers began to register with the SEC; the market also began to report security-based swaps data to swap data repositories. In February, certain data became available to the public.[17] In addition, the Commission proposed to increase the transparency and enhance the integrity of the security-based swaps market, in particular through security-based swap execution facilities.[18]

Crypto markets
Next, I'll turn to crypto assets.[19]

The core principles from the securities laws apply to all corners of the securities markets.[20] Investors and issuers in crypto markets ought to benefit from the same gold standard that has made our capital markets the most liquid and innovative in the world.

Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered by the securities laws, which require that these transactions be registered or made pursuant to an available exemption. Thus, I've asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities. Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements.

Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits. Currently, they primarily are used as means to participate in, or as so-called settlement tokens inside of, crypto platforms. Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; what mechanisms are used to maintain value; or how the tokens are offered, sold, and used within the crypto ecosystem, they may be shares of a money market fund or another kind of security. If so, they would need to register and provide important investor protections.

Given that most crypto tokens are securities, it follows that many crypto intermediaries - whether they call themselves centralized or decentralized (e.g., DeFi) - are transacting in securities and have to register with the SEC in some capacity. I've asked staff to work with crypto intermediaries to ensure they register each of their functions - exchange, broker-dealer, custodial functions, and the like - which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protections.

I also have asked staff to work with firms that have been operating in other well-regulated markets that want to enter the crypto market. Such traditional financial intermediaries have expressed an interest in providing services to investors in the crypto market and to do so in compliance with time-tested investor protection rules. Existing crypto security intermediaries need to do so in compliance with investor protection rules as well.[21] All intermediaries in our capital markets deserve to compete - and comply - on a fair playing field.

As I have stated previously, a small number of tokens likely are crypto non-security tokens, though they may represent a significant portion of the crypto market's aggregate value. Thus, I have asked staff, in working to register crypto security intermediaries, to recommend a pathway to allow both the crypto security and crypto non-security tokens to trade versus or alongside one another. To the extent that crypto intermediaries may need to one day register with both the SEC and the Commodity Futures Trading Commission (CFTC), I would note we currently have dual registrants in the broker-dealer space and in the fund advisory space.

I look forward to working with Congress on various legislative initiatives related to crypto markets, while maintaining the robust authorities we currently have. Let's ensure that we don't inadvertently undermine securities laws underlying $100 trillion capital markets. The securities laws have made our capital markets the envy of the world.

Predictive Data Analytics
The next area is predictive data analytics.[22] I think the use of predictive data analytics in the 2020s is as transformative as the internet was in the 1990s. Coupled with differential marketing, differential pricing, and individually tailored behavioral prompts, these technologies - what we've called digital engagement practices (DEPs) - are increasingly shaping many parts of our economy. Finance is no exception. These DEPs are integrated into robo-advising, wealth management platforms, brokerage platforms, and other financial technologies.

To that end, the Commission last year put out a request for comment on DEPs. Based on that feedback, I've asked staff to make recommendations for the Commission's consideration around how to address conflicts of interest and sales practices in light of the increased use of predictive data analytics.

Issuers and Issuer Disclosure
Next, I will turn to work related to issuers and issuer disclosure.

Disclosures
For the last 90 years, our capital markets have relied on a basic bargain.[23] Investors get to decide which risks to take as long as companies provide full, fair, and truthful disclosures. Congress tasked the SEC with overseeing this bargain. We do so through a disclosure-based regime, not a merit-based one. Over the decades, we have updated our rule set to elicit disclosures of information relevant to investors' decisions.

Increasingly, over the last number of years, investors are making investment decisions based upon factors that include the risks and opportunities related to climate and cybersecurity. Today, climate-related factors and risks as well as cybersecurity risks both can affect a company's bottom line and its future, and therefore an investor's decision to buy, hold or sell a security or how to vote a proxy. Today, investors are already making decisions based upon information about climate and cyber risks. Hundreds of companies are already disclosing such information, pursuant to disparate frameworks, in a manner that lacks consistency and reliability.

Thus, the SEC has issued proposals to help bring investors greater consistency, comparability, and decision-usefulness to such disclosures and enhance the conversation that is already going on between issuers and investors. In March, we put out for comment a proposal to require disclosures from public companies about climate-related risks, and we received more than 14,000 comments.[24]In addition, in March, the Commission proposed rules that would enhance issuers' cybersecurity disclosures to help ensure investors are adequately informed about a company's cyber-related risks.[25] We received over 140 comments on that proposal.

China

It's a privilege for foreign issuers to access our markets - the largest, deepest, most liquid markets in the world. If foreign issuers want access to our public capital markets, they must be on a level playing field with U.S. firms. Investors in U.S. markets should be protected - and have trust in a company's financial numbers - regardless of whether an issuer is foreign or domestic.

More than 50 jurisdictions have complied with the requirements that the Public Company Accounting Oversight Board (PCAOB) inspect and investigate audit firms of U.S. public companies, regardless of where the audit firm is based. Two have not: China and Hong Kong.

In August, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China that provides a framework for PCAOB inspections and investigations of audit firms based in China and Hong Kong.[26] The agreement brings specificity and accountability to effectuate Congress's intent, under the Holding Foreign Companies Accountable Act of 2020 (HFCAA), to ensure PCAOB inspection access across all relevant jurisdictions.

Make no mistake, though: The proof will be in the pudding. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If the PCAOB cannot, roughly 200 Chinese-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.

I thank this Committee for its leadership, and all of Congress, for your continued attention to these important matters.

Other topics
There are a number of other important topics relating to issuers that I'd like to highlight. These include proposals related to special purpose acquisition companies,[27] share repurchase disclosure,[28] beneficial ownership (Regulation 13D-G),[29] and trading by company insiders (10b5-1 plans).[30] Across these areas, I think we have opportunities to enhance market integrity, transparency, and fairness in our markets.

Funds and Investment Management
The next area I will discuss is how we can drive greater efficiency, integrity, and resiliency in the funds and investment management space.

Efficiency
Private fund advisers, through the funds they manage, touch so much of our economy. These funds, including hedge funds, private equity funds, venture capital funds, and liquidity funds, currently have approximately $21 trillion in gross assets.[31] These funds matter because of what, or who, stands on either side of them. The funds pool the money of other people, including retirement plans, university endowments, and others. The people behind those funds and endowments often are teachers, firefighters, municipal workers, students, and professors. And who are the people on the other side of the private funds? They're entrepreneurs, small business owners, and managers of late-stage companies.

That's why I think it is important, using the tools of competition and transparency, to drive greater efficiencies in the private funds market. In this space, there may be somewhere in the range of $250 billion in fees and expenses each year.[32] Thus, the Commission proposed rules to enhance transparency for private fund investors, such as with respect to advisers' fees, performance metrics, and side letter arrangements.

Integrity
In promoting integrity in our markets, it is crucial that investors can evaluate what stands behind a fund's marketing. Recently, we've seen a growing number of funds market themselves as "green," "sustainable," "low-carbon," and so on. What information stands behind those claims?

Thus, we proposed modernizing the 21-year-old Names Rule to help ensure that a fund's name aligns with the fund's characteristics and investing strategy.[33] As the fund industry has developed, gaps in the current Names Rule may undermine investor protection. The proposal would modernize this key rule for today's markets. Concurrently, we proposed a rule enhancing the disclosure requirements for advisers and investment companies marketing themselves using Environmental, Social, and Governance (ESG)-related labels.[34] This would help ensure that investors can see the information that stands behind funds' and advisers' claims.

Resiliency
The nature, scale, and interconnectedness of funds pose issues for financial stability. We've seen such risks emanate from various fund sectors during the 2008 financial crisis, at the start of the COVID crisis in March 2020, and in 1998, when the hedge fund Long-Term Capital Management failed.[35]

Therefore, the Commission has proposed various rules related to resiliency.

In December, the Commission voted to propose amendments designed to increase resiliency of money market funds.[36] There were challenges in this market during the 2008 financial crisis. The SEC sought to address structural issues in these funds through a series of reforms adopted in 2010 and 2014. The events of March 2020, though, suggest that more can be done to improve the resiliency of money market funds.

Next, in response to the 2008 financial crisis, Congress mandated the SEC and CFTC to establish reporting requirements for advisers to private funds through Form PF, an important reporting tool used to protect investors and monitor systemic risk. We've learned a lot, though, since Form PF was first adopted. Thus, over the last year, the Commission has proposed two sets of rules regarding Form PF.

In January, the Commission proposed amendments to the SEC-only sections of Form PF.[37] That proposal would, among other things, require certain advisers to private funds to provide current reporting of key events, and enhance reporting requirements for large private equity and large liquidity fund advisers. In August, we proposed to amend the SEC and CFTC's joint portions of Form PF to expand the reporting requirements for large hedge fund advisers on their large hedge funds, among other things.[38] Together, these proposals, if adopted, would improve the quality of the information we receive from filers, including hedge funds and private equity funds.

Third, in February, the Commission proposed new rules that would require registered investment advisers, registered investment companies, and business development companies to enhance their cybersecurity practices.[39] Such rules would improve advisers' and funds' cybersecurity risk management and incident reporting.

Finally, with respect to open-end funds, I've asked staff whether there are improvements we can consider to enhance fund liquidity, pricing, and resiliency during periods of stress.

Enforcement and Examinations
Maintaining the gold standard of the capital markets means examining against the rules and being the cop on the beat. About half of SEC staff work in the Divisions of Examinations and Enforcement, ensuring that firms are inspected and wrongdoers are held accountable for their misconduct.

Without examination against and enforcement of our rules and laws, we can't instill the trust necessary for our markets to thrive. Preventing fraud, manipulation, and abuse lowers risk in the system. It protects investors and reduces the cost of capital. The whole economy benefits from that.

The Commission has brought a number of important cases based on allegations of books and records violations, complex products, and crypto assets.[40] That being said, the Division of Enforcement shrank 5 percent from Fiscal Year (FY) 16 to FY21. The number of full-time equivalents (FTEs) supported by the FY23 budget request for the agency would still be 1 percent shy of where we were in 2016.

While the Division is doing more with less, we do need more resources. For example, more cases are being litigated and going to trial. The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.

Further, in FY21, we received 46,000 tips, complaints, and referrals from members of the public, up from about 16,000 five years earlier.

Moreover, the Division of Examinations' work is essential to ensuring strong compliance across the board. For example, that includes work to test for compliance with Regulation Best Interest, which helps to ensure retail customers receive unbiased recommendations from their broker-dealers that are truly in the customer's best interest. The Division also plays a key role in monitoring risk and informing policy, which are especially important during times of increased market volatility, geopolitical turmoil, and interconnectedness.

In the most recent completed fiscal year, this Division exceeded the previous year's numbers by completing more than 3,000 examinations and hundreds of non-exam registrant engagements responding to market events.[41] The Division of Examinations grew modestly (4 percent) since FY16. The FY23 budget request supports an additional 4 percent increase in FTEs compared with FY21.

Resources
The SEC oversees 24 national securities exchanges, 99 alternative trading systems, 10 credit rating agencies, seven active registered clearing agencies, five self-regulatory organizations and other external entities. We review the disclosures and financial statements of more than 8,200 reporting companies.[42]

Markets don't stand still. The world isn't standing still. Our resources can't stand still, either.

For example, since 2016, the number of private funds managed by registered investment advisers has increased 40 percent, to 50,000.

In addition, the amount of data that the SEC processes has swelled by 20 percent annually for each of the last two years.

And yet, our agency has shrunk. Last year, the agency had 4 percent fewer staff than it did in 2016. We can't shrink when we're trying to maintain a gold standard.

Thanks to the work of the remarkable staff, the SEC has faced the challenges of limited resources well. For the SEC to continue to succeed in carrying out our mission, our personnel level must continue to grow commensurate with the expansion and complexity in the capital markets around the world. To fund our operations, the agency collects fees on securities transactions at a rate intended to fully offset our appropriation.

Our capital markets are a national treasure. We, at the SEC, must work to maintain them as the envy of the world. But we can't do it alone. We need the help of Congress.

Conclusion
In considering how to maintain the world's best markets in the 2020s and the 2030s, I can't help but think about the establishment of the federal securities regime in the 1930s. These foundational laws help us maintain our competitiveness on the world stage. They are the gold standard. Let's do everything we can to keep them that way in the future.

I'm often asked to prioritize the remaining items on our rulemaking agenda. When will we vote on what?

At their core, those questions are more about sequencing than prioritization. Staff is working diligently on remaining proposals and possible adopting releases. When they and my fellow Commissioners think proposals are ready, we'll put them out for public comment and, when appropriate, finalize items.

In all our work, we are anchored by the laws Congress has passed, the courts' interpretations of those laws, economic analysis, and public input.[43] As a Commission, we benefit greatly from that public input. As staff prepares recommendations for the Commission, they take those comments into close consideration and consider changes based upon that public feedback.

Every day, as we consider these policy areas, we are motivated by our three-part mission, as directed by Congress: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Thank you and I look forward to answering your questions.

[1] See Securities Industry and Financial Markets Association, "2022 SIFMA Capital Markets Fact Book" (July 2022), available at https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf.

[2] See Gary Gensler, "Dynamic Regulation for a Dynamic Society" (Jan. 19, 2022), available at https://www.sec.gov/news/speech/gensler-dynamic-regulation-20220119.

[3] See Gary Gensler, "Testimony Before the United States Senate Committee on Banking, Housing, and Urban Affairs" (Sept. 21, 2021), available at https://www.sec.gov/news/testimony/gensler-2021-09-14.

[4] See statistics from Securities Industry and Financial Markets Association, available at https://www.sifma.org/resources/research/statistics/us-treasury-securities-statistics/#:~:text=Outstanding%20(as%20of%20August)%20%2423.
7,%2C%20%2B8.0%25%20Y%2FY

[5] See Gary Gensler, "Statement on Government Securities Alternative Trading Systems" (Jan. 26, 2022), available at https://www.sec.gov/news/statement/gensler-ats-20220126.

[6] See Gary Gensler, "Statement on the Further Definition of a Dealer-Trader" (March 28, 2022), available at https://www.sec.gov/news/statement/gensler-statement-further-definition-dealer-trader-032822.

[7] See Gary Gensler, "Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership" (July 29, 2022), available at https://www.sec.gov/news/statement/gensler-proposed-amendments-exemptions-national-securities-association-072922.

[8] See Sunshine Act Notice for Sept. 14, 2022, Open Commission Meeting: https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-09142022

[9] See Gary Gensler, "Statement on Proposal to Enhance Clearing Agency Governance" (Aug. 8, 2022), available at https://www.sec.gov/news/statement/gensler-statement-proposal-enhance-clearing-agency-governance-080822.

[10] See Gary Gensler, "The Name's Bond" (April 26, 2022), available at https://www.sec.gov/news/speech/gensler-names-bond-042622.

[11] See Gary Gensler, "Market Structure and the Retail Investor" (June 8, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822.

[12] See Cboe Global Markets data, available at https://www.cboe.com/us/equities/market_share/.

[13] Ibid.

[14] See Gary Gensler, "Statement on Rules to Increase Transparency of Short Sale Activity" (Feb. 25, 2022), available at https://www.sec.gov/news/statement/gensler-statement-rules-increase-transparency-short-sale-activity-022522.

[15] See Gary Gensler, "Statement on Rules Regarding Clearing and Settling" (Feb. 9, 2022), available at https://www.sec.gov/news/statement/gensler-statement-rules-regarding-clearing-settling-020922.

[16] See "Market Structure and the Retail Investor."

[17] See "Statement on Public Dissemination of Security-Based Swap Transactions" (Feb. 16, 2022), available at https://www.sec.gov/news/statement/gensler-public-dissemination-sbs-transactions-202202.

[18] See "SEC Proposes Rules for the Registration and Regulation of Security-Based Swap Execution Facilities," (April 6, 2022), available at https://www.sec.gov/news/press-release/2022-59.

[19] See Prepared Remarks of Gary Gensler On Crypto Markets, Penn Law Capital Markets Association Annual Conference (April 4, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422. See Gary Gensler, Remarks at Aspen Security Forum (Aug. 3, 2021), available at https://www.sec.gov/news/speech/gensler-aspen-security-forum-2021-08-03.

[20] See Gary Gensler, "Kennedy and Crypto" (Sept. 8, 2022), available at https://www.sec.gov/news/speech/gensler-sec-speaks-090822.

[21] See Gary Gensler, "The SEC Treats Crypto Like the Rest of the Capital Markets," available at https://www.wsj.com/articles/the-sec-treats-crypto-like-the-rest-of-the-capital-markets-disclosure-compliance-security-investment-mutual-fund-protections-blockfi-bankruptcy-bitcoin-11660937246.

[22] See Gary Gensler, "Investor Protection in a Digital Age" (May 17, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-nasaa-spring-meeting-051722.

[23] See Gary Gensler, "Remarks at Financial Stability Oversight Council Meeting" (July 28, 2022), available at https://www.sec.gov/news/speech/gensler-statement-financial-stability-oversight-council-meeting-072822.

[24] See "SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors" (March 21, 2022), available at https://www.sec.gov/news/press-release/2022-46.

[25] See "SEC Proposes Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies" (March 9, 2022), available at https://www.sec.gov/news/press-release/2022-39.

[26] See Gary Gensler, "Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong" (Aug. 26, 2022), available at https://www.sec.gov/news/statement/gensler-audit-firms-china-hong-kong-20220826.

[27] See "SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition Companies, Shell Companies, and Projections" (March 30, 2022), available at https://www.sec.gov/news/press-release/2022-56.

[28] See "SEC Proposes New Share Repurchase Disclosure Rules" (Dec. 15, 2021), available at https://www.sec.gov/news/press-release/2021-257.

[29] See "SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting" (Feb. 10, 2022), available at https://www.sec.gov/news/press-release/2022-22.

[30] See "SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures" (Dec. 15, 2022), available at https://www.sec.gov/news/press-release/2021-256.

[31] This represents registered investment adviser (RIA) private fund gross asset value reported on Form ADV as of December 2021.

[32] See Gary Gensler, Prepared Remarks At the Institutional Limited Partners Association Summit, Nov. 10, 2021, available at https://www.sec.gov/news/speech/gensler-ilpa-20211110.

[33] See "SEC Proposes Rule Changes to Prevent Misleading or Deceptive Fund Names" (May 25, 2022), available at https://www.sec.gov/news/press-release/2022-91.

[34] See "SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices" (May 25, 2022), available at https://www.sec.gov/news/statement/gensler-statement-esg-disclosures-proposal-052522.

[35] See "Statement before the Financial Stability Oversight Council on Money Market Funds, Open-End Bond Funds, and Hedge Funds" (Feb. 4, 2022), available at https://www.sec.gov/news/speech/genseler-fsoc-statement-020422.

[36] See Gary Gensler, "Statement on Money Market Fund Reform" (Dec. 15, 2021), available at https://www.sec.gov/news/statement/gensler-mmf-20211215.

[37] See "SEC Proposes Amendments to Enhance Private Fund Reporting" (Jan. 26, 2022), available at https://www.sec.gov/news/press-release/2022-9.

[38] See "SEC Proposes to Enhance Private Fund Reporting" (Aug. 10, 2022), available at https://www.sec.gov/news/press-release/2022-141.

[39] See "SEC Proposes Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds" (Feb. 9, 2022), available at https://www.sec.gov/news/press-release/2022-20.

[40] See, e.g., "JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges" (Dec. 17, 2021) (settled order), available at https://www.sec.gov/news/press-release/2021-262; "SEC Charges Allianz Global Investors and Three Former Senior Portfolio Managers with Multibillion Dollar Securities Fraud" (May 17, 2022) (settled orders as to Allianz; civil action pending as to certain individual defendants), available at https://www.sec.gov/news/press-release/2022-84; "SEC Charges Infinity Q Founder with Orchestrating Massive Valuation Fraud" (Feb. 17, 2022) (civil action pending), available at https://www.sec.gov/news/press-release/2022-29; "SEC Charges Archegos and its Founder with Massive Market Manipulation Scheme" (April 27, 2022) (civil action pending), available at https://www.sec.gov/news/press-release/2022-70 and "BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product" (Feb. 14, 2022) (settled order), available at https://www.sec.gov/news/press-release/2022-26.

[41] See Division of Examinations, 2022 Examination Priorities, available at https://www.sec.gov/files/2022-exam-priorities.pdf.

[42] See Gary Gensler, "Testimony at Hearing before the Subcommittee on Financial Services and General Government U.S. House Appropriations Committee" (May 17, 2022), available at https://www.sec.gov/news/testimony/gensler-testimony-fsgg-subcommittee.

[43] See "Remarks at Financial Stability Oversight Council Meeting."

https://www.sec.gov/litigation/litreleases/2022/lr25506.htm
In a Complaint filed in the United States District Court for the Northern District of Illinois
https://www.sec.gov/litigation/complaints/2022/comp25506.pdf, the SEC charged Chicago Crypto Capital LLC, Brian Amoah, Darcas Oliver Young, and Elbert "Al" Elliott with violating Sections 5(a) and (c) of the Securities Act, Section 15(a) of the Securities Exchange Act, Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Pursuant to a settlement offer from Young, he consented to the payment of disgorgement and a civil penalty, an associational bar, and injunctive relief. As alleged in part in the SEC Release:

[F]rom approximately August 2018 through November 2019, CCC, Amoah, Young, and Elliott acted as unregistered broker-dealers and conducted an unregistered offering of BXY tokens, illegally raising at least $1.5 million in proceeds from approximately 100 individuals, many of whom had no experience investing in crypto assets. The BXY offering was not registered with the Commission and did not satisfy any exemption from registration, and none of the defendants were registered with the Commission as brokers. In addition, the SEC alleges that each of the defendants made materially false and misleading statements in the offer, purchase, and/or sale of BXY tokens, including about the custody and delivery of BXY, the markup charged by CCC, the delivery of account statements, CCC's liquidation of an investor's BXY, their personal investments in BXY, and the financial and management problems occurring at BXY's issuer, Beaxy Digital Ltd., in late 2019. As a result of this alleged fraud, the SEC alleges that some of these investors never received their BXY tokens, and all those who invested paid an undisclosed markup on their BXY tokens.

= = =
9/14/2022

https://www.brokeandbroker.com/6652/merrill-lynch-expert/
The recent federal case involves a deceased customer, his estate, a Merrill Lynch employee, trust accounts, and an annuity. Frankly, they could make a movie out of this one. Until the movie is made, however, you're going to have to read today's blog and see how the case is progressing.

https://www.justice.gov/opa/pr/banker-pleads-guilty-bank-secrecy-act-charges
Hanan Ofer pled guilty in the United States District Court for the Eastern District of New York to failure to maintain an effective anti-money laundering program in violation of the Bank Secrecy Act. As alleged in part in the DOJ Release:

[F]rom 2014 to 2016, Hanan Ofer, 69, of New York City, operated the New York State Employees Federal Credit Union Service Organization (NYSEFCU-CUSO), a money services business that was required to have an effective anti-money laundering program. Through the NYSEFCU-CUSO and other entities, Ofer participated in a scheme that brought more than $1 billion in high-risk transactions, including millions of dollars of bulk cash transactions from a Mexican bank, to the New York State Employees Federal Credit Union (NYSEFCU). 

Ofer was experienced in international banking and trained in anti-money laundering compliance and procedures, and represented to the NYSEFCU that he and his businesses would conduct appropriate anti-money laundering oversight as required by the Bank Secrecy Act. Instead, Ofer willfully failed to implement an effective anti-money laundering program at the NYSEFCU-CUSO. This failure caused the NYSEFCU to process the high-risk transactions without appropriate oversight and without ever filing a single Suspicious Activity Report, as required by law.

https://www.sec.gov/news/press-release/2022-163
Without admitting or denying the findings in an SEC Order 
https://www.sec.gov/litigation/admin/2022/34-95764.pdf Loop Capital Markets, LLC consented to a finding that it violated the rules regarding municipal advisor registration and supervision requirements, the imposition of a Censure and an order to pay disgorgement and prejudgment interest of $5,456.73 and a civil penalty of $100,000. As alleged in part in the SEC Release:

[T]he action marks the first time the SEC has charged a broker-dealer for violating the municipal advisor registration rule.

[B]etween September 2017 and February 2019, Loop Capital advised a Midwestern city to purchase particular fixed income securities, which the city purchased using the proceeds of its own municipal bond issuances. In addition, the Commission's order found that Loop Capital did not maintain a system reasonably designed to supervise its municipal securities activities and had inadequate procedures, including insufficient methods to identify potential violations of the municipal advisor registration rules.

The SEC proposed rules https://www.sec.gov/rules/proposed/2022/34-95763.pdf to update the membership standards required of covered clearing agencies for the U.S. Treasury market with respect to a member's clearance and settlement of specified secondary market transactions; and, further, to reduce the risks faced by a clearing agency and incentivize and facilitate additional central clearing in the U.S. Treasury market. As stated in part in the SEC Release:

Specifically, the proposal would require that clearing agencies in the U.S. Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions. These transactions would include: all repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities entered into by a member of the clearing agency; all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and all purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, a government securities dealer, a hedge fund, or a particular type of leveraged account.

With respect to customer margin, the proposal would permit broker-dealers to include margin required and on deposit at a clearing agency in the U.S. Treasury market as a debit in the customer reserve formula, subject to certain conditions. In addition, the proposal would require clearing agencies in this market to collect and calculate margin for house and customer transactions separately. Finally, the proposal would require policies and procedures designed to ensure that the clearing agency has appropriate means to facilitate access to clearing, including for indirect participants.
As I have noted in the past,[1] it is hard to overstate the importance of the U.S. Treasury market. U.S. Treasury securities are direct obligations of the U.S. Government issued by the Department of the Treasury. There are several different types of Treasury securities, including U.S. Treasury bills, nominal coupon notes and bonds, Floating Rate Notes, and Treasury Inflation-Protected Securities (TIPS). The market consists of two components: the primary market and the secondary market. The primary market is where the Treasury Department auctions securities to the public through a competitive bidding process and subsequently issues awarded securities to finance the Federal government. The secondary market is where the other trading of U.S. Treasury securities occurs. The secondary market includes both the "cash market," for outright purchases and sales of securities, and the repo market, where one participant sells a U.S. Treasury security to another participant, along with a commitment to repurchase the security at a specified price on a specified later date. Treasuries serve as investment instruments and hedging vehicles, as a benchmark for many financial instruments, and as a mechanism for the implementation of monetary policy, among other purposes.

With thanks to my colleagues in the Division of Economic and Risk Analysis, I will briefly highlight a few statistic to help illustrate the importance of the Treasury market:

Average weekly trading volume in the Treasury cash market is approximately $3 trillion[2];

Average daily volume in the Treasury repo market is almost $4 trillion[3];

The total amount outstanding of marketable U.S. Treasury securities held by the public is around $23 trillion[4]; and

Trading in the U.S. Treasury market accounts for approximately 65% of all trading in fixed income securities[5].
For these and other reasons, the U.S. Treasury market is often referred to as the deepest and most liquid market in the world.[6] Confidence in the Treasury market is central to the functioning of the U.S. financial system, and to the global economy more broadly.

The structure of the Treasury market has undergone significant changes over the last 20 or so years.[7] Many of these changes stem from the increased use of technology and automation, and the emergence of the Principal Trading Firm (PTF) entities that have deployed technology-based trading strategies.

Before the mid-2000s, most interdealer trading occurred between primary dealers, and the transactions were centrally cleared - that is, cleared and settled by a central counterparty that interposes itself between the counterparties to the transaction, acting functionally as the buyer to every seller and the seller to every buyer, thus reducing the risk that a transaction will fail and increasing efficiency.[8] However, in recent years, the share of trades on interdealer broker platforms executed by non-dealers, like PTFs and hedge funds, has grown, with a corresponding decrease in the level of central clearing.[9]

There have also been a number of recent disruptions in the Treasury market, including the flash rally of October 2014, the sudden spike in repo rates in September 2019, and the Covid-related market disruption in March 2020. These events triggered extensive interventions by the Federal Reserve and have prompted regulators, industry groups, and academics to consider ways to improve the resilience of the market in times of stress. Increasing the level of central clearing in the Treasury market has been identified in numerous papers, reports, and speeches as one way to do so.[10]

The amendments we are considering today are designed to promote central clearing in the Treasury market in four ways:

First, the proposal would require covered clearing agencies that clear Treasury securities (currently, only the Fixed Income Clearing Corporation) to require all of their direct participant members to submit eligible secondary market transactions in Treasuries for clearance and settlement;

Second, the proposal would require certain changes to strengthen risk management practices at covered clearing agencies that clear Treasury securities, specifically with respect to the separation of margin for proprietary positions from margin for other transactions;

Third, the proposal would require a covered clearing agency that clears Treasury securities to ensure that it has appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities, including those of indirect participants;

Finally, the proposal would amend the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers.
The potential benefits of central clearing are numerous. Increased central clearing in the Treasury market should decrease the overall amount of counterparty risk, reduce contagion risk to the Fixed Income Clearing Corporation,[11] help avoid disorderly member defaults, and increase multilateral netting of transactions, which should in turn reduce operational and liquidity risks.[12]

It should also improve transparency in several ways. First, expanded central clearing should increase regulators' visibility into these markets, in particular the often opaque repo market.[13] It should also improve transparency of settlement risk to regulators and market participants,[14] and increase price transparency.[15]

There are other considerations. In particular, while central clearing reduces counterparty and operational risks, it also concentrates risk in one entity.[16] This underscores the importance of effective risk management at clearing agencies, and of the importance of appropriate supervision and regulation for those institutions. There could also be an increase in the cost to participate in the Treasury market associated with the amendments. However, additional costs are likely to be offset by the netting benefits that should result from additional centrally cleared transactions.[17]

Some may query whether a requirement for FICC members to clear eligible secondary market transactions is necessary, given that the amendments to the customer protection rule and changes to margin practices may, on their own, result in an increase in the level of central clearing in the Treasury market. However, as noted in the release, the benefits of central clearing are proportional to the number of participants.[18] The higher the number of participants, the greater the benefits of central clearing. And central clearing requires participants to incur short-term, private costs in order to obtain a larger, longer-term collective benefit. In other words, central clearing can present a collective action problem, and in the absence of a meaningful inducement to partake, market participants may not do so. The proposal would provide that inducement through the membership requirements, and I therefore consider that aspect of the proposal foundational.

I look forward to reviewing the comments. In particular, I look forward to commenters' views on the scope of the proposed requirements regarding direct member transactions in the secondary market, and whether they may be under- or over-inclusive. I am also interested in commenters' views on appropriate schedule for implementation.

Finally, I'd like to join my colleagues in thanking our fellow regulators for their input, in particular through their participation in the Inter-Agency Working Group on Treasury Market Surveillance, comprising staff from the Department of Treasury, the Federal Reserve Board of Governors, the Federal Reserve Bank of New York, the Commodity Futures Trading Commission, and the SEC. I'd also like to thank the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all of their hard work on this proposal. I'm pleased to support it. Thank you.

[1] See Commissioner Caroline A. Crenshaw, Statement on Amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI (Jan. 26, 2022); see also Commissioner Luis A. Aguilar, Ere Misery Made Me Wise - The Need to Revisit the Regulatory Framework of the U.S. Treasury Market (July 14, 2015).

[2] Average weekly trading volume in the secondary market for U.S. Treasury securities was approximately $3 trillion in 2021, with notable peaks in March 2020 and early 2021. See Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities, Securities Exchange Act Release No. 34-95763 (September 13, 2022) (the "Proposal") at 138.

[3] Throughout 2020 and into 2021, daily transaction volume in the U.S. Treasury securities repurchase market ranged between $1.5 and $2.5 trillion per day. Since April 2021, average daily volume has been considerably higher - approaching $4 trillion per day - coinciding with the growth in the Federal Reserve's overnight reverse repurchase operations. Proposal at 141.

[4] As of June 30, 2022, the total amount outstanding of marketable U.S. Treasury securities held by the public was $23.3 trillion. This includes $3.5T in bills, $13.6T in notes, $3.8T in bonds, 1.8T in TIPs, and 0.6T in floating rate notes. The volume of marketable U.S. Treasury securities outstanding has increased by approximately $18 trillion since 2000. Proposal at 137.

[5] According to industry reports, 65% of the $955.2 billion in average daily trading volume of U.S. fixed income securities in 2021 was in U.S. Treasury securities. Proposal at 137.

[6] See, e.g., U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report (November 8, 2021) at 1.

[7] Id. at 7.

[8] Id. at 5-6; Proposal at 10.

[9] Unlike the interdealer market, the dealer-to-customer market has historically been a bilateral market with little central clearing. Proposal at 26.

[10] See, e.g., U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report (November 8, 2021); FIA Principal Traders Group, Clearing a Path to a More Resilient Treasury Market (July 2021); Treasury Market Practice Group, White Paper on Clearing and Settlement in the Secondary Market for U.S. Treasury Securities (July 2019); Nellie Liang and Pat Parkinson, Enhancing Liquidity of the U.S. Treasury Market Under Stress (December 16, 2020); Commissioner Elad Roisman, Remarks at U.S. Treasury Conference (September 29, 2020).

[11] The Fixed Income Clearing Corporation (FICC) is currently the only covered clearing agency that provides central counterparty services for transactions in U.S. Treasury securities.

[12] Proposal at 73.

[13] Proposal at 76.

[14] Proposal at 76.

[15] Proposal at 225.

[16] See U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report (November 8, 2021) at 31.

[17] Proposal at 217-18.

[18] Proposal at 237.

Statement on Treasury Clearing by SEC Commissioner Jaime Lizárraga
https://www.sec.gov/news/statement/lizarraga-statement-treasury-clearing-091422

Today, the Commission is proposing amendments designed to improve transparency and lower systemic risk in the $23.3 trillion market for U.S. Treasury securities. By increasing the number of transactions subject to central clearing, these amendments should help strengthen the U.S. Treasury market and make it more resilient to unexpected shocks.

In the United States, the Treasury market plays a vital role in public finance and in monetary policy. Worldwide, market participants depend on this market to manage risk, post collateral, set benchmarks for borrowing and lending decisions, and for many other purposes.

Backed by the full faith and credit of the United States, Treasury securities can also serve as a safe haven for retail investors who prefer the certainty of a reliable return relative to riskier assets.

In short, as former SEC Commissioner Luis Aguilar noted in 2015, the "U.S. Treasury market remains the largest and most liquid sovereign debt market in the world," and continues to play a "unique and indispensable role" in global finance.

Over time, however, the structure and size of the Treasury market has changed in important ways. Between 2007 and 2022, debt held by the public increased fourfold, from $5.1 trillion to over $23 trillion. During this period, electronic trading and expanded participation by proprietary trading firms brought with it a significant decrease -- 50 percent -- in central clearing of interdealer cash trades.

This reduction in market visibility carries implications for systemic risk, especially in the context of market disruptions. In October 2014, the Treasury market experienced unusually high levels of volatility and liquidity became significantly strained. In March 2020, the global spread of COVID-19 significantly disrupted the market. Even as recently as February 25, 2021, the prices of Treasuries dropped sharply amid strained liquidity conditions.

The changes the Commission is voting on today are aimed at reducing the risks generated by these market developments and at increasing much needed transparency.

Public feedback on all elements of the proposal will be essential. First, clearing agencies would be required to direct participants to centrally clear all repo and certain cash transactions in Treasuries in which they are counterparties. Second, the proposal will require clearing agencies to collect margin separately for house and customer transactions in Treasuries. Taken together, both elements may increase transparency, reduce systemic risk, and incentivize more central clearing.

Third, clearing agencies will also be required to take steps to facilitate access to central clearing for additional market participants like pension funds and asset managers. And also for indirect participants like investment advisers and registered investment companies. These steps should reinforce the other elements of the proposal and further incentivize more central clearing.

Fourth, the proposal permits margin required and deposited with a clearing agency to be included as a debit in reserve formula calculations. This amendment should increase liquidity while maintaining customer protection objectives in current SEC rules.

Today's proposal to increase central clearing is an important step in enhancing visibility into and lowering risk in the Treasury market and I am pleased to support it.

I would like to acknowledge the important work of our partner agencies and financial regulators in overseeing the various segments and participants in the Treasury market.

I would also like to thank the staff in the Division of Trading and Markets, the Division of Economic and Risk Analysis, Division of Investment Management and the Office of the General Counsel for their hard work and dedication in crafting this thoughtful approach.

https://www.sec.gov/news/statement/peirce-statement-treasury-clearing-09142022

Thank you, Mr. Chair. I support today's proposal because it seeks comment on how to address problems we have observed in the Treasury market, not because I necessarily embrace the solution that we are proposing.

Over the past several years, regulators, market participants, and academics alike have devoted increasing attention to the Treasury market. Some of this attention stems from the nature of the market: No market is larger or deeper; none facilitates such a wide range of activities, including effectuating the U.S. government's fiscal, monetary, and regulatory policy, and serving investors' hedging, liquidity, and investment needs. Treasury issuance has exploded in the last two decades; the proposing release notes that the volume of marketable U.S. Treasury securities outstanding has increased by approximately $18 trillion since 2000. Or, as a recent inter-agency report notes, Treasury debt held by the public totaled $5.1 trillion, or 35 percent of 2007's GDP and $21.6 trillion, or 101 percent of 2020's GDP.[1]

The growth in the national debt is concerning for a citizen, but regulators thinking about market quality also quite naturally sit up and take notice. Some of the attention stems from periodic dislocations that are disconcerting in a market of such size, importance, and historic stability. Most recently, for example, in the wake of the COVID-19 outbreak and governmental responses to it, market participants fled from rather than to the Treasury markets.[2] We cannot write off this market disruption as just another pernicious result of the pandemic and associated government actions. The events of March 2020, although prompted by an unusual set of events, may signal deeper problems in the Treasury market. Indeed, disruptions in this market have become notoriously common, including a flash rally in October 2014 and stress in the repo market in September 2019.

Attention on Treasury markets also comes in response to changes in how the market operates and in the roster of market participants. The Treasury markets have increasingly shifted to electronic trading, which has facilitated greater participation in the market by principal trading firms. These firms use trading strategies and exhibit trading behaviors that can differ significantly from dealers.[3] As the role these firms play in the market has increased and dealer balance sheet space devoted to the Treasury markets has shrunk, the proportion of "interdealer" transactions that are cleared has declined significantly.[4]

Finally, some of the attention on the Treasury market comes from its unique regulatory structure. Congress has allocated oversight of the Treasury market across several different authorities, including the Federal Reserve Board, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and the Securities and Exchange Commission.[5] Given the fragmentation of oversight, no single regulator can implement a market-wide solution to perceived problems; at the same time, any significant issue in the market is likely to attract the attention of most or all of these bodies. Translating this attention into coherent policy can be challenging.

In light of the Treasury market's size and recent history of disruptions and change, regulators have a responsibility to examine the market and to devote careful consideration to whether regulatory changes may be warranted. Today's release is the product of careful consideration by the Commission staff. Through its many questions, the release invites the public to further our consideration with comments based on, among other things, the experience and expertise that comes from being in the market. In a moment, I will add some additional questions to the list.

Both regulators and market participants have discussed the possibility that expanded central clearing could help prevent future disruptions by improving and standardizing risk management, netting gross exposures, enhancing transparency, and facilitating further evolution in market structure that could reduce barriers and improve liquidity.[6] As former Commissioner Roisman explained, the rise of electronic trading presents great opportunity for investors, but it also may increase the risk of non-performance by counterparties. He suggested that increased central clearing-and thus increased novation, netting, and guaranteed settlement-could make the market more resilient.[7]

Today's proposal represents one approach to increasing central clearing of Treasury transactions. The proposed rule amendments, if adopted, would effectively require most Treasury transactions into which clearing agency members enter with a large class of counterparties to be cleared. Treasury clearing agencies, of which there is now only one, the Fixed Income Clearing Corporation ("FICC"), would have to calculate, collect, and hold margin from direct participants separately from indirect participants' margin. To accommodate the anticipated increased demand for clearing, the proposal also would require clearing agencies to have policies and procedures to facilitate broader access to clearing and settlement services. Finally, the proposal would amend the broker-dealer customer protection rule to facilitate the posting of customer margin to the clearing agency in connection with Treasury transactions.

The proposal takes a considerably heavier hand to achieve the goal of increased central clearing than seems necessary or desirable. I have several specific questions designed to explore whether we could and should approach the problem with a lighter touch.

Does the proposal adequately grapple with the complex set of trade-offs associated with central clearing? The proposal seems simply to assume that the more Treasury transactions that are cleared, the better. Any limitations on the reach of the proposed mandate seem driven not by careful considerations of the policy trade-offs but by how far it seems appropriate to extend the membership requirements under our rules. Yes, central clearing can produce significant benefits, including encouraging higher and more transparent risk management standards, netting trades to reduce gross exposures and increase balance sheet capacity, and mutualizing risk in a way that can reduce the contagion risk of firm failure. But central counterparties also can have unpredictable effects on risk: They concentrate risk, which under certain circumstances can increase risks to the market more broadly; they also can transmit risks from a failing firm to other members; they may increase moral hazard; and, through the use of standardized models, they may increase the risk that erroneous models applicable to all participants may present to the market; and, because they generally can make changes to risk management only subject to Commission review and approval, they may decrease flexibility during extreme market events.[8]

Does the proposal take sufficient account of the potential unintended effects of the proposed clearing mandate? For example, the clearing mandate, if adopted, likely would increase costs of transacting in the Treasury market. Would these higher costs force some participants out of the market, and, if so, what effect would these exits have on liquidity? Perhaps the effects would be more nuanced and more pernicious. For example, perhaps the higher costs of transacting Treasuries instead-or also-make it more likely that some firms that are not clearing agency members would seek out counterparties that also are not clearing members. If so, would more creditworthy firms be able to transact with counterparties that do not trigger the clearing requirement? Would the result be a clearing mandate that applies disproportionately to transactions between members and firms that are less creditworthy on average and that therefore may present a relatively greater risk to their counterparties and to the clearing agency? Under the clearing access amendment, could the clearing agency feel pressure to prove that it has in place the required access policies by granting easy access to the less creditworthy firms doing business with its members?

Is FICC able to handle the risk associated with the new transactions it would have to clear if the mandate were adopted? The proposal would increase the size and complexity of FICC's task. Some people assume that regulatory oversight will ensure that the clearing agency manages risk appropriately, but regulators do not always get it right either.

Would the other proposed amendments (aside from the clearing mandate) shift incentives sufficiently on their own to produce a significant increase in clearing without a mandate? Many market observers agree that increasing the level of central clearing in the Treasury market is desirable, but have cautioned against imposing a mandate, given the difficulty of understanding and balancing the trade-offs of such a requirement. As Marta Chaffee and Sam Schulhofer-Wohl have explained, the changes that would need to be made to make mandatory clearing feasible-changes that include improving access to clearing and modifying customer protection requirements, which are also being proposed today-may themselves improve incentives for central clearing sufficiently to produce some or most of the increase that would be attained by a clearing mandate.[9] Why not start with a less prescriptive approach and move to the mandate only if these other measures prove insufficient?

Is the Commission overstepping its bounds and encouraging the FICC to overstep its bounds by imposing this requirement as a requirement of membership in FICC? The release argues that members of FICC who do not clear all of their cash or repo Treasury securities transactions "create[] contagion risk to [clearing agencies] clearing and settling in these markets, as well as to the market as a whole" and implies that because increased clearing may ameliorate this risk, it is appropriate to require FICC members to clear even trades with non-members. This reasoning establishes a potentially dangerous precedent for allowing, or requiring, the clearing agency to regulate directly any activity of its members and indirectly the activity of non-members as well. What are the limits of this authority? Could the clearing agency forbid clearing members from entering into transactions with a counterparty whose activities it determines marginally increase the risk the counterparty presents to the clearing agency, such as a hedge fund that does not margin its bilateral trades with counterparties that are not members of the clearinghouse or that invests in both Treasuries and bitcoin?
Thank you in advance to the commenters who will help us to think through the proposal, its potential consequences on the market, and reasonable alternatives. And thank you to the staff in the Divisions of Trading and Markets and Economic and Risk Analysis and Office of the General Counsel for your work on the proposal and your discussions with me about the current state of the Treasury market and the future state we hope the proposal will produce.

[1] Staffs of the U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report at 5 (Nov. 2021), available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf ("Inter-Agency Working Group for Treasury Market Surveillance ("IAWG") Report").

[2] See, e.g., id. at 7-8 ("The disruptions to Treasury markets caught many participants and observers by surprise because they were driven by heavy sales during a period when many had expected a flight to safety to bolster demand for Treasury securities. Typically, demand for Treasury securities increases during market shocks as investors seek to hold safe and liquid assets. However, investors value Treasury securities in part because they are easy to liquidate. In the unique circumstances of the COVID-19 shock, a broad range of investors wanted to raise cash at the same time and sold their most liquid non-cash assets, often Treasury securities, to do so. . . . Amid these sales, Treasury yields exhibited extreme volatility. . . . The heavy sales demonstrated the potential for sudden, large shifts in investor positioning in the Treasury market. Although trading volumes soared, intermediaries' capacity did not keep up with the selling pressure, and market liquidity deteriorated.").

[3] Id. at 5.

[4] Id at 5-6.

[5] See Yesha Yadav, The Failed Regulation of U.S. Treasury Markets, 121 Colum. L. Rev. 1173, 1193 (2021). Yadav helpfully lays out the complicated web of requirements that apply to financial institutions participating in this market and the confusion that even regulators experience in determining what rules apply to what types of activity in this space. Id. at 1193-1199.

[6] See, e.g., IAWG Report at 30-31; Futures Industry Association Principal Traders Group, Clearing a Path to a More Resilient Treasury Market (July 2021), available at https://www.fia.org/sites/default/files/2021-07/FIA-PTG_Paper_Resilient%20Treasury%20Market_FINAL.pdf; SIFMA, Improving Capacity and Resiliency in US Treasury Markets: Part II Proposals for Reforming US Treasury Markets (Mar. 2021), available at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-2/#_ednref4.

[7] See Commissioner Elad L. Roisman, Remarks at U.S. Treasury Market Conference (Sept. 29, 2020), available at https://www.sec.gov/news/speech/roisman-us-treasury-conference-2020-09-29.

[8] See, e.g., Hester Peirce, Derivatives Clearinghouses: Clearing the Way to Failure, 64 Clev. St. L. Rev. 589, 620-630 (2016).

[9] Marta Chaffee and Sam Schulhofer-Wohl, Is a Treasury Clearing Mandate the Path to Increased Treasury Clearing?, Chicago Fed Insights (June 23, 2021), available at https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/treasury-clearing-mandate (arguing that "the changes in the design of the Treasury market necessary to facilitate a clearing mandate could increase clearing even without a mandate").
U.S. Treasury securities serve as a foundation and key linkage in both domestic and international financial markets. The U.S. Treasury market is the deepest and most liquid government securities market in the world.[1]

Treasury securities are used by a wide range of market participants, including seniors on a fixed income building their retirement portfolios and foreign governments investing their U.S. dollar reserves. For instance, market participants use Treasury securities as investment hedges, in portfolio construction to generate stable low risk returns, and in interest rate investment-based strategies.[2]

Treasury securities are also the primary means of financing our ever-expanding federal deficit. The Treasury market, however, experienced significant stresses in recent years, including the September 2019 repo pressures and the March 2020 pandemic-related "dash for cash."[3]

Since the late 1980s, central clearing for Treasury security transactions in the cash market have existed in the interdealer broker segment through the Fixed Income Clearing Corporation (FICC), which is overseen by the Commission.[4] FICC's model was formulated before the entrance of principal trading firms as significant participants in the Treasury markets in the early 2000s.[5]

Former Commissioner Elad Roisman noted that "expanding access to central clearing could . . . have positive effects on market breadth and depth," yet also cautioned that the Commission "should carefully consider whether we have adequate safeguards for ensuring that we do not further entrench entities as systemically important."[6]

Others have noted that "while central clearing will certainly be a key element of the debate around Treasury market reform. . . it should be subject to thorough study to assess both its costs and benefits - and particularly how different segments of the market may be impacted by additional clearing - before reforms are undertaken."[7]

With these proposed amendments, the Commission takes an important step in seeking an improved regulatory framework for the central clearing of Treasury securities.[8] Increasing access to central clearing may result in additional transparency, provide more comprehensive data on trading, and in certain instances, promote sounder risk management practices.

I am interested in hearing commenter views on the questions raised in today's release, including whether increasing access to central clearing can be achieved without leading to the entrenchment of larger firms. Are there mechanisms and incentives that would increase the amount of Treasury security transactions that are centrally cleared without imposing a mandate? Are there approaches that promote competition? How can robust risk management practices be achieved? While the balance between an overly prescriptive approach and a framework that incentivizes central clearing might be difficult to achieve, it can be crucial to a more resilient market structure.

Lastly, given the complexities associated with the regulation of the Treasury market and the critical role it plays in the global economy,[9] I would have preferred a comment period of at least 90 days.

Nonetheless, I am pleased to support today's proposal. I thank the staff in the Divisions of Trading and Markets, Economic and Risk Analysis, Examinations, Corporation Finance, and Investment Management as well as the Office of the General Counsel for their efforts on the proposal. I also want to recognize the contributions to this proposal from my former colleagues at the Department of the Treasury.

I look forward to the public comments and have no questions for the staff.

[1] See, e.g., Staffs of the U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report, at 1 (Nov. 2021), available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf ("Joint Report"). This report represents the views of staff of the Commission and other Federal agencies. The report is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content in the report. The report, like all staff reports, has no legal force or effect; it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

[2] Congressional Research Service, Treasury Securities Market Disruptions and Policy Issues, In Focus (Jan. 10, 2022), available at https://crsreports.congress.gov/product/pdf/IF/IF12012.

[3] See Joint Report, supra note 1, at 7-20.

[4] U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Capital Markets, at 81 (Oct. 2017), available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf ("2017 Treasury Capital Markets Report").

[5] Id.

[6] Commissioner Elad L. Roisman, Remarks at U.S. Treasury Market Conference (Sept. 29, 2020), available at https://www.sec.gov/news/speech/roisman-us-treasury-conference-2020-09-29.

[7] Peter Ryan and Robert Toomey, Improving Capacity and Resiliency in US Treasury Markets, Part II (Mar. 30, 2021), available at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-2/; see also 2017 Treasury Capital Markets Report, at 81 ("to better understand . . . the consequences of reform options available in the clearing of Treasury securities, Treasury recommends further study of potential solutions by regulators and market participants.")

[8] Standards for Covered Clearing Agencies for U.S. Treasury Securities and Related Amendments to the Broker-Dealer Customer Protection Rule, SEC Release No. 34-95763 (Sept. 14, 2022), available at https://www.sec.gov/rules/proposed/2022/34-95763.pdf.

[9] Id. at 9

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95753; Whistleblower Award Proc. File No. 2022-84)
https://www.sec.gov/rules/other/2022/34-95753.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Nor does Claimant satisfy Rule 21F-4(c)(2). Enforcement staff responsible for the Covered Action affirmed that the investigative team never received any information provided by Claimant; nor did responsible Enforcement staff have any communication *** with Claimant before or during the investigation. Further, with respect to the tips that Claimant submitted to the Commission, all but one was closed with a disposition of "No Further Action" or "NFA"9 and not forwarded to Enforcement staff in connection with any matter. The single tip that was not designated for No Further Action was provided to other Enforcement staff in connection with a matter unrelated to the Covered Action. 

Claimant's contention that the CRS could not have had enough time to review the record before issuing the Preliminary Determination is without merit. That the Enforcement attorney signed the declaration the same day that the Preliminary Determination was issued does not mean that the CRS did not adequately consider the underlying record, nor does it mean that the CRS did not have opportunity to review the declaration prior to the issuance of the Preliminary Determination. To the contrary, the staff declaration succinctly and conclusively shows that Claimant could not have provided information that led to the success of the Covered Action because Enforcement staff responsible for the investigation received no information from, and had no communication with, Claimant. . . .

https://www.sec.gov/litigation/litreleases/2022/lr25504.htm
In Complaints filed in the United States District Court for the Southern District of Florida, the SEC The SEC charged 
  • TBG Holdings Corporation https://www.sec.gov/litigation/complaints/2022/comp25504-tbgholdings.pdf
  • Neil B. Swartz https://www.sec.gov/litigation/complaints/2022/comp25504-tbgholdings.pdf
  • Timothy S. Hart https://www.sec.gov/litigation/complaints/2022/comp25504-tbgholdings.pdf
  • Ted L. Romeo https://www.sec.gov/litigation/complaints/2022/comp25504-romeo.pdf 
  • Frank S. Dickerson https://www.sec.gov/litigation/complaints/2022/comp25504-dickerson.pdf
  • Vincent J. Caputo https://www.sec.gov/litigation/complaints/2022/comp25504-caputo.pdf
with violations of the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Without admitting or denying the allegations, the following consented to an injunction and:
  • TBG: a $100,000 civil penalty, and a Bar of five years from participating in an offering of penny stock. 
  • Swartz and Hart: a $50,000 civil penalty, and a Bar for a period of five years from participating in an offering of penny stock. 
  • Romeo: disgorgement of $468,523 with $63,733 in prejudgment interest, a $150,000 civil penalty, and a bar from participating in an offering of penny stock. 
  • Dickerson: disgorgement of $25,193 with $3,710 in prejudgment interest, a $25,000 civil penalty, and a bar for a period of three years from participating in an offering of penny stock. 
Caputo has not settled. In part, the SEC Release alleges that:

[F]rom 2018 through March 2020, TBG and its principals, Swartz and Hart, hired and directed a group of unregistered sales agents to solicit investors to purchase shares of MediXall, a microcap company. According to the complaints, TBG and sales agents Romeo, Caputo, and Dickerson advised investors on the merits of the investments, described the offer to purchase the shares as time-sensitive, provided investors with promotional materials, and raised approximately $3 million by selling MediXall stock to more than 200 investors. As alleged, TBG, Hart and Swartz tracked the sales agents' investor solicitations, and paid over $500,000 in commissions to the sales agents for their sales of MediXall stock, even though they were not registered as broker-dealers or associated with registered broker-dealers.

https://www.finra.org/sites/default/files/fda_documents/2019062623002
%20Peng%20Zhang%20CRD%20No.%206103092%20AWC%20gg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Peng Zhang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Peng Zhang was first registered in 2012 and by September 2016, with MM Global Securities, Inc.. In accordance with the terms of the AWC, FINRA imposed upon Zhang a $5,000 fine and a 45-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From November 2018 to August 2019, Respondent used WeChat instant messages on at least 22 occasions to communicate regarding securities-related business with another individual associated with the firm and with another FINRA member firm (Firm B). In addition, on at least 100 occasions, Respondent used his personal email account and another non-firm email account to communicate with another FINRA member (Firm B) regarding the referral of potential investors to Firm B to participate in the initial public offering of an affiliate of MM Global. In certain of these emails, Respondent attached the potential investors' applications for new accounts at Firm B. Respondent did not retain copies of these instant messages or emails for his firm to preserve. 

Therefore, Respondent violated FINRA Rules 4511 and 2010. 

Also see: FINRA Censures, Fines, and Prohibits Market Access in MM Global Securities, Inc. Settlement In the Matter of MM Global Securities, Inc., Respondent (FINRA AWC)

= = =
9/13/2022

https://www.brokeandbroker.com/6640/finra-joseph-stone-awc/
Given all the fraud that has emanated from FINRA's member firm broker-dealers in recent decades, the investing public needs someone on the ramparts of Wall Street -- vigilant, on-watch, alert. Clearly FINRA has the staffing to do the job, but does FINRA get the job done? At first glance, a recent million-dollar settlement suggests that FINRA is a vigilant regulator; however, after further scrutiny, that same settlement exposes FINRA as little more than a toll-booth on Wall Street.  


RE-POSTED IN RESPONSE TO
September 13, 2022  DMCA Takedown Notice
Prior 2020 DMCA Notice Reversed

The "BrokeAndBroker.com" and "Securities Industry Commentator"
Are Each Published 
With A Copyright Notice 
And Contain Original Content
Authored by Bill Singer, Esq. 
and Published on 
RRBDlaw.com, BrokeAndBroker.com,  and SecuritiesIndustryCommentator.com

I, BILL SINGER, am a lawyer who represents securities-industry firms, individual registered persons, Wall Street whistleblowers, and defrauded public investors. 

For over three decades, I represented clients before the American Stock Exchange, the New York Stock Exchange, the Financial Industry Regulatory Authority (formerly the NASD), the United States Securities and Exchange Commission; in criminal investigations brought by various federal, state, and local prosecutors; and I have the distinction of representing witnesses during Congressional investigations. In 2015, I achieved a significant award of approximately $1.5 million from the Securities and Exchange Commission on behalf of a whistleblower client, who was the first in-house compliance officer to be declared eligible under the rigorous Dodd-Frank exemptions. 

I am presently Of Counsel to a law firm. Before entering the private practice of law, I was employed in the Legal Department of Smith Barney, Harris Upham & Co.; as a regulatory attorney with both the American Stock Exchange and the NASD (now FINRA); and as a Legal Counsel to Integrated Resources Asset Management. I was formerly Chief Counsel to the Financial Industry Association; General Counsel to the NASD Dissidents' Grassroots Movement; and General Counsel to the Independent Broker-Dealer Association. During my four-decades on the Wall Street regulatory scene, I have been a vocal advocate for securities industry reform and investors rights. I oppose mandatory arbitration for investors and associated person, and am a leading critic of the present form of self-regulation.

Since 1989, I have been a law firm Partner/Of Counsel whose core areas of concentration in securities-industry law are Regulatory/Compliance; White-Collar Criminal; Membership Applications; Issuer Listings; Litigation/Arbitration; and Congressional Investigations. For a number of years, I was a Series 7 and Series 63 stockbroker. Also, I served as a Hearing Officer for the New York City Environmental Control Board and a Business Editor for Prentice-Hall, Inc.

From 1997 to 2011, I was the author of Registered Rep. Magazine's "Street Legal" column. From 2009 to 2013, I authored the "Street Sweeper" column for Forbes.com.  For several years I was the author of the "Summary Discipline" column for Institutional Investor / Wall Street Letter. Also, I hosted the "Side Bar" (Thomson Reuters) and "Case in Point" (Penton/Wealthmanagement.com) video series during which I interviewed leading broker-dealer, investment advisory, and industry compliance guests. 

I am the founder/publisher of the Securities Industry Commentator, RRBDLaw.com, and the BrokeAndBroker.com Blog, which was rated as one of he industry's top eight destination websites and the leading legal/regulatory blog by "Investment News." 

The Securities Industry Commentator was launched in November 1998 under the Rrbdlaw.com website. http://www.rrbdlaw.com/1998/PartI.html 

The BrokeAndBroker.com Blog was launched on or about April 25, 2005, http://www.brokeandbroker.com/index.php?a=blog&id=2 and has published over 6,000 posts since that time. http://www.brokeandbroker.com/index.php?a=archive  

Starting in late December 2019/early January 2020, my webmaster informed me that my websites had been victimized by what appeared to have been a DDoS attack. He noted that a large number of files had apparently been copied, and he promptly took measures to deny access to certain sources and monitored the ongoing attacks until he believed that they had subsided.  Sometime on or about January 8, 2020, my Host informed me that its Abuse Department had received a DMCA takedown notice 
http://www.brokeandbroker.com/index.php?a=blog&id=318  My BrokeAndBroker blog article cited in the DMCA takedown notice, "What Is On First? No, What Is On Second. Who Is In Arbitration," was the 318th posted by me and contained content that I personally authored over a decade ago on February 25, 2010, as noted in the posted content. As is set forth on the bottom of the page at issue and on all similarly published content:

RRBDLAW.com & Securities Industry Commentator™ © Copyright 1998-2022 Bill Singer. Third party Trademarks, graphics, and/or content are the property of their respective owners.

The alleged infringed-upon article cited by the DMCA takedown notice was
https://news-postonline.blogspot.com/2010/02/what-is-on-first-no-what-is-on-second.html The article claiming infringement is located under a website titled "Fastest," which appears to be emanating from India and authored by an "Orlando Ruiz" https://fastest-templatesyard.blogspot.com/

The purportedly infringed-upon Blogspot.com/Ruiz article discusses an arcane Wall Street legal issue and has no discernible relationship to the other content posted on the Fastest site. Pointedly, I assert that the Blogspot/Ruiz article is populated with content that has been stolen from my BrokeAndBroker.com archive and re-posted. In addition to the fact that the Blogspot article is a virtual verbatim re-post of my copyrighted intellectual property, it clumsily failed to eliminate a reference/attribution to me by my name ("Bill")  in their re-published article: 

Don't Leave Me This Way. I Can't Survive, Can't Stay Alive

But Bill, you plead and beseech of me, don't leave us this way (with all respects to Gloria Gaynor).  Surely, surely the FINRA Arbitrator at least explained the point of the 2006 Settlement Agreement.  Just give us that much, you beg of me.  Okay, just to toss you one last bone, here is the Arbitrator's definitive explanation of the 2006 Settlement Agreement:

If the so-called Orlando Ruiz had written the 2010 article, the "But Bill" reference above should have been "But Orlando." It's hard to point out a more glaring example of why the article at issue was authored by "Bill Singer" and not "Orlando Ruiz." Similarly, it's hard to imagine a more compelling proof upon which a DMCA Takedown should be denied.

Because the Fastest/Blogspot site appears distributed by Google's Blogger, I filed a request with Google and with Lumen to take down the infringing Orlando Ruiz article. I informed Google and Lumen that I believe that there is no real "Orlando Ruiz," and that said attribution is wholly fictitious. Moreover, there is no online history of any Wall Street legal, regulatory, or compliance content attributed to such an author by the name of Orlando Ruiz but there are some 20-plus years of such authorship attributed to Bill Singer. 

As is an all too common result for content published on the Internet, the DMCA notice was honored against my copyright material, and in response to threats from Google to de-index my site and cease AdSense revenue, I removed my "318" article from its published state but it remains on my content management system in unpublished form. I intend to re-publish it when this issue is finally resolved; however, I harbor no illusions as to how long that process may take. That being said, should this outrageous effort to silence me persist, I will continue to re-post and re-post the essential elements of the FINRA Lombard v. GunnAllen Arbitration Decision in order to thwart any effort to censor my content. What was once a ten-year-old article of little interest to anyone, is now revitalized via this 2020 content. If an aggrieved party or non-party had simply contacted me in 2020, explained why my 2010 article was an issue for them, and provided some compelling reason for the deletion or redaction of his or her name, I may well have been persuaded to offer some accommodation. I never received any such communication. 

I suspect that someone retained a so-called "Reputation" defense company, which misused the DMCA takedown process as a way to delete an unwanted, negative reference from the Internet. There is much literature on this despicable practice and there are growing complaints about the manner in which takedowns are approved and executed. The abuse of this process likely protects the reputations of many fraudsters and criminals, and probably extends to those who are just discomforted by having their name online. I have absolutely no idea as to who may be behind the DMCA notice pertaining to the 2010 FINRA arbitration that I reported, and I have no idea as to their purpose. Be that as it may, the effort failed because I have posted a new story about the same case!  In the event that I continue to receive DMCA notices for this story and am forced to un-publish my original, copyrighted content should my appeals fail, I will re-write a new article detailing the very same litigation -- and I will do so as long as I am alive.

As noted in the Official Lombard v. GunnAllen FINRA Arbitration Decision, in 2009, public customer Jay Lombard asserted claims for breach of fiduciary duty, omission of facts, and failure to supervise, which Respondents GunnAllen and Soiferman denied. Claimant Lombard sought $100,000 in compensatory damages and $40,000 in interest. Respondents GunnAllen and Soiferman requested dismissal of the claims. In January 2010, Claimant Lombard withdrew his claims against Respondent Soiferman and attempted to amend his Statement of Claim to add a Jamie Diaz as a new Respondent, which the sole FINRA Arbitrator denied.

In response to remaining Respondent GunnAllen's January 22, 2010, Motion to Dismiss, the sole FINRA Arbitrator dismissed Claimant Lombard's claims as against remaining Respondent GunnAllen. In his rationale, AND QUOTING FROM THE PUBLISHED FINRA ARBITRATION DECISION, the FINRA Arbitrator stated at  https://www.finra.org/sites/default/files/aao_documents/09-04105-Award-FINRA-20100224.pdf):

1. During July 2004 the Claimant, for his retirement account with GunnAllen had purchased in a private placement, as an "Accredited Investor", one Unit of Florida Capital Apartments 2004, Ltd. That purchase and Claimant's subsequent retention of that investment form, in alt their aspects, the gravamen of Claimant's Statement of Claim in this matter. It now appears that in March 2006 Claimant and GunnAllen had entered into a written Settlement Agreement and Release dated March 7, 2006 (the "Agreement" included as part of Exhibit C to Respondent's motion papers) with reference to a dispute that had arisen between them concerning certain alleged improprieties with respect to Claimant's account at GunnAllen, expressing their "desire to compromise and settle all claims, causes of action, injuries, and damages asserted or that may be asserted [emphasis added]" and providing for payment of $5,547.00 to Claimant by GunnAllen, in full settlement. The precise nature of the unspecified improprieties is nowhere described, and has not been identified by either party, apart from their both agreeing that it was completely unrelated to Claimant's July 2004 investment that is the subject of this arbitration proceeding. 

2. The Agreement further states that its "[p]erformance.. .will operate as a genera/ release [emphasis added] by and between GunnAllen and Claimant and their present and former representatives." Nowhere is this "general release" qualified or limited In any way to reference to any specific claim or any kind of claim; as written (and despite its being far from a model of legal draftsmanship in most respects), agreed to and fully performed it is sufficiently broad in its reach to include the claims made by Claimant in his Statement of Claim, which have to do with a transaction entered into almost two years prior to the settlement and are plainly "claims . . . that may be asserted", as indeed they have been, subsequent to execution of the Agreement. The Agreement was signed by both parties, and the required payment was made to Claimant a few days following its execution. 

3. Claimant now asserts that his signature to the Agreement was procured by fraud on the part of GunnAllen's registered representative Jaime Diaz, and that he did not at all understand its purpose or effect as a general release, but was assured that it was simply a document he was required to sign in order to obtain the promised payment, which he did. However, the final paragraph of the Agreement, which Claimant, hardly an uneducated person, indeed a physician, must conclusively be presumed to have read and understood, states in relevant part immediately preceding its signatures that "all parties having consulted legal counsel, or having been advised to consult legal counsel, and having had full opportunity to do so, [emphasis added] . . .hereby acknowledge that the provisions of this Agreement shall be binding upon themselves and respective heirs and next of kin, executors, and administrators." Their respective signatures appear directly below, with Claimant's signature dated March 25, 2006, and that of Jay Marc Israel, Esq., attorney for GunnAllen, dated March 27, 2006. Neither party can now claim not to be bound by the Agreement in any respect. Claimant has admitted that he has at no time sought legal advice concerning the settlement or the Agreement itself, or in connection with his commencement of or participation in any other aspect of the arbitration proceedings in this matter; Claimant asserts that in all respects he was bamboozled by Jaime Diaz, whom he has only now named as a Respondent.


Man Sentenced to 135 months for Operating a "Ponzi" Scheme and Committing Securities and Bank Fraud (DOJ Release)
https://www.justice.gov/usao-pr/pr/man-sentenced-135-months-operating-ponzi-scheme-and-committing-securities-and-bank-fraud
After a jury trial in the United States District Court for the District of Puerto Rico, Carlos Maldonado (owner of Business Planning Resources International Corporation ("BPRIC"), Glorimar Fashions and Tailoring, LLC, Global Business Insurance Agency Inc., and associated under the incorporation documents with Pet Card Systems, Inc., and Datavos Corporation) was found guilty on 16 counts of securities fraud and bank fraud. Maldonado was sentenced to 135 months in prison plus five years of supervised release, and ordered to pay $1,986,734.26 in restitution. As alleged in part in the DOJ Release:

The jury found that, from on or about the year 2007 through the year 2012, Carlos Maldonado along with several associates fraudulently solicited and procured over $5,000,000 on behalf of BPRIC from over 100 individuals and other businesses. As part of the fraudulent scheme, Maldonado and his associates provided phony Investment Contracts to victims in Puerto Rico and the Continental US in exchange for their monetary investment in his bogus business enterprises.

During trial, the government presented checks, bank records, emails, other documentary evidence, and witness and victim testimonies that proved that the defendant made or caused materially false and misleading representations to be made to investors, including: (i) that the various companies were involved in legitimate business functions―which he knew not to be true; (ii) failing to disclose to investors that their funds would be used to buy and trade stocks and commodities on a ScottTrade account, Foreex Capital markets, LLC, and other personal trading accounts, and for Maldonado's family expenses instead of funding the bogus business ventures; and (iii) failing to disclose that the investment funds fraudulently obtained were to be used by Maldonado to purchase goods and services at retail stores, restaurants, and spend money for travel, rent, entertainment, and personal auto loan payments.

https://www.sec.gov/litigation/litreleases/2022/lr25503.htm
In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2022/comp25503.pdf, the SEC charged Marc J. Frankel with violating the antifraud provisions of the Investment Advisers Act. As alleged in part in the SEC Release:

[B]etween December 2017 and June 2020, Frankel stole more than $743,000 from two clients, including a Major League Baseball player. Frankel allegedly used their funds to pay personal charges on a credit card in the name of his deceased mother. As alleged in the complaint, those charges included sports tickets, college tuition for Frankel's children, travel, jewelry, and electronics. Frankel allegedly made several small payments each month in order to evade detection and took other steps to conceal the fraud, such as falsely claiming that the payments were for a credit card held by the baseball player's personal assistant.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95748; Whistleblower Award Proc. File No. 2022-83)
https://www.sec.gov/rules/other/2022/34-95748.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending that joint claimants (referred to as "Claimant") receive a Whistleblower Award for about $500,000.The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[(i)] Claimant's information was significant, as it resulted in Commission staff initiating an investigation into misconduct that Redacted ("Company") engaged in, and it ultimately led in part to the Covered Action; (ii) Claimant submitted information and documents to Commission staff, participated in interviews with Commission staff, and helped Commission staff identify key individuals and entities involved in the investigation; (iii) Claimant's information and assistance helped Commission staff focus its investigation into the Company and helped the Commission conserve significant time and resources; and (iv) Claimant raised Claimant's concerns internally at the Company in efforts to remedy the relevant misconduct. 

https://www.sec.gov/news/press-release/2022-161
Without admitting or denying the findings in respective SEC Orders, 
settled the charges, and agreed to a Censure and to cease and desist from future violations of Rule 15c2-12 under the Securities Exchange Act of 1934, which establishes disclosures that must be provided to investors, as well as Municipal Securities Rulemaking Board (MSRB) Rule G-27 and Section 15B(c)(1) of the Exchange Act. Further, the Respondents agreed to the following monetary relief:

  • BNY: $656,833.56 disgorgement plus prejudgment interest and a $300,000 penalty;
  • TD: $52,955.92 disgorgement plus prejudgment interest and a $100,000 penalty; and
  • Jefferies: $43,215.22 disgorgement plus prejudgment interest and a $100,000 penalty
Also, the SEC filed a Complaint in the United States District Court for the Southern District of New York against Oppenheimer & Co., Inc.
https://www.sec.gov/litigation/complaints/2022/comp-pr2022-161.pdf charging the firm with the same violations cited in the Orders above in connection with at least 354 offerings; however, Oppenheimer is further charged with making deceptive statements to issuers in violation of MSRB Rule G-17, which prohibits deceptive, dishonest, or unfair practices.  As alleged in part in the SEC Release:

[T]hese are the first SEC actions addressing underwriters who fail to meet the legal requirements that would exempt them from obtaining disclosures for investors in certain offerings of municipal bonds. 

According to the SEC's complaint and the settled orders, during different periods since 2017, the four firms sold new issue municipal bonds without obtaining required disclosures for investors. Each of the firms purported to rely on an exemption to the typical disclosure requirements called the limited offering exemption, but they did not take the steps necessary to satisfy the exemption's criteria.

. . .

The SEC's complaint against Oppenheimer, filed in federal district court in Manhattan, charges the same violations as above in connection with at least 354 offerings. The complaint also alleges that Oppenheimer made deceptive statements to issuers in violation of MSRB Rule G-17, which prohibits deceptive, dishonest, or unfair practices. The complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and a civil money penalty.

As a result of its findings in these investigations, the SEC staff has begun investigations of other firms' reliance on the limited offering exemption. Firms that believe their practices do not comply with the securities laws are encouraged to contact the SEC at LimitedOfferingExemption@sec.gov.   . . .

SEC Brings Settled Actions Charging Cherry-Picking and Compliance and Supervisory Failures (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25502.htm
In response to a Complaint filed in the United States District Court for the District of New Jersey
https://www.sec.gov/litigation/complaints/2022/comp25502.pdf, Scott Adam Brander, Buckman Advisory Group, LLC, and Henry J. Buckman, Jr. settled the charges. As alleged in part in the SEC Release:

The SEC's complaint against Brander, filed in federal district court in New Jersey, alleges that from 2012 through 2017, Brander disproportionately allocated profitable trades to his own account and unprofitable trades to certain client accounts, to enrich himself at the expense of his clients. The complaint further alleges that Brander often traded highly leveraged securities and disproportionately allocated unprofitable trades in these securities to his clients. Brander made these allocations without performing any analysis as to whether these potentially volatile securities were suitable for his clients or discussing the risks with them. According to the complaint, Brander improperly received more than $800,000 of ill-gotten gains as a result of his fraudulent scheme. The complaint charges Brander with violating the antifraud provisions of Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the allegations, Brander consented to the entry of a judgment, subject to court approval, that permanently enjoins him from violating these provisions and orders him to pay disgorgement of $812,876, prejudgment interest of $169,089.83, and a civil penalty of $200,000.

The SEC also instituted a related settled administrative proceeding against Buckman Advisory Group and its CEO Buckman, based on their failures to implement policies and procedures reasonably designed to prevent violations of the Advisers Act and on their failures in supervising Brander. The SEC's order charges Buckman Advisory Group with violating, and Buckman with causing its violations of, Advisers Act Section 206(2); the firm with violating, and Buckman with aiding and abetting and causing its violations of, Advisers Act Section 206(4) and Rule 206(4)-7; and both the firm and Buckman with failure to reasonably supervise Brander within the meaning of Sections 203(e)(6) and 203(f) of the Advisers Act. Without admitting or denying the findings in the SEC order, both Buckman Advisory Group and Buckman agreed to the entry of cease-and-desist orders; the firm agreed to a censure, a penalty of $400,000, and an undertaking to retain and adopt the recommendations of an independent compliance consultant; and Buckman agreed to a penalty of $75,000 and a limitation on acting in a supervisory capacity for twelve months.


https://www.sec.gov/news/press-release/2022-160
Without admitting or denying the findings in an SEC Order, 
https://www.sec.gov/litigation/admin/2022/33-11099.pdf, VMware Inc. consented to a cease-and-desist order and agreed to pay an $8 million penalty. The SEC Order found that VMware violated antifraud provisions of the Securities Act as well as certain reporting provisions of the federal securities laws. In part the SEC Release alleges that:

[B]eginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. According to the SEC's order, VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company's financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was "managed based upon multiple considerations," it did not reveal to investors that it used the backlog to manage the timing of the company's revenue recognition.

https://www.justice.gov/usao-sdny/pr/tippee-pleads-guilty-first-ever-cryptocurrency-insider-trading-case

Nikhil Wahi pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

At all relevant times, Coinbase was one of the largest cryptocurrency exchanges in the world.  Coinbase users could acquire, exchange, and sell various crypto assets through online user accounts with Coinbase.  Periodically, Coinbase added new crypto assets to those that could be traded through its exchange, and the market value of crypto assets typically significantly increased after Coinbase announced that it would be listing a particular crypto asset.  Accordingly, Coinbase kept such information strictly confidential and prohibited its employees from sharing that information with others, including by providing a "tip" to any person who might trade based on that information.

Beginning in approximately October 2020, ISHAN WAHI worked at Coinbase as a product manager assigned to a Coinbase asset listing team.  In that role, ISHAN WAHI was involved in the highly confidential process of listing crypto assets on Coinbase's exchanges and had detailed and advanced knowledge of which crypto assets Coinbase was planning to list and the timing of public announcements about those crypto asset listings. 

On multiple occasions between July 2021 and May 2022, after getting tips from ISHAN WAHI as to which crypto assets Coinbase was planning to list on its exchanges, NIKHIL WAHI used anonymous Ethereum blockchain wallets to acquire those crypto assets shortly before Coinbase publicly announced that it was listing these crypto assets on its exchanges.  Following Coinbase's public listing announcements, on multiple occasions NIKHIL WAHI sold the crypto assets for a profit. 

To conceal his purchases of crypto assets in advance of Coinbase listing announcements, NIKHIL WAHI used accounts at centralized exchanges held in the names of others, and transferred funds, crypto assets, and proceeds of their scheme through multiple anonymous Ethereum blockchain wallets.  NIKHIL WAHI also regularly created and used new Ethereum blockchain wallets without any prior transaction history in order to further conceal his involvement in the scheme.

Romanian National Sentenced to Prison for Role in International Online Auction Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-ndoh/pr/romanian-national-sentenced-prison-role-international-online-auction-fraud-scheme
Costel Alecu, 38, was sentenced in the United States District Court for the Northern District of Ohio
 "to more than five and a half years in prison " and ordered to pay a $12,000 special assessment. As alleged in part in the DOJ Release (which fails to disclose whether the sentences were impose pursuant to a plea agreement or after trial):

[F]rom July 2008 through August 2020, Alecu and codefendant Madalin Ghinea, 35, of Alexandria, Romania, were part of a conspiracy that devised a scheme to entice victims in the United States and elsewhere to purchase items online, including vehicles and other high-value items, that did not exist and to obtain the personal identifying information of their victims. 

As a result, victims suffered a combined loss of approximately $3 million USD. 

As part of the scheme, Alecu and other conspiracy members created accounts on various auction websites to post advertisements for goods that did not exist.  In certain cases, Alecu and others created and used fictitious websites, email addresses and other forms of communication that contained counterfeit trademark information designed to convince their victims that the advertisements were genuine. 

In addition, court documents state that the conspirators used a number of fraudulent online communication templates and email addresses to deceive victims into believing that they were communicating with legitimate business representatives when, in fact, they were speaking with a member of the conspiracy.

Court documents state that Alecu and others in the conspiracy then used a network of money launderers and money mules to obtain payment from their victims and transfer the funds overseas.  Alecu and the conspirators then used the stolen personal identifying information of their victims, credit cards and bank accounts to launder money overseas and fund the operation of their network by purchasing items such as virtual private networks and domain names.

Romanian authorities arrested Alecu and Ghinea in March 2021.

Madalin Ghinea was sentenced on June 1, 2022, to more than four years in prison and ordered to pay $450,000.00 in restitution for his role in the scheme.

FINRA Fines BofA Securities, Inc. $5 Million for Large Options Position Reporting Failures / Firm Failed to Report Over-the-Counter Options Positions in More Than 7.4 Million Instances (FINRA Release)
https://www.finra.org/media-center/newsreleases/2022/firm-failed-report-over-counter-options-positions-more-74-million
Pursuant to the identification of OTC exercise limits, FINRA's Trading and Financial Compliance Examination Group originated a matter that was resolved by FINRA imposing upon member firm BofA Securities Inc. a $5 million fine. BofAS consented to the entry of FINRA's findings, without admitting or denying the charges; and the firm agreed to a penalty of a Censure and a certification that BofAS has established, maintains and enforces supervisory procedures reasonably designed to achieve compliance with FINRA Rule 2360. 

Read the full Acceptance, Waiver & Consent settlement ("AWC") at https://www.finra.org/sites/default/files/2022-09/BofAS-AWC-091222.pdf

As alleged in part in the FINRA News Release:

FINRA Rule 2360 requires member firms to report large options positions to the LOPR, which FINRA uses to surveil for potentially manipulative behavior, including attempts to corner the market in the underlying equity, leverage an option position to affect the price, or move the underlying equity to change the value of a large option position. The accuracy of LOPR reporting is essential to FINRA's surveillance, and is particularly important with respect to the OTC options market because there is no independent source of data for regulators to review OTC options activity.

Between January 2009 and October 2020, BofAS failed to report OTC options positions to the LOPR in more than 7.4 million instances, in violation of Rule 2360 as well as Rule 2010 (Standards of Commercial Honor and Principles of Trade). Twenty-six of the unreported positions were also over the applicable OTC position limit of either 25,000 or 50,000 contracts. In addition, FINRA found that from January 2014 through October 2020, the firm's supervisory system was not reasonably designed to comply with its LOPR reporting obligations, a violation of FINRA Rules 3110 (Supervision) and 2010. Among other things, the firm did not have an effective system to detect whether there were positions that should have been reported to the LOPR but were not.

Bill Singer's Comment: I mean, seriously, FINRA thinks that it should take a victory lap when it's citing -- in 2022 -- misconduct that transpired from January 2009 through October 2020? Not only didn't FINRA catch the earliest non-reporting going back just shy of 13 years, but, somehow, the self-regulatory-organization missed 7.4 million instances of failed reporting. Frankly, this AWC offers little more than a pathetic display of lame-ass self-regulation. For a variation on the inept and ineffective self regulation of Wall Street, see: "Stone Cold Day of Reckoning for FINRA and Self Regulation" (BrokeAndBroker.com Blog/ September 12, 2022) https://www.brokeandbroker.com/6640/finra-joseph-stone-awc/

= = =
9/12/2022

Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/ia-6120.pdf, Hudson Advisors L.P. and Lone Star Global Acquisitions Ltd. agreed to a cease-and-desist order finding that they violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 204(6)-7 and 206(4)-8 thereunder, and ordering them to pay  $11.2 million in civil penalties (Respondents paid an $68.5 million reimbursement). As alleged in part in the SEC Release:

[B]between at least 2005 and 2017, Hudson included $54.6 million of its owner's anticipated U.S. tax liability in fees charged to the funds. By law, these tax liabilities were payable by the owner rather than by Hudson. The SEC's order finds that Hudson and Lone Star Global never disclosed the inclusion of these tax liabilities to their clients. The order also finds that Hudson and Lone Star Global were not authorized to charge this fee component without full and fair disclosure to the funds. Lastly, the order finds that Hudson and Lone Star Global failed to implement appropriate policies and procedures in connection with conflicts of interest and disclosure of fees charged to advisory clients.

https://www.sec.gov/news/speech/uyeda-speech-sec-speaks-090922

Good morning and thank you, Gurbir [Grewal, Director, SEC Division of Enforcement], for that kind introduction.[1] I am pleased to join you for the first SEC Speaks Conference to be conducted in-person since the start of the pandemic.

During the past two-and-a-half years, we have used new methods to communicate and work with each other. Our ability to improvise, adapt, and overcome has allowed our economy to sustain itself during this period. Importantly, robust and efficient capital markets have played a key role in fostering innovation and creativity, which has resulted in new services and products to address the challenges of the pandemic.

While I have attended SEC Speaks in the past, today is the first where I have the privilege of addressing you. With this appearance coming slightly over two months since I was sworn into office as a Commissioner, it is an opportune time to describe the factors and principles that will guide how I will approach upcoming policy decisions.

My views have been shaped by my professional experience. For nearly nine years, I was in private practice drafting securities offering disclosures as well as preparing periodic reports and proxy statements. As a state securities regulator, I witnessed some of the most egregious retail-level frauds and their impact on investors, but I also observed firsthand inspiring stories of entrepreneurs seeking capital. For nearly 16 years at the Commission, I have been involved in rulemaking, ensuring that such efforts complied with the Administrative Procedure Act, including a robust consideration of all public comments and a comprehensive economic analysis.

The SEC's Tripartite Mission is My Foundation

Maintaining a focus on investor protection, capital formation, and fair and orderly markets will promote high quality regulatory standards. Although capital markets have grown increasingly complex, our mission remains the same as it did when the SEC was first created.[2] Ferdinand Pecora, an early architect of the SEC, put the following question to the Convention of the Farmers Union of Iowa while speaking in 1934: "[w]hat are the objectives of the Securities Act of 1933?" His response was: "[t]o see it that those who issue securities and offer them for sale to the public, shall first tell the truth and the whole truth to the public with respect to these securities." This observation remains true today and should guide our regulatory responses through both calm and turbulent markets.

Prioritize Effective and Cost-Efficient Regulations

I analyze regulations using a two-by-two matrix. One axis is labeled whether a regulation is effective or ineffective. The other axis is labeled whether a regulation is costly or not costly. Thus, one can categorize a regulation into one of four boxes.

The Commission - and any regulator - should strive for regulations that are effective and not costly. This box contains regulations that address the identified problem and do so at the lowest possible cost.

The second box contains regulations that are effective, but costly. These regulations may resolve the identified problem, but at a significant cost. The goal of a responsible regulator should be to modify these types of regulations and shift them to the first box. A solid economic analysis can enable a regulator to distinguish between approaches that are effective and efficient, on the one hand, and effective but costly, on the other.

The third box contains regulations that are ineffective but not costly. Given the thousands of pages of SEC rules contained in the Code of Federal Regulations, many of which have not been scrutinized for effectiveness for decades, I fear that a large number may fall within this box.[3] However, as the rules are not particularly costly from a compliance perspective, further reform or removal may not be at the top of the regulatory agenda.

That brings us to the final box - regulations that are ineffective and costly. These rules must be avoided. The ultimate cost of such rules falls not on Wall Street or corporations, but on investors and the public. More importantly, investors and the public will still remain vulnerable to the very concern that such rules were intended to address.

As I evaluate the proposals on the Commission's regulatory agenda, and the various choices presented thereunder, this two-by-two matrix will frame my analysis.

Limited Scope and Regulator Independence

Financial regulators - including the SEC, the Commodity Futures Trading Commission, and the Federal Trade Commission - have a unique place in our constitutional structure. Although part of the Executive Branch, they are not subject to direct control by the President in the same manner as the Department of Justice, the Department of Labor, or the Department of Commerce.

The Commission is structurally designed to promote regulation that is the product of consideration by five individuals with different perspectives. The underlying statute that created the Commission requires that the commissioners come from different political parties, with no more than three being from the same party.[4]

I view this arrangement as creating a basic bargain that the SEC will enjoy a degree of independence and insulation from political accountability to the voters, but in return, will have a narrow scope of responsibilities.

The lack of political accountability, however, can make it tempting to use the federal securities laws to alter or influence general business conduct or to resolve pressing societal concerns, in the absence of financial materiality. Taken to an extreme, "everything everywhere is securities fraud."[5]

I disagree with that view. The Commission best serves the American public when it works within the statutory framework enacted by Congress and the limitations imposed by the courts. The Commission is not well-suited, nor should it attempt to resolve, complex societal questions that do not relate to financial market practices. Those questions are best addressed by the legislature.

Economic Analysis is Important and Should Consider the Effects of Multiple Overlapping Rule Proposals

Final rules should result from careful and thoughtful analysis, including sufficient time for the public to comment on a proposal. The Commission should ensure that rulemakings consider all known economic impacts, including the cumulative impact of concurrent rulemakings. While individual regulations may not be costly, when aggregated they may impose significant compliance costs for firms and individuals.

The Commission staff's guidance on economic analysis sheds light on how to carry out this exercise. That guidance states that an economic analysis compares "the current state of the world, including the problem that the rule is designed to address, to the expected state of the world with the proposed regulation (or regulatory alternatives) in effect."[6] The guidance further states that proposing releases should include "a discussion of any existing studies or data that bear on the proposal so that the public knows what studies or data we are relying on, can comment on it, and can provide additional data relevant to the topic."[7] This is an important component of the rulemaking process, and one that should underpin our decision-making.

Don't Take Steps that Deter Robust Public Comment

Several rulemaking proposals issued by the Commission in 2021 and in early 2022 had a comment deadline of only 30 days after publication in the Federal Register, which I view as insufficient under the circumstances. The 30-day comment period stands in contrast to executive orders issued by the administrations of President Clinton, President Obama, and President Biden, all of which recognized the importance of a 60-day comment period.[8] A comment period of at least 60 days is also endorsed by the Administrative Conference of the United States for significant regulatory actions.[9]

The Commission recently finalized a proposal that had a short 30-day comment period.[10] In that case, the Commission proposed amendments on November 18, 2021 and comments were due by December 27 of that year.[11] This period overlapped with major holidays. It also fell during the first holiday season since the rollout of COVID vaccines, which allowed families to gather for the first time since the start of the pandemic.

The short comment period likely deterred some interested persons from submitting comment letters. It may have also resulted in the Commission seeing a narrower picture of the public concerns and failing to capture relevant data and perspectives. Short comment periods are also inappropriate when the Commission is asking for public comment on multiple proposals affecting the same stakeholders at the same time or in short order.

Don't Take Rulemaking Shortcuts

As a rulemaking convention, staff practice has been generally to recommend re-proposal if more than five years have elapsed since the original proposal. Yet, the Commission has instead recently decided to simply reopen the comment period for several proposals that were past the five-year expiration date.[12]

These reopening notices went even further and introduced new regulatory alternatives. The reopening notices, however, did not provide any accompanying economic analysis or examine the effects that such alternatives may have on smaller entities. In other words, the Commission used procedural shortcuts that undercut the robust notice-and-comment process required by the Administrative Procedure Act.[13]

One example was the proposal to implement the Dodd-Frank Act's pay versus performance requirement, initially issued on April 29, 2015.[14] On January 27, 2022, the Commission reopened the comment period on the proposed rule.[15] The reopening notice did not update any economic analysis, benefits and costs discussion, or analysis required by the Paperwork Reduction Act[16] and the Regulatory Flexibility Act.[17]

The failure to update the economic analysis from the 2015 proposal was problematic because significant parts of the data justifying the original proposal were from 2010 and 2012, while other data was from the period between 1997-2008.[18] Yet, the adopting release contained an economic analysis using data from 2020 - one that the public had never seen, or been given the chance to comment on.[19]

Avoid Issuing New Interpretations through Enforcement Actions

Rulemaking can be challenging and time-consuming. It may be tempting to develop "new" interpretations of existing statutes and rules and apply them through enforcement action. This temptation should be avoided.

One significant shortcoming of regulation by enforcement is that it fails to provide a mechanism for the Commission to consider the views by market participants, which can result in a myopic approach. In contrast, through the rulemaking process, the public can provide their perspectives on market practices and developments, leading to an informed regulatory response. Regulation through litigation fails to provide these important inputs that result in better crafted rules.

Additionally, regulation by enforcement fails to provide the nuanced and comprehensive guidance that allows market participants to tailor their practices, and instead requires regulated entities to divine how the facts and circumstances of another case apply to their own business model. Market participants should be able to look to the Commission's rules rather than compare how their particular facts and circumstances may differ from those in a specific enforcement case. This principle, while often requiring a longer timeline, and more deliberation, often results in a more transparent and understandable regulatory framework.

Be Willing to Tackle the Big, Difficult, and Complex Issues

Today, one big, difficult, and complex issue that is conspicuously absent from the Commission's published regulatory agenda is how to regulate crypto assets and related services. Market participants have expressed significant concerns regarding the lack of regulatory guidance in this space. There is a widespread concern that the lack of predictability with regard to our regulation may encourage crypto firms to relocate to other jurisdictions.

There are two major issues and areas of uncertainty: does the crypto asset constitute a security and, if so, how do market participants comply with the federal securities laws and the Commission's rules. To date, the Commission's views in this space have been more often expressed through enforcement action. This is an example of a situation where regulation through enforcement does not yield the outcomes achievable through a process that involves public comment.

Without the benefit of comments from crypto investors and other market participants, the Commission is unable to consider their perspectives in developing an appropriate regulatory framework. To the extent that crypto assets raise unique issues not otherwise addressed in the current rule book, the Commission should consider proposing rules or issuing interpretive releases.

* * * * *

Thank you for listening to my thoughts this morning, even if you will not be receiving CLE credit for it! I want to acknowledge the many hard-working members of the SEC staff who have contributed to the presentations and materials for this conference. It has been a privilege and an honor to call them colleagues and friends. I have seen firsthand their dedication to serve the public by creating robust, dynamic, and resilient markets that work for all Americans.

[1] The views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners.

[2] See, e.g., Act of June 6, 1934, Public Law No. 73-291, 48 STAT 881 ("to provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.")

[3] The 2021 version of Title 17 of the Code of Federal Regulations for Commission rules covers 922 pages in volume3, 798 pages in volume 4, and 574 pages in volume 5. See https://www.govinfo.gov/app/collection/cfr/2021/.

[4] 15 U.S. Code § 78d.

[5] Matt Levine, Bloomberg News, Everything Everywhere Is Securities Fraud (June, 26, 2019) (discussing views of U.S. federal securities laws that treat any negative event affecting a U.S. public company as securities fraud) available at https://www.bloomberg.com/opinion/articles/2019-06-26/everything-everywhere-is-securities-fraud.

[6] Memorandum from the Division of Risk, Strategy, and Financial Innovation and the Office of the General Counsel, Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), at 21, available at https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.

[7] Id. at 16.

[8] Executive Order 13563, Improving Regulation and Regulatory Review (Jan. 18, 2011) [76 Fed. Reg. 3821 (Jan. 21, 2011)]; see also Executive Order 12866, Regulatory Planning and Review (Sept. 30, 1993) [58 Fed. Reg. 51735 (Oct. 4, 1993)] ("each agency should afford the public a meaningful opportunity to comment on any proposed regulation, which in most cases should include a comment period of not less than 60 days"); Memorandum for the Heads of Executive Departments and Agencies, Modernizing Regulatory Review (Jan. 20, 2021) [86 Fed. Reg. 7223 (Jan. 26, 2021)] ("This memorandum reaffirms the basic principles set forth in [Executive Order 12866] and in Executive Order 13563 of January 18, 2011 (Improving Regulation and Regulatory Review), which took important steps towards modernizing the regulatory review process. When carried out properly, that process can help to advance regulatory policies that improve the lives of the American people.").

[9] See Administrative Conference of the United States, Rulemaking Comments, Recommendation No. 2011-2 (June 16, 2011), available at https://www.acus.gov/recommendation/rulemaking-comments.

[10] Mark T. Uyeda, Statement on Final Rule Amendments on Proxy Voting Advice (July 13, 2022), available at https://www.sec.gov/news/statement/uyeda-statement-amendments-proxy-voting-advice-071322.

[11] See Proxy Voting Advice, Release No. 34-93595 (Nov. 17, 2021) [86 FR 67383 (Nov. 26, 2021)].

[12] See Reopening of Comment Period for Pay Versus Performance, Release No. 34-94074 (Jan. 27, 2022) [87 FR 5751 (Feb. 2, 2022)], available at https://www.sec.gov/rules/proposed/2022/34-94074.pdf; Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-10998 (Oct. 14, 2021) [86 FR 58232 (Oct. 21, 2021)], available at https://www.sec.gov/rules/proposed/2021/33-10998.pdf; Reopening of Comment Period for Universal Proxy, Release No. 34-91603 (Apr. 16, 2021) [86 FR 24364 (May 6, 2021)] available at https://www.sec.gov/rules/proposed/2021/34-91603.pdf (collectively, "reopening notices").

[13] Id.

[14] Pay Versus Performance, Release No. 34-74835 (Apr. 29, 2015) [80 FR 26329 (May 7, 2015)] ("2015 Proposal"), available at https://www.sec.gov/rules/proposed/2015/34-74835.pdf.

[15] Reopening of Comment Period for Pay Versus Performance, Release No. 34-94074 (Jan. 27, 2022) [87 FR 5751 (Feb. 2, 2022)] available at https://www.sec.gov/rules/proposed/2022/34-94074.pdf.

[16] 44 U.S.C. 3501 et seq.

[17] 5 U.S.C. 603(a).

[18] 2015 Proposal at n. 132 (the 2015 Proposal acknowledges the data may not reflect practices at the time the 2015 Proposal was published).

[19] Pay Versus Performance, Release No. 34-95607 (Aug. 25, 2022) [87 FR 55134 (Sept. 8, 2022)], available at https://www.sec.gov/rules/final/2022/34-95607.pdf.

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95712; Whistleblower Award Proc. File No. 2022-82)
https://www.sec.gov/rules/other/2022/34-95714.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[F]irst, the record demonstrates that the Investigation was opened in Redacted more than two years before Claimant began providing his/her information to the Commission. Accordingly, Claimant's information did not cause the staff to open the Investigation. 

Second, even assuming that Claimant's information caused the Commission to inquire into conduct in Other Country, the Commission did not bring a successful action in whole or in part based on conduct that was the subject of Claimant's information, nor did Claimant's information significantly contribute to the Investigation. It is undisputed that the information Claimant provided to the Commission did not address conduct in Country, but instead related to conduct in Other Country. And while the record shows that Enforcement staff investigated conduct in Other Country, the violations charged in the Covered Action only pertain to conduct in Country. Enforcement staff confirmed that Claimant's information was not used in nor had any impact on the charges brought in the Covered Action. 

Further, Claimant's information did not assist with settlement discussions or otherwise help resolve the Covered Action. Enforcement staff assigned to the Investigation have confirmed, in a supplemental declaration, which we credit, that Enforcement staff had already determined, prior to the beginning of settlement discussions, that there was not sufficient evidence for the Commission to bring charges based upon conduct in Other Country. 

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95712; Whistleblower Award Proc. File No. 2022-81)
https://www.sec.gov/rules/other/2022/34-95713.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[F]irst, the record demonstrates that the Commission's investigation which led to the Covered Redacted Action (the "Investigation") was opened Redacted in more than eighteen months before Claimant submitted his/her tip to the Commission, and more than one year before Claimant contends Claimant spoke with the investigator associated with the Law Firm. Accordingly, Claimant's information did not cause the staff to open the Investigation. 

Second, the record shows that Claimant's tip to the Commission did not cause the staff to inquire into different conduct or significantly contribute to the Investigation. To the extent that Claimant argues he/she is the original source of any information provided to the Commission by the Law Firm, Enforcement staff provided a supplemental declaration, which we credit, stating that the staff did not recall receiving any communications or tips from the Law Firm or the investigator with regard to the Company or the Investigation. The staff also reviewed email records associated with the Investigation and did not identify any email or tip from the Law Firm or the investigator. For these reasons, the record does not support the contention that Claimant was the original source of any information used by the Commission prior to the filing of the Covered Action. Lastly, as stated by the CRS, Claimant's own submission to the Commission occurred approximately six weeks after the Covered Action was filed and therefore did not contribute to the Investigation or to the charges in or resolution of the Covered Action.

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95712; Whistleblower Award Proc. File No. 2022-80)
https://www.sec.gov/rules/other/2022/34-95712.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Second, the record shows that Claimant's information did not cause the staff to inquire into different conduct or significantly contribute to the Investigation. Enforcement staff assigned to the Investigation confirmed that Claimant's information, which concerned the issue of Redacted did not relate to the matters at issue in the Investigation or the charges in the Covered Action. Further, staff confirmed that the Redacted Claimant raised in the Response were already known to the staff before Redacted Claimant submitted his/her information. Staff assigned to the Investigation also confirmed that the Commission's NYRO staff did not share any additional information received from Claimant. The emails Claimant attached to the Response also do not bolster his/her argument: the staff had Redacted already confirmed that Claimant's information from Redacted did not relate to the Investigation or the charges in the Covered Action. Based upon these facts, Claimant's information did not cause the staff to inquire into different conduct or significantly contribute to the Investigation.

Claimant does not qualify for an award under either of the above-described provisions. First, the record demonstrates that the Commission's investigation which led to the Covered Action (the "Investigation") was opened based upon information developed during a separate investigation into the Company. Claimant's information did not cause the staff to open the Investigation. 

SEC Denies Whistleblower Award to Claimant Citing Untimely Filing
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95711; Whistleblower Award Proc. File No. 2022-79)
https://www.sec.gov/rules/other/2022/34-95711.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Claimant argues that the Commission should use its authority under Exchange Act Rule 21F-8(a) to waive the ninety-day filing requirement in the two Covered Actions discussed herein. Rule 21F-8(a) provides that "the Commission may, in its sole discretion, waive any of these procedures upon a showing of extraordinary circumstances." We have explained that the "extraordinary circumstances" exception is "narrowly construed" and requires an untimely claimant to show that "the reason for the failure to timely file was beyond the claimant's control." Further, we have identified "attorney misconduct or serious illness" that prevented a timely filing as two examples of the "demanding showing" that an applicant must make before we will consider exercising our discretionary authority to excuse an untimely filing. 

SEC Denies Whistleblower Award to Claimant Citing "Potential or Theoretical Use"
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95672; Whistleblower Award Proc. File No. 2022-78)
https://www.sec.gov/rules/other/2022/34-95672.pdf
The SEC's Office of the Whistleblower ("OWB") issued a Preliminary Summary Disposition recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[F]irst, Claimant misinterprets the eligibility criteria under Rule 21F-4(c)(1): contrary to Claimant's arguments in the Response, our rules do not provide for awards based upon the potential or theoretical use of a claimant's information. Instead, awards are based upon the actual use of a claimant's information by Commission staff. As we have stated, "the standard for award eligibility is not what the staff would have, or could have done in hypothetical circumstances but, rather, what impact the whistleblower's information actually had on the investigation." The Commission will not speculate on the supposed value of Claimant's information in the absence of its actual use during the Investigation. 

Accordingly, while Claimant may have submitted information to the Commission prior to the opening of the Investigation, the record here demonstrates that Claimant's information did not cause Enforcement staff responsible for the Investigation to open the Investigation or cause the staff to inquire into different conduct. A staff declaration, which we credit, confirms that the staff responsible for the Investigation opened the Investigation based upon a referral from REDACTED ("Other Agency 1"). A supplemental declaration from OWB staff, which we also credit, confirms that, after review of Claimant's information, other Enforcement staff referred Claimant's information to the REDACTED ("Other Agency 2") and the REDACTED ("Other Agency 3") and then closed Claimant's submission with a disposition of "no further action." Contrary to Claimant's contentions, there is no evidence in the record that Other Agency 2 or Other Agency 3 had any role in the referral to the Commission from Other Agency 1, and the record demonstrates that Other Agency 1 has no record of receiving any information from Claimant or that Claimant was the source of Other Agency 1's referral to the Commission. And while other Enforcement staff reviewed Claimant's tip and forwarded it to Other Agency 2 and Other Agency 3, there is no evidence in the record that Claimant's information was forwarded to staff assigned to the Investigation.

The record demonstrates that Claimant did not cause the Commission to inquire into different conduct and did not significantly contribute to the success of the action: Claimant's information was not used by staff assigned to the investigation, nor did Claimant ever communicate with staff assigned to the investigation.

https://www.finra.org/sites/default/files/fda_documents/2019061612601
%20SagePoint%20Financial%2C%20Inc.%20CRD%20133763%20AWC%20va.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, SagePoint Financial, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that SagePoint Financial, Inc. has been a FINRA Member Firm since 2005 with about 1,800 registered representatives at 800 branches. In accordance with the terms of the AWC, FINRA imposed upon SagePoint Financial a Censure, $35,000 fine and $51,830.25 in restitution.As alleged in under the "Overview" section of the AWC [Ed: footnote omitted]:

During the period April 2014 through July 2017, SagePoint failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as they pertain to margin use. As a result, SagePoint failed to identify or reasonably respond to red flags of unsuitable use of margin in two customer accounts that caused the customers to pay more than $51,800 in commissions, fees, and margin interest. By this conduct, SagePoint violated NASD Rule 3010, FINRA Rules 3110 and FINRA Rule 2010.  

https://www.finra.org/sites/default/files/fda_documents/2019062351401
%20Glendale%20Securities%2C%20Inc.%20CRD%20123649%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, Glendale Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Glendale Securities, Inc. has been a FINRA Member Firm since 2003 with about 12 registered representatives at three branches. In part under the "Background" section of the AWC, FINRA alleges that [Ed: footnote omitted]:

In 2010, Glendale consented to FINRA's findings that, between 2005 and 2008, the firm failed to adequately implement its anti-money laundering (AML) compliance program insofar as the firm failed to detect, analyze, and/or report suspicious transactions. AWC Nos. 2009019747601 and 20060075263 (Nov. 2010). The firm also failed, between 2007 and 2009, to establish and maintain an adequate supervisory system and written procedures that were reasonably designed to prevent participation in an unregistered distribution of securities. As a result, the firm allowed a customer to deposit millions of shares of low-priced securities into more than 50 foreign corporate accounts, promptly liquidate them, and wire the proceeds to multiple foreign bank accounts. Additionally, the firm consented to the imposition of a censure and a $45,000 fine for violating NASD Rules 3011, 3010, and 2110, as well as FINRA Rule 2010.

In 2021, the National Adjudicatory Counsel (NAC) held that the firm violated FINRA Rules 3310 and 2010 by failing to: (a) establish and implement an AML compliance program reasonably tailored to its microcap stock liquidation business; (b) detect, investigate, and report red flags presented in 2015 and 2016 by suspicious liquidations of three penny stocks; ( c) conduct adequate due diligence on accounts introduced to the firm by a bank in Belize; and ( d) employ non-documentary means, in accordance with the firm's Customer Identification Program, to verify the identities of customers based in China, Malaysia, and Singapore. Dep 't of Enforcement v. Glendale Securities, Inc., et al., No. 2016049565901, 2021 FINRA Discip. LEXIS 25 (NAC Oct. 6, 2021 ). In addition, the NAC held that the firm violated FINRA Rules 3110 and 2010 by failing to supervise communications between Asia-based customers and one of its registered representatives. The NAC sanctioned the firm with a censure, a $155,000 fine, and a requirement to retain a consultant to review and revise its AML-related procedures to appropriately tailor them to its microcap stock liquidation business model. 

In accordance with the terms of the AWC, FINRA imposed upon Glendale Securities, Inc. a Censure, $50,000 fine, and an undertaking to retain an independent consultant. As alleged in part in the "Overview" section of the AWC:

Between June 2018 and April 2019, Glendale failed to develop and implement an AML compliance program reasonably designed to detect and report suspicious transactions. As a result, the firm failed to investigate red flags of potentially suspicious trading activity in the account of one of its corporate customers. Through this conduct, the firm violated FINRA Rules 3310(a) and 2010.  

Also READ: "Troubling FINRA Regulatory Case: Quis Custodiet Ipsos Custodes?" (BrokeAndBroker.com Blog /  October 7, 2021)
https://www.brokeandbroker.com/6097/finra-glendale/

Today's BrokeAndBroker.com Blog presents a difficult scenario. Publisher Bill Singer offers rare and high praise for the efforts of a FINRA Office of Hearing Officers Hearing Panel and of the National Adjudicatory Council. The byproduct of those bodies' deliberations yielded two comprehensive Decisions of the highest caliber. Unfortunately, FINRA's Chief Hearing Officer stayed the proceedings after information had purportedly come to her attention and eventually compelled the hiring of outside counsel to conduct a review. Sadly, FINRA's lack of transparency about the underlying nature of the troubling information mars the proceedings. Quis custodiet ipsos custodes?

https://www.finra.org/sites/default/files/fda_documents/2019062623001
%20MM%20Global%20Securities%2C%20Inc.%20CRD%202509%20AWC%20gg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, MM Global Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that MM Global Securities, Inc. has been a FINRA Member Firm since 1940 with about 3 registered representatives. In accordance with the terms of the AWC, FINRA imposed upon MM Global Securities, Inc. a Censure, $450,000 fine and the firm is prohibited from:

1. Providing market access, as defined by SEC Exchange Act Rule 15c3-5(a)(1), to customers for a period of two years following the date of the notice of acceptance of this AWC and; 

2. Engaging in any business in which Respondent provides market access to customers unless and until: 
A registered principal or officer of Respondent certifies in writing to FINRA that the firm revised and enhanced its AML and supervisory procedures related to detecting and investigating suspicious trading activity and potential market manipulation. . . .

As alleged in part in the "Overview" section of the AWC:

From at least January 2019 to June 2020, MM Global failed to establish and implement an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity in violation of FINRA Rules 3310(a) and 2010. During the same period, MM Global failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with federal securities laws and FINRA rules prohibiting market manipulation in violation of FINRA Rules 3110 and 2010. 

From at least October 2017 to April 2019, MM Global also failed to implement its Customer Identification Program (CIP) in violation of FINRA Rules 3310(b) and 2010. 

In addition, from November 2018 to August 2019, MM Global failed to preserve and maintain certain instant messages and email communications of its registered representatives representatives in violation of Section 17(a) of the Securities Exchange Act of 1934, Exchange Act Rule 17a-4(b)(4), and FINRA Rules 4511 and 2010.

https://www.finra.org/sites/default/files/fda_documents/2020068006501
%20Ronald%20Coy%20Bailey%20CRD%206270312%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, Ronald Coy Bailey submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ronald Coy Bailey entered the industry in 2013, and by March 2014, he was registered with NYLife Securities LLCC. In accordance with the terms of the AWC, FINRA imposed upon Bailey a $15,000 fine and a 12-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In 2017, while associated with NYLife, Respondent participated in a private securities transaction by soliciting and facilitating a firm client's $588,000 investment in an LLC membership interest in Golden Empire Seafood, LLC (Golden Empire) in exchange for compensation from Golden Harvest Alaska Seafood, LLC (Golden Harvest), an affiliate of Golden Empire. Respondent neither notified nor received prior written approval for this securities transaction from NYLife. As a result of this conduct, Respondent violated FINRA Rules 3280 and 2010. 

In 2017 and 2018, Respondent engaged in two outside business activities without providing prior written notice or receiving prior approval from NYLife. Respondent assisted in founding and then served as a strategic partner of Focus Employer Solutions, a human resources and payroll consulting business. Respondent also assisted Golden Harvest establish local business contacts. Respondent did not have NYLife's approval to engage in any of these outside business activities. As a result, Respondent violated FINRA Rules 3270 and 2010. 

Additionally, in the course of soliciting investors to invest in Golden Empire, Respondent emailed financial projections to a potential investor that did not clearly disclose the applicable risks of the investment and were promissory and misleading. As a result, Respondent violated FINRA Rules 2210(d)(l)(A), 2210(d)(l)(B), and 2010. 

Permalink

Search RRBDLaw

Related Topics

Previous Entries

No Headlines Found

Tag Cloud

Securities Industry Commentator Bill Singer BrokeAndBroker RRBDLaw Securities Industry Commentator by Bill Singer Esq Bill Singer Esq securities industry commentator Bill Singer RRBDLAW