Commission rules often focus on corporate transparency and helping investors understand how their money - their ownership stake of U.S. companies - is used. Today's rule does just that. When the Commission adopted Form N-PX in 2003, it stated that investors in mutual funds have a "fundamental right" to know how proxy votes are being cast on their behalf.[1] Today's amendments build on that foundation in a number of ways:

First, the information reported on Form N-PX will be easier to analyze, digest, and access.[2] For example, proxy votes will be broken into specific, standardized categories. Votes will be listed using the same language, and in the same order, as the issuer's form of proxy. The Form N-PX will be filed using a structured data language that will make it easier for reporting persons to prepare and submit the information accurately, increase the utility of the information submitted, and ultimately, be more readable by the end user. And, proxy voting records will be publicly available on fund websites.

Second, pursuant to the 2010 Dodd-Frank mandate, the final rule requires that certain large institutional investment managers report their proxy votes on matters of executive compensation ("say-on-pay" votes). This covers proxy votes relating to the approval of executive officer compensation, the frequency of executive compensation approval votes, and the approval of so-called "golden parachute" compensation in connection with mergers or acquisitions.

Additionally, the rule will clarify that the reported proxy disclosures should reflect a fund's securities lending activities - or, shares that were loaned out but not recalled for voting purposes. This closes what is a wide gap in the current disclosure regime,[3] which can lead to an incomplete picture of proxy voting practices.[4]

With the passage of today's amendments, investors will have better insight into fund governance of portfolio companies, which can improve shareholder value. Additionally, investors can further distinguish voting practices or share lending practices among different funds, or verify fund claims of active stewardship. The amendments will further act as a deterrent to fund advisers who might be motivated to vote corporate proxies based on their own economic or personal interests, rather than those of their investors.[5]

I started today's statement by noting transparency as an impetus behind today's rule. Well, transparency goes hand-in-hand with accountability. When investors have better information about fund proxy voting records - including information about the governance and stewardship provided by funds to their portfolio companies - those investors can better allocate their hard-earned capital in line with their goals and preferences.

***

Although it may be repetitive by now, I want to once again thank the teams in the Division of Investment Management, the Division of Economic and Risk Analysis, the Office of the General Counsel and in the Chair's and my fellow Commissioners' offices. Your hard work and acumen have led to another rule that gives shareholders important information about their investments and generally strengthens corporate democracy. Much like the Philadelphia Phillies' batters in the World Series last night, the staff keeps hitting it out of the park.[6] And, thank you to the many who provided comments on the rule proposal. The feedback we received was instrumental to my consideration of the final rule.

[1] Final Rule, Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Release Nos. 33-8188, 34-47304, IC-25922 (Apr. 14, 2003) ("2003 Adopting Release") ("[W]e continue to believe that requiring funds to disclose their complete proxy voting records will benefit investors by improving transparency and enabling fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies. . . . [R]egardless of whether all, or a majority of, investors are interested in proxy vote disclosure, we believe that fund shareholders who are interested in this information have a fundamental right to know how the fund has exercised its proxy votes on their behalf.").

[2] See generally Final Rule, Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Release Nos. 33-11131, 34-96206; IC-34745 (Nov. 2, 2022) ("Adopting Release"). As noted in the proposal underlying today's rule, current Form N-PX reports can be of formidable length, with larger fund filings exceeding 1,000 pages. The organization and language used by different funds can be disparate and inconsistent. As a result, it can be difficult and time-consuming to understand or compare funds' voting records. See Proposed Rule, Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Release Nos. 34-93169, IC-34389 (Sept. 29, 2021) at 10-12.

[3] SeeEdwin Hu, Joshua Mitts & Haley Sylvester,The Index Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff (N.Y.U. L. & Econ. Research Paper No. 20-52, 2020) ("[W]e document a substantial increase in the degree to which large institutions lend shares rather than cast votes in corporate elections.").

[4] See, e.g., Mitts, Joshua, The Price of Your Vote: Proxy Choice and Securities Lending (Oct. 11, 2021) (noting certain tradeoffs made by investors when funds and managers engage in securities lending and calling "to enhance the transparency of the securities lending market more generally").

[5] See generally Adopting Release at Sections IV.C.1.a and IV.C.2.

[6] Go Nats!

Today, the Commission adopts important enhancements to the information mutual funds, exchange-traded funds (ETFs), and certain other funds report about their voting. We also fulfill a congressional mandate in the Dodd-Frank Act requiring managers to report how they vote proxies relating to executive compensation matters. By facilitating investor access to more usable and transparent information, both of these actions strengthen the SEC's investor protection mission.

Funds are major shareholders in public companies that list on U.S. stock exchanges. The Commission estimates that, as of May of this year, over 12,000 funds with average total net assets of approximately $35 trillion were required by law to report their proxy voting.

Funds therefore play an important role in our capital markets, particularly for retail investors. In 2021, approximately 102 million individuals owned mutual funds. Millions of working families rely on these funds to meet their financial goals, fund their retirements, save for their children's education, and to build wealth.

A fund exercises its voting power on behalf of its fund investors, and those voting decisions can have a significant impact on maximizing the value of a fund's investments.

Currently, funds report those votes annually on a form filed with the Commission. Form N-PX, as it's known, serves a unique dual purpose: informing investors about whether the fund voted on a proxy and how. Most importantly, investors can use this form to monitor their fund's involvement in the governance activities of its portfolio companies. As the Commission stated in 2003 when it first adopted fund proxy reporting rules: "Investors in mutual funds have a fundamental right to know how the fund casts proxy votes on shareholders' behalf."

The current form, however, is outdated, overly lengthy, difficult to navigate, and of very limited use for comparisons across funds.

The Commission's actions today will make the information provided on Form N-PX easier to understand, and will also facilitate comparisons across funds. Improved and meaningful transparency of a fund's voting record will better enable investors to monitor their fund to ensure that it's meeting their financial needs.

The rule will also require that certain fund managers publicly disclose their proxy votes on executive compensation matters, implementing a key Dodd-Frank provision that is long overdue. Recently, the Commission adopted key Dodd-Frank Act executive compensation reforms on clawbacks and on pay vs. performance. Taken together, all of these reforms will strengthen accountability by corporate executives and enhance the decision-useful information available to investors.  

I am pleased to support the adoption of the rule and would like to thank the staff from the Division of Investment Management, and all other Commission staff involved, for their hard work on today's release.

Thank you, Chair Gensler. Director Birdthistle, congratulations on such a remarkable team. So remarkable is the team that I want to take a moment to recognize an impressive achievement by the Division of Investment Management-four rulemakings between this week's and last week's open meetings. All of these rules are substantial. I cannot overstate what a feat the teams have accomplished in an extremely compressed time period. Rulewriters' midnight oil has been burning for many months now. Complementing their work are the intense efforts of many others across the Division-including staff in DRAO and the Chief Counsel's Office charged with working with funds and advisers as they implement new rules-and across the Commission. Countless people have poured themselves into these rulemakings. The Division of Economic and Risk Analysis and the Office of General Counsel are under tremendous pressure to provide economic and legal analysis very quickly. Even if some of the policy choices embedded in these rules are not choices I would have made, I marvel at the staff's work.

If we had confined ourselves simply to implementing the Dodd-Frank mandate on say-on-pay reporting for institutional investment managers, I would have supported this rulemaking. If we had paired that additional reporting obligation with an elimination of the 2003 rule to mandate the disclosure of proxy votes for funds, I would have supported this rulemaking with great enthusiasm. Rather than eliminating the 2003 mandate, however, we are expanding it. The expansion will serve the needs of third parties eager to pressure funds to vote their way, but will harm funds and fund investors. Accordingly, I cannot support this rulemaking.

For example, the final rule will require funds to identify the subject matter of each reported voting item from a selection of standardized, but non-exclusive, categories, which we claim will facilitate easier searches and increase comparability. In response to comments, the final rule contains fewer categories and has reworked subcategories into examples within the different categories. Funds must "select all categories applicable to the matter" voted, which the adopting release claims "will further aid investors in locating useful information by allowing them to identify multiple topics that may be of interest."[1] These groupings will fail of their purpose because of the unavoidable level of subjectivity involved in classifying each voting topic. Take, for example, the "Human rights or human capital/workforce" category, which encompasses "workforce-related mandatory arbitration" and "outsourcing or offshoring," but not "environmental justice." "Responsible tax policies" belong in "Other social issues," as does "data privacy." We suggest that a proposal that ties executive compensation to a successful merger should be in both the "Compensation" and "Extraordinary transaction" categories.[2] If the merger involves a foreign entity, or a company with manufacturing facilities in a repressive country is it then also in the "Human rights or human/capital workforce" category? Will funds be able to make sense of these categories, and, if they do, will they make sense of them in the same way other funds do? What happens when today's hot topics give way to tomorrow's?[3] Since fund investors are unlikely to be poring over these vote reports, maybe it does not matter much, but funds will incur categorization costs and categorization anxiety. Rather than run the risk of being second-guessed by Exams, Enforcement, and third parties, funds likely will err on the side of caution and take the "All of the above" approach.

Just as detailed chronicling of votes will not benefit the average investor, neither will requiring funds to disclose how many shares they have decided to leave out on loan instead of voting them help investors. A clear declaration of fund voting and lending practices would cost far less and enable the few investors who are so inclined to pick funds based on their approach to recalling shares. The mandated disclosure will be granular and costly to compile with precision, but will not provide worthwhile insight into the analysis that fund managers undertake in deciding whether to recall shares. As former SEC Commissioner Elad Roisman explained when we proposed the rule, the manager undertakes "a calculus that can involve, for example, weighing how significant that company's shares are to the overall portfolio, how likely it is that the fund will influence the outcome of the vote, and what issues might be on the company's agenda in the first place."[4] The manager also takes into account lending revenue that would be forgone if the shares were recalled, a factor that likely is of greater interest to many investors than whether shares are voted or how, unless, of course, the shares are being voted to further the interests of third parties.

Judging from the limited discussion accorded to the opportunity cost of recalling lent shares, the Commission does not seem to care much about the financial costs of voting. Many commenters expressed concern that mandating a disclosure of unrecalled securities, bereft of context and a discussion of consequences, will place significant pressure on managers to recall securities to avoid negative ESG ratings.[5] Although the final rule allows managers to provide some context, the nudge to vote remains strong.

The lack of concern for the trade-offs around recalling lent securities to vote is part and parcel of a larger theme that courses through this rulemaking. Voting is presumed to be a fund's highest function. As I routinely do, I asked the following questions when reviewing this rulemaking: What problem are we trying to solve? And for whose benefit are we doing this? The release asserts confidently that the added information serves shareholders, but evidence that investors want such detailed information is scant. Third parties with an interest in pressuring funds to vote in a particular way do have an interest in the information, but should fund investors be footing the bill to make it easier for third parties to assess funds' voting patterns? This new requirement, I suggest, may turn out to be less about reporting voting practices than it is about manipulating them

The Commission is too enthusiastic about the rule's purported benefits to pay much attention to its costs. For instance, in response to commenters'[6] concerns that some custodians do not provide the information managers will need to report the number of unrecalled securities, we suggested that disadvantaged managers engage their custodians to obtain it.[7] Assuming custodians and securities lending agents are willing to provide this added service, fees will most certainly go up. Large fund managers will be able to absorb these additional costs or pass them along to clients, but smaller managers will be at a distinct disadvantage. The complicated manner in which we will assess who holds voting power also is destined to create confusion and generate costs.

Thank you again to the staff for the care that went into drafting this final rulemaking.

[1] Proposal at page 33.

[2] Id.

[3] See Comment letter from the U.S. Chamber of Commerce, December 14, 2021 ("More importantly, the SEC seems to be assuming with the Proposal that investor interests on certain issues will always revolve around topics that may have been popular during the 2020 proxy season. What if investors begin demanding that companies be

responsive to societal issues that are currently not on the SEC's radar?"), https://www.sec.gov/comments/s7-11-21/s71121-20109518-263914.pdf.

[4] See Elad Roisman, Commissioner, SEC, Statement on Proposed Changes to Asset Managers' Proxy Voting Disclosures (Sep. 29, 2021), https://www.sec.gov/news/public-statement/roisman-open-meeting-2021-09-29.

[5] See, e.g., Comment letter from Federated Hermes, December 14, 2021 ("We are concerned that the proposed rulemaking, as currently written, could act as a deterrent to securities lending because of the potential negative implications of the required disclosures on Form N-PX, even in the many cases when engaging in securities lending has been determined by the investment adviser to be in the best interests of a fund and its shareholders."), https://www.sec.gov/comments/s7-11-21/s71121-20109570-263927.pdf; Comment letter from Risk Management Association, December 14, 2021 ("In addition, we are concerned that this single data point indicating shares not recalled could be viewed in a negative light by market data firms providing ESG rankings. This could lead these firms to inappropriately compare funds based on the simple percentage of shares recalled to vote, rather than considering the full information about the decision-making process used by the manager to properly exercise their fiduciary duty to investors and to maximize shareholder value. Said differently, funds could receive a lower ESG ranking for the fact that their portfolio managers adhered to their fiduciary principles to seek to achieve maximum shareholder benefit while adhering to their fund's investment mandate."), https://www.sec.gov/comments/s7-11-21/s71121-20109561-263922.pdf.

[6] See, e.g., Comment letter from BlackRock, December 14, 2021 ("Finally, as an operational point, fund custodians are typically the primary source of data on which shares are on loan over a record date; however, the practice of

including this information with the proxy ballot currently varies. *** Absent a requirement that custodians furnish this data alongside each proxy ballot, the process of determining this information would be highly labor intensive for fund managers and impose increased administrative costs on investors, as each fund manager must determine the settled shares on loan as of the relevant record date for every position that could be voted on by a fund. While larger firms like BlackRock with sufficient technology resources could potentially compile this data, requiring such disclosure may be disadvantageous or overly burdensome for smaller firms."), https://www.sec.gov/comments/s7-11-21/s71121-20109576-263949.pdf.

[7] Proposal at page 98.

The SEC proposed  amendments to enhance how open-funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information https://www.sec.gov/rules/proposed/2022/33-11130.pdf . As alleged in part in the SEC Release:

Currently, open-end funds other than money market funds and most exchange-traded funds are required to classify the liquidity of their investments into four categories, ranging from highly liquid to illiquid. The proposal seeks to improve these funds' liquidity classifications by establishing new minimum standards for classification analyses, including some that incorporate stressed conditions, and by updating the liquidity categories to limit the extent of a fund's investments in securities that do not settle within seven days. These changes are designed to help better prepare funds for stressed conditions and prevent funds from over-estimating the liquidity of their investments. Affected funds would also be required to maintain a minimum amount of highly liquid assets of at least 10 percent of net assets to help manage stressed conditions and heightened redemption levels. These funds would publicly report certain information about their liquidity profiles to improve the availability of information about liquidity risk for investors as well as information about use of liquidity classification service providers.

In addition, the proposal would require open-end funds other than money market funds and exchange-traded funds to use a liquidity management tool called "swing pricing," which is a method to allocate costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. The proposal would also require a "hard close" for relevant funds. With a hard close, investor orders would need to be received by the fund, its transfer agent, or a registered clearing agency by the time of the fund's pricing, typically 4 p.m. ET, to receive that day's price. In addition to helping to operationalize swing pricing, a hard close would help prevent late trading of fund shares and improve order processing. The release also includes questions about alternative liquidity management tools, such as the use of liquidity fees.

Finally, the proposal would provide the Commission and investors with timelier information. As proposed, funds would be required to file portfolio and other information on Form N-PORT on a monthly basis within 30 days, with the report becoming public after 30 additional days. This change would triple the amount of information currently available to investors and would apply to all registrants that report on Form N-PORT, including most open-end funds and registered closed-end funds, with certain exceptions.

Today, the Commission will consider whether to propose amendments to enhance the liquidity risk management of open-end funds. I'm pleased to support the proposal because, if adopted, it would promote investor protection and greater resiliency for open-end funds.

A defining feature of open-end funds is the ability for shareholders to redeem their shares daily, in both normal times and times of stress. Open-end funds, though, have an underlying structural liquidity mismatch. This is because they invest in securities across a range of liquidities, including securities that are costlier or take more time to sell.

In times of stress, when many investors may redeem their shares in a fund at once, a fund might need to sell less-liquid securities quickly to generate cash. When done in volume, this can raise issues for investor protection, our capital markets, and the broader economy. We saw such systemic issues during the onset of the Covid-19 pandemic, when many investors sought to redeem their investments from open-end funds. The resulting liquidity challenges contributed to stress across our financial system.[1]

Today's proposal addresses these investor protection and resiliency challenges in four ways:

• Updating and enhancing the liquidity rule for open-end funds;
• Requiring mutual funds to use a liquidity management tool called swing pricing;
• Requiring mutual funds to make fund order processing more timely; and
• Enhancing the disclosure requirements for open-end funds.

First, today's proposal would amend the 2016 liquidity rule, making liquidity classifications more standardized and specific. In particular, this would help ensure that when funds designate an investment as highly liquid or moderately liquid, these terms have specific meanings that are applied consistently across funds. I cannot-try as I might-classify gummy bears as one of my daily servings of fruit. Similarly, under the proposal, funds would not be able to classify the liquidity of certain holdings without following objective standards.

Further, the proposed revisions to the liquidity rule establishes a minimum for the amount of highly liquid assets a fund must maintain. In addition, the proposal would broaden the scope of the assets classified as illiquid-which funds are required to limit in their portfolios. Taken together, these amendments to the liquidity rule would further enhance fund liquidity, which would reduce risk during stress times.

Second, a goal of today's proposal is to ensure that redeeming shareholders, rather than remaining shareholders, bear the cost of redemptions, particularly during stress times. To manage that, the proposal includes a liquidity management tool called "swing pricing." The release also includes questions about alternative liquidity management tools, such as the use of liquidity fees. We look forward to comments on how such liquidity management tools-both swing pricing as proposed and the alternative of using liquidity fees-could best achieve the goal that redeeming shareholders, particularly in times of stress, bear the appropriate cost associated with their redemptions.

Third, today's proposal addresses a current lag between when shareholders send in their fund order and when funds receive that critical information. Currently, shareholders who want to transact based on the 4 p.m. ET fund close must send their order prior to 4 p.m. ET. Funds, though, may not receive that information until the evening, or even in some cases the following morning. Using modern technology, I believe that we can shorten this lag. Under the proposal, funds would receive this critical information earlier. That is helpful particularly in stress times, when funds may need to sell holdings.

I think this would lower some systemic risk. I would note that there are some funds that currently use a so-called "hard close." Further, such a hard close could facilitate swing pricing if we were to adopt that aspect of our proposal. I am particularly interested in public comment on this aspect of the proposal.

Finally, today's proposal would bring investors and regulators greater transparency about funds, by requiring open-end funds to file reports monthly rather than quarterly, with each monthly report going to the public.

I think that this proposal, if adopted, would help to build resiliency for these funds. That helps investors.

I would like to thank the SEC staff involved in this proposal, particularly:

William Birdthistle, Sarah ten Siethoff, Brian Johnson, Angela Mokodean, Mykaila DeLesDernier, Rachel Kuo, Nathan Schuur, James Maclean, Michelle Beck, Holly Miller, Michael Republicano, Tim Dulaney, Trevor Tatum, Daniel Stemp, Juan Carlos Forero, Isaac Kuznits, and Guang Yang in the Division of Investment Management; Jessica Wachter, Alex Schiller, James McLoughlin, Dasha Safonova, Lauren Moore, and Charles Woodworth in the Division of Economic and Risk Analysis; Meridith Mitchell, Malou Huth, Natalie Shioji, Bob Bagnall, and Monica Lilly in the Office of the General Counsel; Song Brandon in the Division of Examinations; and Corey Schuster in the Division of Enforcement.

[1] As a report from the Financial Stability Oversight Council said about the matter: "The impact of these asset sales . . .was magnified by poor liquidity and stressed trading conditions. Open-end funds were not the sole or primary cause of market stress . . . but the size of their asset liquidations indicates that they were one of the significant contributors to this stress." https://home.treasury.gov/news/press-releases/jy0587.

The Importance of Liquidity Risk Management Programs

Mutual funds, ETFs and other open-end funds have become primary investment vehicles for the retirement and savings accounts of U.S. families.[1] Through these investments, shareholders can gain access to potentially broad and diverse portfolios easily and - relevant here - with guaranteed liquidity. Specifically, shareholders have a statutory right to receive payment within seven days upon seeking redemption of their investments (and, in some instances, even sooner).[2] Investors rely on this liquidity. As such, it is critically important that open-end funds have robust liquidity risk management programs in place. This is true in normal times, and especially important during times of market stress and volatility.

In addition to protecting shareholder redemption rights, effective liquidity risk management programs also address shareholder dilution, a problem that may arise when current fund investors bear the transaction costs of redeeming or incoming shareholders. Dilution was noted as a principal concern upon the enactment of the Investment Company Act,[3] and it remains a concern for the Commission today.

Lessons from the Recent Past

Today's proposal draws from the lessons of recent history in at least two notable ways.

First, when the Commission amended Rule 22e-4 in 2018, it stated that staff would monitor and solicit feedback on our amendments, and would evaluate at least one full year's worth of liquidity classification data.[4] Today's proposal reflects that evaluation and, among other things, amends the classification framework, "highly liquid investment" minimums, and the frequency of liquidity classifications.

Additionally, today's proposal incorporates lessons from actual times of stress. As the proposal notes, in March 2020, at the outset of the Covid-19 pandemic, most segments of open-end funds witnessed significant redemptions, and funds faced pressure to generate liquidity quickly enough to meet investor demand.[5] The release notes that this, along with other market factors, likely contributed to the dilution of fund share values. Ultimately, the Federal Reserve used its emergency powers to intervene.[6]

In light of these (and other) events, the Commission today proposes swing pricing and the hard close. Understanding that complex problems often have myriad solutions, the proposal lays out a series of alternatives to swing pricing, such as the imposition of liquidity fees or dual pricing; as well as alternatives to the hard close, such as indicative or estimated flows.

Some Questions for the Future

As the saying goes, "history does not repeat itself. . . but it often rhymes."[7] With the benefit of hindsight, and looking toward the future, I am cognizant that we are not the only participants in this history lesson. We are also not the only ones who may have observations to draw from the events of March 2020 or from the implementation of Rule 22e-4. So, as the proposal does, I look forward to your careful consideration of the following:

• In applying swing pricing to all open-end funds other than ETFs and money market funds, does today's proposal have unintended consequences for the mutual fund market?
• The proposal observes that there may be significant operational challenges involved in effecting the hard close, potentially for retirement plans in particular. Are those challenges surmountable and at what cost?
• Are swing pricing and a hard close the best tools we have available to address dilution and liquidity in times of stress? If not, are the alternatives discussed in the release - such as imposing liquidity fees or relying on estimated fund flow information - sufficiently precise and palatable to meet our stated goals?

I want to recognize and applaud the staff involved in crafting this proposal. You have been thoughtful and responsive in considering many options and alternatives to addressing the potential concerns laid out today. So a resounding thank you to the staff in the Division of Investment Management, Division of Economic and Risk Analysis, the Office of the General Counsel, and the staff in the Chair's office and the offices of my fellow Commissioners. With that, I support today's rule proposal.

[1] Investment Company Institute 2022 Fact Book (noting, among other statistics, that 62.2 million U.S. households, and 108.1 million individuals, own U.S. registered funds; and that mutual funds made up approximately 58% of defined contribution retirement plans and 45% of IRA assets).

[2] 15 U.S.C. § 80a-22 (providing that registered investment companies must deliver payment upon redemption no later than seven days following the tender of such security). Open-end funds redeemed through broker-dealers must meet redemption requests within two business days. 17 C.F.R. 240.15c6-1. As the Commission noted when first adopting the Liquidity Risk Management Program Rule, "Redeemability is a defining feature of open end investment companies." Adopting Release, Investment Company Liquidity Risk Management Programs, Release Nos. 33-10233, IC-32315 (2016).

[3] Proposed Release, Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT, Release Nos. 33-11130; IC-34746 ("Proposing Release") (Nov. 2, 2022) at 7 and n. 3 (citing Investment Trusts and Investment Companies: Hearings on S. 3580 before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. (1940), at 37, 137-145).

[4] Proposing Release at 17. Rule 22e-4 requires, among other things, assessment, management, and periodic review of a fund's liquidity risk; classification of the liquidity of each of a fund's portfolio investments; and, limitations on illiquid investments.

[5] For example, in March 2020, open end funds had outflows of nearly 329.4 billion, or 1.7% of prior period assets. Overall, by the end of the month, assets in open-end funds fell approximately 17% from December 2019. Proposing Release at 23, 25.

[6] See Proposing Release at 27 and n. 55; see also Ben S. Bernake and Janet Yellen, Former Fed Chairs Bernake and Yellen testified on Covid-19 and Response to Economic Crisis, (July 17, 2020).

[7] The phrase is often attributed to Mark Twain.

Today, the Commission is proposing reforms designed to enhance the resiliency and liquidity of the $26 trillion mutual funds and exchange-traded funds (ETFs) market during periods of market stress. This proposal addresses key investor protection issues and I am pleased to support it.  

During the COVID-19 pandemic, our capital markets faced heightened volatility. Many open-end funds experienced significant outflows. In the wake of market instability, the Federal Reserve stepped in to inject liquidity into the system.

All market volatility events force us to reflect on the steps we can take to strengthen the system's resiliency and to reduce the likelihood of government bailouts. More robust liquidity risk management that ensures funds can satisfy redemption requests in the timeframe required by law is an essential component of today's reforms.

In 2016, the Commission first adopted liquidity risk management rules to reduce the risk that a fund would be unable to meet its redemption obligations and to minimize the potential dilution of shareholder interests. Those reforms were designed to address the increasingly complex and growing asset management industry. The market instability and stressed conditions at the onset of the COVID-19 pandemic tested liquidity risk management programs and revealed weaknesses that warrant our attention. 

Today's release offers several enhancements to manage a fund's liquidity during times of market stress. For instance, the proposal would require all funds to determine and maintain a minimum amount of highly liquid assets, which can help funds better meet investor redemptions. Together, these reforms would promote transparency and increased investor protection.  

I am hopeful to see robust feedback from all stakeholders, particularly on whether our proposed reforms will strengthen funds' resiliency and liquidity risk management during stressed conditions.

I would like to thank the staff in the Division of Investment Management, and other Commission staff involved, for their hard work on this proposal. 

Thank you, Mr. Chair. I cannot support even releasing this proposal for comment. At a time when so much of our rulebook is up for discussion, nobody has the bandwidth to consider properly a proposal that would fundamentally alter the way open-end funds operate, how investors interact with them, and the infrastructure surrounding them. Yet the Commission is poised to kick off such consideration today and to wrap it up early in the New Year when the sixty-day comment period ends.

Open-end funds are among the most important financial market innovations. They have been central to the financial portfolios of generations of Americans. As the proposing release notes, more than 102 million Americans owned these funds at the end of last year, and the funds were valued at $26 trillion.[1] Open-end funds make capital available to companies across the country and across the world.

In 2016, the Commission adopted a liquidity risk management rule. The Commission amended that rule in 2018, and now we are back at the drawing board with an eraser and bold marker at the ready. Our explanation for the changes being proposed is March 2020, a time of great stress across the financial markets and the broader economy. Many funds suffered outflows. The Proposing Release asserts that shareholders who remained in the funds suffered as the funds' liquid assets were depleted and other assets had to be sold to meet redemptions. This one month taught us, the Release suggests, that open-end funds are a threat to long-term investors and--channeling our friends at the Financial Stability Oversight Council--financial stability. The proposed remedy is an overhaul of our liquidity regime, the institution of mandatory swing-pricing, and a hard close to support swing pricing.

Among the proposed changes are shifting the liquidity buckets, requiring funds to assume a stressed trade size of 10% of each of the fund's portfolio investments when determining liquidity, establishing fixed standards for determining significant market value impact, and requiring funds to classify their portfolio investments each business day, instead of monthly.

And then there is mandatory swing pricing. . . . This part of the proposal is stunning in light of the stone-cold reception the proposal to require swing pricing for money-market funds received. They, along with exchange-traded funds ("ETFs") get a pass in this proposal. The stated aim of swing pricing is to reduce dilution of non-transacting fund shares and lower potential first-mover advantages, especially when the market is volatile.

The 2016 liquidity reforms gave US registered open-end funds the authority to use swing pricing,[2] but they have not used it. The Commission has decided that swing pricing is just too valuable a tool to leave unused at the bottom of the junk drawer, and looks to Europe for encouragement. The Commission finds confidence in Europe's experience with swing pricing. Swing pricing, however, is voluntary there and we have different "intermediary structures between funds and their investors,"[3] different "regulatory frameworks and investor base,"[4] and "the European mutual fund sector does not depend as much as the U.S. mutual fund sector on pension plans."[5]

Since industry has failed to make the changes to allow for swing pricing's implementation in the US, the Commission will simply have to do the job for them by instituting a hard close. At present, a fund shareholder's order to purchase or redeem shares will be executed at the current day's price if the intermediary receives the order before the fund's established time for calculating its net asset value, usually 4 o'clock eastern time. The fund might not receive the order flow information until as late as the next morning.[6] Swing pricing, however, is dependent upon the fund or one of its service providers, such as a transfer agent or a registered clearing agency, receiving order flow information prior to the establishment of that day's share price to allow the fund to determine whether to implement the swing factor, and if so, how large it should be. The Proposing Release offers a solution: "[i]ntermediaries would need to reengineer their systems to ensure disseminated order information reaches the transfer agent or Fund/SERV before 4 p.m."[7] Such a hard close would have cascading consequences; some intermediaries likely would set their own internal cut-off times -- including adopting a blanket policy of processing orders at the next day's price.[8] Retirement plan recordkeepers, the Release admits, could have a particularly rough transition.[9] It would not just be fund administrators and intermediaries who would have to alter their current practices and expectations, investors interested in securing same-day pricing would have to adjust too, but the Commission thinks it's worth it.[10]

Dilution may occur and is more likely in volatile times, but the solution we are proposing today may cost fund investors more than the dilution does. We have other options. First, investors concerned about dilution can invest in ETFs. Second, we could empower each fund to analyze, based on its own portfolio holdings and investor base, the need for anti-dilution tools and to craft the tool that would work best for it. Funds could compete for investors concerned about dilution based on the efficacy of their anti-dilution tools. The release offers several alternatives, including a simplified liquidity fee.[11] If a fund chose to implement it, a simplified liquidity fee could apply to all redemption orders and be processed as part of a transaction, without the need for the Commission to upend the current order flow regime.[12] A heterogeneous, market-driven approach would contribute to a more resilient system; funds would not all be doing exactly the same thing during volatile periods. I hope that commenters will help us think about different options for addressing dilution concerns, along with weighing in on the proposed changes.

Today's proposed amendments to the Commission's liquidity management and swing pricing rules resemble less a series of regulatory initiatives than an essay on Greek tragedy. In Poetics,[13] Aristotle painstakingly lays out and analyzes the elements of a quality Greek tragedy.[14] For example, Aristotle instructs that "A perfect tragedy should be arranged not on the simple but on the complex plan."[15] We have taken that message to heart. The hallmark of Greek tragedy is the protagonist's downfall, "brought about not by vice or depravity, but by some error or frailty."[16] The Commission's flaw is hubris-thinking we can redesign open-end funds to eliminate their purported flaws has only revealed our own. In a significant departure from Aristotle's six elements, however, it will not be the hero who suffers - the Commission will be just fine, thank you - it will be fund investors, administrators, and intermediaries who will pay the price should this tragedy unfold. Although I expect my plea will come too late, Aristotle wrote that "without action there cannot be a tragedy,"[17] so there is still time to reconsider the wisdom of proposing these measures.

As my colleagues ponder that option, I offer my thanks to the staff of the Divisions of Investment Management, Economic and Risk Analysis, and Examinations, and the Offices of the Chief Accountant and General Counsel. Although I am unable to support today's proposal, I appreciate all of the work and effort staff has expended on an extremely complex rulemaking. I am particularly grateful for the time you took to discuss my questions and concerns. As always, I look forward t

[1] Proposal at page 8.

[2] See Liquidity Rule Adopting Release supra note 7 and Investment Company Swing Pricing, Investment Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)].

[3] Proposal at page 306, note 481.

[4] Id.

[5] Proposal at page 251.

[6] Proposal at page 132.

[7] Proposal at page 144.

[8] Id.

[9] Id. (and may "need to substantially update or alter their processes and systems to accommodate the proposed hard close requirement to submit orders more quickly.").

[10] Proposal at pages 149-50 ("While we understand that investors may experience a change in how late they may transact through intermediaries that set earlier cut-off times as a result of our proposed rule, overall the proposal is intended to better protect shareholders' interests by operationalizing swing pricing to combat shareholder dilution and enhancing fund resiliency.").

[11] Proposal at pages 162-64.

[12] Id.

[13] Aristotle, The Poetics, trans. S.H. Butcher, 1902, https://www.amherst.edu/system/files/media/1812/The%252520Poetics%252520of
%252520Aristotle%25252C%252520by%252520Aristotle.pdf. ("Poetics")

[14] The six elements of tragedy are: Plot, Character, Thought, Diction, Spectacle, Song, Poetics. VIII

[15] Poetics, XIV.

[16] Poetics, XIII.

[17] Poetics, VI.

Thank you, Chair Gensler, and thank you to the staff for the presentation.

Mutual funds have been phenomenally successful as a savings tool for retail investors by offering professional money management at a low cost. The substantial regulatory protections provided by the Investment Company Act of 1940 ("Investment Company Act") help to ensure that funds are managed for the benefit of investors, including important safeguards against self-dealing, conflicts of interest, misappropriation of funds, and overreaching, as well as to ensure the disclosure of full and accurate information about funds and their sponsors.[1]

The growth of mutual funds is also an American success story. As of December 2021, mutual funds had $21 trillion under management.[2] This figure includes around $12.6 trillion of defined contribution plan and IRA assets invested in mutual funds, and 63% of American households have tax-advantaged savings.[3]

A key feature of mutual funds is the ability of an investor to redeem his or her shares on any business day, which is specifically protected by law.[4] The Commission has previously adopted a rule mandating that funds institute liquidity risk management programs, in part to facilitate shareholder redemptions in a timely matter.[5]

Today's proposals go further and are designed to: (1) revise fund liquidity determinations and classifications; (2) require more frequent reporting on Form N-PORT; (3) require swing pricing; and (4)institute a hard 4:00 pm close Eastern time for investor purchases and redemptions.

These proposals, if adopted, would dramatically alter how investors buy and sell fund shares. The proposals potentially reduce investor choice, and come with significant compliance and operational costs, which will ultimately be paid for by fund investors.

While today's proposals sensibly do not apply to exchange-traded funds ("ETFs"), the Commission may be simply accelerating an existing trend where ETFs replace mutual funds as the low cost choice of investors.[6]

Retirement plan sponsors may also eliminate mutual funds as investment options due to the complexities of swing pricing and the hard 4:00 pm close. Unregulated pools such as collective investment trusts may replace mutual funds regulated under Investment Company Act - thus not only reducing investor choice but also undercutting investor protection.

The release justifies today's proposals in part because of potential shareholder dilution, concerns about late trading, and assertions that European funds successfully use swing pricing, but the underlying data is not persuasive in my opinion. The concerns appear to be more theoretical, rather than grounded in fact. For instance, the release does not provide any support for the concern that late trading is occurring or that the reforms regarding market timing adopted nearly 20 years ago are not working.[7] And while some European funds may use swing pricing, their experience does not appear analogous to ours due to the fundamental differences in our markets and retirement plan systems.

The events of March 2020, at the start of the COVID-19 pandemic, are cited in support of the proposals. The release notes there were significant redemptions, most notably with fixed-income funds. Our staff's separate analysis of this time period found, however, "though many observers have been concerned about the ability of bond funds to access liquidity to meet redemption requests during periods of market stress, these concerns did not materialize."[8]

In the end, the only convincing case of liquidity concerns is with respect to bank loan funds organized as mutual funds. Yet at the end of March 2020, bank loan assets represented only $70 billion out of $13.5 trillion in mutual fund assets.[9] Targeted changes may be appropriate for bank loan funds. Wholesale changes to how fund investors purchase and redeem their shares are not needed to address these concerns.

Funds should have sufficient liquidity and must be resilient at all times, particularly during market stress. However, costly and prescriptive regulations that provide little or no assurance of achieving those objectives neither benefit investors nor market stability. Accordingly, I cannot support today's proposals.

Nonetheless, the release also discusses some alternatives to further enhance liquidity and resiliency, which are worthy of consideration. These alternatives include liquidity fees, dual pricing, and alternatives to a hard 4:00 pm close. Thus, I look forward to public comments, especially with respect to the alternatives described.

I appreciate the efforts of the staff of the Divisions of Investment Management, and Economic and Risk Analysis, as well as the Office of the General Counsel. I also appreciate the effects of other offices that have contributed to these proposals.

Thank you.

[1] See, e.g., Division of Investment Management, Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation (May 1992) at xviii, available at https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf.

[2] Open-End Fund Liquidity Programs and Swing Pricing; Form N-PORT Reporting, Release No. 11130 (Nov. 2, 2022) ("Adopting Release"), at note 8, available at https://www.sec.gov/rules/proposed/2022/33-11130.pdf.

[3] Investment Company Institute, 2022 Fact Book, available at https://icifactbook.org/pdf/2022_factbook.pdf.

[4] 15 U.S.C. 80a-22(e).

[5] 17 CFR 270.22e-4.

[6] Conrad de Aerile, As Investors Switch to E.T.F.s, so do Investment Managers, N.Y. Times (Apr. 8, 2021, updated Oct. 18, 2021), available at https://www.nytimes.com/2021/04/08/business/mutfund/fund-stock-etf-conversion.html.

[7] Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings, Release No. 33-8048 (Apr. 9, 2004) [69 FR 22300 (Apr. 23, 2004)], available at https://www.sec.gov/rules/final/33-8408.htm.

[8] See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 2020) at 7, available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.

[9] Adopting Release, supra note 2 at text accompanying note 10.

My thanks to the Practising Law Institute and the 54th Annual Institute on Securities Regulation. As is customary, I'd like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

On May 27, 1933, when he signed the first of the federal securities laws, President Franklin Delano Roosevelt said: "This law and its effective administration are steps in a program to restore some old-fashioned standards of rectitude."[1]

For nearly 90 years since, Congress has tasked the Securities and Exchange Commission and our dedicated staff with this "effective administration."

We do this through overseeing markets, registering entities, enacting rules, examining against the rules, and enforcing those rules.

Today, I am going to focus on that final pillar: enforcement.

In the fiscal year that just ended on September 30, 2022, we filed more than 700 actions. We obtained judgments and orders totaling $6.4 billion, including $4 billion in civil penalties.

These numbers, though, tell only part of the story.

As I said a year ago, I think of the "effective administration" of our enforcement through five themes: Economic Realities, Accountability, High-Impact Cases, Process, and Positions of Trust.[2]

Economic Realities

Justice Thurgood Marshall, in describing the scope of the federal securities laws, said, "Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called."[3]

Thus, to effectuate Congress's purpose, we look to underlying economic realities regardless of the "form" or "name" of the securities, funds, or investors involved. We follow Aristotle's principle: "Treat like cases alike."

Economic realities inform every sector of our enforcement program. To use "effective administration" in my speaking time, though, let me point to a few cases from this past year.

First: If you fail to register a security as required-or to register appropriately as an investment company-you violate the securities laws, regardless of the "form" or "name" of the securities involved.

That's why, when BlockFi failed to register the offers and sales of a crypto lending product, and made materially false and misleading statements about those securities, we charged them.[4]

Second: If you improperly trade securities on inside information, you violate the securities laws, regardless of the "form" or "name" of the securities involved.

That's why, when a former Coinbase manager and others allegedly misappropriated confidential information to purchase crypto asset securities, we charged them.[5]

Finally, fraud is fraud, regardless of the types of investors you have defrauded and the types of securities used in the fraud.

That's why, when several firms-Allianz Global Investors, Archegos Capital Management, and Infinity Q Capital Management, or in some cases their executives-used complex products allegedly to defraud investors, we charged them.

If you defraud any investor-retail or institutional, sophisticated or not-you will be held accountable.[6]

Accountability

Secondly, nothing motivates what Roosevelt calls "rectitude" quite like accountability.

We use many tools to hold violators accountable-including bars and suspensions, penalties and disgorgements, injunctions and cease-and-desist orders, undertakings, admissions, criminal referrals, and allegations or findings of fact.

When it comes to accountability, the details matter.

The details mattered when we held Allianz and its senior managers accountable. A key US subsidiary of Allianz (AGI US) admitted to the wrongdoing and pleaded guilty in a parallel criminal action. We charged three senior managers, imposing injunctions on two and continuing to litigate against one. We imposed a penalty of $1 billion on the firm. Moreover, as a result of its guilty plea, AGI US no longer advises mutual funds in the United States.[7]

The details mattered when we held Boeing and its then-CEO accountable. Both misled investors about the safety of Boeing's airplanes-even as two crashed, killing 346 people. We charged the company and then-CEO for making false statements about their airplanes' safety.[8]

Make no mistake: If a company or executive misstates or omits information material to securities investors, whether in an earnings call, on social media, or in a press release, we will pursue them for violating the securities laws.

The details mattered when we filed a complaint to hold Vale S.A., a Brazilian mining company, accountable. Vale told the public that their dams were safe, all while they allegedly manipulated safety audits. Then a dam collapsed, killing 270 people.[9] We charged them for allegedly making misleading disclosures and engaging in other deceptive misconduct. Our litigation is ongoing.

Allianz, Boeing, and Vale are but a few examples of how we hold violators accountable.

High-Impact Cases

If you are a victim of fraud or any other violation of the securities laws, then the highest-impact case is the one we bring against those who wronged you.

When you, the lawyers in this room, think about high-impact cases, you likely think of a different kind of matter: cases that send a message to the markets. You write memos to your clients about them. Hopefully, market participants take notice of these high-impact cases and change behavior.

Let me highlight two recent examples.

The first relates to books and records. Since the 1930s, recordkeeping obligations have been vital to market integrity and the SEC's "effective administration."

Last year, we charged J.P. Morgan Securities for widespread failures to meet these obligations. Employees, supervisors, and even managing directors conducted, and failed to maintain, off-channel communications through WhatsApp, text messages, and personal email accounts.[10]

Cases like these have happened before.[11] Frankly, though, some market participants did not act as if they got the message. So we imposed a $125 million penalty against J.P. Morgan, nearly 10 times what we have imposed in previous similar matters. They admitted their misconduct.

We then did a sweep for similar violations. In October, we charged 16 additional financial entities for similar recordkeeping failures, all of whom admitted their misconduct, in a combined settlement of $1.1 billion.[12] We ordered undertakings against the 16 firms designed to remediate past failures and prevent future misconduct, and our investigation is ongoing.

I hope this sends a message to other registrants. Books and records matter. We will strive to ensure that penalties are not seen as the cost of doing business. We will use sweeps, initiatives, and undertakings to shape market behavior.

Second, high-impact cases aren't just the ones that have a high profile or high penalties. They also can be cases where we reward good behavior.

We rewarded good behavior with Cronos Group Inc., a Nasdaq-listed cannabis company based in Toronto.

Upon discovering material accounting errors, Cronos promptly self-reported and cooperated with our investigation. We charged the company and a former insider for the violation, but we did not impose a penalty.[13]

This should send a message: If you mess up-and people do mess up sometimes-come in and talk to us, cooperate with our investigation, and remediate your misconduct.

Process

Now, let me turn to process.

Process is about fairness: to the market, to the public, to those who are investigated, and to those who are wronged.

Process is about timeliness. I think we should work thoughtfully and expeditiously to bring matters to resolution.

Process is about working with our partners at the federal, state, and international level, as well as with self-regulatory organizations.

One recent example relates to Trevor Milton and the company he founded, Nikola Corporation.

We alleged that, among other claims, Milton misled investors by saying that Nikola had "billions and billions and billions and billions of dollars in orders."[14]

This sounds more like a botched Carl Sagan quote than a full, fair, and truthful disclosure.[15] We charged Milton and Nikola with fraud.[16] Just last month, thanks to the work of our partners at the Department of Justice, Milton was found guilty in federal court.[17]

In bringing our action against BlockFi, several state securities regulators and the North American Securities Administrators Association played a key role.

I thank all of our partners involved in matters from the recent fiscal year.[18]

Finally, process is about following the facts and the law wherever they lead. When the facts demand a fight, we are not afraid to go to court. Over the recent fiscal year, we litigated jury or bench trials in 15 cases in federal district courts. We won favorable verdicts in 12.[19]

If the facts and the law merit we do not make a case, I am comfortable with that.

Positions of Trust

Finally, to all the securities lawyers I am speaking to, you play an essential role to the clients that you counsel.

You also have a role as gatekeepers in upholding the law.

For instance, today's event takes place in the State of New York, where the state courts describe the role of attorney as a position of duty, trust, and authority, conferred by governmental authority for a public purpose.[20]

We want you to succeed in meeting these standards of rectitude.

When lawyers-or other gatekeepers, like auditors and underwriters-breach their positions of trust and violate the securities laws, we will not hesitate to take action.

During the recent fiscal year, for example, we charged an attorney for his role in an unregistered, fraudulent securities offering, and we suspended him from practicing before the SEC as an attorney.[21]

We also are litigating an action against an attorney for his alleged role in a would-be pump-and-dump scheme. In addition to other remedies, we seek an injunction to prohibit him from providing legal services regarding securities offers or sales.[22]

In June, we charged Ernst & Young (EY) for cheating by its audit professionals on its ethics exams.[23]

These are professionals whose job, amongst other important responsibilities, is to catch cheating by clients. Yet, these same professionals cheated on their ethics exams. Further, EY attorneys who were aware of the conduct failed to bring these problems to our attention despite direct requests.

What an egregious failure of the public trust. In charging EY, we imposed remedial actions and a $100 million penalty, the largest of its kind against auditors.

If issuers or registrants in our markets are relying upon them, it doesn't matter where the gatekeeper is located. This fall, we charged Deloitte-China, an audit firm who essentially asked companies to complete critical parts of their own audits, a plain violation of professional requirements. Deloitte-China abdicated their responsibility as a gatekeeper. Among other things, we imposed a $20 million penalty.[24]

We also filed actions against four underwriters-Oppenheimer & Co., BNY Mellon, TD Securities, and Jefferies LLC-charging them with failing to meet disclosure requirements when offering municipal bonds. This, too, was the first action of its kind.[25]

As I said last year, if your client is considering a course of action that takes them up to the line, keep them back from the line.[26]

Conclusion

On May 23, 1934, nearly one year after Roosevelt spoke of "standards of rectitude," he received a letter from Felix Frankfurter, his adviser who later would become a Supreme Court justice. Frankfurter wrote regarding the "effective administration" the SEC would need to succeed.

"You need administrators," Frankfurter wrote, ". . . who have stamina and do not weary of the fight, who are moved neither by blandishments nor fears, who in a word, unite public zeal with unusual capacity."[27]

That's our remarkable staff: public servants, cops on the beat, uniting public zeal with unusual capacity.

I thank them for their service. I thank them for their rectitude.

Thank you.

[1] See Franklin D. Roosevelt, "Statement on Signing the Securities Bill" (May 27, 1933), available at https://www.presidency.ucsb.edu/documents/statement-signing-the-securities-bill.

[2] See Gary Gensler, "Prepared Remarks At the Securities Enforcement Forum" (Nov. 4, 2021), available at https://www.sec.gov/news/speech/gensler-securities-enforcement-forum-20211104.

[3] See Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990).

[4] See In re BlockFi Lending LLC, Release No. 33-11029 (Feb. 14, 2022), available at https://www.sec.gov/news/press-release/2022-26.

[5] See SEC v. Wahi, et al., No. 22 Civ. 1009 (W.D. Wash.) (complaint filed July 21, 2022), available at https://www.sec.gov/news/press-release/2022-127.

[6] For the Allianz matter, see SEC v. Tournant, et al., No. 22 Civ. 4016 (S.D.N.Y.) (complaint filed May 17, 2022); In re Allianz Global Investors U.S. LLC, Release No. 34-94927 (May 17, 2022); In re Trevor L. Taylor, Release No. 34-94925 (May 17, 2022); In re Stephen G. Bond-Nelson, Release No. 34-94926 (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84.

For the Archegos matter, see SEC v. Hwang, et al., No. 22 Civ. 3402 (S.D.N.Y.) (complaint filed Apr. 27, 2022), available at https://www.sec.gov/news/press-release/2022-70.

For the Infinity Q matter, see SEC v. Velissaris, No. 22 Civ. 1346 (S.D.N.Y.) (complaint filed Feb. 17, 2022), available at https://www.sec.gov/news/press-release/2022-29.

[7] See Note 6.

[8] See In re The Boeing Company, Release No. 33-11105 (Sept. 22, 2022); In re Dennis A. Muilenburg, Release No. 33-11106 (Sept. 22, 2022), available at https://www.sec.gov/news/press-release/2022-170

[9] See SEC v. Vale S.A., No. 22 Civ. 2405 (E.D.N.Y.) (complaint filed Apr. 28, 2022), available at https://www.sec.gov/news/press-release/2022-72.

[10] See In re J.P. Morgan Securities LLC, Release No. 34-93807 (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262.

[11] See SEC v. Morgan Stanley & Co. Inc., No. 06 Civ. 882 (D.D.C.) (complaint filed May 10, 2006), available at https://www.sec.gov/news/press/2006/2006-69.htm; see In re Bank of America Securities LLC, Release No. 34-49386 (Mar. 10, 2004), available at https://www.sec.gov/news/press/2004-29.htm.

[12] See In re Barclays Capital Inc., Release No. 34-95919 (Sept. 27, 2022); In re Citigroup Global Markets Inc., Release No. 34-95920 (Sept. 27, 2022); In re BofA Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 34-95921 (Sept. 27, 2022); In re Goldman Sachs & Co. LLC, Release No. 34-95922 (Sept. 27, 2022); In re Jefferies LLC, Release No. 34-95923 (Sept. 22, 2022); In re Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC, Release No. 34-95924 (Sept. 27, 2022); In re Nomura Securities International, Inc., Release No. 34-95925 (Sept. 27, 2022); In re Credit Suisse Securities (USA) LLC, Release No. 34-95926 (Sept. 27, 2022); In re Cantor Fitzgerald & Co., Release No. 34-95927 (Sept. 27, 2022); In re Deutsche Bank Securities Inc. DWS Investment Management Americas, Inc., and DWS Distributors, Inc., Release No. 34-95928 (Sept. 27, 2022); In re UBS Financial Services Inc. and UBS Securities LLC, Release No. 34-95929 (Sept. 27, 2022), available at https://www.sec.gov/news/press-release/2022-174.

[13] See In re Cronos Group Inc., Release No. 33-11123 (Oct. 24, 2022); In re William Hilson, CPA, CA, Release No. 33-11124 (Oct. 24, 2022), available at https://www.sec.gov/news/press-release/2022-191. Without admitting or denying the SEC's findings, Cronos and Hilson offered to settle the matters by agreeing to cease and desist from future violations of the charged provisions. In addition, Cronos agreed to retain an independent compliance consultant to review, assess, and make recommendations with respect to the firm's internal control over financial reporting and internal accounting controls. Hilson agreed to a three-year officer and director bar and agreed to be suspended from appearing and practicing before the SEC as an accountant for at least three years. The Commission determined not to impose a financial penalty on Hilson in light of his consent to pay $70,000 (CAD), or approximately $54,000 (USD), to the Ontario Securities Commission for similar conduct.

[14] See SEC v. Trevor R. Milton, No. 21 Civ. 6445 (S.D.N.Y.) (complaint filed July 29, 2021), available at https://www.sec.gov/litigation/complaints/2021/comp-pr2021-141.pdf.

[15] See Carl Sagan, "Billions & Billions: Thoughts on Life and Death at the Brink of the Millennium" (June 6, 1997), available at http://www.randomhousebooks.com/books/159723/.

[16] See SEC v. Trevor R. Milton, No. 21 Civ. 6445 (S.D.N.Y.) (complaint filed July 29, 2021), available at https://www.sec.gov/news/press-release/2021-141; See also In re Nikola Corporation, Release No. 33-11018 (Dec. 21, 2021), available at https://www.sec.gov/news/press-release/2021-267.

[17] See U.S. v. Trevor Milton, No. 21 Crim. 478 (S.D.N.Y.) (indictment unsealed July 29, 2021), available at https://www.justice.gov/usao-sdny/pr/former-nikola-corporation-ceo-trevor-milton-charged-securities-fraud-scheme. See also CNBC, "Nikola founder Trevor Milton found guilty of fraud over statements he made while CEO of the EV company" (Oct. 14, 2022), available at https://www.cnbc.com/2022/10/14/nikola-nkla-founder-trevor-milton-found-guilty-of-fraud-.html.

[18] For additional examples, see SEC v. Mohamed, et al., No. 22 Civ. 3252 (N.D. Ga.) (complaint filed Aug. 15, 2022), available at https://www.sec.gov/news/press-release/2022-145; SEC v. Shah, No. 22 Civ. 3012 (S.D.N.Y.) (complaint filed Apr. 12, 2022), available at https://www.sec.gov/litigation/litreleases/2022/lr25367.htm; SEC v. Bauer, et al., No. 22 Civ. 3089 (S.D.N.Y.) (complaint filed Apr. 14, 2022) and SEC v. Calabrigo, No. 22 Civ. 3096 (S.D.N.Y.) (complaint filed Apr. 14, 2022), available at https://www.sec.gov/news/press-release/2022-62.

[19] One of the 15 trials in FY 22 was in SEC v. Henry B. Sargent, 19-cv-11416 (D. Mass). There, the jury returned a thirteenth FY 22 verdict in the SEC's favor, but a different judge of the court ruled that the trial judge's decision not to poll the jury constituted reversible error, vacating the verdict and ordering a new trial. The Commission was permitted to file an interlocutory appeal of this ruling. The Commission filed the interlocutory appeal, which is currently pending in the United States Court of Appeals for the First Circuit. See SEC v. Henry B. Sargent, App. No. 22-1596 (1st Cir.). A verdict for the SEC on any claim is treated as a win, unless it is later set aside by the trial court or on appeal.

[20] See Supreme Court of the State of New York Appellate Division: Second Judicial Department, "Orientation to the Profession" (Aug. 2006), available at https://www.nycourts.gov/courts/ad2/forms/Law%20Guardian%20handbook
/OrientationtotheProfessionProgramMaterials.pdf.

[21] See In re John W. Pauciulo, Esq., Release No. 33-11080 (July 7, 2022), available at https://www.sec.gov/enforce/33-11080-s. Without admitting or denying the SEC's findings, Pauciulo consented to an order finding that he violated the registration and antifraud provisions of Sections 5 and 17(a) of the Securities Act of 1933, and the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Pauciulo also agreed to pay a $125,000 civil penalty and consented to the imposition of a cease-and-desist order, and an order denying him the privilege of appearing or practicing before the SEC as an attorney, which includes the right to apply for reinstatement after five years.

[22] See SEC v. Coldicutt, No. 22 Civ. 274 (S.D. Cal.) (complaint filed Mar. 1, 2022), available at https://www.sec.gov/litigation/litreleases/2022/lr25338.htm.

[23] See In re Ernst & Young LLP, Release No. 34-95167 (June 28, 2022), available at https://www.sec.gov/news/press-release/2022-114.

[24] See In re Deloitte Touche Tohmatsu Certified Public Accountants LLP, Release No. 34-95938 (Sept. 29, 2022), available at https://www.sec.gov/news/press-release/2022-176.

[25] See In re TD Securities (USA) LLC, Release No. 34-95751 (Sept. 13, 2022); In re BNY Mellon Capital Markets, LLC, Release No. 34-95750 (Sept. 13, 2022); In re Jefferies LLC, Release No. 34-95749 (Sept. 13, 2022); SEC v. Oppenheimer & Co. Inc., No. 22 Civ. 7801 (S.D.N.Y.) (complaint filed Sept. 13, 2022), available at https://www.sec.gov/news/press-release/2022-161. The SEC's litigation against Oppenheimer is ongoing.

[26] See Note 2.

[27] See SEC Historical Society. https://www.sechistorical.org/collection/papers/1930/1934_05_23_Frankfurter_to_FD.pdf

Pursuant to an AWC issued in April 2020, Western consented to FINRA's findings that from October 2011 through June 2018, the firm failed to (i) timely amend the Uniform Application for Securities Industry Registration or Transfer (Form U4) for 52 registered representatives to disclose 163 liens, judgments and/or bankruptcies totaling more than $5.6 million and (ii) establish, maintain, and enforce a supervisory system reasonably designed to ensure the timely reporting of disclosable events. It was censured, fined $325,000, and ordered to obtain an independent consultant. 

Pursuant to an AWC issued in February 2018, Western consented to FINRA's findings that, among other things, from 2011 to 2015, the firm failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with its suitability obligations in connection with its representatives' sales of leveraged and inverse exchange-traded funds. It was censured, fined $125,000, and ordered to pay restitution to customers in the amount of approximately $520,000.

From April 2013 to March 2017, Western's written supervisory procedures required supervisors to review non-traded REIT investments for suitability, including whether the transactions were consistent with customers' investment objectives and other profile factors. Western's procedures also required customers to complete a non-traded REIT disclosure form but did not specify what documents to review or steps to take in conducting a suitability analysis for non-traded REITs. In practice, some supervisors reviewed only the non-traded REIT disclosure form to assess suitability. Those forms lacked important customer profile information, including the customer's age, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and financial situation, including income, liabilities, and net worth. Although that information was included on Western's new account form, the WSPs did not expressly require supervisors to review new account forms before approving non-traded REIT transactions, and some supervisors did not do so. 

Western's non-traded REIT disclosure form also contained the phrase "estimated liquidate [sic] net worth," which was neither defined nor consistent with customer profile terms that Western included on customers' new account forms. Therefore, Western's supervisors had inconsistent understandings regarding the term's meaning. Given the lack of guidance in the firm's procedures, some supervisors failed to make their own independent determination regarding whether a transaction was suitable for a particular customer, relying instead on representations made by the customer and broker on the disclosure form.

From April 2013 to March 2017, a former representative, MP, recommended 81 purchases of non-traded REITs totaling more than $7.8 million to 59 firm customers, without a reasonable basis to believe that the recommendations were suitable for any customer; and for six customers, he also had no reasonable basis to believe that the recommendations were suitable for them. 4 MP offered and sold non-traded REITs within three months of becoming associated with Western to a majority of his customers of various ages and profiles, including retirees, customers with limited financial resources, and customers with limited or no investment experience. 

The firm's supervisory system for non-traded REIT sales, as described above, was not reasonably designed to review these sales to achieve compliance with the firm's suitability obligations. In addition, red flags associated with MP and certain of his sales were not properly investigated. For example, in a number of instances MP overstated the customers' net worth information on the disclosure forms to make it appear that his recommendations were consistent with state suitability standards in California that contained a 10% concentration limit. The new account forms of certain customers, some of which had been signed on the same day or weeks apart, contained net worth and liquid net worth values significantly lower than those shown on the disclosure forms, red flags that invited further follow-up. 

In addition, other red flags involving MP's sales practices were present: MP had received several customer complaints relating to sales practice issues both prior to and while associated with Western; 19 of the 59 customers who purchased non-traded REITs through MP were 60 years or older and surrendered variable annuities to purchase the non-traded REITs; and MP engaged in a pattern of sales of non-traded REITs to his customers. In some years, MP's commissions from his non-traded REIT sales accounted for over 90 percent of his total commissions. The firm failed to take reasonable steps to investigate MP's sales practices in the face of these red flags. For instance, one of MP's customers was a retired senior who had significant liquidity needs, yet MP recommended that she invest the majority of her liquid assets into a single non-traded REIT. 

Therefore, Respondent violated NASD Rule 3010 and FINRA Rules 3110 and 2010.

. . .

Between 2015 and 2022, Western failed to report or timely report on registered representatives' Forms U4 and/or U5 approximately 45 written customer complaints, arbitrations, and/or settlements. In some instances, the delays were not significant, but in other instances, the reporting failures impeded FINRA's investigation of allegations and prevented disclosure to the investing public. For example, one set of MP's customers, a husband and wife, who purchased a non-traded REIT, complained in writing to the firm in June 2017 about unsuitable investments. The firm failed to ever amend MP's Form U4 to report the complaint (or its related settlement) on MP's Form U4. Thus, FINRA was unaware of the details of the complaint until approximately four years later, when it interviewed the customers at issue and learned of the complaint. 

Therefore, Western violated Article V, Sections 2(c) and 3(b) of FINRA's By-laws and FINRA Rules 1122 and 2010.

[F]rom 2015 through 2019, the defendants and numerous other conspirators-including a now-deceased conspirator who is referenced in the indictment as RICH4EVER4430-banded together to engage in a sophisticated cybercrime and tax fraud scheme. 

Jenkins, Michel, Propht-Francisque, Cherelus, and RICH4EVER4430 purchased on the dark web server credentials for the computer servers of Certified Public Accounting (CPA) and tax preparation firms across the country. They used those server credentials to remotely and covertly commit computer intrusions and exfiltrate the tax returns of thousands of taxpayers who were clients of those CPA and tax preparation firms. Those tax returns included the clients' names, dates of birth, Social Security numbers, and financial information.

Jenkins, Michel, Propht-Francisque, Cherelus, RICH4EVER4430, and other conspirators then partnered with Jacques, Elan, Poix, Jolteus, and others to form an enterprise through which they filed thousands of false tax returns in the names of more than 9,000 identity theft victims. 

Members of the enterprise created and operated at least six fraudulent tax preparation businesses in south Florida, and used those businesses to file many of these false tax returns. The conspirators directed the resulting tax refunds to debit cards and bank accounts that they controlled. Also, to make the businesses appear more legitimate, members of the enterprise opened bank accounts in the names of these fraudulent tax businesses to receive fake "tax preparer fees." Members of the enterprise also registered with the Internal Revenue Service (IRS) preparer tax identification numbers using the names and information of identity theft victims, to make it appear that those victims were the individuals who were filing false returns in bulk. 

In other iterations of the charged RICO conspiracy, members of the enterprise "hijacked" the IRS-issued identification numbers of CPA and tax preparation firms and used those identification numbers to file scores of additional false tax returns.  Members of the enterprise filed false self-prepared tax returns using stolen identities as well.

To obfuscate their cybercriminal conduct, the conspirators routinely used pseudonyms, opened business entities and bank accounts in the names of nominees and identity theft victims, and conducted their illicit business using dozens of different email addresses. Altogether, the enterprise claimed more than $36 million in false tax refunds over the course of approximately four years. The actual loss amount is still being calculated but is at least $4 million.

From August 2016 through August 2017, Hill-Birdsong conspired with Lamar Melhado, of the Bronx, New York, and others to defraud a Mount Laurel, New Jersey, bank. Hill-Birdsong worked inside the call center and recruited other call center employees to participate in the scheme by stealing the identities and account information of customers who called into the bank's call center. The conspirator bank employees would then take photographs or screenshots of the bank customer's account information and signatures and would send that information to Hill-Birdsong and Melhado. The conspirators then had phony identification documents made in the names of the bank customers, and used various runners to go into bank branches and make unauthorized cash withdrawals. The conspirators also used the stolen identity information to conduct unauthorized online transfers of moneys from the customer's accounts.

Between September 2017 and September 2021, Schreiber exercised discretionary trading authority when he executed at least 295 securities transactions in 27 Aegis customer accounts. The 27 customers did not provide Schreiber with prior written authorization for his use of discretion, and Aegis did not approve the accounts as discretionary accounts. 

Therefore, Schreiber violated NASD Rule 2510(b) and FINRA Rules 3260(b) and 2010. 

. . .

Between September 2017 and September 2021, Schreiber improperly marked 181 order tickets as "unsolicited" when in fact Schreiber had solicited them because he had recommended the transactions to the customers, causing Aegis to maintain inaccurate books and records with respect to these trades. 

Additionally, between July 2019 and June 2020, Schreiber used his personal e-mail address to communicate with two firm customers about securities transactions in their Aegis accounts. Schreiber did not disclose his use of his personal e-mail to Aegis, or provide the firm with copies of his electronic correspondence with the customers, causing the firm to maintain incomplete records of his business-related communications. 

Schreiber falsely stated on the Finn's 2017, 2018, 2019, 2020 and 2021 annual compliance questionnaires that he did not exercise discretionary authority in any customer accounts. Schreiber also falsely stated on the Firm's 2019, 2020 and 2021 annual compliance questionnaires that he did not use a personal e-mail address for business-related communications. 

Therefore, Schreiber violated FINRA Rules 4511 and 2010. 

Beginning in July 2017, while Warnock was employed in Raymond James' Corporate & Executive Services group, Customer A asked Warnock to prepare letters of credit to obtain financing for Customer A's business activities. Warnock's job responsibilities at the time included providing brokerage account-related services to corporate and executive customers like Customer A. However, Raymond James did not provide letters of credit to firm customers, and Warnock never sought authorization from Raymond James to sign letters of credit on behalf of the firm. 

Between December 2017 and October 2018, Warnock prepared and signed six documents that purported to be letters of credit issued by Raymond James, totaling approximately $6 million in credit, without his firm's knowledge or authorization. Warnock did not receive remuneration or otherwise profit from this conduct. Customer A provided these letters of credit to two lenders. When Raymond James discovered the unauthorized letters of credit in September 2020, it advised Customer A that the letters of credit he had provided to the lenders were not valid. Customer A then provided alternative letters of credit to the lenders. 

By executing and issuing the purported letters of credit without authorization from Raymond James, Warnock violated FINRA Rule 2010. 

[M]autone was one of five individuals who together perpetrated a scheme to convince an elderly man to invest $1 million in a fraudulent high-yield international investment scam. In July 2015, one of Mautone's co-defendants, Jared Mack, 46, of Utah, made initial contact with the victim to pitch an investment opportunity claiming to produce weekly returns of 20%. Once the victim expressed interest in the purported investment opportunity - and produced evidence he had $1 million to invest - Mack introduced him to Mautone, the supposed connection to investment "platform partner," and codefendant Olabode Olukanni, 39, of New York.

For several months, Mautone and his co-defendants maintained frequent contact with the victim and repeatedly attempted to assure him, via a series of increasingly intimidating and pressure-laden communications, of the investment opportunity's legitimacy, low risk, and promised returns. Mautone made these false representations despite knowing that others had their money stolen by his supposed Hong Kong investment partner, and despite being convicted only two years earlier of wire fraud for pitching a similar high-yield investment scam in South Carolina. 

In December 2015, following this months-long pressure campaign, the victim wired $1 million to a bank account in Dubai, United Arab Emirates, which was controlled by codefendant Rovshan Bahader Oglu Qasimov, 38, of Azerbaijan. Qasimov immediately withdrew the money and used it to purchase gold from a jewelry store in Dubai. The victim never saw his money again, nor did he receive the promised investment returns.

Santilli managed and partly owned Aloris Entertainment, LLC, which acquired an interest - through securities called "Class A Units" - in Mike's Mobile Detailing, LLC, the company that operates the "Magic Mike Live" stage show, which is based on two "Magic Mike" movies that chronicle the life of a male stripper.

From June 2016 to February 2020, Santilli raised funds from victims by soliciting investments in "Aloris Magic Mike LP," a different business that he falsely told investors owned the Class A Units. Santilli lied to investors, telling them that, in return for their investment, they would receive "shares" in Aloris Magic Mike LP that corresponded to a particular number of Class A Units and entitled them to a percentage of the profits from "Magic Mike Live." To bolster his false claims, Santilli used a doctored legal document that made it appear that Aloris Magic Mike LP was a shareholder of Mike's Mobile Detailing

Santilli misappropriated a significant portion of his victims' investments, including by withdrawing more than $1 million at casinos across the United States, where he used investors' money for gambling. To raise more funds, Santilli falsely told his victims that new investment opportunities had arisen, resulting in Santilli selling shares in his businesses that corresponded to nearly double the number of Class A Units of Mike's Mobile Detailing that his company actually owned.

In total, Santilli caused approximately $4,258,679 in losses to his victims.

[F]rom May 2019 to early January 2021, Syed Arham Arbab, 25, and five others made more than $2 million in bogus deposits from empty or underfunded bank accounts into various brokerage accounts to deceive broker-dealers into providing instant deposit credit for online securities trading. The complaint alleges that Arbab and his fellow participants, which included his high school and college friends and a relative, received more than $1.5 million in instant deposit credit that they used to make unfunded online trades, which caused affected broker-dealers to lose at least $146,660. The complaint alleges that, in some instances, Arbab's co-defendants gave Arbab their brokerage account log-in credentials so that he could personally engage in freeriding using their accounts, while, in other instances, Arbab coached such individuals in real time through text messages about how to freeride using their own accounts. Arbab allegedly conducted this scheme just before starting his prison sentence for another securities related scheme. The SEC previously charged Arbab in 2019 for running a Ponzi scheme from his fraternity house near the University of Georgia campus-for which he began serving a five-year sentence in January 2021, after he pleaded guilty in a parallel criminal case by the U.S. Attorney's Office for the Middle District of Georgia.

[(1)] Claimant's information was of great significance to the investigation, and there is a close nexus between Claimant's allegations about certain Redacted and those charges in the Covered Action; (2) Claimant provided substantial assistance by providing important documents and meeting twice with Enforcement staff; and (3) the law enforcement interests here are high, as Claimant's information led to the return of a significant amount of money to harmed investors. 

From October 2019 through February 2020, Davis forged 181 firm documents by cutting and pasting customers' signatures from previously executed documents. These documents included, among others, Broker/Dealer Change Requests, Client Information and Suitability profiles, IRA Rollover Disclosures and Acknowledgements, Change of Beneficiary forms, and IRA/ESA Distribution Requests. Although Davis' customers did not give prior permission for the use of their signatures, they authorized the activity set forth on the forms in question. 

Therefore, Davis violated FINRA Rule 2010. 

Moreover, by forging the documents identified above, Davis caused Cambridge to maintain inaccurate books and records. 

Therefore, Davis also violated FINRA Rules 4511 and 2010. 

Morgan engaged in two business activities that were outside the scope of her relationship with Royal Alliance without providing prior written notice to the firm. First, from February to April 2017, Morgan provided services to two senior Royal Alliance customers in connection with the preparation of their house for sale and their transitioning to an independent-living facility. Morgan sent the customers an invoice for her services, which the customers paid. Second, in July 2021, Morgan provided services to another Royal Alliance customer in connection with the removal of a customer's property from a duplex the customer owned and rented out to others. Morgan also sent that customer an invoice for her services, which the customer paid. 

Morgan did not disclose either of these business activities, both of which were outside of the scope of her relationship with Royal Alliance, to the firm. On the contrary, between 2017 and 2020, Morgan also completed annual compliance questionnaires for Royal Alliance in which she attested that she had disclosed all of her disclosed outside business activities when, in fact, she had not disclosed to the firm the two business activities described above. 

Therefore, Morgan violated FINRA Rules 3270 and 2010.