Securities Industry Commentator by Bill Singer Esq

BrokeAndBroker.com Hit With Second 2022 DMCA Takedown Notice After Prevailing in Same Dispute in 2020 (BrokeAndBroker.com Blog)

Former SEC Ombudsman Misled Congress, Lied to IG, Probe Alleges (Bloomberg by John Holland)

SEC Awards Joint Claimants Almost $280,000 Whistleblower Award

Order Determining Whistleblower Award Claims

Court orders 'biblically based' RIA and execs to pay $2m over 12b-1 fees (Citywire RIA by Andrew Foerch)

President Of Sham United Nations Affiliate Sentenced To 42 Months In Prison For Cryptocurrency Scheme (DOJ Release)

Florissant Bank Manager Accused of Defrauding Elderly Customers (DOJ Release)

New Haven Man Admits Stealing More Than $160K from Retired Woman's Bank Account (DOJ Release)

SEC Obtains Partial Summary Judgment Against Microcap Issuer and Its CEO (SEC Release)

SEC Charges Promoter and Companies with $4 Million Fraud (SEC Release)

SEC Charges Real Estate Investment Firm and Principal with $100 Million Offering Fraud (SEC Release)

SEC Charges Gol Intelligent Airlines, Brazil's Second Largest Airline, with FCPA Violations (SEC Release)

SEC Charges Infrastructure Company Granite Construction and Former Executive with Financial Reporting Fraud (SEC Release)

Laudable Ends, Poorly Pursued: Statement Regarding Recent Pay-to-Play Rule Settlements by SEC Commissioner Hester M. Peirce

FINRA Censures, Fines, and Requires Undertakings In Vision Financial/Brokerage AML/Foreign Traders/ATS Failures

In the Matter of Vision Financial Markets LLC and Vision Brokerage Services, LLC. Respondent (FINRA AWC)

FINRA Fines and Suspends Former Edward Jones Rep for Compensating Customer for CD Losses

In the Matter of Daniel Shawn Murff, Respondent (FINRA AWC)

Federal Court Denies JPMorgan TRO Against Former Employee But Grants Expedited Discovery (BrokeAndBroker.com Blog)

Wilmington Investment Advisor Pleads Guilty to Charges Related to $7 Million Scheme to Defraud Clients (DOJ Release)

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)

Testimony Before the United States Senate Committee on Banking, Housing, and Urban Affairs by SEC Chair Gary Gensler

SEC Sues Chicago-Area Unregistered Crypto Assets Broker, Its Owner, and Two Salespeople with Fraud and with Conducting an Unregistered Offering (SEC Release)

The Deceased Customer, His Estate, The Merrill Lynch Employee, The Trusts, The Annuity, the Expert, and the Lawsuit (BrokeAndBroker.com Blog)

Banker Pleads Guilty to Bank Secrecy Act Charges (DOJ Release)

SEC Charges Loop Capital Markets in First Action against Broker-Dealer for Violating Municipal Advisor Registration Rule (SEC Release)

SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional Central Clearing for the U.S. Treasury Market (SEC Release)

Statement on 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 by SEC Commissioner Caroline A. Crenshaw

Statement on Treasury Clearing by SEC Commissioner Jaime Lizárraga

Treasury Clearing Standards for Membership Requirements and Risk Management by SEC Commissioner Hester M. Peirce

Statement on 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 by SEC Commissioner Mark T. Uyeda

SEC Denies Whistleblower Award to Claimant Citing NFA Status

Order Determining Whistleblower Award Claims

SEC Charges South Florida Venture Capital Firm and Others with Acting as Unregistered Brokers and Selling $3 Million in Securities to Investors (SEC Release)

FINRA Fines and Suspends Former MM Global Securities Rep for Instant Messaging

In the Matter of Peng Zhang, Respondent (FINRA AWC)

UPDATED: Stone Cold Day of Reckoning for FINRA and Self Regulation (BrokeAndBroker.com Blog)

STANDING RESPONSE TO DMCA TAKEDOWN NOTICES PERTAINING TO COVERAGE OF In the Matter of the Arbitration Between Jay Lombard, Claimant vs. GunnAllen Financial, Inc., and David Neil Soiferman, Respondents / RE-POSTED IN RESPONSE TO September 13, 2022 / DMCA Takedown Notice. Prior 2020 DMCA Notice Reversed

Man Sentenced to 135 months for Operating a "Ponzi" Scheme and Committing Securities and Bank Fraud (DOJ Release)

SEC Charges Former Investment Adviser with Stealing from Clients (SEC Release)

SEC Awards Joint Claimants $500,000 Whistleblower Award

Order Determining Whistleblower Award Claims

SEC Charges Four Underwriters in First Actions Enforcing Municipal Bond Disclosure Law (SEC Release)

SEC Brings Settled Actions Charging Cherry-Picking and Compliance and Supervisory Failures (SEC Release)

SEC Charges VMware with Misleading Investors by Obscuring Financial Performance (SEC Release)

Tippee Pleads Guilty In First Ever Cryptocurrency Insider Trading Case / Nikhil Wahi Traded Based on Tips From a Former Coinbase Employee Regarding Crypto Assets That Were Going to be Listed on Coinbase Exchanges (DOJ Release)

Romanian National Sentenced to Prison for Role in International Online Auction Fraud Scheme (DOJ Release)

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)

SEC Charges Hudson Advisors and Lone Star Global for Failing to Disclose that Fund Fees Included More Than $50 Million of Owner's Income Tax Liability (SEC Release)

Remarks at the "SEC Speaks" Conference 2022 by SEC Commissioner Mark T. Uyeda

SEC Denies Whistleblower Award to Claimant 

Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 

Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 

Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant Citing Untimely Filing

Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant Citing "Potential or Theoretical Use"

Order Determining Whistleblower Award Claims

FINRA Censures and Fines SagePoint for Financial Margin Suitability

In the Matter of SagePoint Financial, Inc., Respondent (FINRA AWC)

FINRA Censures, Fines, and Imposes Outside Consultant Undertaking on Glendale Securities

In the Matter of Glendale Securities, Inc., Respondent (FINRA AWC)

FINRA Censures, Fines, and Prohibits Market Access in MM Global Securities, Inc. Settlement

In the Matter of MM Global Securities, Inc., Respondent (FINRA AWC)

FINRA Fines and Suspends Former NYLife Securities LLC Rep for Private Securities Transaction and OBA

In the Matter of Ronald Coy Bailey, Respondent (FINRA AWC)

The SEC official charged with helping the public navigate the agency's complex system lied to investigators, added misleading information in reports to Congress, and didn't log hundreds of entries into the agency's tip program, according to the summary of an inspector general's report.

[J]oint Claimants provided significant information alerting Commission staff to the underlying conduct, which, in part, caused staff to open the Covered Action investigation, and also participated in multiple communications with Commission staff. 

[S]AINT CLAIR solicited investors for the launch of IGObit through promised investment returns, representations that the World Sports Alliance, a purported intergovernmental organization, was a close affiliate and partner with the United Nations, and representations about the World Sport Alliance's development projects around the world.  World Sports Alliance did not in fact have any relationship with the United Nations and did not, and had not, participated in any international development projects. 

SAINT CLAIR also represented to investors that their money would be used for the development of IGObit, when he in fact diverted those funds to other entities controlled by him and members of his family, as well as to pay his personal expenses, including dinners at Manhattan restaurants, travel, and online shopping.

SAINT CLAIR defrauded more than 60 victims of more than $600,000 dollars.

[F]rom Feb. 20, 2020 to May 25, 2021, while manager of the Commerce Bank branch on Natural Bridge Avenue in St. Louis, she devised a scheme to divert money from numerous customer accounts for her own use. 

Hopkins targeted elderly customers, including two 80-year-olds, one 95-year-old and one 82-year-old, the indictment says. She logged into customer accounts and transferred funds out, the indictment says, sometimes obtaining cashier's checks or prepaid cards. She changed the address on some account statements, forged customer signatures and transferred funds among customers to try and hide the thefts, the indictment says.

In all, Hopkins fraudulently diverted $328,273 from customer accounts, but $152,431 of that she transferred internally among customers to hide her theft, the indictment says.

[I]n 2018, Ivy began working for a retired woman ("the victim"), doing odd jobs for her.  In October 2018, Ivy began to steal checks from the victim's checkbook while in her home.  He then wrote checks payable to himself, forged the victim's signature on the checks, and deposited the checks into his personal credit union account.  Ivy also gave stolen blank checks on which he had forged the victim's signature to another individual, who then cashed or deposited the checks.  That individual then recruited other individuals, including Lamont Bethea, to cash or deposit stolen checks on which Ivy had forged the victim's signature.

Bethea used the information on the stolen checks, including the bank routing number and the victim's bank account number, to arrange electronic funds transfers (EFTs) from the victim's bank account to make payments for himself, his family members, and other friends or acquaintances.  Bethea used these EFTs to pay credit cards bills, rent, car insurance, student loans, cell phone bills, and other payments for himself and others. Bethea also provided the victim's routing and bank account numbers to other individuals so they could arrange similar EFTs for themselves and others from the victim's account.

Ivy, Bethea and other participants attempted to obtain a total of $624,818.28 from the victim's bank account.  Because the victim's bank account became overdrawn, some attempted check deposits or EFTs were reversed, resulting in a loss to the victim of $479,569.08.  Ivy personally stole $162,942 from the victim during his involvement in the scheme, which lasted until May 2021.

Judge Dooley scheduled sentencing for December 21, at which time Ivy faces a maximum term of imprisonment of 30 years. 

Ivy was arrested on a federal criminal complaint on November 8, 2021.  He is released on a $50,000 bond pending sentencing.

Bethea and his family members and friends stole more than $131,000 from the victim.  On September 1, 2022, Bethea pleaded guilty to fraud offenses stemming from this scheme and a separate, unrelated scheme.  He awaits sentencing.

According to the SEC's complaint, Nutra Pharma Corporation, a microcap issuer that purports to make pain relief drugs with cobra venom, and its CEO, Rik Deitsch, issued or posted a series of press releases that materially misled investors. The releases allegedly implied, among other things, that Nutra Pharma had taken purported steps to distribute Nyloxin internationally, when it had not, and that Nutra Pharma had expanded and upgraded its cobra farm facilities, when it did not own those facilities or its cobras and there were no expansions or upgrades. Nutra Pharma publicized many of these press releases while Nutra Pharma and Deitsch allegedly engaged in an unregistered distribution of its securities to retail investors. In addition, on multiple occasions, Deitsch allegedly engaged in manipulative trading to try to stabilize or raise Nutra Pharma's stock price and to create the appearance of active trading. Further, Nutra Pharma and Deitsch allegedly failed to make numerous required filings, including ones about the company's sales of unregistered securities and ones about Deitsch's beneficial ownership of the company's securities.

The Commission moved for summary judgment on its non-fraud claims against Nutra Pharma and Deitsch. The Court found Nutra Pharma and Deitsch violated Sections 5(a) and (c) of the Securities Act of 1933 through their unregistered offering of securities; that Nutra Pharma violated Section 13(a) of the Exchange Act of 1934 ("Exchange Act") and Rule 13a-11 thereunder for failing to file required Forms 8-K related to stock issuances; and that Deitsch violated Exchange Act Sections 13(d)(1) and 16(a) and Rules 13d-2(a) and 16a-3 thereunder by failing to make required filings about his beneficial ownership. The Court denied the Commission's motion as to its claim that Deitsch aided and abetted Nutra Pharma's failure to file these required Forms 8-K, leaving that claim along with the Commission's fraud claims for resolution at trial.

[B]etween February 2017 and May 2021, Edelman, through Creative and Edelman Blockchain, entities he controlled, fraudulently offered and sold securities using false and misleading statements to four investors, raising a total of approximately $4.3 million. According to the complaint, the Defendants falsely told investors their funds would be invested in digital assets. However, Edelman allegedly did not follow through on these promises, and in fact, only invested a small portion of investor funds in digital assets, while using a significant amount of investor funds for personal expenses. Also according to the complaint, Edelman made early repayments to some investors in a Ponzi-like fashion in order to encourage further and larger investments.

[S]IG, at McDermott's direction, touted to investors that it would pool their money to make real estate loans secured by first lien positions on the underlying properties and that their investments would be secured by this real estate. According to the SEC's complaint, SIG and McDermott dramatically departed from SIG's business model and in doing so misrepresented material aspects of the investment. The complaint alleges that though SIG did originate real estate loans, it also sold off tens of millions of dollars of its loans along with the corresponding security interests. As a consequence, the outstanding principal value of SIG's real estate loan collateral has at all points in time been substantially less than what it owed to its investors.

[G]ol bribed prominent Brazilian government officials in exchange for certain favorable payroll tax and aviation fuel tax reductions. The scheme took place against a backdrop of insufficient internal accounting controls, and the bribes were characterized as legitimate business expenses in Gol's recordkeeping.

[I]n 2021, Granite restated its financial statements from 2017 through 2019 to correct revenue and profit margin errors allegedly caused by Swanberg's misconduct. The company agreed to pay $12 million to settle the SEC's charges.

In separate administrative proceedings, the company's former CEO, James H. Roberts, and former CFOs, Laurel Krzeminski and Jigisha Desai, while not charged with misconduct, agreed to return more than $1.4 million, $327,000, and $176,000, respectively, in bonuses and compensation to Granite. These clawbacks were made pursuant to Section 304 of the Sarbanes-Oxley Act (SOX), which requires executives to reimburse certain compensation when an issuer is required to restate its financials as a result of misconduct.

The SEC's complaint against Swanberg alleges that, beginning in 2017, he faced demands within Granite to turn around the flagging performance of his group and to improve its financial metrics. Swanberg and his group, however, allegedly encountered significant increases in expected costs for their construction projects that, if recorded, would have decreased the group's earned revenues. The complaint alleges that Swanberg, when faced with these competing demands, orchestrated a scheme to manipulate profit margins and improperly defer the recording of expected costs to hide the group's flagging performance. The scheme allegedly unraveled in mid-2019 when several construction projects neared completion and Swanberg could no longer defer recognition of the cost increases.

The SEC's complaint against Granite is premised on Swanberg's alleged misconduct. The complaint charges Granite with violations of 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The complaint credits Granite with self-reporting to the Commission and undertaking remediation by, among other things, redesigning its internal accounting controls and policies and procedures to increase the transparency and accuracy of expected costs for construction projects. Without admitting or denying the SEC's findings, Granite agreed to be enjoined from violating Section 10(b) of the Securities Exchange Act of 1934 and other provisions of the securities laws, and to pay a civil penalty of $12 million. The proposed judgment is subject to court approval.

The SEC's complaint against Swanberg, which was filed in federal district court in the Northern District of California, charges him with violations of 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5(a), 10b-5(c), and Rule 13b2-1 thereunder. The complaint also charges Swanberg with aiding-and-abetting Granite's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5(b) 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The complaint seeks disgorgement plus prejudgment interest, civil penalties, and an officer and director bar, among other relief.

Without admitting or denying the SEC's findings, Roberts, Krzeminski, and Desai each agreed to cease and desist from violating Section 304 of SOX. Roberts's order provides that he will return an aggregate $1.4 million, including $627,000 in cash and 27,527 shares to Granite. In connection with the orders, Krzeminski and Desai have already returned $327,708.50 and $176,100.51, respectively, to Granite. . . .

Today the Commission instituted and settled administrative proceedings against four investment advisers for violating the Pay-to-Play Rule.[1] The Rule, adopted in 2010, came in response to instances where government entities, such as state and municipal pension plans, were choosing investment advisers based on their political contributions. When adopting the Rule, the Commission observed that " 'pay-to-play' arrangements are inconsistent with an adviser's fiduciary obligations, distort the process by which investment advisers are selected, can harm advisers' public pension plan clients and the beneficiaries of those plans, and can have detrimental effects on the market for investment advisory services."[2] The Pay-to-Play Rule was intended to "ensure that adviser selection is based on merits, not on the amount of money given to a particular candidate for office."[3] The Commission characterized the Rule as being "closely drawn . . . to accomplish its goal of preventing quid pro quo arrangements while avoiding unnecessary burdens on the protected speech and associational rights of investment advisers and their covered employees."[4] Today's enforcement actions illustrate that the Rule is a poorly conceived means to pursue laudable ends. Accordingly, I dissent and urge the Commission to revisit the Pay-to-Play Rule to ensure that it does not hinder political engagement that is unconnected to an adviser's quest for government clients.

The four enforcement actions share similar facts. All involve one-time, small-dollar contributions by one or two people, and all the investment advisers had established advisory relationships with the relevant government entities before the contributions occurred. Three of the four actions involve closed-end funds investments where "investors were generally prohibited from withdrawing their money for the life of the Funds."[5] In the fourth, the contributor was not covered by the Rule at the time of the contribution in July 2018; the contributor became a covered associate when promoted in September 2018.[6] Nowhere do the Commission's orders find that any of the investment advisers solicited new or additional business from any governments at the time of or after the contributions. In sum, the conduct at issue in these cases is far afield from the conduct that gave rise to the Rule.

The Pay-to-Play Rule is sweeping in its reach. It only exempts up to $350 to one official per election,[7] and it defines "official" broadly to include both incumbents and candidates if the office held or sought "has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser."[8] Additionally, the Commission reads "influence" expansively-any person in a position to participate in the selection of an investment adviser can influence the hiring, regardless of whether the person has authority to make the hiring decision.[9] The Rule's look-back provision means that it also applies retroactively; a contribution that was lawful when made becomes a "disallowed contribution" if the donor's job duties change after she makes the contribution. The consequences of making a disallowed contribution are serious: the Rule prohibits "provid[ing] investment advisory services for compensation" within two years of a disallowed contribution.[10]

For these reasons, it is immaterial, under the Rule's terms, that one of the contributions at issue in the recent cases was only $400,[11] that each of the advisers involved in the matters had a longstanding, existing advisory relationship with the government client when the contributions were made, and that the political candidates who received the contributions had attenuated influence over the government entities' adviser selection. For example, the Governor of Hawai'i does not have unfettered control over appointments to the University of Hawai'i Board of Regents,[12] and the Governor of Massachusetts and Mayor of New York do not appoint a majority of the relevant pension boards.[13] Under the Rule's broad reading of "influence," the Governors and Mayor need only have the authority to appoint a single person who might indirectly influence the hiring of an investment adviser. Finally, it is immaterial that there is no finding that the advisers sought or obtained any new investments from government entities at the time of or after the contributions; rather, it is enough that the advisers simply continued to receive compensation from existing investments, the terms of which generally precluded early withdrawal.

In other words, the Pay-to-Play Rule is an exceedingly blunt instrument. It does not require any evidence of an actual quid pro quo, or even evidence that the adviser was seeking a quid pro quo. The Rule likewise does not require any assessment of whether the official receiving the contribution realistically could influence the decision to hire an investment adviser, or whether the contribution itself reasonably could be expected to influence the official. The Pay-to-Play Rule simply does not concern itself with whether the official would or could have prevented the adviser from playing without first paying or whether the adviser was paying to obtain a spot on the playing field.

The Pay-to-Play Rule, although well-intentioned, imposes unique, unquantifiable costs on individuals by impeding their ability to participate in the political process. An investment adviser, when seeking qualified candidates for a position meeting the Rule's definition of "covered associate," is in the uncomfortable position of having to seek a list of prior political contributions. The job candidate is in the equally uncomfortable position of having to provide that information to a prospective employer, and possibly being excluded from the competitive applicant pool because of lawful political activity. Rule 206(4)-5(e) authorizes the Commission to grant exemptions, but exemptions are rare, perhaps in part because among the various factors the Commission considers in the exemptive process is "the contributor's intent or motive in making the contribution . . . as evidenced by the facts and circumstances surrounding such contribution."[14] Because applications for exemptions are public documents, the unavoidable and altogether unfortunate consequence is that any entity seeking an exemption must publicly name the covered associate together with a description of the covered associate's intent or motive in contributing.[15] A government agency's probe into the motives of a person exercising her right to participate in the political process is not comfortable for anyone involved and can itself become political.

We did not need the Rule to bring pay-to-play cases. Before we adopted the Rule, the Commission brought such cases.[16] The Rule, agnostic to evidence of actual, harmful pay-to-play schemes, dissuades political contributions that have nothing to do with obtaining advisory business from government clients. The Commission and the public now have a dozen years of experience with the Rule, and it is past time to consider how it might be improved. In the meantime, investment advisers should have effective policies and procedures in place to prevent contributions made to win business, our examiners should examine for compliance with the Rule, and the Commission should exercise prudence in its enforcement efforts. Cases such as today's, however, do more harm than good.

[1] Investment Advisers Act Rule 206(4)-5 (the "Pay-to-Play Rule" or "the Rule"), 17 C.F.R. § 275.206(4)-5.

[2] Political Contributions by Certain Investment Advisers, Rel. No. IA-3043, 75 Fed. Reg. 41018, 41023 (July 14, 2010) ("Adopting Release").

[3] Id.

[4] Id.

[5] Asset Management Group of Bank of Hawaii, Rel. No. IA-6127, 5-6 (Sept. 15, 2022); Canaan Management, LLC, Rel. No. IA-6126, 4-5 (Sept. 15, 2022); Highland Capital Partners, LLC, Rel. No. IA-6128, 4-5 (Sept. 15, 2022); StarVest Asset Management, Inc., Rel. No. IA-6129, 4-5 (Sept. 15, 2022).

[6] See Asset Management Group, 6 (noting the $1,000 July 2018 contribution and stating that the individual become a "covered associate" in September 2018). As applicable here, the "look-back" provision of Rule 206(4)-5(b)(2) brings contributions made by individuals who, although they were not covered associates at the time of the contribution, become covered associates within six months of the contribution.

[7] Rule 206(4)-5(b)(1).

[8] Rule 206(4)-5(f)(6)(ii).

[9] See Adopting Release, 75 Fed. Reg. 41029 & n.143.

[10] Rule 206(4)-5(a)(1).

[11] StarVest, 5.

[12] Regents for the University of Hawai'i are selected from a pool of qualified candidates nominated by the Regent Candidate Advisory Council and then appointed by the Governor, with the advice and consent of the Hawai'i Senate. See Hawai'i State Const., Art. X and Haw. Rev. Stat. § 304A-104.

[13] The Mayor appoints one of the eleven-member Board of Trustees of the New York City Employees' Retirement System and two of the seven-member Teachers' Retirement Board of the Teachers' Retirement System of the City of New York. See https://www.nycers.org/board-trustees and https://www.trsnyc.org/memberportal/About-Us/ourRetirementBoard. The Governor of Massachusetts, or his designee, serves as an ex officio member of the PRIM Board and the Governor appoints two of nine members. See https://www.mapension.com/about-prim/prim-board/.

[14] Rule 206(4)-5(e)(6)

[15] See, e.g., D.B. Fitzpatrick & Co., Amendment No. 1 and Restatement of Application for an Order Pursuant to Section 206A of the Investment Advisers Act of 1940, at 6, 8 (March 23, 2020) (identifying the contributor by name and describing the contribution as "spontaneous and motivated by the Candidate's support of the environment and acknowledgement of the existence and impact of climate change and the threat it poses to the State of Idaho") (available at https://www.sec.gov/rules/ia/2020/803-00253-amended-application.pdf); D.B. Fitzpatrick & Co., Notice of Application for Exemptive Order, Rel. No. IA-5475, at 10 (April 9, 2020) (noting the applicant stated the contribution was motivated by "legitimate personal interest in supporting the Official because of the Official's support for the environment, position on climate change and focus on protecting Idaho's natural resources") (available at https://www.sec.gov/rules/ia/2020/ia-5475.pdf); Stephens Inc., Amendment No. 1 and Restatement of Application for an Order Pursuant to Section 206A of the Investment Advisers Act of 1940, at 6, (June 21, 2017) (identifying the contributor by name and describing the contribution as "spontaneous and motivated by his longstanding friendship with the Official" who he had "known for approximately thirty years," further noting that "Contributor and the Official's ex-husband also have a shared interest in competitive swimming" and that "Contributor lived with them for a time during college, worked at their restaurant and has maintained close relations") (available at https://www.sec.gov/rules/ia/2017/803-00238-application-amended.pdf); Stephens, Inc., Notice of Application for Exemptive Order, Rel. No. IA-4797, at 8-9 (Oct. 18, 2017) (noting that applicant represented that "Contributor and the Official have a long standing friendship as the Contributor worked at the Official's restaurant and lived with the Official and her ex-husband when he was in college" and contended that "it was because of that relationship, and not any desire to influence the award of investment advisory business that the Contributor made the Contributor made the Contribution to the Official's campaign") (available at https://www.sec.gov/rules/ia/2017/ia-4797.pdf).

[16] See, e.g., SEC v. Henry Morris, et al., Litigation Release No. 20963 (Mar. 19, 2009) (alleging investment advisers paid sham "placement fees," portions of which were funneled to public officials, as a means of obtaining public pension fund investments in the funds those advisers managed) (available at https://www.sec.gov/litigation/litreleases/2009/lr20963.htm); SEC v. Paul J. Silvester, et al., Litigation Release No. 16759 (Oct. 10, 2000) (alleging a former Treasurer for the state of Connecticut participated in a scheme in which he awarded investments of hundreds of millions of dollars of state pension fund money in exchange for lucrative fees paid by the private equity firms to friends and political associates) (available at https://www.sec.gov/litigation/litreleases/lr16759.htm).

In March 2019, Vision Financial entered into a settlement with the Securities and Exchange Commission in which it was censured, ordered to pay a civil penalty of $625,000, and ordered to cease and desist from willfully violating Section 17(a) of the Securities and Exchange Act of 1934 and Exchange Act Rule 17a-8. The SEC found that from at least August 2013 through December 2014, Vision Financial cleared millions of shares of low-priced securities on behalf of certain customers of some of its introducing broker-dealers. These trades included suspicious patterns in which new customers of the firm deposited a physical certificate for a substantial amount of a thinly-traded low-priced stock, systematically sold the shares into the market shortly thereafter, and then wired out the sale proceeds from its accounts. In some instances, the same customer engaged in this pattern for multiple securities. Despite clearing these suspicious transactions and despite other related red flags, Vision Financial did not file timely suspicious activity reports related to relevant activities by at least 100 of these accounts when it knew, suspected, or had reason to suspect that these transactions involved the use of the firm to facilitate fraudulent activity, or had no business or apparent lawful purpose. 

OVERVIEW 

From September 2016 through December 2020, Vision Financial and Vision Brokerage failed to develop and implement an anti-money laundering (AML) program reasonably designed to achieve and monitor the firm's compliance with the Bank Secrecy Act and the implementing regulations thereunder. In particular, the firms did not establish and implement policies and procedures tailored to the firms' business, which could be reasonably expected to detect and cause the reporting of suspicious activity arising from transactions and money movements in domestic and foreign-based retail accounts. 

In addition, during that period, Vision Financial also accepted direct and omnibus accounts domiciled outside of the United States that had traders located primarily in China, Russia, Eastern Europe and other jurisdictions outside of the United States. Vision Brokerage similarly accepted direct accounts with foreign traders in these locations. Certain of these accounts had hundreds of traders who engaged in active trading strategies. Despite the heightened risks presented by these accounts, Vision Financial and Vision Brokerage failed to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to monitor for potentially manipulative trading on its platform, such as layering, spoofing, and wash trades. 

Also, from August 2018 through December 2020, Vision Financial provided its customers with direct market access to an alternative trading system (ATS) and multiple exchanges but failed to establish, document, and maintain financial risk management controls and procedures reasonably designed to limit the financial and regulatory risks associated with this activity. Vision Financial's failures resulted in potentially manipulative trading occurring and orders entering the markets without being subjected to reasonably designed risk management controls. 3 Based on this conduct, Vision Financial and Vision Brokerage violated FINRA Rules 3310(a), 3110, and 2010, and Vision Financial violated Section 15(c)(3) of the Securities Exchange Act of 1934, and Exchange Act Rule 15c3-5. 

In May 2021, firm customer LC, an elderly investor, purchased a brokered CD for $50,000 based upon Murff s recommendation. The CD had a 0.95 percent interest rate and a five-year term. LC held the CD in an Edward Jones brokerage account that Murff was the assigned GSR. 

On December 22, 2021, LC instructed Murff to sell the CD. Murff effected the sale of the CD on the same day, and LC incurred a loss of approximately $1,267 on the sale. On December 31, 2021, Murff provided LC with $1,267 in cash to compensate LC for the loss incurred from the sale of the CD. Murff did not seek or obtain authorization from Edward Jones to compensate LC for his investment losses. 

Therefore, Murff violated FINRA Rules 2150(c) and 2010. 

[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.

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. 

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."

[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.

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.

• Securities Industry Commentator
• Bill Singer