Securities Industry Commentator by Bill Singer Esq

The Problem for A Merrill Lynch Registered Rep Seeking the Expungement of a Settled FINRA Arbitration (BrokeAndBroker.com Blog)

TD Ameritrade Customer Loses Incorrect Address FINRA Arbitration

(BrokeAndBroker.com Blog)

DOJ RELEASES

CEO and President of Hawaii Shipbuilding Company Charged with Securities Fraud (DOJ Release)

Three Men Convicted of $1 Million 'Upfront-Fee' Scheme (DOJ Release)

Former Raleigh Investment Advisor Found Guilty in Healthcare Fraud that Targeted the Elderly and Disabled (DOJ Release)

Sarasota Man Sentenced To 23 Years In Federal Prison For Running $80 Million "Oasis" FOREX Ponzi Scheme (DOJ Release)

Chesterfield Man Convicted in Scheme to Embezzle Funds in Law Firm Trust Account (DOJ Release)

SEC RELEASES

SEC Charges Canadian Cannabis Company and Former Senior Executive with Accounting Fraud (SEC Release)

SEC Obtains Final Judgment Against Investment Advisers Charged with Defrauding Their Advisory Clients (SEC Release)

SEC Charges Mattel with Financial Misstatements and Former PwC Audit Partner with Improper Professional Conduct (SEC Release)

SEC Obtains Judgments Against Three Defendants in a Microcap Fraud Scheme (SEC Release)

SEC Grants Waiver for Deficient Form TCR and Awards Claimant Over $400,000 Whistleblower Award
Order Determining Whistleblower Award Claims

SEC Awards Two Claimants Over $1 Million and Over $500,000 in Whistleblower Awards
Order Determining Whistleblower Award Claims

"Competition and the Two SECs" Remarks Before the SIFMA Annual Meeting by SEC Chair Gary Gensler

CFTC RELEASES

Federal Court Orders California Man and His Commodity Pool Operator and Introducing Broker to Pay Over $2.3 Million for Commodity Fraud and Making False Statements to the NFA (CFTC)

FINRA RELEASES

FINRA Fines and Suspends Rep for Forging Supervisor's Electronic Signature

In the Matter of Heather S. Skipper, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Falsifying Rep Code

In the Matter of Robert Louis Takacs, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Guaranteeing Customer Against Loss and Texting

In the Matter of Dennis David Karjala, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for PSTs

In the Matter of Chad M. Koehn, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Excessive Trading

In the Matter of Stephen James Sullivan, Respondent (FINRA AWC)

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10/25/2022

[A]llegedly engaged in a scheme to fraudulently obtain money by deceiving purchasers of Semisub securities about the company's business and operations, including its revenue and expenses. Specifically, the indictment alleges that Curtiss Jackson and Jamey Jackson, who were respectively Semisub's CEO and President, would use funds raised from the sale of securities to develop and build a fleet of semi-submersible vessels for tourism and other commercial purposes and raised over $28 million from more than 400 investors.

For over 10 years, the defendants allegedly falsely told investors that a purported prototype vessel, dubbed "Semisub One," was "weeks" or "months" away from beginning operations. They also allegedly falsely claimed that Semisub had entered into agreements or developed relationships with marquee government agencies and a well-known private equity firm to build and sell a fleet of additional vessels for $32 million each. The defendants allegedly misused a substantial amount of the money raised from the sale of Semisub securities to pay for luxury residences in California and Hawaii, a Mercedes-Benz automobile, luxury vacations, psychics, marijuana, personal credit card bills, and cash withdrawals for their personal use, among other things. Curtiss Jackson and Semisub were also allegedly barred from offering or selling securities by the Pennsylvania Securities Commission in 2008 and by the California Department of Corporations in 2009 in those states. The defendants nonetheless allegedly continued to sell securities to investors across the United States, including to those in Pennsylvania and California, in violation of both states' orders.

From March 2016 through June 2016, Douglas, Gillar, and Mignott, along with a fourth conspirator, agreed to defraud the owners of the victim company of approximately $1 million. The defendants fraudulently induced the two victim company owners to enter a joint venture agreement with the defendants' New Jersey-based shell company. The defendants falsely represented that their company could acquire and provide a "standby letter of credit" (SBLC) backed by either €1 billion in cash or highly lucrative Mexican gold bonds. An SBLC is a guarantee of payment issued by a bank on behalf of a client that is used should the client fail to fulfill a contractual commitment with a third party.

The victim company wanted access to the standby letter of credit so it could purchase raw gold overseas and sell it to gold refineries. As part of the joint venture agreement, the company agreed to pay the defendants $1 million for the bank fee associated with the standby letter of credit.

In order to cover up the scheme and convince the victims to approve the transfer of the funds, the defendants made numerous verbal and written misrepresentations, including providing the victims with a phony letter from a major international bank saying that it was ready, willing, and able to provide a €1 billion SBLC to the defendants' shell company.

However, after the victim company owners transmitted $800,000 of the $1 million to the defendants, the defendants failed to provide an SBLC or anything of value. Instead, the defendants misappropriated the money for their personal use.

[I]n three separate quarters between 2019 and 2021, Cronos submitted financial statements with the SEC that contained material accounting errors related to, among other things, revenue recognition and goodwill impairment. The order also found that, in one of the quarters, Hilson entered into an undisclosed oral agreement to sell cannabis raw material and to repurchase cannabis product in the following quarter. This agreement was neither known nor accounted for by Cronos, which discovered the $2.3 million accounting error during an internal investigation. After discovering the accounting errors, Cronos promptly reported the misconduct to the SEC and provided extensive cooperation that meaningfully advanced the Commission's investigation. It also took effective remedial steps to enhance its internal accounting controls.

. . .

The SEC's order against Cronos finds that the company violated the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The SEC's order against Hilson finds that he violated the antifraud provisions of the federal securities laws and further aided and abetted and caused Cronos's violations of the reporting, books and records, and internal controls provisions.

According to the SEC's amended complaint filed on October 11, 2019, in the United States District Court for the District of Colorado, the Cetera defendants breached their fiduciary duty and defrauded retail advisory clients by, among other things, failing to properly disclose conflicts of interest related to the firms' receipt of compensation in the form of 12b-1 fees, revenue sharing, administrative fees, and mark-ups.

The CFTC charged the defendants in connection with the CTAX Series 1, LLC commodity pool (CTAX pool). The complaint alleged, and the court found, that during the relevant period from approximately July 25, 2014 to March 22, 2019, Mankad and CTAX Series (1) represented to pool participants that only experienced commodity trading advisors (CTAs) would trade funds in the CTAX pool, when in reality Mankad, who was not a CTA and had limited, unsuccessful experience trading futures, engaged in much and eventually all trading in the CTAX pool; (2) misrepresented and omitted material facts regarding brokerage commissions that would be charged to the CTAX pool, when in fact Mankad and CTAX Partners misappropriated pool funds by extracting excessive commissions triggered by Mankad's own unauthorized trading; (3) beginning in July 2018, recklessly traded the CTAX pool's assets in a manner that resulted in a loss of approximately 89 percent of the CTAX pool's assets, resulting in significant losses to pool participants; (4) concealed those losses from pool participants by intentionally delaying the provision of monthly account statements to pool participants; and (5) submitted false emails to the NFA, in connection with an NFA audit of CTAX Series and CTAX Partners, to make it appear that the defendants provided timely account statements to all pool participants. As a result of this conduct, pool participants lost more than $1.9 million.

The CFTC previously issued an order simultaneously filing and settling related charges against Paul Ohanian, an SEC-registered investment advisor based in Scottsdale, Arizona, and his advisory firm Scottsdale Wealth Planning, Inc., for intentionally or recklessly omitting material facts from communications with their clients who were pool participants contributing funds to the CTAX pool and for failing to register with the CFTC as CTAs. That order required Ohanian and Scottsdale Wealth to pay $338,000 in restitution and a $169,000 civil monetary penalty, among other things. 

Between approximately December 2020 and April 2021, Skipper forged the electronic signature of her supervisor on 105 commission adjustment letters, reflecting changes to representative codes on customers' annuity accounts, by either copying and pasting the supervisor's electronic signature or signing the supervisor's name electronically. Skipper then caused these letters to be transmitted to the annuity carriers. The supervisor did not give Skipper prior permission to sign the supervisor's name. 

In April 2021, Skipper forged the electronic signature of a different supervisor on an internal firm document, known as a Document Verification Form (DVF), used to verify customer information. Specifically, a customer had failed to provide certain information on a form designating the beneficiary of the customer's Individual Retirement Account at the firm. After obtaining the missing information from the customer, Skipper completed a DVF, which Wells Fargo required to be signed by a qualified supervisor. Rather than obtaining a supervisor's signature, Skipper affixed a scanned, electronic copy of a supervisor's signature on the DVF and submitted the DVF to Wells Fargo for processing.² The supervisor did not give Skipper prior permission to sign the supervisor's name. 

Therefore, Skipper violated FINRA Rule 2010. 

= = = = =

Footnote 2: Wells Fargo rejected the DVF from processing because Skipper had neglected to sign her name to the form as the submitter

In 2012, Takacs entered into eight agreements through which he agreed to service certain customer accounts, including executing trades for those accounts, under joint representative codes ( also known as joint production numbers) that he shared with a senior member of his team (Representative 1 ). Each agreement set forth the percentages of the commissions that each representative would earn on trades placed using the applicable joint representative code. 

From October 2014 through December 2019, Takacs placed 1,286 trades in accounts covered by the joint production agreements using representative codes other than those he should have used. Specifically, although Morgan Stanley's system correctly prepopulated the trades with the applicable joint representative code, Takacs changed the code for the 1,286 trades to his personal representative code or another joint representative code. As a result, Morgan Stanley's trade confirmations for the trades reflected an inaccurate representative code, and Takacs received a higher percentage of commissions than what he was entitled to receive pursuant to the joint production agreements. 

Takacs did not ask Representative I whether he could change the representative code on the 1,286 trades at issue prior to each trade. Rather, Takacs mistakenly believed that Representative I had previously agreed that he could change the representative codes so that Takacs would receive higher percentages of commissions than what was set forth in the joint production agreements. In fact, Representative 1 had not agreed that Takacs could change the representative codes. 

In February 2020, Morgan Stanley paid restitution of approximately $63,000 to Representative 1, which is the approximate amount of additional commissions Takacs received as a result of changing the representative code on the 1,286 trades. 

By falsifying the representative code on the 1,286 trades, Takacs violated FINRA Rule 2010. In addition, Takacs violated FINRA Rules 4511 and 2010 by causing Morgan Stanley to maintain inaccurate trade confirmations.

 

[F]ord and Guess submitted over 5,000 claims to Medicare, totaling approximately $534,438, for mental health services allegedly provided to approximately 145 beneficiaries between October 2018 and February 2020.  Defendant executed several fraud schemes to obtain the beneficiaries' Medicare information.  In one scheme, Ford's company offered Electronic Health Records conversion and teletherapy counseling to assisted living homes for the elderly and disabled.  In another scheme, Ford's company offered free food in exchange for the Medicare information of low-income elderly parishioners at churches in Bladen County, and by cold calling unsuspecting victims offering telehealth services.   

[F]rom November 2011 through April 18, 2019, DaCorta ran an investment company named Oasis International Group, Ltd. ("OIG"). DaCorta and his co-conspirators persuaded at least 700 victims to invest in OIG through promissory notes and other means, causing victims' losses exceeding $80 million. DaCorta, who had effectively been banned from conducting foreign exchange trading ("FOREX") by agreement with the National Futures Association, induced victims to invest in OASIS by falsely representing to victim-investors that OASIS was reaping enormous profits by being a "market maker" and collecting "spread" on voluminous FOREX trades. DaCorta also pitched the opportunity as essentially risk free and OASIS as well-collateralized. In reality, OASIS was not making markets and had no true revenue. The "spread" earnings were being paid on each trade by OASIS back to OASIS in order to create the illusion of revenue, which was published to investors on fictious account statements and an online portal. The OIG investor portal showed the "spread" credits but concealed catastrophic underlying trading losses.

DaCorta and his conspirators used the balance of the victim-investors' funds to make Ponzi-style payments to perpetuate the scheme and to fund lavish lifestyles. For example, the evidence showed that DaCorta used victim-investors' funds to purchase a Maserati and Range Rovers for his family members, a country club membership, multiple million-dollar homes in Florida, college tuition for family members, flights on private jets, and lavish trips to Europe and the Cayman Islands. DaCorta also under-reported his income on his 2017 federal income tax return, claiming a negative income and receiving a tax refund.

owned various businesses that purchased, rehabilitated, and sold homes around Richmond. He funded this work via construction loans that were held in escrow in the trust account of a Chesterfield County law firm. The loans were earmarked for use by Romano only for the purchase of and rehabilitation of specific properties, and only with the lender's express approval for each disbursement. Acting at Romano's direction, Lindsey Epps Passmore, 39, a paralegal at the law firm, disbursed $1.2 million of a lender's funds held in trust for Romano's projects without receiving the lender's approval or by misleading the lender about how the funds were to be used. The funds were then used for purposes outside the scope of the agreements with the lender.   

[H]owever, a Section 36(a) waiver is appropriate under the unique facts and circumstances here, which include the following: (1) Claimant's information was submitted through an on-line Form TCR, thus satisfying Rule 21F-9(a); (2) while Claimant did not sign the whistleblower declaration he/she did sign the counsel certification; (3) Claimant completed the TCR under his/her counsel's name and notified his/her counsel after the fact; (4) counsel did not contest the validity of the TCR and has represented the Claimant throughout his/her interactions with the Commission and confirmed that he/she was aware of the Form TCR filing under his/her name; and (5) Claimant would be otherwise meritorious, as he/she expeditiously reported information about an ongoing offering fraud to the Commission, prompting the opening of the investigation and thereafter provided additional assistance to the Commission staff. 

Redacted

In coming to this conclusion, the Commission considered that Claimant, a prospective investor, expeditiously alerted Commission staff to an ongoing fraud, prompting the opening of the investigation. Rather than stay silent, Claimant immediately reported suspected wrongdoing to the Commission when presented with what he/she believed was false investor information and materials. Claimant also provided continuing assistance by supplying critical documents, participating in an interview with Commission staff, and giving testimony that advanced the investigation. 

[I]n particular, Claimant 1's information caused the opening of the investigation that led to the Covered Action and formed the basis for the some of the findings in the Covered Action. Further, Claimant 1 provided additional information and assistance to the Enforcement staff through interviews in person and via telephone, along with internal Company documents. Accordingly, the CRS believes that a ***% award reflects Claimant 1's contributions to the success of the Covered Action. In contrast, Claimant 2 provided evidence of false statements by the Company's Redacted and provided significant information about the Company's internal processes. Claimant 2's information formed the basis for the some of the findings in the Covered Action. However, while Claimant 2 provided significant information, Claimant 2's information was indeed less significant vis-à-vis Claimant 1's information. This is because, as noted, Claimant 1 brought the operation of the scheme to the Commission staff's attention and assisted in the staff's understanding of the scheme as a whole. The award percentage also recognizes that Claimant 2 unreasonably delayed reporting to the Commission for over 30 months. Accordingly, we believe that a  *** % award strikes the appropriate balance between Claimant 2's assistance to the success of the Covered Action and Claimant 2's unreasonable reporting delay.

[M]attel understated the tax-related valuation allowance for the third quarter of 2017 by $109 million and overstated the tax expense for the fourth quarter of 2017 by the same amount. As a result, Mattel's third quarter and fourth quarter 2017 net loss and net loss per share were understated by 15% and overstated by 63%, respectively. In addition, the SEC's order finds that, at the time, Mattel had no internal control specifically related to calculating a valuation allowance. As explained in the order, until Mattel's November 2019 restatement, the $109 million tax expense error remained uncorrected, and the lack of internal control for financial reporting related to the error remained undisclosed. As alleged, neither Mattel's CEO nor audit committee was informed of the $109 million error.

The SEC's separate order against Abrahams alleges that he violated numerous professional standards in the third quarter 2017 interim review and the 2017 annual audit of Mattel's financial statements. According to the order, Abrahams failed to verify that the uncorrected $109 million error was documented, despite knowing of it, and failed to communicate the error to Mattel's audit committee. The order further alleges that Abrahams failed to maintain independence by providing prohibited human resource advice to Mattel, including suggesting to Mattel's then-CFO which candidate would be the best fit for a senior position at the company, as well as who should not be hired. The matter involving Abrahams will be scheduled for a public hearing before the Commission to decide if the Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate.

The SEC's order against Mattel finds that it violated the negligence-based antifraud provisions and the reporting, books and records, and internal controls provisions of the securities laws. Without admitting or denying these findings, Mattel agreed to a cease-and-desist order and to pay a $3.5 million civil penalty. The SEC's order also notes that, in determining to accept Mattel's settlement offer, the Commission took into account the company's cooperation with the SEC's investigation and its remediation.

[R]oe and Atlantean, along with defendants Warawa and Shane Schmidt, engaged in a fraudulent scheme to dump the securities of a microcap company, Sandy Steele Unlimited, Inc. Roe, Warawa and Schmidt allegedly used Atlantean and other defendant entities to secretly hold their shares of Sandy Steele and the other entities to sell the shares through a fraudulent business, operated by defendant Nelson Gomes, which concealed their identities while illegally dumping their stock into the public market. The complaint alleges that these illegal sales of Sandy Steele's stock were boosted by promotional campaigns that, in some instances, included false and misleading information designed fraudulently to capitalize on the COVID-19 pandemic, such as false claims that Sandy Steele could produce medical quality facemasks.

On October 20, 2022, the Court ordered Roe to pay a civil penalty of $248,435 and Atlantean to pay a civil penalty of $300,000. Previously, Roe, Atlantean and Warawa consented to the entry of final judgments on March 30, 2022, enjoining each of them from violations of Sections 5(a), 5(c) and 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. The judgment against Warawa also imposed a five year penny stock bar and ordered her to pay disgorgement in the amount of $9,190 plus prejudgment interest in the amount of $362, and a civil penalty of $9,190. Further, on March 30, 2022, the Court ordered: (i) Roe to pay $548,435 in disgorgement plus prejudgment interest in the amount of $32,971 (of which $545,974 is joint and several with Atlantean); and (ii) Atlantean to pay disgorgement and prejudgment interest of $545,974, which is joint and several with Roe. The judgment against Atlantean also imposed a five year penny stock bar.

On July 13, 2021, the court entered a partial judgment by consent against the one remaining defendant, Shane Schmidt, which required him to pay disgorgement and prejudgment interest. . . .

Thank you, Ken [Bentsen]. As is customary, I'd like to note that my views are my own, and I'm not speaking on behalf of my fellow Commissioners or the SEC staff.

1933 was an important year in SEC history.

No, I'm not referring to the passage of the first federal securities law.

I'm not actually referring to the Securities and Exchange Commission at all.

I mean the other SEC: you know, the Southeastern Conference.

I'm sure, Ken, that you could've guessed that, being a Texan, though I think you've spent more time in Houston than College Station.

Fall sports are big in the SEC. Of course, those football games happen every weekend. As a long-distance runner, I'd like to give a shout out to the SEC cross country championships taking place on Friday at Ole Miss.

The Southeastern Conference was first formed in February 1933. That was a mere three months before Congress and President Franklin Delano Roosevelt enacted the Securities Act of 1933. About a year and a half later, they set up the slightly younger SEC - the one where I'm honored to work.

A Focus on Competition

What does the SEC have to do with the SEC?

Beyond our similar abbreviations and vintages, the two SECs share one big thing in common: a focus on competition.

Though it may seem less obvious than at the Southeastern Conference, competition is central to the Securities and Exchange Commission's remit, too.

This SEC was set up in 1934 to protect investors and act in the public interest. In 1975, largely to address fixed commissions and other anticompetitive practices by market intermediaries, Congress amended the Securities Exchange Act of 1934.[1] Literally, they added the word "competition" to the '34 Act - not once, not twice, but 20 times.

In 1996, Congress returned to the importance of competition. They mandated that in all of our rulemaking, the Commission must consider efficiency, competition, and capital formation, in addition to those earlier tenets of investor protection and the public interest. They didn't just amend the '34 Act, either. This new requirement applied to all of our foundational statutes and to rulemaking affecting all investors, issuers, and intermediaries.

Today, I'd like to zoom in on that principle of competition, and how it runs through each part of the SEC's mission.

Why Competition Matters

Why does competition in our capital markets matter?

The SEC's mission is to protect investors, facilitate capital formation, and maintain that which sits in the middle: fair, orderly, and efficient markets.

The whole economy benefits when there's greater competition among investors, issuers, and the intermediaries in the middle.

Competition increases returns for investors and lowers the cost of capital for issuers. It promotes innovation and efficiency in the middle of the markets. It helps capital markets more effectively price and allocate money and risk. It helps the U.S. maintain our global competitiveness. I think Congress understood that when they amended our laws in '75 and '96.

While we have projects designed to enhance competition across all three parts of our mission - investors, issuers, and intermediaries - today I'll primarily focus on how we can promote greater competition among the intermediaries in the middle of our markets.

The markets in the middle are almost like the neck of an hourglass. Let's visualize that for a minute.

Imagine grains of sand flowing through the hourglass every single day. The sand, in this analogy, is money and risk.

Financial intermediaries, like market makers, exchanges, and asset managers, sit at the neck of that hourglass, collecting a few grains in each transaction. With trillions of grains flowing through daily, a few grains of sand can really add up. Those grains may potentially become excess profits above what robust market competition would provide - also known as economic rents.

Today, the financial sector - including the capital markets the SEC oversees, as well as banking and insurance - represents about 8 percent of America's economy. That's grown significantly since 1975, when Congress passed those amendments. At that time, the sector had less than a 5 percent share of gross domestic product (GDP).[2]

In other words, finance has grown as a percentage of our economy despite the passage of the '75 and '96 amendments - not to mention the countless technological advancements that have lowered the cost of communicating and transacting elsewhere.

Centralization and Concentration

Since antiquity, finance has tended toward centralization and concentration - whether the Medici family back in the 15th century or J.P. Morgan a century ago.

There's a tendency for central intermediaries to benefit from scale, network effects, and access to valuable data.

Though technological innovations repeatedly disrupt incumbent business models, centralization still tends to reemerge.

For example, index funds, created by Jack Bogle in the 1970s,[3] allowed anybody to own the whole market, cheaply. Today, though, more than 80 percent of total net assets in U.S. registered investment company index funds are managed by just four asset managers.[4]

Similarly, the internet democratized many forms of information, including in finance, and thus facilitated lower-cost brokerage. Again, however, there's been growing centralization among equity market makers handling retail market orders, as I'll discuss later.

We've even seen centralization in the crypto market, which was founded on the idea of decentralization. This field actually has significant concentration among intermediaries in the middle of the market.

Thus, we must remain vigilant to areas where concentration and potential economic rents have built up, or may do so in the future.

The Tools

Faced with these natural tendencies in finance, the SEC draws upon a number of tools to fulfill Congress's vision regarding competition. I'll mention three such tools: transparency, access, and fair dealing.

Transparency addresses information asymmetries. It lowers some of the advantages of scale, network effects, and data as more people can see the information.

A second tool is access - importantly, not just for the biggest or most central players. Accessible markets bring in more competitors. Access increases innovation, as market participants seek new ways to compete.

Finally, there's fair dealing - or another way to put it, a fair playing field. Those SEC cross-country athletes all will run the same distance this weekend. It's important, as Aristotle put it, to treat like cases alike.[5]

Races also have rules to promote integrity. The runners, for example, can't trip their competitors.

Treating like market participants alike, and promoting market integrity, increases investor trust in the overall markets. It focuses participants' competition on price, service, and other key factors, rather than on whether the game is fair or the information is trustworthy.

Competition and Policy Projects

Now, I'd like to discuss how we are looking to apply these tools across the fixed income, equity, and private markets.

Fixed income

To begin, let me turn to the $55 trillion fixed income markets, and in particular our suite of projects designed to instill greater competition and resiliency in the $24 trillion Treasury market.[6]

First, we've proposed to require that all market participants that engage in important liquidity-providing roles, including in the Treasury market, register as dealers.

We've also proposed that significant Treasury market platforms, including interdealer brokers, come into compliance with Regulation ATS.

Why should other firms have to register while some firms currently don't?

Third, we've proposed broadening central clearing in both the cash and repurchase agreement (repo) markets for Treasuries.[7] Central clearing lowers risk in the system and increases access to more counterparties.

Fourth, we also have proposed three key reforms to better facilitate customer clearing in Treasuries.[8] Such increased accessibility, along with the proposed broadening of central clearing in U.S. Treasury markets, would help promote anonymized all-to-all trading, improving competition and resiliency.

Last, I also support consideration of work undertaken by the Financial Industry Regulatory Authority (FINRA) to bring greater post-trade transparency to both the Treasury market and the nearly $30 trillion non-Treasury fixed income markets.[9]

Equity markets

Next, let me turn to the equity markets.

We've made real progress since the days of fixed commissions back in 1975. While some might say that retail investors have never had it better, make no mistake: There are still a lot of costs in equity market trading. Zero commission doesn't mean zero cost.

An important segment of the equity market - where most retail market orders are executed - is off-exchange and tending toward centralization.

Today, retail market orders generally are not sent to lit exchanges, where buy and sell orders compete and can be matched. Instead, a significant portion of retail orders are sent to just a few large wholesalers. As a result, retail investors may not be getting the best prices possible.

Thus, I've asked staff to make recommendations for the Commission's consideration, using the available tools, around how to enhance competition in the equity markets. We haven't updated key aspects of our national market system rules, particularly related to order handling and execution, since 2005.

One area we're exploring is how to level the playing field between the dark market and the lit market.

Particularly, I've asked staff to explore the possibility of harmonizing the tick size across different market centers, whether a quote or trade is on-exchange or off-exchange.

In addition, I've asked them to make recommendations for the Commission's consideration around a potential SEC-level Best Execution rule. I've also sought recommendations around how to instill greater competition for retail market orders on an order-by-order basis, through auctions. With greater competition, more market participants would have access to these retail market orders.

I've also asked staff for recommendations around lowering the maximum fees exchanges can charge for access to protected quotes. Further, I've asked them to make recommendations around how we might update Rule 605 so that investors receive more useful disclosure about order execution quality.[10]

Private fund advisers

Finally, let me turn to private fund advisers. Private funds hold approximately $21 trillion in gross assets.[11] Given its relative growth, soon, this sector may surpass the U.S. commercial banking sector ($23 trillion) in size.[12]

Private fund advisers, through the funds they manage, touch so much of our economy. Often, private fund investors are retirement plans and endowments. The people behind those entities often are teachers, firefighters, municipal workers, students, and professors. On the other side, the people raising money from private funds might be startup entrepreneurs, small business owners, or the managers of late-stage companies.

Given that these funds touch so much of our economy, efficiency and competition among these intermediaries is important.

That's why I supported our recent proposal to require registered private fund advisers to provide detailed reporting to investors of fees, expenses, performance, and preferential treatment, such as side letters.[13] More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets.

Conclusion

In sum, these projects are designed to lower the cost to issuers and raise the returns for investors, using the tools of transparency, access, and fair dealing to promote greater competition.

I discussed a few of our projects related to enhancing competition, but Congress' mandate on competition touches upon all of our work promoting our three-part mission.

I note that Congress's various mandates for the SEC to consider competition and efficiency didn't cabin our approach only to retail investors or only to one segment of our markets. They didn't leave out so-called sophisticated investors. I think they understood that our whole economy benefits when we drive greater competition throughout the capital markets, whether private fund advisers, the Treasury market, the equity market, or elsewhere.

I get that intermediaries, who make up a lot of the SIFMA membership, naturally would have questions and comments on policies designed to promote greater competition in our financial markets. We benefit from your feedback and input on our proposals.

Effectively, though, Congress directed us to have you all compete to benefit the public. Our clients are the 330 million people in our great nation. Americans benefit from more competition and efficiency in our markets.

Ultimately, I hope that competition is something we all can stand behind. I'm sure our friends at the other SEC would agree.

Thank you.

[1] See Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249. Five objectives laid out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1): (1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities; (4) the practicability of brokers executing investors' orders in the best market; and (5) an opportunity, consistent with efficiency and best execution, for investors' orders to be executed without the participation of a dealer.

[2] See Paul Kiernan and Dave Michaels, "SEC's Gensler Aims to Save Investors Money by Squeezing Wall Street" (Oct. 5, 2021), available at https://www.wsj.com/articles/secs-gensler-aims-to-save-investors-money-by-squeezing-wall-street-11633426201.

[3] See Dan Culloton, "A Brief History of Indexing" (Aug. 9, 2011), available at https://www.morningstar.com/articles/390749/a-brief-history-of-indexing.

[4] Based on the most recent public N-CEN filings (which include a data field that identifies whether a fund is an index fund) and the most recent public N-PORT filings. Calculation for "index" funds based on funds who declare themselves as index funds on Form N-CEN.

[5] See "Remarks Before the Healthy Markets Association Conference" (Dec. 9, 2021), available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921.

[6] See statistics from Securities Industry and Financial Markets Association, available at https://www.sifma.org/resources/research/us-treasury-securities-statistics/

[7] See Gary Gensler, "Statement on Proposed Rules Regarding Treasury Clearing" (Sept. 14, 2022), available at https://www.sec.gov/news/statement/gensler-statement-treasury-clearing-0914222.

[8] Ibid. "First, the proposal would strengthen the Commission's rules for clearinghouses transacting trades in Treasuries, particularly with regards to gross and net margining. . . . Second, the proposal would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, a process known as rehypothecation. . . . Finally, the proposal would require clearinghouses to have policies and procedures designed to ensure they facilitate access to clearing services for all eligible transactions, including for indirect participants, such as through the use of sponsored clearing."

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

[10] 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.

[11] This represents registered investment adviser (RIA) private fund gross asset value reported on Form ADV as of September 2022.

[12] See Board of Governors of the Federal Reserve System, "Assets and Liabilities of Commercial Banks in the United States," available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets $22.6 trillion as of Oct. 5, 2022 (Table 2, Line 33).

[13] See Gary Gensler, "Statement on Private Fund Advisers Proposal" (Feb. 9, 2022), available at https://www.sec.gov/news/statement/gensler-statement-private-fund-advisers-proposal-020922.

During August 2021, Respondent's firm customer (the "Customer") made an inquiry via text message about a mutual fund investment Respondent had recommended. In an August 2021 response, which Respondent sent to the Customer via text message using his personal cell phone, Respondent stated that he would give the Customer money to guarantee against any future losses in the investment. 

Therefore, Respondent violated FINRA Rules 2150(b) and 2010.

. . .

During August 2021, Respondent also sent the same Customer multiple text messages using his personal cell phone that violated the content standards of FINRA Rule 2210(d)(1)(B). For example, Respondent stated that a mutual fund in which the customer invested charged only an upfront fee, rather than any additional fees, even though the mutual fund charged ongoing fees. Additionally, Respondent stated that that the customer "already lost 30%" by holding cash, without providing a basis for calculation. In addition, Respondent stated that he was "certain" the customer would make "plenty of money" before retirement and that the customer's investment should "double." These statements were false, exaggerated, unwarranted, promissory and/or misleading. 

Therefore, Respondent violated FINRA Rules 2210(d)(1)(B) and 2010.

. . .

During the relevant period, LPL's written supervisory procedures required that representatives use an LPL-approved application when sending electronic communications related to the firm's securities business. However, as described above, during August 2021, Respondent exchanged text messages related to securities business with the Customer using his personal cell phone and outside of any LPL-approved application. Respondent did not provide copies of these communications to LPL. As a result, the firm did not capture or preserve these messages. 

Therefore, Respondent violated FINRA Rules 4511 and 2010.

Between August 2020 and October 2020, while associated with SA Stone, Respondent participated in private securities transactions involving investments by at least 59 individuals ("Individuals") in Company A, a company that purported to own software development and blockchain technology businesses. Specifically, Respondent discussed the private placement offering of Company A's common stock with the Individuals, told the Individuals that Respondent intended to invest in Company A's private placement, introduced the Individuals to Company A's founder, and invited the Individuals to meetings that Respondent hosted, where the founder delivered presentations regarding Company A's business and the private placement. Subsequently, the Individuals, approximately 34 of whom were SA Stone customers, invested approximately $1,475,000 in Company A's stock. Respondent did not receive selling compensation. 

Respondent did not provide prior written notice to, or receive prior written approval from, SA Stone to participate in these transactions. 

Therefore, Respondent violated FINRA Rules 3280 and 2010.

In February 2016, Sullivan entered into a Letter of Acceptance, Waiver and Consent with FINRA (AWC No. 2014039219802) to resolve allegations that, while registered with another member firm, Sullivan exercised discretion in the accounts of two customers without obtaining prior written authorization from the customers and without the approval of these accounts for discretionary trading by his member firm. Sullivan was suspended in all capacities for 10 business days and fined $5,000. 

In October 2019, Sullivan and SW Financial entered into a settlement with a customer to resolve the customer's written complaint alleging that, while registered with SW Financial, Sullivan engaged in excessive trading, unauthorized trading, unsuitable transactions, fraud, negligence, breach of contract, and breach of fiduciary duty. Sullivan contributed $14,999 to the $39,998 settlement payment to the customer. 

In December 2021, another member firm entered into a settlement with a customer to resolve the customer's arbitration claim alleging that, while registered with the member firm, Sullivan engaged in excessive trading, unauthorized trading, unsuitability, breach of contract, breach of fiduciary duty, and negligence. Sullivan did not contribute to the firm's $30,000 settlement payment to the customer.

From May 2018 through November 2019, Sullivan engaged in quantitatively unsuitable trading in four accounts of three customers. Sullivan recommended a pattern of high-cost, high-frequency, in-and-out trading in these customers' accounts. Sullivan's customers routinely followed his recommendations and, as a result, Sullivan exercised de facto control over the customers' accounts. 

From June 2019 to October 2019, Sullivan effected 33 trades in Customer A's account, resulting in a turnover rate of 20.45 and a cost-to-equity ratio of 76.55%. Sullivan's trading in Customer A's account generated total trading costs of $14,317, including $11,859 in commissions, and caused $621 in realized losses. 

From October 2018 to June 2019, Sullivan effected 45 trades in Customer B's first account, resulting in a turnover rate of 30.4 and a cost-to-equity ratio of 135.11%. Sullivan's trading in Customer B's first account generated total trading costs of $15,464, including $12,604 in commissions, and caused $19,125 in realized losses. 

From August 2018 to June 2019, Sullivan effected 37 trades in Customer B's second account, resulting in a turnover rate of 19.28 and a cost-to-equity ratio of 55.19%. Sullivan's trading in Customer B's second account generated total trading costs of $7,344, including $5,077 in commissions. This account had $343 in realized gains over this period. 

From May 2018 to August 2019, Sullivan effected 32 trades in Customer C's account, resulting in an annualized turnover rate of 12.93 and an annualized cost-to-equity ratio of 42.61%. Sullivan's trading in Customer C's account generated total trading costs of $12,572, including $10,456 in commissions, and caused $53,074 in realized losses. 

Sullivan's trading in these three customers' accounts was excessive and unsuitable given the customers' investment profiles. As a result of Sullivan's excessive trading, the customers suffered collective realized losses of $72,476, while paying total trading costs of $49,696, including commissions of $39,996. 

Therefore, Sullivan violated FINRA Rules 2111 and 2010.

• Securities Industry Commentator
• Bill Singer