Securities Industry Commentator by Bill Singer Esq

SEC Chair Gensler Speaks About Shakespeare and Hammurabi While FTX Dissolves (BrokeAndBroker.com Blog)

To Err Is Human. To Forgive Is A FINRA Fine. (BrokeAndBroker.com Blog)

DOJ RELEASES

Watertown Man Arrested in Connection with African Sports Investment Fraud Scheme (DOJ Release)

SEC RELEASES

SEC Charges Massachusetts Resident with Conducting $2 Million Fraudulent Investment Offering (SEC Release)

SEC Denies Second Whistleblower Award to Claimant

Order Determining Whistleblower Award Claims

SEC Announces Enforcement Results for FY22 / Commission filed 760 enforcement actions and recovered record $6.4 billion in penalties and disgorgement on behalf of investing public (SEC Release)

SEC Charges S&P Global Ratings with Conflict of Interest Violations (SEC Release)

"The Beatles and the Treasury Market:" Remarks Before the U.S. Treasury Market Conference SEC Chair Gary Gensler

CFTC RELEASES

LedgerX Withdraws Clearing Application (CFTC Release)

FINRA RELEASES

FINRA Fines and Suspends Rep for Forging Customer Signatures

In the Matter of Lee Ray Diedrich, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for OBA

In the Matter of Joan Ella Burgio, Respondent (FINRA AWC)

FINRA Censures and Fines Firm for Private Placement Compliance

In the Matter of Boustead Securities, LLC, Respondents (FINRA AWC)

Cybersecurity Alert - Ongoing Phishing Campaign (FINRA Alert)

Crypto Asset Communications (FINRA Release / November 2022)

Enhancing Your Compliance Practice with the FINRA Institute at Georgetown CRCP Program (FINRA Unscripted)

[T]he Second Action did not arise out of the same nucleus of operative facts as the Covered Action. The record demonstrates that the Covered Action and the Second Action involved different and unrelated parties and transactions, which Claimant concedes. The Second Action also was brought more than two years after the Covered Action. That the two enforcement proceedings allege similar violations of law does not mean that they arose from the same nucleus of operative facts.

Thank you. It's good to be here for the eighth annual U.S. Treasury Market Conference. Thank you to the conference organizers and my colleagues across the Inter-Agency Working Group on Treasury Market Surveillance (IAWG) for putting it together and issuing the latest IAWG report.

As is customary, I'd like to note that I'm not speaking on behalf of my fellow Commissioners or the SEC staff.

In March 1998, when I was an Assistant Secretary in the Department of the Treasury, I gave my first speech in public service. What was it about? The Treasury market.

I was fortunate to work with excellent colleagues on that speech, including a career public servant named Dave Monroe, then Director of Cash and Debt Management, who used to wear a different Beatles tie every day.

We had a few "hard day's night[s]"[1] working on that speech, but with "a little help from [our] friends,"[2] we described Treasury's three principal goals regarding debt management: "sound cash management," "lowest cost financing for the taxpayers," and "efficient capital markets."[3]

When you maximize the competitiveness, liquidity, and resiliency of the $24 trillion Treasury market, that lowers the cost of financing and helps American taxpayers save money. It helps the central bank administer monetary policy. It also helps the fluid functioning of our financial system, as Treasuries are the foundation of the capital markets.

Much has changed in our Treasury market since 25 years ago, "when I was younger, so much younger than today."[4] Now, a significant portion of this market is transacted and intermediated outside of commercial banks: by principal trading firms (PTFs) and hedge funds, on electronic trading platforms. Nevertheless, the three key principles we described in 1998 remain every bit as important.

We've also seen jitters in this market over the last decade: in 2014, 2019, and 2020.[5]

That's why, since the start of this Administration, the Treasury,[6] Federal Reserve Board, Federal Reserve Bank of New York, and the Securities and Exchange Commission have worked on a series of projects to enhance the competitiveness and resiliency of the Treasury market.

To enhance competition, the official sector can use tools such as promoting transparency, access, and fair playing fields.[7]

To enhance resiliency, we can address system-wide risks by closing regulatory gaps and promoting greater central clearing. Competition itself also improves resiliency because it broadens out the market.

Though no one policy could have prevented the "dash for cash" in March 2020, our goal was, and remains, to improve the smooth functioning of this market-so that, whether in good times or stress times, it can "carry that weight."[8]

Policy Projects

Today, I will review five important projects in the Treasury market.

The first two projects center on the intermediaries that provide liquidity or perform exchange-like functions in this market. These projects focus on the tools of a fair playing field, greater access, and transparency.

The second two projects deal with the central clearing and customer clearing processes. These projects rely upon the tools of access, a fair playing field, and shock absorbers to close regulatory gaps and lower interconnectedness in our market plumbing.

Finally, the fifth project focuses on post-trade transparency, an area that Under Secretary of the Treasury Nellie Liang just discussed.

Taken together, I believe that these projects would promote greater resiliency and competition, allowing more market participants to interact directly with one another, whether through anonymized all-to-all trading or otherwise.

Dealers

First, I'll turn to our project on dealers.

The Commission proposed rules intended to ensure that market participants who are in the business of providing liquidity in Treasuries or other securities-or engaging in other similar activities-are appropriately registered with the SEC, become members of a self-regulatory organization, and comply with federal securities laws and regulatory obligations.

This project is rooted in some hard lessons of the 1980s[9]-a "sad song" that we can "make better."[10] Between 1982 and 1985, a dozen government securities firms failed. Thus, in 1986, Congress enacted the Government Securities Act, which, for the first time, set up a federal regulatory regime specific to government securities dealers, brokers, and clearing.[11] Congress addressed this regulatory gap. I think it's time we make sure this gap is sealed.

Registration of government securities brokers and dealers means that market participants must, among other requirements, keep important books and records, meet minimum capital requirements, and report certain data to regulators. Not registering, in turn, leaves the system more opaque and vulnerable than it should be.

In recent decades, certain market participants, including PTFs, started participating significantly in the Treasury cash market.[12] In general, these firms play an increasingly significant liquidity-providing role in overall trading and market activity-a role traditionally performed by entities registered with the Commission.

Some of these firms are registered, but not all.

Thus, in March, we proposed to further define a "dealer" and "government securities dealer" so that PTFs and firms performing dealer-like roles register with the SEC and comply with federal securities laws and regulatory obligations.[13] I believe this lowers risk and creates a fairer playing field by supporting transparency and market integrity.

Further, the Commission unanimously voted to re-propose amendments to Rule 15b9-1 to require broker-dealer participants in our fixed-income (and equity) markets to register with the Financial Industry Regulatory Authority (FINRA).[14]

Platforms[15]

The second policy project concerns the main platforms on which Treasuries are traded.

Specifically, the Commission proposed to require platforms that provide marketplaces for Treasuries to register as broker-dealers and comply with Regulation ATS.

Reflecting the electronification of and other significant changes to platforms in recent decades, the proposal also would modernize the rules regarding the definition of an exchange. It would subject to exchange regulatory framework certain interdealer brokers (IDBs) that, for example, provide request-for-quote protocols. This update would close a regulatory gap among platforms that act like exchanges but are not being regulated like exchanges.

It also would require Treasury platforms with significant volume to comply with the Fair Access Rule. This would prohibit platforms from unreasonably prohibiting or limiting access or applying their rules for access in an unfair or discriminatory manner.

Additionally, the proposal would bring Treasury platforms with significant volume under Regulation Systems Compliance and Integrity, a rule that protects the resiliency of technology infrastructure.

All told, the proposal would provide greater resiliency and competition for activities on these platforms.

Central clearing

Third, the Commission recently proposed rules[16] that would widen the scope of transactions brought into central clearing in the Treasury markets.

Clearinghouses help lower risk in the system and promote competition in the market by sitting in the middle: as the buyer to every seller and the seller to every buyer. Otherwise, the clearing process can be a "long and winding road."[17]

I think Congress understood the importance of clearinghouses when, in 1986, they added Treasury securities to our clearing authorities.

Initially, in the 1990s, we saw a rise in the amount of Treasury securities clearing. By 2017, though, given various changes in the marketplace, only 13 percent of trades were fully centrally cleared.[18]

Reduced clearing increases system-wide risk. Currently, IDBs often are bringing just one side of the trade into central clearing if the counterparty is not also a member of the clearinghouse.[19] Broadly speaking, our proposal would require clearinghouses to ensure that their members bring in all of their repurchase agreement (repo) transactions, both legs of the transactions for IDB trades, and certain additional cash transactions.

Repos, the funding instrument for much of the debt markets, were at the center of the jitters in the Treasury market in 2019. Moreover, in the last few years, many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied.[20] For repo transactions, the scope of the proposal is broader than proposed in the cash market and would cover any repo transactions entered into by a clearinghouse member.

On the cash transactions, the proposal applies to specific categories of transactions. The proposal would bring in transactions entered into by an IDB that I just mentioned. It also would scope in trades between clearinghouse members, on the one hand, and hedge funds, levered accounts, or registered brokers-dealers on the other hand. This would help address the potential contagion risk that could flow through to the markets if a hedge fund or levered fund were unable to deliver on a transaction.

Additionally, clearinghouses need robust governance and risk management practices in order to play that shock absorbing role. That's why the Commission voted to propose rules to strengthen the governance of registered clearinghouses, particularly with respect to conflicts of interest.[21]

That's also why, going forward, I've asked staff to make recommendations for the Commission's consideration around clearinghouse recovery and wind down processes.

Customer clearing

Finally, we also have proposed three key reforms to better facilitate customer clearing in Treasuries and increase access to this market.

The first reform would strengthen the Commission's rules for clearinghouses transacting trades in Treasuries, particularly with regard to gross and net margining. Under such rules, members of a clearinghouse would no longer be able to net their customers' activity against house activity when determining margin.

As the Beatles put it, "money can't buy me love,"[22] but it can help you post margin. (Let's just say it was a missed opportunity in their lyrics.)

The second reform would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, subject to requirements designed to protect the customer margin from the broker-dealer's default while it is held at the clearinghouse. This process sometimes is referred to as rehypothecation. These rules would enhance customer protection, free up broker-dealers' resources, and improve liquidity in the Treasury markets.

The third reform would require clearinghouses to have policies and procedures designed to facilitate access to clearing services, such as through the use of customer clearing models.

Post-Trade Transparency

Finally, the Treasury, Fed, SEC, and FINRA have taken up efforts to strengthen post-trade transparency in the Treasury market.

In September, the Fed implemented a new rule requiring large banks to report transactions to the Trade Reporting and Compliance Engine (TRACE).

The Commission's re-proposed amendments to Rule 15b9-1, along with the rulemaking ensuring that PTFs are appropriately registered, also would enhance transparency, as these firms would report transaction data to TRACE.

Treasury put out a request for information on enhancements to post-trade transparency in Treasuries.[23]

Lastly, FINRA has amended its rules to enhance the transparency and timeliness of reporting in Treasuries and other sovereign debt markets.

Conclusion

In sum, nearly 25 years after my first speech on the Treasury market, I still believe those three principles I discussed are every bit as important for our collective work: sound cash management, lowest cost to taxpayers, and efficient capital markets.

I am privileged to continue to partner with my colleagues throughout the government on these efforts. I "still need [them], when I'm 64."[24] (Actually, I turned 65 last month.)

I opened this speech talking about Dave Monroe's love of the Beatles, one of the United Kingdom's greatest cultural exports.

Well, that reminds me: Across the government, we had embarked on these efforts long before the recent hiccups in the U.K. bond market. Though I'm glad Beatlemania came to our shores six decades ago, we don't want to import those types of market jitters to our shores, too.

Yes, the Treasury market is larger than the gilt market. Yes, the facts of that situation are specific to the U.K.

Still, there's a lesson here. The tremors in the U.K.'s sovereign debt market speak to the importance of building resiliency and competitiveness in the U.S. sovereign debt markets.

Fortunately, the troubles in the gilt market still "[seem] so far away."[25] Let's do what we can to keep it that way.

Thank you.

[1] See "A Hard Day's Night," available at https://www.youtube.com/watch?v=Yjyj8qnqkYI.

[2] See "With a Little Help from My Friends," available at https://www.youtube.com/watch?v=0C58ttB2-Qg.

[3] See Gary Gensler, "Assistant Secretary for Financial Markets Gary Gensler Addresses the Annual Meeting of the Bond Market Association" (March 6, 1998), available at https://home.treasury.gov/news/press-releases/rr2280.

[4] See "Help!" available at https://www.youtube.com/watch?v=2Q_ZzBGPdqE.

[5] See Gary Gensler, "Prepared Remarks at U.S. Treasury Market Conference" (Nov. 17, 2021), available at https://www.sec.gov/news/speech/gensler-us-treasury-market-conference-20211117.

[6] See "Remarks by Secretary of the Treasury Janet L. Yellen at the Securities Industry and Financial Markets Association's Annual Meeting" (Oct. 24, 2022), available at https://home.treasury.gov/news/press-releases/jy1045.

[7] See Gary Gensler, "Competition and the Two SECs" (Oct. 24, 2022), available at https://www.sec.gov/news/speech/gensler-sifma-speech-102422.

[8] See "Carry That Weight," available at https://www.youtube.com/watch?v=6B224XDJw6g.

[9] See, e.g., "How Drysdale affair almost stymied US securities market" (May 27, 1982), available at https://www.csmonitor.com/1982/0527/052737.html, and "E.S.M. Collapse: A Lesson in Safety" (March 8, 1995), available at https://www.nytimes.com/1985/03/08/business/esm-collapse-a-lesson-in-safety.html.

[10] See "Hey Jude," available at https://www.youtube.com/watch?v=mQER0A0ej0M.

[11] See Government Securities Act of 1986, available at https://www.congress.gov/bill/99th-congress/house-bill/2032.

[12] ". . . by 2014, [PTFs] represented the majority of trading activity in the futures and electronically brokered interdealer cash markets." See "Recent Disruptions and Potential Reforms in the U.S. Treasury Market:

A Staff Progress Report" (Nov. 8, 2021), prepared by staff of the IAWG, available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf.

[13] See Gary Gensler, "Statement on the Further Definition of a Dealer-Trader" (March 28, 2022), available at https://www.sec.gov/news/statement/gensler-statement-further-definition-dealer-trader-032822.

[14] See Gary Gensler, "Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership" (July 29, 2022), available at https://www.sec.gov/news/statement/gensler-proposed-amendments-exemptions-national-securities-association-072922.

[15] See Gary Gensler, "Statement on Government Securities Alternative Trading Systems" (Jan. 26, 2022), available at https://www.sec.gov/news/statement/gensler-ats-20220126.

[16] 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.

[17] See "The Long and Winding Road," available at https://www.youtube.com/watch?v=fR4HjTH_fTM.

[18] See 2021 IAWG report: ". . . the expansion of PTFs' role in the interdealer market beginning in the mid-2000s resulted in a decreasing fraction of interdealer trades being centrally cleared. In recent years, approximately one-half of interdealer cash trades (representing about one-quarter of the total cash market) have been centrally cleared, compared with central clearing of virtually all interdealer trades (representing about one-half of the total cash market) before the entry of PTFs in the interdealer market." In addition: "Overall, the Treasury Market Practices Group has estimated that 13 percent of cash transactions are centrally cleared; 68 percent are bilaterally cleared; and 19 percent involve hybrid clearing, in which one leg of a transaction on an IDB platform is centrally cleared and the other leg is bilaterally cleared."

[19] Ibid.

[20] As a recent G30 report put it, "In principle, if all repos were centrally cleared, the minimum margin requirements established by FICC would apply marketwide, which would stop competitive pressures from driving haircuts down (sometimes to zero), which reportedly has been the case in recent years." See Group of 30 Working Group on Treasury Market Liquidity, "U.S. Treasury Markets: Steps Toward Increased Resilience" (2021), available at https://group30.org/publications/detail/4950. In addition, as a 2021 Federal Reserve Board report said, "Most of hedge fund repo is transacted bilaterally, with only 13.7% of the repo centrally cleared." See Federal Reserve Board Division of Research & Statistics and Monetary Affairs, "Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis" (April 2021), available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.

[21] See Gary Gensler, "Statement on Proposal to Enhance Clearing Agency Governance" (Aug. 8, 2022), available at https://www.sec.gov/news/statement/gensler-statement-proposal-enhance-clearing-agency-governance-080822.

[22] See "Can't Buy Me Love," available at https://www.youtube.com/watch?v=srwxJUXPHvE.

[23] See "Notice Seeking Public Comment on Additional Transparency for Secondary Market Transactions of Treasury Securities," available at https://home.treasury.gov/system/files/136/RFI-on-Treasury-Transparency-6.23.2022.pdf.

[24] See "When I'm Sixty-Four," available at https://www.youtube.com/watch?v=HCTunqv1Xt4.

[25] See "Yesterday," available at https://www.youtube.com/watch?v=wXTJBr9tt8Q.

Although Diedrich had received the firm's WSPs, he electronically signed fifteen customer names on thirty-three documents, including on thirty-one new account opening applications and two variable annuity applications. Diedrich also listed his own email address as the customer email address on eight of the account opening documents. Diedrich did not have prior permission or authority from any of the fifteen firm customers to electronically sign their names to the documents. 

By forging customer signatures, Diedrich violated FINRA Rule 2010. 

Additionally, Diedrich submitted the thirty-one new account opening applications and two variable annuity applications with forged customer signatures to the firm to be processed. Eight of the documents also listed Diedrich's own email address as the customer email address. By submitting documents with forged customer signatures and false customer email addresses, Diedrich caused the firm to create and maintain inaccurate books and records and thereby violated FINRA Rules 4511 and 2010.  

Throughout Respondent's associations with Morgan Stanley and LPL, the firms had written supervisory procedures that prohibited their associated individuals from engaging in any outside business activity unless they received prior written approval from the firms. 

Between April 2020 and May 2021, while registered and associated with Morgan Stanley, Burgio established Crane & Lotus LLC (C&L), a company she formed for the purpose of providing administrative services to a Florida-based private investment firm (Company A). In April 2020, Burgio incorporated C&L in Wyoming, was the sole owner and employee of C&L and opened a bank account in the name of C&L which she controlled. C&L provided administrative services that included reconciling trades at the direction of Company A, and ensuring Company A's vendors were paid timely. While associated with Morgan Stanley, Respondent was paid approximately $246,000 in compensation through C&L for the administrative services she provided to Company A. 

Between May 2021 and April 2022, after she became associated with LPL, Burgio continued to engage in the C&L outside business activities and provided services to Company A for which she received approximately $46,000 in compensation. In October 2021, several months after joining LPL, she finally disclosed and requested approval to engage in the activities of C&L, which LPL denied in November 2021. Burgio dissolved C&L as a corporate entity in April 2022. 

Respondent did not provide prior written notice to Morgan Stanley and LPL of her C&L outside business activities prior to engaging in them. Additionally, Respondent falsely attested on two Morgan Stanley compliance questionnaires in October 2020 and in January 2021 that she had accurately and fully disclosed her outside business activities. The attestations were false because Respondent did not disclose her outside business activities involving C&L. 

By engaging in outside business activities involving C&L without providing prior written notice to Morgan Stanley and LPL, Respondent violated FINRA Rules 3270 and 2010. 

This email is to warn member firms of an ongoing phishing campaign that involves fraudulent emails purporting to be from FINRA and using the domain name "@filling-regfinra.com". The domain of "filling-regfinra.com" is not connected to FINRA, and firms should delete all emails originating from this domain. Member firms should be aware that they may receive similar phishing emails from other domain names in addition to those identified in this Alert.

The email states:

Dear Name,

I hope all is well!

I will be your FINRA relationship manager going forward and would appreciate the opportunity to have to discuss how you work with Finra account management (reports, exams and fillings) and where FINRA fits into your practice.

As of now, my schedule is relatively tight and I need to confirm an appointment that works for you before the end of today. Please click the "book a meeting" link in my signature to select a date and time.

PS: I'm unable to respond to unscheduled calls and you may be required to authenticate your email account to confirm a booking.

I look forward to speaking soon!

Name

BOOK A MEETING

Regards,

Name

Principal Risk Monitoring Analyst

FINRA

Phone Number

FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links. FINRA has requested that the Internet domain registrar suspend services for "filling-regfinra.com"

For more information, firms should review the resources provided on FINRA's Cybersecurity topic page, including the Phishing section of our Report on Cybersecurity Practices - 2018.

Questions regarding this alert should be directed to FINRA's Cyber Analytics Unit (CAU) at cybertech@finra.org.

Note: If you would like to add or change who receives this email, please update your firm's Chief Information Security Officer (CISO) and/or Chief Compliance Officer (CCO) contacts in FINRA Gateway.

FINRA is conducting a targeted exam of firm practices regarding retail communications concerning Crypto Asset1 products and services.

Unless otherwise noted, the relevant period for each request is July 1, 2022 through September 30, 2022 (the "Relevant Period"). In addition, if your response varies over the Relevant Period, please explain the differences in your response.

1. For the Relevant period, provide all retail communications2 that were distributed or made available by the firm or its affiliate(s) on its behalf that refer to, relate to, or concern a Crypto Asset or a service involving the transaction or holding of a Crypto Asset ("Communication").

2. Provide a numbered tabular list identifying each Communication provided pursuant to Item 1 above. Within the tabular list please:

a. Include the date the Communication was first made available to the public:

b. Identify whether or not the Communication was filed with FINRA's Advertising Regulation Department. If the Communication was filed, include the FINRA Advertising Regulation reference number for the Communication;

c. Indicate whether or not each Communication provided pursuant to Item 1 was approved by a registered principal of the firm. If so, provide the date of approval in the tabular list and provide separately records that reflect such approvals; and

d. Identify each Crypto Asset and/or service involving the transaction or holding of a Crypto Asset that the Communication refers to, relates to, or concerns.

3. Provide the firm's written supervisory procedures concerning the review, approval, record keeping and dissemination of Communications in effect for any portion of the Relevant Period.

4. Provide any compliance policies, manuals, training materials, compliance bulletins, and any other written guidance in effect for any portion of the Relevant Period concerning Communications.

5. Provide any contracts or other written agreements in place between the firm and any affiliate concerning:

a. The firm's creation or dissemination of Communications on behalf of the affiliate or concerning services offered by the affiliate; and

b. The affiliate's use of information concerning the firm's customers to determine who will receive Communications.

= = =

1 "Crypto Asset" means an asset that is issued or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called "virtual currencies," "coins," and "tokens." A Crypto Asset may or may not meet the definition of a "security" under the federal securities laws, provided, however, that the term "Crypto Asset" shall not include a security registered under the Securities Act and transferred through the system of a registered clearing agency.

2 "Retail Communication" is defined in FINRA Rule 2210(a)(5) as "any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period."  In addition to written communications, video, social media, mobile applications, and websites generally fall into this communications category.

The Securities and Exchange Commission today announced that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or "stand alone," enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 "follow-on" administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC's stand-alone enforcement actions in fiscal year 2022 ran the gamut of conduct, from "first-of-their-kind" actions to cases charging traditional securities law violations.

Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and up from $3.852 billion in fiscal year 2021. Of the total money ordered, civil penalties, at $4.194 billion, were also the highest on record. Disgorgement, at $2.245 billion, decreased by 6 percent from fiscal year 2021. Fiscal year 2022 was the SEC's second highest year ever in whistleblower awards, in terms of both the number of individuals awarded and the total dollar amounts awarded.

From March 2018 through March 2020, Boustead's WSPs required the use of new account forms to collect and record customer and investment profile information, but Boustead did not enforce this procedure with respect to certain customers in certain private placement offerings. In practice, Boustead did not require the use of new account forms for customers participating in private placements. Instead, the firm collected customer information through other methods such as an issuer-specific subscription agreement, the registration process conducted through an affiliated crowd funding portal, or an accredited investor questionnaire. The firm's WSPs did not address the collection of customer information through a crowd funding portal and did not provide any guidance as to the content of subscription agreements or accredited investor questionnaires or require them to solicit any specific customer information. In each sampled private placement transaction for this period, Boustead failed to collect at least one component of the customer and investment profile information required by Exchange Act Rule 17a-3 or FINRA Rules 4512 and 2111. 

By failing to supervise the collection and recording of required information about its customers participating in private placement offerings, including not enforcing its WSPs, Boustead violated FINRA Rule 3110. By failing to collect and record required customer information, Boustead violated Exchange Act Rule 17a-3 and FINRA Rule 4512. By violating those rules, Boustead also violated FINRA Rule 2010. 

. . .

From March 2018 through March 2020, Boustead's WSPs acknowledged the firm's obligation to comply with FINRA Rule 5110, but the firm did not establish any procedures to do so. For example, there was no reasonable process to ensure the firm made timely filings required by the rule. The firm did not assign an individual to be responsible for compliance with Rule 5110. In addition, although the firm authorized its outside counsel to make the filings required by Rule 5110, the firm did not have a process to ensure that its counsel or others made such filings in accordance with the rule. As a result, Boustead failed to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110. During this period, Boustead also failed to file with FINRA documents required by Rule 5110 on 19 occasions and failed to timely file with FINRA other documents required by Rule 5110 on 51 occasions, in violation of FINRA Rule 5110(b). 

By failing to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110, Boustead violated FINRA Rule 3110. By failing to file or timely file documents with FINRA required by FINRA Rule 5110, Boustead violated FINRA Rule 2010.

Re: Corrective Action Statement to Letter of Acceptance, Waiver and Consent
Boustead Securities, LLC, Matter No. 2019060735601 

Dear Ms. Betcher: 

I am responding on behalf of Boustead Securities, LLC ("Boustead") to the above-referenced Letter of Acceptance, Waiver and Consent (the "AWC"). The AWC related to two (2) issues: Boustead's collection of customer information as required by Exchange Act, Rule 17a-3, and FINRA Rules 2111 and 4512; and the filing of certain information associated with public offerings of securities as required by the corporate financing rule, FINRA Rule 5110(b). The findings in the AWC have been addressed and mitigated as explained in this Corrective Action Statement. 

This Corrective Action Statement is submitted by Boustead and does not contain factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff. 

In response to the collection of customer information, Boustead has required the use of customer relationship forms to collect and record customer and investment profile information as set forth in Boustead's WSPs. The form and content of the forms are modeled on the FINRA Account Application Template short format which contains all components of the relevant rules. Boustead has also required that at least one (1) supervisor is responsible for reviewing the account forms to ensure they are complete and provide all the information required by the Exchange Act and FINRA rules. 

In response to the corporate financing rule, Boustead revised its WSPs to provide procedures for ensuring that filings for all public offerings with which Boustead is affiliated are filed within the timeframe required by the FINRA rules. Boustead has also assigned a designated principal to be responsible for ensuring that all public offering filings are filed in compliance with FINRA Rule 5110, whether by Boustead directly, or by a duly authorized representative associated with the public offering. In order to address the violations alleged by FINRA during the investigation, Boustead also directly communicated with FINRA representatives about the public filing reports regarding accessibility and requirements for compliance with FINRA Rule 5110, including changes made by FINRA to Rule 5110 thereafter. 

The AWC does not allege that customers were harmed. Boustead reviewed all customer-related information related to the violations noted in the AWC and did not identify any customer harm. Therefore, Boustead has not contacted any prior customers to request that they provide their investment profile information on a new profile form, nor has Boustead contacted prior issuers or representatives, but it will continue to monitor customer accounts to determine if any further corrective action is necessary in the event any customer harm is found. 

I greatly appreciate your attention to this matter. Please feel free to contact me at any time if you have any questions regarding the corrective actions taken. . . .

The SEC's order finds that an issuer engaged S&P to rate a jumbo residential mortgage backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees -- employees responsible for managing the relationship with the issuer -- on several occasions attempted to pressure the S&P analytical employees -- employees responsible for evaluating and assigning the rating -- to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error. Despite sending the communications through the compliance department as required by S&P's policies and procedures at that time, some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations. The order finds that, as a result of the content, urgent nature, high volume, and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.

. . .

After discovering the circumstances surrounding the rating of the transaction, S&P self-reported the conduct at issue to the SEC, cooperated with the SEC's investigation, and took remedial steps to enhance its conflicts of interest policies and procedures.

• Securities Industry Commentator
• Bill Singer