Securities Industry Commentator by Bill Singer Esq

Keeping Up With Kenny -- Not the Kardashians (BrokeAndBroker.com Blog)

A Lack of Finality: The Trevor Saliba Saga at FINRA and the SEC and Again at FINRA 

(BrokeAndBroker.com Blog)

Wells Fargo suit against ex-lawyer 'unusual,' could have 'chilling effect' (Financial Planning by Victoria Zhuang)

OFAC Settles with Bittrex, Inc. for $24,280,829.20 Related to Apparent Violations of Multiple Sanctions Programs (Treasury Department Release)

US DEPARTMENT OF LABOR ANNOUNCES PROPOSED RULE ON CLASSIFYING EMPLOYEES, INDEPENDENT CONTRACTORS; SEEKS TO RETURN TO LONGSTANDING INTERPRETATION / Misclassification continues to deny workers' rightful wages; hurt businesses, economy

DOJ RELEASES

Broward County Couple Charged in Alleged Ponzi Scheme (DOJ Release)

Fake Home Loans Land Perpetrators in Prison (DOJ Release)

Detroit Equity Fund Owner Charged with Defrauding Investors of Over $27 million (DOJ Release)

Santa Barbara Man Sentenced to Over 11 Years in Federal Prison for $14 Million Ponzi Scheme, Tax Evasion, ID Theft and Other Felonies (DOJ Release)

Former Comptroller Of Investment Adviser Firm Sentenced To 80 Months In Multimillion-Dollar Investment Fraud (DOJ Release)

SEC RELEASES

SEC Adopts Rule Amendments to Modernize How Broker-Dealers Preserve Electronic Records and Enhance the Electronic Recordkeeping Requirements for Security-Based Swap Entities (SEC Release)

Statement on Updates to Electronic Recordkeeping Requirements for Broker-Dealers and Security-Based Swap Entities by SEC Commissioner Caroline A. Crenshaw

Statement on Amended Recordkeeping Requirements by SEC Commissioner Jaime Lizárraga

Burying the Technologically Primitive WORM: Open Meeting on Broker-Dealer Electronic Recordkeeping Requirements by SEC Commissioner Hester M. Peirce

Statement on Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants by SEC Commissioner Mark T. Uyeda

SEC Obtains Court Order to Enforce Investigative Subpoenas Against Two Principals of Broadway Musical Fund (SEC Release)

SEC Obtains Final Judgment Against Fraud Guarantee Co-Founder for Engaging in Fraudulent Securities Offering (SEC Release)

SEC Reopens Comment Periods for Several Rulemaking Releases Due to Technological Error in Receiving Certain Comments (SEC Release)

SEC Awards Claimant About $825,000 Whistleblower Award

Order Determining Whistleblower Award Claims

CFTC RELEASES

Federal Court Orders Texas Fraudulent Forex Trader and His Company to Pay Over $940,000 (CFTC Release)

FINRA RELEASES

Heightened Threat of Fraud: FINRA Alerts Firms to Recent Trend in Fraudulent Transfers of Accounts Through ACATS (FINRA Regulatory Notice)

FINRA Censures and Fines Rep for Willful Violation of Best Interest Obligation Under Regulation BI

In the Matter of Charles V. Malico, Respondent (FINRA AWC)

[F]rom 2018 through 2021, the Varrones offered individuals with good credit a short-term "Credit Leasing" investment program tied to a purported hedge fund that would yield a guaranteed return on investments plus fully repay the loans within 36 months or less. The Varrones and their co-conspirators helped victims apply for the high interest, short term loans and the victims "leased" the proceeds to The Credit Engineers and David Varrone. However, there was no hedge fund and victims' funds never were invested. Instead, the proceeds were used to enrich the Varrones and to pay back earlier victims-i.e., a Ponzi scheme. In total, the scheme funneled over $6.4 million of misappropriated victims' funds into the Varrones' accounts. Additionally, David Varrone fraudulently applied for and received approximately $650,000 in C.A.R.E.S. Act, Economic Injury Disaster Relief Loans from the U.S. Small Business Administration (SBA). These loans are intended to keep small businesses afloat and retain employees.

[A]mador and Casilla submitted fraudulent loan applications in connection with sham real estate transactions. The two would look for vacant properties with a high market value. They used the personal identifying information of former clients to apply for the mortgages from private mortgage lenders. The lenders would fund the loans for the purported purchase of the properties, and Amador and Casilla would pocket the loan proceeds. There never was a genuine sale or property purchase.    

Amador and Casilla were well versed in the mortgage industry and knew the details of the loan process, including the documents to be completed to obtain a loan. Amador worked as the president of a title company for a number of years. Casilla was a former attorney who worked with Amador doing real estate closings. They knew that "hard money lenders" would loan money for the purchase of properties as long as the property had sufficient value to serve as collateral to the loan. These lenders loaned money to high-risk clients unable to obtain a conventional mortgage for various reasons, to include poor credit risk, no verifiable income, or insufficient employment history. Amador and Casilla also knew that if they could convince the mortgage lenders to loan money for the purported purchase of a property, they could obtain the loan proceeds before anyone knew that a property wasn't being purchased.    

Amador and Casilla located high-end vacant residences that they would purportedly "buy" using someone else's name, credit and identity to secure a hard money lender mortgage. Once the "sale" was complete, the mortgage proceeds would be wired from the hard money lender to a fictitious title company controlled by Amador and Casilla. The owner of the property did not know the real estate transaction occurred. The buyer of the property did not know they had purchased it. Instead, they made it seem as if a sale had been completed, thereby having the mortgage company wire the mortgage proceeds to their title companies, after which they would withdraw the money. Utilizing this scheme, they were responsible for an intended loss of more than $3.3 million and an actual loss to the victims of more than $1.6 million. They each were ordered to pay more than $1.6 in restitution. 

[F]rom May 2017 through May 2022, Middlebrooks solicited clients for EIA by telling them he was able to exploit "inefficiencies" in global equity markets which would result in large returns for investors.  From the beginning of the scheme to defraud, however, EIA's fund failed to produce the predicted returns and suffered catastrophic losses.

Instead of informing EIA's existing investors that the fund was failing, Middlebrooks solicited new investors with false statements about the fund's performance and lulled existing investors by lying to them about the returns their investments generated. Middlebrooks also created and distributed false documents claiming that EIA's performance was exceptional. In one document, created in the fall of 2019, Middlebrooks falsely claimed that EIA's track record included a cumulative return of 476.81% with 81.82% of monthly trading showing a profit.

Middlebrooks also lied to investors about how their money would be used. During the scheme, Middlebrooks routinely took money from the fund for living expenses and transferred money from the fund to his wife's business. By the Spring of 2022, Middlebrook's scheme to defraud began unraveling, and EIA's fund collapsed. Losses to at least 100 investors exceeded $27 million.

Aviss ran his Ponzi scheme from at least 2012 through the summer of 2020, soliciting money from people who wanted to purchase annuities from insurance companies based in Switzerland. Aviss claimed the Swiss annuities he offered were safe and secure, and, in some instances, he told victims the annuities would pay interest rates ranging from 5% to 7%.

But Aviss did not use the victims' money to purchase annuities, even though he arranged for the victims to receive fabricated statements showing the purported value of the annuities, which the false documents showed were increasing over time.

Victims, most of whom were over the age of 60, gave Aviss more than $14 million, with most of that money coming from just one victim. Some money was paid back to victims to keep the scheme running.

Instead of purchasing annuities, Aviss used the victims' money for his own purposes and to support his lavish lifestyle. He used the money for, among other things, Ponzi payments to victims, mortgage payments, luxury car leases, expensive watches, trips to Monaco, more than $170,000 in purchases at a Santa Barbara nightclub, and 20 tickets to a U2 concert and after-party.

One victim lost more than $9.7 million in Aviss' Ponzi scheme. Aviss stole $400,000 from another victim whom he knew recently had been diagnosed with cancer, according to the prosecution's sentencing memorandum.

. . .

Aviss also defrauded the United States by failing to file tax returns for 2014, 2015 and 2016 and failing to pay any income taxes for those years. Aviss evaded paying more than $3 million in income taxes.

Aviss also failed to file with the Department of the Treasury Reports of Foreign Bank and Financial Accounts for the years 2015 through 2020 in an attempt to conceal accounts he controlled in Monaco, where he deposited some of his ill-gotten gains. He transferred victims' money to these offshore accounts, one of which was established with information from an identity theft victim.

The SEC's broker-dealer electronic recordkeeping rule currently requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format, known as the write once, read many format. The amendments add an audit-trail alternative under which electronic records can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased. The audit-trail alternative is designed to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems so they more closely align with current electronic recordkeeping practices while also protecting the authenticity and reliability of original records. The amendments apply the same requirements to nonbank SBSDs and MSBSPs.

Among other things, to facilitate examinations and make them more efficient, the amendments also require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format.

Recordkeeping is not an especially flashy topic. However, for regulators, a robust recordkeeping regime is fundamental to our ability to oversee our regulated entities. Without accurate and complete records, it is difficult or impossible to assess compliance with our rules.

Today's amendments make common-sense updates to modernize the broker-dealer and security-based swap ("SBS") entity recordkeeping regime, taking into account advances in technology over the last two decades.[1]

The current framework requires broker-dealers and non-bank SBS entities to maintain and preserve electronic records exclusively in a write-once, read-many, or "WORM" format. This means that the records are non-rewriteable and non-erasable, which is intended to ensure the integrity of the records. The amendments we are voting on today would add flexibility by allowing these entities to use an alternative "audit trail" method to satisfy their electronic recordkeeping obligations. Instead of preserving each version of a record in a non-rewriteable and non-erasable format, entities would be permitted to use an electronic recordkeeping system that maintains an audit trail that permits the recreation of an original record if it is altered, over-written, or erased. The amendments would also make other common-sense updates to the recordkeeping regime, including with respect to the use of third-party recordkeeping services and the prompt production of records.

The comment file reflected broad support for the proposed amendments.[2] Commenters also provided helpful feedback, which led to certain changes from the proposed approach. For example, the final amendments include a provision designed to accommodate cloud storage solutions, changes to the rule text designed to be more technology-neutral, and the removal of certain requirements that might be duplicative or redundant.[3]

While the amendments provide significant additional flexibility, they are also designed to maintain the same level of protection for the authenticity and reliability of original records. Some commenters suggested that the SEC provide even greater flexibility by imposing only a high-level requirement for "appropriate systems and controls."[4] However, we must be able to actually test and assess the effectiveness of the system. Such a high-level approach simply would not provide us the ability to do our jobs effectively. As the release explains, we need to be able to identify specific outcomes that the electronic recordkeeping system must achieve in order to promote the authenticity and reliability of the records.[5]

Winston Churchill is often quoted as saying "History will be kind to me, for I intend to write it."[6] His point, as I understand it, was that as the recorder of certain historical events, he would shape how future generations understood them, including his role. One problem: Winston Churchill probably did not actually say the words I attributed to him just now. At least, there is no reliable record of him doing so.

Going back to the records, we can see that he did say something similar during a meeting of Parliament, for which a transcript is available.[7] But it is not the pithy statement so often attributed to him. This confusion perhaps underscores the point of the original quote: without a record of events, we risk misunderstanding them. And the quality of the records informs the accuracy and completeness of our understanding.

Today's amendments are designed to make common-sense updates to our recordkeeping framework for SBS entities and broker-dealers, while continuing to protect the authenticity and reliability of original records. It accomplishes that goal thoughtfully, with what I believe is an appropriately tailored and balanced approach. Thank you to the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel, for your hard work on these amendments. I am pleased to support them.

[1] Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Release No. 34-96034 (October 12, 2022) (the "Adopting Release").

[2] See, e.g., Letter from John Trotti, NCC Group (Dec. 29, 2021); Letter from Ian J. Frimet, Senior Vice President, Associate General Counsel, LPL Financial (Jan. 3, 2022), Letter from William C. Anderson, Senior Vice President and Chief Compliance Officer, American Funds Distributors, Inc. (Dec. 31, 2021).

[3] Adopting Release at 4-10.

[4] See Petition 4-713 (Nov. 14, 2017) filed by the Securities Industry Financial Markets Association, Financial Services Roundtable, Futures Industry Association, International Swaps Derivatives Association, and Financial Services Institute.

[5] Adopting Release at 4-11.

[6] See, e.g., BrainyQuote (accessed 10/11/2022).

[7] Hansard Online, Commons Chamber, Volume 446: debated on Friday 23 January 1948 ("For my part, I consider that it will be found much better by all parties to leave the past to history, especially as I propose to write that history myself.")

In 1997, Netscape was the dominant web browser and the hottest tech item was a Tamagotchi - a virtual pet on a keychain. Sony marketed a data storage product called the Minidisc that was quickly overtaken by CD-R technology.

Streaming music was possible in 1997, but the well-known apps most of us are familiar with today weren't around yet. Chances are that RealPlayer was the go-to streaming platform for most. And many may recall the Pilot 1000, the first generation personal digital organizer that as the New York Times reported, "shared data with a desktop computer and synchronized information quickly on both machines."

Although the contours of the digital lifestyle we take for granted today were starting to emerge back then, technology has evolved significantly since the Commission first adopted its electronic recordkeeping rules in 1997. Optical disks were the predominant electronic storage method then, instead of the cloud of today.

To catch up with rapid technological change, the Commission is modernizing its recordkeeping rules. Today's amendments will make these rules more technology neutral. The amendments address the maintenance and preservation of records; use of third-party services, including cloud-based services, to hold records; and prompt production of records.

The amendments are designed to provide market participants with flexibility in determining how to preserve their records. The adoption of these amendments could result in significant market efficiencies and cost savings without compromising market stability or smooth market operations.

Recordkeeping by some broker-dealers and security-based swap entities in recent years has shifted to servers or other storage devices owned or operated by cloud service providers. Unlike the relationship with traditional third-party recordkeeping providers, firms using cloud services retain control of their recordkeeping system, as well as access to the records held in the cloud.

With these amendments, broker-dealers would no longer be required to notify their designated examining authority before deploying a recordkeeping system. The amendments would also permit firms to designate an executive officer for the purpose of executing an undertaking that provides the Commission access, directly or indirectly, to its records.

To meet the current recordkeeping requirement that records be preserved in an exclusively write once, read many, or WORM, format, the amendments provide for an audit-trail alternative. This alternative is meant to balance the concerns with current WORM requirements while preserving the goal of the Commission's recordkeeping rules, which is to protect the authenticity and reliability of original records.

The amendments also include an alternative undertaking for cloud service providers that is tailored to how these third party providers hold electronic records.

In addition, the amendments requires records maintained by a firm to be provided to the Commission in a reasonably usable electronic format.

Finally, the Commission is designating FINRA as the Commission's designee for purpose of accessing its members' records.

Today's Commission updates to electronic recordkeeping are long overdue, strike the right balance between market oversight and flexibility, and I'm pleased to support them.

I would like to thank the staff from the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel for their work on these amendments. I appreciate your dedication and extensive work on these highly technical amendments.

The Commission finally is considering the adoption of a rule that will allow broker-dealers[1] to retire the antiquated systems using CD-ROMs or other similar write-once-read-many (or, appropriately primitive, WORM) technology that our current rules require.

This day has been long in coming. The current rule, which was adopted in 1997, specified that a broker-dealer must preserve its records "exclusively in a non-rewriteable, non-erasable format."[2] This requirement was more flexible than the proposal, which had specified that firms keeping records electronically had to use "optical storage technology."[3] Commenters on that proposal objected that the requirement was overly restrictive.[4] In the adopting release, the Commission acknowledged these concerns. Noting that other technologies also were "available in a WORM, non-rewriteable version," the Commission declined to "specify[] the type of storage technology that may be used," and instead established standards that the storage media had to satisfy to be acceptable under the rule.[5] In other words, the Commission moved from a proposed approach that would have required optical storage technology because it recorded data in a non-rewriteable, non-erasable manner to a final rule that simply articulated an apparently technologically neutral standard that specified only that the medium needed to be in a non-rewriteable and non-erasable format.

The standard soon showed its true colors. Only six years later, the Commission found it necessary to respond to repeated requests from broker-dealers that suggested that the original rule was not as technologically neutral as the Commission initially thought. Broker-dealers were asking "for guidance on whether this requirement limits them to using optical platters, CD-ROMs, DVDs, or similar physical mediums to achieve" preservation of their records "exclusively in a non-rewriteable and non-erasable format" as required under rule 17a-4.[6] The Commission explained that the rule "does not require that a particular type of technology or method be used to achieve the non-rewriteable and non-erasable requirement" and that a broker-dealer could use an integrated system of hardware and software control codes to comply with the rules.[7] However, the Commission expressly excluded from this interpretation any system that relied exclusively on software controls, as they do not prevent modification or destruction of records and thus were not compliant with the rule.[8]

Given the limitations of this interpretation, it appears that many, perhaps most, broker dealers continued to use various forms of optical storage technology to meet the requirements of rule 17a-4,[9] notwithstanding its many deficiencies. Many broker-dealers incur significant costs to maintain a system that has little or no business use; that may be incapable of capturing, in a usable form, the types of dynamic information that contemporary information systems produce; and that, by all appearances, regulators almost never use.[10] Significantly, broker-dealers bear these burdens while investment advisers and CFTC-regulated entities, some of which are also registered as broker-dealers, do not.

Given the inflexibility and costs of our current rules, I am happy to see this recommendation come before the Commission. The rule provides what appears to be a viable, less expensive, and more useful alternative to WORM that I hope will benefit both our regulated entities and the Commission as it supervises and examines them.

At the same time, our experience with the rule we adopted in 1997 nags at me. The release we are considering states that one of the goals of this rulemaking is to make the requirement "more technology neutral." I hope these amendments achieve this goal, but, to be frank, our experience over the past quarter century with the existing rule leaves me in doubt. As commenters pointed out, even in the mid-90s, it would have been foolish to assume that optical storage technologies would continue to be a commonly used form of storage. Many people probably thought that a standard that required records to be kept in a non-rewriteable, non-erasable format would be much more durable. As I have already described, we had to revisit this question six years after we finalized the current rule. As a consequence, both firms and the Commission have been burdened with an expensive, obsolete, and probably, as a practical matter, unusable storage methodology for the better part of two decades.

What guarantees do we have that a rule that requires an "audit trail" will be any different? If the past twenty-five years have taught us anything, it is that technological developments consistently surprise us all. I hope that "audit trail" is sufficiently expansive to include all future technological solutions to identify changes to records and to reconstructing earlier versions of altered documents, but I fear that audit trail is to 2022 what WORM was to 1997.

We could be far more confident in the staying power of our rule if we were instead considering a principles-based approach that specified the objective we expected firms to achieve and allowed them to find the best technology available to them to reach this goal. For example, we could have specified that a broker-dealer needs to be able, upon request from the Commission, to retrieve any record it is required to maintain, as of any date specified by the Commission. This kind of rule would ensure that firms are capable of doing what we expect them to be able to do under the rule we are considering today. For many of them, an audit trail might be the best solution. For others-or for firms doing business a decade from now-other, more economical solutions might be available. Under a principles-based approach, the Commission could hold any firm liable for not maintaining a system capable of producing records required under the rules, but would not hold firms liable for failing to have systems that checked particular technological boxes.

Notwithstanding these concerns, I believe that this rule represents an improvement over our current, outdated requirement and am happy to support it. To be clear, however, I view this as an initial step toward a truly principles-based, technologically neutral future where our registrants are free to find the best solutions available to meet our regulatory requirements.

I would like to express my thanks to the staff for all the hours they have spent engaging with market participants to find a way to move beyond WORM, in discussing recordkeeping with me, and in drafting this rule.

[1] The rule also sets out generally similar provisions for security-based swap dealers and major security-based swap participants. See amendments to Exchange Act rule 18a-6.

[2] Exchange Act rule 17a-4(f)(2)(ii)(A).

[3] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934; Proposed Amendments, Exchange Act Rel. No. 32609 (July 9, 1993), 58 Fed. Reg. 38092, 38094 (July 15, 1993). See also id. at 38093 (noting that "[o]ptical storage technology allows for digital data recording in a non-rewriteable, non-erasable format, such as write once, ready many ('WORM'), which provides a non-alterable, permanent record storage medium").

[4] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934; Final Rule, Exchange Act Rel. No. 38245 (Feb. 5, 1997); 62 Fed. Reg. 6469, 6470 (Feb. 12, 1997) ("Several commenters explained that the description of optical storage technology in the Proposing Release included only one specific type of writing technology known as ablative writing, and requested clarification that the final rule would apply to other forms of optical disk technology that met the requirements of the rule.").

[5] Id.

[6] Electronic Storage of Broker-Dealer Records; Interpretation, Exchange Act Rel. No. 47806 (May 7, 2003), 68 Fed. Reg. 25281, 25282 (May 12, 2003).

[7] Id.

[8] Id. at 25282-25283.

[9] See SIFMA, Financial Services Roundtable, Futures Industry Association, Financial Svcs. Inst., International Swaps and Derivatives Association, Petition for Rulemaking to Amend Exchange Act Rule 17a-4(f) (Nov. 14, 2017), available at https://www.sec.gov/rules/petitions/2017/petn4-713.pdf.

[10] See id. at 5 (noting that "regulators . . . do not typically ask for production of records from WORM storage because the information or data is not readily sortable or searchable [but] instead request customized extracts or views of data collected from active storage systems where the record was originally created, that has not yet been transferred to a WORM system").

Thank you, Chair Gensler. I appreciate the staff's presentation on the recommendation to finalize amendments to the Commission's recordkeeping rules applicable to broker-dealers, security-based swap dealers, and major security-based swap participants.

On July 9, 1993, the Commission proposed amendments to its broker-dealer records preservation rule to allow such entities to employ optical storage technology to maintain records that were required to be retained.[1] Two notable features of this 1993 proposal were: (1) it took up less than four pages in the Federal Register; and (2) like today's recommendation, the first name listed as a staff contact was Associate Director Michael Macchiaroli.

In 1997, when the Commission adopted these amendments to Rule 17a-4, it stated that its actions to require the use of write once, ready many, or WORM formats "reflect a recognition of technological developments that will provide economic as well as time-saving advantages for broker-dealers by expanding the scope of recordkeeping options."[2] However, the "optical storage technology" addressed by that rulemaking, such as optical platters, CD-ROMs, and DVDs was already on the way to becoming outmoded.

Twenty-five years later, the Commission is finally addressing antiquated technology. I am pleased that the Commission is reviewing rules that are woefully in need of updating so that the rules achieve their intended purposes while being sensitive to their costs and benefits. In particular, the responsibility to preserve records is foundational not only to the Commission's Exams and Enforcement programs, but also for regulated entities to efficiently run their businesses. The previous rules effectively required firms to keep two sets of records: one using outdated "WORM" technology solely for SEC purposes; and the other for their businesses. This approach to regulation is unproductive and costly.

I support the recommendation before us because it amends the existing rules in a manner that is technology-neutral and does not seek to entrench a specific format. While I am hopeful that today's amendments achieve this important goal, I encourage the Commission not to wait twenty-five more years to revisit the rules if they do not.

As the Commission continues to consider how advances in technology might impact its regulations, we should be mindful of the potential benefits and risks. For example, technologies such as cloud storage and distributed ledger technology may make it easier and more efficient to maintain and preserve records.

The ease at which these technologies and other systems can record, preserve, and index large amounts of otherwise innocuous data on an automated basis, however, should be carefully evaluated. In this regard, I am concerned about overly intrusive surveillance that tracks employees' every keystroke, constantly takes facial images and screen snapshots, and logs every turnstile entry and exit.[3] America has a long history of respecting privacy, and the need to regulate the conduct of the financial services industry should not override these long-established norms. While financial services firms may have business justifications for engaging in extensive surveillance practices, the notion of doing so for regulatory compliance at the behest of government regulators can be unsettling.[4]

As a regulatory body that has an obligation to act in the public interest, the Commission has a responsibility to monitor its rulebook to see what is working and what is outdated. Rulemaking must be conducted in a methodical and deliberative process, based on a thorough review of the costs and benefits, and meaningfully seek and consider public comment. In that respect, I believe that the administrative file for this proposal would have been improved had the Commission not provided a short comment period that began last year just before Thanksgiving and ended on January 3rd. This comment period occurred at the same time as several open or recently closed comment periods for other rulemakings. The rulemaking process should - as a matter of good government - seek robust engagement from the public. The Commission can and should do better.

I am also disappointed that the Commission did not consider a more rational compliance period for smaller broker-dealers. Six months is an extremely abbreviated time frame, particularly for smaller firms that are already facing substantially increased compliance burdens as a result of the Commission's ambitious rulemaking agenda.

According to the data in the adopting release, 3,363 broker-dealers have total customer assets of less than $1 billion, which represents only 1.4% of overall assets. On the other hand, approximately $5.26 trillion, or 98.6% of total assets, are held at only 145 broker-dealers above that threshold.

Size of Broker-Dealer (Total Assets)	Total Num. of BDs	Cumulative Total Assets ($bln)	Cumulative Num. of Customer Accounts
> $50 billion	21	3,682	75,808,084
> $ 1 billion to $50 billion	124	1,581	153,243,391
> $500 million to $1 billion $50 billion	30	22	518,545
> $100 million to $500 million	147	31	9,559,082

Let's face it - by not staggering the compliance date based on firm size and recognizing the disparate impact on small businesses, today's action effectively favors Wall Street interests over Main Street brokers. Extending the compliance date for smaller broker-dealers, including the nearly 1,600 broker-dealers that have less than $1 million in assets, would have helped to alleviate burdens for these small businesses without affecting investor protection.[5]

Notwithstanding my concerns, on balance, I support today's amendments as important updates that provide useful alternatives to WORM for records preservation. I thank the staff in the Divisions of Trading and Markets, and Economic and Risk Analysis as well as the Office of the General Counsel for their efforts.

[1] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Release No. 34-32609 (July 9, 1993) [58 FR 38092 (July 15, 1993)], available at https://archives.federalregister.gov/issue_slice/1993/7/15/38089-38095.pdf.

[2] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Release No. 34-38245 (Jan. 31, 1997) [62 FR 6469, 6469 (Feb. 12, 1997)], available at https://www.sec.gov/rules/final/34-38245.txt.

[3] See Danielle Abril and Drew Harwell, Keystroke Tracking, Screenshots, and Facial Recognition: The Boss May Be Watching Long After the Pandemic Ends, The Washington Post (Sept. 24, 2021), available at https://www.washingtonpost.com/technology/2021/09/24/remote-work-from-home-surveillance.

[4] See, e.g., George Orwell, 1984 (1949).

[5] Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Release No. 34-96034 (Oct. 12, 2022) at 95, available at https://www.sec.gov/rules/final/2022/34-96034.pdf.

[T]he SEC is investigating whether Cronin and Joseph or others violated the federal securities laws by, among other things, making materially misleading statements to existing or prospective investors concerning the valuation of the Fund assets, and whether, after the SEC had begun a formal investigation of the Fund, they falsely represented in due diligence questionnaires disseminated to actual or prospective investors that there have not been any investigations of the Fund or the Fund's general partner. As stated in the filing, SEC staff served both Cronin and Joseph with investigative subpoenas requiring the production of certain documents and compelling their testimony. According to the filing, however, and despite numerous attempts to secure compliances with the subpoenas, Cronin and Joseph refused to produce documents and failed to comply with the testimonial obligations.

The SEC's application sought a court order directing Cronin and Joseph to comply fully with the subpoenas. Following a hearing on September 14, 2022, the court granted the SEC's application and ordered the respondents to produce non-privileged responsive documents to the Commission's subpoena and to appear for testimony. The Court's order also states that in the event Cronin and Joseph do not produce the documents and appear for testimony, the Court may hold them in civil contempt. The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.

[F]rom 2013 through mid-2019, Parnas, along with another individual, David Correia, raised over $2 million from investors through investments in their entity, Fraud Guarantee. According to the complaint, Parnas and Correia told potential investors that their funds would be used to develop products that would help customers recoup losses resulting from investment or consumer fraud. The complaint further alleged that contrary to Parnas's and Correia's representations, the funds were instead largely used for personal expenses including travel, jewelry, cars, and disbursements at a casino.  As alleged, Parnas and Correia also falsely told potential investors that they had raised millions of dollars from other investors and that they had invested hundreds of thousands of dollars of their own money into Fraud Guarantee.

Bittrex, Inc. ("Bittrex"), a private company based in Bellevue, Washington, that provides an online virtual currency exchange and hosted wallet services, has agreed to remit $24,280,829.20 to settle its potential civil liability for 116,421 apparent violations of multiple sanctions programs. As a result of deficiencies related to Bittrex's sanctions compliance procedures, Bittrex failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions. The applicable sanctions programs generally prohibited U.S. persons from engaging in transactions with these jurisdictions. Based on internet protocol ("IP") address information and physical address information collected about each customer at onboarding, Bittrex had reason to know that these users were in jurisdictions subject to sanctions. At the time of the transactions, however, Bittrex was not screening this customer information for terms associated with sanctioned jurisdictions. The settlement amount reflects OFAC's determination that Bittrex's apparent violations were not voluntarily self-disclosed and were not egregious.

Specifically, the proposed rule would do the following:

• Align the department's approach with courts' FLSA interpretation and the economic reality test.
• Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. 
• Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
• Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer's business, is also included.
• Assist with the proper classification of employees and independent contractors under the FLSA.
• Rescind the 2021 Independent Contractor Rule. 
  

Beginning in 1982, HECTOR MAY was the president of ECP and provided financial advisory services to numerous clients.  In 1993, BELL joined ECP, where she held various titles including comptroller and chief compliance officer.  ECP worked with a broker dealer ("Broker Dealer-1"), of which MAY became a registered representative in 1994. 

In order to obtain money from the Victims' securities accounts with Broker Dealer-1, MAY advised the Victims, among other things, that they should use money from those accounts to have ECP, rather than Broker Dealer-1, purchase bonds on their behalf.  With BELL's assistance, MAY guided the Victims, first, to withdraw their money from their Broker Dealer-1 accounts, and second, to send that money to the ECP Custodial Account by wire transfer or check.  At times, when ECP was running out of cash and desperately needed to make supposed bond interest payments to avoid exposing the Ponzi scheme, BELL reached out to Victims directly.  After the Victims sent their money to the ECP Custodial Account, MAY and BELL did not use the money to purchase bonds.  Instead, BELL and MAY transferred the money to ECP's "operating" account and spent it on business expenses, personal expenses, and to make payments to certain Victims in order to perpetuate the scheme and conceal the fraud.  In this way, from the late 1990's through March 9, 2018, BELL and MAY induced Victims to forward them more than $11,400,000.

To help perpetuate the fraud, BELL and MAY created phony "consolidated" account statements that they issued through ECP and sent to the Victims.  These "consolidated" account statements purported to reflect the Victims' total portfolio balances and included the names of bonds MAY falsely represented that he purchased for the Victims and the amounts of interest the Victims were supposedly earning on the bonds.  In order to create the phony consolidated account statements, MAY provided BELL with bond names and false interest earnings, and BELL created ECP computerized account statements and had them distributed to the Victims.  As part of the scheme, MAY personally drove to the home of a stroke victim he and BELL had been defrauding of millions of dollars in order to retrieve the legitimate statements being sent by Broker Dealer-1 and later replace them with BELL's fake consolidated statements purporting to show the victim's investments had been growing.

BELL was instrumental to the scheme in multiple ways.  BELL processed and spent client money from ECP's custodial and operating accounts, watching the money dwindling and helping her father achieve more thefts at many months' ends; BELL faked account statements that made people believe that they held millions, even when she knew that their money was gone; and BELL wielded her role as Chief Compliance Officer and Comptroller to help conceal the fraud from Broker Dealer-1.

In an audio recording made in 2016, after more than sixteen years in the scheme, BELL said the following about MAY:  "I am his daughter, I am his confidante, I am the backbone that saves his butt in every promise he makes out of there. . . . The virtue of my knowledge is just by the presence of time here.  There is nothing in this office that I don't know, haven't touched, haven't seen, haven't done, haven't taught.  Everyone is always intimidated by the time I come in or the things I get to do personally that I've earned over time based on my life circumstances. It's what we call the perk of being the boss's daughter."  At the end of that year, MAY thanked BELL in a handwritten note: "My Dearest Vania: you have always been there for me.  You always watch my back.  I couldn't do it without you[.] Love, Daddy".

[C]laimant, Redacted expeditiously provided detailed information that prompted the opening of the investigation and thereafter met with Commission staff in person and provided additional information after submitting the initial TCR. Redacted

The order finds that from approximately October 2019 to June 2021, the defendants used various websites and social media platforms to fraudulently market their forex trading pool as a version of a savings account that offered a greater yield with similarly low or no risk. The defendants called this forex trading pool "The Black Club" and "The Forex Savings Club," which their website claimed had received over $460,000 from 411 participants.

The order further finds the defendants induced participation in their forex trading pool by falsely claiming to "guarantee" to repay participants the funds they contributed to their individual "Forex Savings Accounts" and falsely offered participants "with a 100% certainty" portions of the "substantial profit[s]" to be generated using participants' pooled funds to trade forex. In truth, the defendants knew or recklessly failed to appreciate that no forex trader can guarantee profitable trading, or the avoidance of losses required to guarantee all participants' contributions, and knew, but failed to inform participants, they had no U.S.-based forex trading accounts. 

Finally, the order finds the defendants illegally operated their commodity pool by failing to register as commodity pool operators, in violation of the CEA and CFTC regulations. 

Respondent understands that this settlement includes a finding that he willfully violated Rule 15l-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes him subject to a statutory disqualification with respect to association with a member.

From July 2020 through November 2021, Malico recommended to one of his retail customers (Customer A) at Network 1 a series of transactions that was excessive in light of that customer's investment profile. In so doing, Malico placed his and Network 1's interests ahead of the interests of the customer. Customer A was a 63-year-old tax preparer with an annual income of approximately $100,000 and a liquid net worth of approximately $50,000. Although Customer A's average account balance during the relevant period was less than $30,000, Malico recommended that he make more than 350 trades in his account, which caused Customer A to pay more than $54,000 in commissions and other trading costs. 

Malico frequently recommended that Customer A buy and then sell a security, only to repurchase the same security weeks or even days later. For example, between January and July 2021, Malico recommended that Customer A buy and then sell shares of the same biotechnology company on six separate occasions. On four of those occasions, Malico recommended that Customer A buy shares of the company only to sell them on the same day or the next day. Such in-and-out trading caused Customer A to lose more than $6,000, while generating more than $3,200 in commissions and trading costs to Malico and Network 1. 

Collectively, the trades that Malico recommended in Customer A's account resulted in an annualized cost-to-equity ratio exceeding 158 percent-meaning that Customer A's account would have had to grow by more than 158 percent annually just to break even. As a result, Malico's recommendations made it virtually impossible for Customer A to realize a profit and, in fact, Customer A lost more than $17,500 during the relevant period.² 

Therefore, Malico willfully violated Exchange Act Rule 15l-1 and violated FINRA Rule 2010. 

= = = = =

Footnote 2: This AWC does not require that Malico pay restitution to Customer A because Network 1 has already compensated Customer A in connection with the settlement of an arbitration claim filed by the customer.

[D]ue to a technological error that resulted in a number of public comments submitted through the Commission's internet comment form not being received by the Commission. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021.

To ensure that interested persons, including any affected commenters, have the opportunity to comment on the affected releases or to resubmit comments, the Commission is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register.

As further described in the reopening release, all commenters who submitted a public comment to one of the affected comment files through the internet comment form between June 2021 and August 2022 are advised to check the relevant comment file on SEC.gov to determine whether their comment was received and posted. If a comment has not been posted, commenters should resubmit that comment.

. . .

Affected Releases:

• Securities Industry Commentator
• Bill Singer