Securities Industry Commentator by Bill Singer Esq

SEC Buries the Lede About Stunning Misconduct in Its Office of the Ombudsman (BrokeAndBroker.com Blog)

Former U.S. Department of Housing and Urban Development Assistant Inspector General Convicted of Falsifying Financial Disclosure Forms (DOJ Release)

Area man who claimed to be African prince convicted by jury of several fraud crimes (DOJ Release)

SEC Charges Investment Adviser with Violating the Proxy Voting Rule (SEC Release)

Statement Regarding In the Matter of Toews Corporation by SEC Commissioner Hester Peirce and Commissioner Mark T. Uyeda

SEC Awards Joint Claimants Almost $280,000 Whistleblower Award

Order Determining Whistleblower Award Claims

Morgan Stanley Smith Barney to Pay $35 Million for Extensive Failures to Safeguard Personal Information of Millions of Customers (SEC Release)

Sparkster to Pay $35 Million to Harmed Investor Fund for Unregistered Crypto Asset Offering / Crypto Asset Promoter Ian Balina Charged for Touting Tokens Without Disclosing Compensation (SEC Release)

SEC Obtains Final Judgment Against Municipal Advisor and Its Owner in Municipal Bond Offering Schemes (SEC Release)

FINRA Bars Former Merrill Lynch Rep for Conversion of Childcare Reimbursements

In the Matter of Jared Winston, Respondent (FINRA AWC)

Opening Remarks to the Institute for Inclusion in the Legal Profession by SEC Chair Gary Gensler

U.S. Promoter of Foreign Cryptocurrency Company Sentenced to Prison for Role in Fraud Scheme (DOJ Release)

Federal Court Orders Defendants to Pay More than $6.6 Million for Defrauding Binary Options Pool Participants (CFTC Release)

FINRA Fines and Suspends Former Wells Fargo Clearing Services Rep for Suitability involving New Issue Preferred Securities and Cell Phone Communications

In the Matter of Solomon Wei-En Hua, Respondent (FINRA AWC)

FINRA Enforcement: Bringing Cases Against Individual Brokers (FINRA Unscripted)

[S]affarinia, 62, of Alexandria, Virginia, engaged in a scheme to conceal material facts, including the nature and extent of his financial relationship with a personal friend who was the owner and chief executive officer of an information technology company. During a period in which Saffarinia received payments and loans from his friend totaling $80,000, Saffarinia disclosed confidential internal government information to his friend and undertook efforts to steer government contracts and provide competitive advantages and preferential treatment to his friend's company. Saffarinia also failed to disclose this financial relationship and another large promissory note on his public financial disclosure forms.

[F]rom January 2014 until September 2020, Harrison defrauded victims who thought they were investing in African trucking and mining companies.

Harrison - falsely holding himself out to be a royal prince from the African national of Ghana - told investors he had direct connections with these companies, and that they could expect an investment return of 28 to 33 percent.

Harrison and his stepfather claimed to be ministers with Power House of Prayer Ministries, which sponsored religious services in various church facilities and private residences throughout the Greater Dayton area, Southwestern Ohio area and Parker, Colorado. Many investor victims were members of the congregation.

Harrison routinely withdrew thousands of dollars in cash from the Ministries bank accounts shortly after receiving investments. Harrison and his stepfather used the investment funds to rent a house in Colorado, purchase luxury vehicles, airplane tickets, hotel accommodations and rental cars.

[F]rom January 2017 through January 2022, Toews directed a third-party service provider it engaged to cast proxy votes on behalf of registered investment companies ("RICs") Toews managed to always vote in favor of proposals put forth by the issuers' management and against any shareholder proposals.  According to the SEC's order, in connection with over two hundred shareholder meetings, Toews caused the third-party service provider to vote the RICs' securities pursuant to this standing instruction without exception and without any review by Toews of the proxy materials associated with those votes. Toews did not otherwise take steps to determine whether the votes were cast in the RICs' best interests and failed to implement policies and procedures reasonably designed to ensure that Toews voted proxies in its clients' best interests, as required by the Investment Advisers Act of 1940.

We are unable to support this action, which may affect how investment advisers shape their proxy voting policies and procedures. The Commission's Order finds that Toews Corporation ("Toews"), a registered investment adviser, violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act"), and Rule 206(4)-6 thereunder (the "proxy voting rule"), when it caused a third-party service provider to vote client proxies pursuant to a standing instruction without any review by Toews of the proxy materials associated with those votes. In particular, Toews instructed the third-party service provider always to vote all client proxies in favor of the proposals put forth by the issuers' management and against any shareholder proposals. Importantly, the Order does not make any findings that the adviser's clients would have been financially better off had the adviser cast any of the votes at issue in an alternative manner. The Order also does not find that any of the votes cast were the product of a conflict of interest.[1]

We are concerned that the Order may be misconstrued regarding an adviser's fiduciary duties with respect to voting proxies on behalf of its clients, as well as the specific requirements imposed by the proxy voting rule.[2]

In stating that the adviser "has revised its proxy voting policies and procedures to address the issues raised by the facts described,"[3] the Order might be read to imply that the adviser's prior proxy voting practices were per se improper and violate the Advisers Act and the proxy voting rule.[4] This implication, however, would be at odds with the Commission's own guidance that "[a] client and its investment adviser may agree that the investment adviser should exercise voting authority pursuant to specific parameters designed to serve the client's best interest," such as by voting in accordance with the voting recommendations of management of the issuer.[5]

Consistent with the adviser's fiduciary duties and in compliance with the proxy voting rule, an adviser and its client can agree that a "standing instruction" approach to proxy voting is in the best interest of the client. For example, the cost of reviewing and analyzing individual matters may outweigh any corresponding increase in the value of the issuers' securities. The adopting release for the proxy voting rule recognizes that the adviser may take cost into account when determining how to satisfy its fiduciary duties. The release recognizes that, at times, "refraining from voting a proxy [may be] in the client's best interest, such as when the adviser determines that the cost of voting the proxy exceeds the expected benefit to the client."[6]

Costs incurred by smaller investment advisers to review and analyze each matter submitted for a shareholder vote likely will be passed on to clients. Toews is not a large adviser with hundreds of employees and trillions under management. According to its most recent Form ADV, Toews reported about $1.25 billion in assets under management and 17 employees who perform investment advisory functions. Given that the majority of investment advisers fall within this category, incorrect implications drawn from the Order potentially could have wide-ranging consequences.[7]

Accordingly, we dissent.

[1] The adopting release for the proxy voting rule states that "[a]n adviser that votes securities based on a pre-determined voting policy could demonstrate that its vote was not a product of a conflict of interest if the application of the policy to the matter presented to shareholders involved little discretion on the part of the adviser." See Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan. 31, 2003) [68 FR 6585, 6588 (Feb. 7, 2003)], available at https://www.sec.gov/rules/final/ia-2106.htm.

[2] The adopting release for the proxy voting rule states that, while the issue of how an adviser must exercise its proxy voting authority is not specifically addressed in the federal securities laws, "[u]nder the Advisers Act…an adviser is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client's behalf, including proxy voting." Id., at 6586.

[3] In the Matter of Toews Corporation, Release No. IA-6139 (Sept. 20, 2022), at paragraph 6, available at https://www.sec.gov/litigation/admin/2022/ia-6139.pdf.

[4] The Order also focuses on discrepancies between the adviser's disclosures to clients regarding its proxy voting practices and the manner in which the adviser actually voted clients' proxies. However, the cure for a disclosure-related violation presumably would be to revise the deficient disclosures. Here, the Order highlights revisions to the underlying proxy voting policies and procedures as "addressing the issues" described in the Order.

[5] See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) [84 FR 47420, 47422 (Sept. 10, 2019)], available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf. Although the guidance states that such an arrangement "could" be subject to conditions, such as a condition that the investment adviser conduct additional analysis where the voting recommendation concerns a matter that may present heightened management conflicts of interest or involve a type of matter of particular interest to the investment adviser's client, the guidance does not state that such conditions are necessary. Id.

[6] See Release No. IA-2106, supra note 1, at 6587. See also Release No. IA-5325, supra note 5, at 47426.

[7] One recent survey found that over 88% of investment advisers are small businesses employing 50 or fewer people, and two-thirds of investment advisers both employ 50 or fewer people and have less than $1 billion in assets under management. See Investment Adviser Association Industry Snapshot 2022: Evolution Revolution Reimagined, 2nd Edition, available at https://investmentadviser.org/wp-content/uploads/2022/06/Snapshot2022.pdf.

[T]he record demonstrates that Claimant voluntarily provided original information to the Commission, and that this information led to the successful enforcement of the Covered Action and the Other Agency Action. REDACTED the information Claimant provided to the Commission was valuable, on point, and conserved Commission resources. And Claimant did provide ongoing assistance to the Other Agency.

[A]s far back as 2015, MSSB failed to properly dispose of devices containing its customers' PII. On multiple occasions, MSSB hired a moving and storage company with no experience or expertise in data destruction services to decommission thousands of hard drives and servers containing the PII of millions of its customers. Moreover, according to the SEC's order, over several years, MSSB failed to properly monitor the moving company's work. The staff's investigation found that the moving company sold to a third party thousands of MSSB devices including servers and hard drives, some of which contained customer PII, and which were eventually resold on an internet auction site without removal of such customer PII. While MSSB recovered some of the devices, which were shown to contain thousands of pieces of unencrypted customer data, the firm has not recovered the vast majority of the devices.

The SEC's order also finds that MSSB failed to properly safeguard customer PII and properly dispose of consumer report information when it decommissioned local office and branch servers as part of a broader hardware refresh program. A records reconciliation exercise undertaken by the firm during this decommissioning process revealed that 42 servers, all potentially containing unencrypted customer PII and consumer report information, were missing. Moreover, during this process, MSSB also learned that the local devices being decommissioned had been equipped with encryption capability, but that the firm had failed to activate the encryption software for years.

According to the SEC's order, Sparkster and Daya raised $30 million from 4,000 investors in the United States and abroad by offering and selling crypto asset securities called SPRK tokens to raise money to further develop Sparkster's "no-code" software platform. As stated in the order, Sparkster and Daya told investors that SPRK tokens would increase in value, that Sparkster management would continue to improve Sparkster, and that they would make the tokens available on a crypto trading platform. The order also finds that the SPRK tokens, as offered and sold, were securities, were not registered with the SEC, and were not applicable for a registration exemption.

According to the SEC's complaint against Balina filed in the United States District Court for the Western District of Texas, he purchased $5 million worth of SPRK tokens and promoted SPRK tokens on YouTube, Telegram, and other social media platforms from approximately May 2018 to July 2018. Balina allegedly failed to disclose that Sparkster had agreed to provide him a 30 percent bonus on the tokens that he purchased, as consideration for his promotional efforts. Balina also allegedly organized an investing pool of at least 50 individuals to whom he offered and sold SPRK tokens, despite not registering the offering with the SEC as required by federal securities laws and despite the lack of an applicable exemption from registration.

[I]n 2017 and 2018 the town of Sterlington, Louisiana issued two revenue bonds to finance the development of a water system and improvements to its existing sewer system. As required by state law, Sterlington applied to the Louisiana State Bond Commission (SBC) for approval of the two offerings. The SEC alleged that Sterlington submitted false financial projections, created by Fletcher and Twin Spires, which substantially overstated the number of historical and projected sewer customers in order to mislead the SBC as to the town's ability to cover the debt service for the proposed bonds. The SEC alleged bond investors were not informed that SBC approval of the bonds was based on the false projections. SEC further alleged that Twin Spires and Fletcher provided municipal advisory services to Sterlington without Twin Spires being registered as a municipal advisor with the Commission.

Winston enrolled in the firm's childcare reimbursement program and identified a family friend as the informal childcare provider. Each time Winston applied for childcare reimbursement, he clicked a box certifying that he had read the program guidelines and would "only submit expenses for reimbursement which are eligible for reimbursement" under the program. Nonetheless, during the relevant period, Winston applied for childcare reimbursement from Merrill Lynch on approximately 20 days during which he did not pay for childcare and therefore was not entitled to reimbursement from the firm. For those days, the firm paid Winston approximately $2,000 in reimbursement, which Winston retained in his bank account for personal use. As a result, Winston converted the firm's funds. 

Therefore, Winston violated FINRA Rule 2010. 

Good afternoon. It is my pleasure to welcome you to today's event with the Institute for Inclusion in the Legal Profession (IILP). My thanks to Sandra Yamate and the entire IILP team for the invitation to participate in this important event.

As is customary, I'd like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or Securities and Exchange Commission staff.

To me, the mission of the SEC relates directly to diversity, equity, and inclusion. We work every day to protect investors and facilitate capital formation across the spectrum of communities that make America strong, including underserved communities. With respect to the middle part of our mission-to maintain fair, orderly, and efficient markets-fairness literally is embedded in our mission.

In promoting fairness and efficiency, it is important that access to our more than $100 trillion capital markets is inclusive. It means that brokers and investment advisers provide services fairly and equitably. It means that entrepreneurs and companies of every size can tap into our capital markets to fund their ideas and innovations. It means that investors have access to the fair, full, and material information that they need to make informed investing decisions.

Diversity, equity, and inclusion are important not only to our agency's mission but also to our agency's makeup. The most important asset at the SEC is our remarkable staff. In recent years, we have made important gains to help ensure that the agency is a place where everyone on the staff can bring their whole selves to work, make their mark in public service, and rise in the profession, including into senior leadership.

We strive to be a model workplace at the SEC. That means tapping into the commitment of talented individuals of every background. We are dedicated to serving the American public, and we enhance that service when we draw upon every community across our nation.

Building upon earlier efforts, we have made progress with respect to diversity and representation among our senior management, advisory committees, and our Commissioners. We continue to implement our first-ever Diversity and Inclusion Strategic Plan, which the SEC published in 2020. In the near future, we will begin the planning process for the next Diversity and Inclusion Strategic Plan for fiscal years 2023-2025.

We want to make sure that career opportunities like internships are accessible for all. Therefore, we launched a paid internship program, and we have made efforts to ensure that these internships are available to all interested students, including those from underserved communities. We also have enhanced our inclusion-focused efforts regarding our recruiting and financial education programming.

Furthermore, we continue our ongoing work with regulated entities through the Diversity Assessment Report process, through which entities voluntarily provide self-assessments of their diversity policies and practices.

I am proud of the progress we have made. I am also proud that, in recent years, including this year, our staff has rated the SEC among the best places to work in the federal government. We have more work to do, and I look forward to working across the agency to advance these goals.

Throughout all of our work, we benefit from public engagement and public comment, including through venues and conversations like today's concerning the legal profession. I wish you a productive and thoughtful roundtable discussion.

Thank you.

• Securities Industry Commentator
• Bill Singer