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The bill would require independent public audits of cryptocurrency exchanges and prevent individuals from owning the same companies, such as brokerages and tokens, to stop conflicts of interest. Crypto platforms would also have responsibilities to customers similar to banks under the federal Electronic Fund Transfer Act by requiring platforms to reimburse customers who are the victims of fraud. The bill would also strengthen the New York State Department of Financial Services’ (DFS) regulatory authority of digital assets.
The Securities and Exchange Commission today announced charges against investment adviser Pinnacle Advisors LLC for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC also charged the fund’s two independent trustees, Mark Wadach and Lawton “Charlie” Williamson, and two officers of both Pinnacle Advisors and of the fund it advised, Robert Cuculich and Benjamin Quilty, with aiding and abetting Liquidity Rule violations by the fund. A third trustee, Joseph Masella, agreed to settle charges that he caused and willfully counseled the fund’s violations.
The action is the first-ever case enforcing the Liquidity Rule, which prohibits mutual funds from investing more than 15 percent of their net assets in illiquid investments, requires funds to take certain prompt remedial steps if they hold illiquid investments above this percentage limit, and requires funds to adopt a liquidity risk management program to assess their liquidity risk.
The SEC’s complaint alleges that, from June 2019 to June 2020, the fund held approximately 21 to 26 percent of its net assets in illiquid investments. According to the complaint, Pinnacle Advisors and its officers, Cuculich and Quilty, classified the fund’s largest illiquid investment as a “less liquid” investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of fund counsel and auditors. The SEC alleges that Pinnacle Advisors and its officers did not present the fund’s board with a plan to reduce the fund’s illiquid investments to 15 percent or lower or make required filings with the SEC, as required by the Liquidity Rule. The complaint also states that Cuculich, Quilty, and Masella misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. According to the complaint, the fund’s board had oversight responsibilities regarding the fund’s Liquidity Risk Management Program, and Wadach and Williamson, who knew that the shares were restricted and illiquid, aided and abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program.
. . .
Without admitting or denying the SEC’s findings, Masella consented to an order requiring him to cease and desist from violations of the Liquidity Rule and pay a civil penalty of $20,000, and suspending him from association with any investment adviser, registered investment company, and others for six months.
The SEC also announced charges against Pinnacle Investments LLC, an affiliate of Pinnacle Advisors, for making false and misleading statements in its Form ADV brochure regarding reviews of advisory client accounts and failing to disclose certain conflicts of interests, adopt and implement related policies and procedures, and deliver to clients required information about advisory personnel. Without admitting or denying the SEC’s findings, Pinnacle Investments consented to an order requiring it to cease and desist from violations of the antifraud and other provisions of the Investment Advisers Act of 1940, a censure, and disgorgement and a civil penalty totaling approximately $476,000.
As I’ve said, in times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly.
Bill Singer's Comment: For godsakes, really??? As a 42-year veteran of Wall Street, I know better than to place any value in such misplaced assurances from regulators. Moreover, if the SEC had done its job in recent months and adopted a more vigilant, energetic pro-investor-anti-fraud posture, some of the crap that's now tanking the market might have been avoided. Then again, markets go up and down, like horses on a carousel -- which makes me wonder why Chair Gensler thought he needed to try to becalm the markets today. Mind you, this statement is coming from the Chair of the same SEC that spent years rebuffing Harry Markopolos' warnings about Bernard Madoff. Further, if SEC Chair Gensler wasted less time with dozens of new rules and rule amendments and had allocated Staff from that nonsense to enforcement, then he would not now be "focused on identifying" those whose names should have already been uncovered by the SEC. Finally, Chair Gensler's statement calms no nerves, serves no purpose, and accomplishes nothing more than undeserving publicity -- other than that, it's a wonderful statement that will go down in the annals of history along with Lincoln's Gettysburg Address.
Table 1.1.5 Average and Median Number of FINRA-Registered Representatives per Firm, 2018–2022 (Count as of year-end): For year-end 2022, on "average" 187 reps per firm versus a "median" of only 11 reps per firm. at Page 4 of FINRA Snapshot
Figure 2.1.1 Total Number of FINRA-Registered Firms, 2018−2022 (Count as of year-end): 3,378 member firms.at Page 13 of FINRA Snapshot
Table 2.1.3 Firm Distribution by Size, 2018−2022 (Count as of year-end) [Ed: percentage of 3,378 member firms] at Page 14 of FINRA Snapshot
From in or about 2013 and in or about 2019, BARBERA was the founder and CEO of Nanobeak, a privately held nanotechnology company that represented to investors that the company had developed a breathalyzer sensor technology that could detect cancer and narcotics in human breath.
From at least in or about 2013 through in or about 2020, BARBERA and others perpetrated a scheme to defraud dozens of investors out of at least approximately $7 million (i) by soliciting investments through false and misleading statements, (ii) by failing to use investors’ funds as promised, and (iii) by converting investors’ money for his own use. Specifically, BARBERA falsely represented that Nanobeak had developed a breathalyzer sensor that could detect narcotics and cancer in a person’s breath and that the company was expected to earn millions of dollars in sales revenue through distribution contracts. In truth and in fact, Nanobeak never developed the purported technology, and it was impossible for the company to generate revenue because there was no breathalyzer device to sell and, accordingly, no distribution contracts.
BARBERA also falsely represented that he had undergraduate and graduate degrees in physics from New York University, that he had a business degree from the Massachusetts Institute of Technology, and that Nanobeak would soon have an initial public offering (“IPO”), which would result in large profits to investors. In truth and in fact, the company was not close to an IPO, BARBERA was permanently barred from serving as the CEO of a public company as a result of a prior, unrelated proceeding brought by the U.S. Securities and Exchange Commission (“SEC”), and BARBERA never finished college and never attended MIT.
BARBERA converted for his own use approximately half of the investor funds raised in the form of cash withdrawals and to pay personal expenses, including private school and college tuition for his children, mortgage payments on his Central Park West apartment, and for other personal items, such as credit card bills, jewelry, automobiles, and daily living expenses.
Former Naugatuck Resident Charged with Offenses Stemming from Alleged Investment Fraud Scheme (DOJ Release) https://www.justice.gov/usao-ct/pr/former-naugatuck-resident-charged-offenses-stemming-alleged-investment-fraud-scheme In the United States District Court for the District of Connecticut, an Indictment was filed charging Rafael Muzzi with 12 counts of wire fraud and two counts of money laundering. As alleged in part in the DOJ Release:
[I]n 2017 and 2018, Muzzi, at times using two entities he formed, Solace Investments LLC and Asseno LLC, induced victim-investors to provide him funds based on the representation he would use the funds for trading currencies in foreign exchange markets using a trading software program that he told his victims he had developed. Muzzi represented to victims that his software program had a feature that would cause trading to cease in the event of a certain loss in value, thus minimizing downside risk. Muzzi failed to invest a substantial portion of invested funds as he represented, and instead diverted those funds for his own personal use, and to pay other individuals who had invested with him.
It is alleged that, through this scheme, Muzzi defrauded at least 12 victim-investors out of a total of more than $550,000.
The indictment further alleges that Muzzi sent victims fabricated monthly account statements that falsely overstated their return on investment and their account balances. These misrepresentations induced some victim-investors to provide him with additional investment funds. Muzzi also provided victims with purported tax documents reflecting fictitious investment profits, causing victims to report and pay taxes on profits that they had not realized.
As alleged in court documents, in response to victim complaints, the State of Connecticut’s Department of Banking investigated Muzzi’s conduct, issued orders finding that Muzzi and Solace Investments had violated state securities laws, ordered them to make restitution to victims, and fined Muzzi $300,000. On September 6, 2020, Muzzi traveled to Brazil and did not return.
Massachusetts and Connecticut Men Sentenced for Ponzi and Tax Fraud Schemes (DOJ Release) https://www.justice.gov/usao-ma/pr/massachusetts-and-connecticut-men-sentenced-ponzi-and-tax-fraud-schemes In the United States District Court for the District of Massachusetts, Thomas D. Renison, 69, pled guilty to one count of conspiracy to commit wire fraud and two counts of filing false tax returns; and he was sentenced to four years in prison plus three years of supervised release, and ordered to pay forfeiture of $526,120 and restitution of $6,240,983. Also, Timothy J. Allcott, 65, pled guilty to one count of conspiracy to commit wire fraud; and he was sentenced to 30 months in prison plus three years of supervised release, and ordered to pay forfeiture of $5,052,661 and restitution in the amount of $6,098,173. As alleged in part in the DOJ Release:
[I]n January 2020, the Securities and Exchange Commission (SEC) charged Allcott and Renison with fraudulently misleading investors in connection with the same conduct.
Renison was the former owner of ARO Equity LLC, a privately-held investment company that purportedly pooled money from investors and then invested it in various New England-based businesses. Between 2015 and 2018, Renison and Allcott fraudulently raised and solicited funds for ARO Equity LLC by misrepresenting to victims how their money would be invested, ARO’s investment track record and the safety of the investments. Allcott and Renison also concealed Renison’s ownership interest and affiliation with ARO because the SEC and regulators in Maine had previously barred Renison from working in the securities industry.
Over the course of the scheme, ARO took in over $6 million from investors but only invested half of that amount. Of the investments that ARO actually made, the substantial majority yielded significant losses. Despite these losses, Allcott and Renison failed to inform the victims of the poor performance of prior investments. Instead, they told the victims on many occasions that the investments were doing well and remained safe. ARO paid required monthly payments to earlier investors using funds raised from later investors.
The defendants generally told victims that ARO would use their investments to fund one of three different businesses. Instead, Renison and Allcott paid themselves exorbitant commission fees, satisfied monthly interest obligations to other investors and invested in different undisclosed businesses. As part of the scheme, Allcott and Renison disguised commissions paid to Renison as loans to Renison’s wife, which allowed them to continue to conceal Renison’s ownership stake in the company. In addition, Renison failed to declare more than half a million dollars of commission income and failed to pay over $150,000 in taxes.
The record demonstrates that Claimant 1 voluntarily provided original information to the Commission, *** and Claimant 1’s original information led to the successful enforcement of the Covered Action.The record reflects that: (1) Claimant 1’s information was significant, as it caused Enforcement staff responsible for the Covered Action (“Staff”) to expand the Investigation from REDACTED (2) Claimant 1’s information saved the Commission significant time and resources; and (3) Claimant 1 provided substantial, ongoing assistance, which included multiple written submissions, communications, and interviews. While Claimant 1’s information was important, it was submitted after the Investigation had already been opened and after Staff had already become aware of potential misconduct by the Company REDACTED Further, Claimant 1’s specific information only related to certain of the conduct that the Commission ultimately charged in the Covered Action.
. . .
Claimant 2’s information did not either (1) cause the Commission to commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation; or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action. . . .
. . .
We deny an award to Claimant 3. To qualify for an award under Section 21F of the Exchange Act, a whistleblower must voluntarily provide the Commission with original information that leads to the successful enforcement of a covered action. Claimant 3 did not provide the Commission with such information. Because Claimant 3 is not eligible for an award in the Covered Action, Claimant 3 is not eligible for an award in the Related Actions.
raised approximately $5.9 million from at least 103 investors through a fraudulent securities offering targeting members of the African-American community in Jacksonville, Florida and elsewhere.
The SEC's complaint alleges that from at least January 2020 to December 2021, Griffin lured individuals into investing in promissory notes issued by two of his companies, G8 Equity LLC and G8 RE Capital LLC, promising investors high monthly returns ranging from 10% to 33%. As alleged, Griffin represented to investors that he would use their money to purchase, rehabilitate, and resell real estate for a profit, and provide investors monthly returns from those profits. According to the SEC's complaint, Griffin did not, in fact, purchase any real estate and, instead, misappropriated investor funds and used investor funds to pay other investors their purported investment returns in Ponzi-like fashion.
SEC Charges Advisory Firm and Part-Owner for Breach of Fiduciary Duty in Connection with Use of Leveraged ETFs (SEC Release) https://www.sec.gov/news/press-release/2023-88 Without admitting or denying the findings in an SEC Order https://www.sec.gov/litigation/admin/2023/34-97427.pdf, Classic Asset Management LLC ("CAM") and its "indirect part-owner and investment adviser representative" Douglas G. Schmitz agreed to a cease-and-desist order and censures; and, further, CAM and Schmitz agreed to pay $195,228 and $738,113, respectively, in disgorgement, prejudgment interest, and civil penalties; and, finally, CAM agreed to conduct a respondent-administered distribution. As alleged in part in the SEC Release:
[F]rom at least 2017 through December 2020, CAM and Schmitz invested advisory clients in leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks, were designed to be held for no more than a single trading day, and required frequent monitoring. The order finds that CAM and Schmitz misunderstood these fundamental characteristics of the leveraged ETFs and thus lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests. Further, according to the order, CAM and Schmitz failed to appropriately monitor the performance of these products and, consequently, did not evaluate whether the leveraged ETFs were in their clients’ best interests throughout the holding period. The order also finds that CAM failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act.
FINRA Arbitration Panel Awards Customer Over $14 Million Oppenheimer & Co., Inc. in Horizon Private Equity III Lawsuit In the Matter of the Arbitration Between Jerry Willoughby, Victor Hooper, Kelly Hooper, John Disosway & Sylvia Majani, Sheri Bridges, Brian Spence, Kelly Hooper, individually, as joint tenant of the account of Betty Earle, and as sole beneficiary of Vickie L. Earle Trust, Robyn Roberts, as trustee of the Victor J. Hooper Irrevocable Trust FBO Kelly Victoria Hooper and Jeremy Hooper, Claimant, v. Oppenheimer & Co., Inc., Respondent (FINRA Arbitration Award 21-03115) https://www.finra.org/sites/default/files/aao_documents/21-03115.pdf In a FINRA Arbitration Statement of Claim filed in December 2021 and as amended, public customer Claimants asserted violations of FINRA Rules; breach of fiduciary duty; aiding and abetting breach of fiduciary duty; breach of contract and breach of the duty of good faith and fair dealing; unlawful sales of securities; and respondeat superior/agency by estoppel liability. The causes of action relate to "investments in Horizon Private Equity III." At the hearing, Claimants requested just under $7 million in compensatory damages. Respondent Oppenheimer & Co. generally denied the allegations and asserted affirmative defenses. In May 2023, Claimants filed a partial notice of settlement of the claims of Claimants K. Hooper, S. Bridges, B. Spence, K. Hooper and B. Earle and J. Hooper; and, accordingly, the FINRA Arbitration Panel made no determination with respect to any of the relief requests contained in the Statement of Claim for these Claimants. The Panel found Respondent Oppenheimer liable and order it to pay the following in:
compensatory damages plus interest:
Claimant Willoughby $2,658,518.00
Claimant V. Hooper $1,611,212.00
Claimant Disosway $1,797,936.00
Claimant Majani $220,713.00
Claimant Disosway & Majani $221,489.00
Claimant V. Hooper Trust $291,968.00
Claimant V. Earle Trust $187,866.00
compensatory damages (based upon findings of "gross negligence by failing to supervise its employees"):
Claimant Willoughby $2,658,518.00
Claimant V. Hooper $1,611,212.00
Claimant Disosway $1,797,936.00
Claimant Majani $220,713.00
Claimant Disosway & Majani $221,489.00
Claimant V. Hooper Trust $291,968.00
Claimant V. Earle Trust $187,866.00
Additionally, the Panel found Respondent Opphenheimer liable and ordered it to pay to the above Respondents costs and attorneys' fees in an amount to be determined by a court of competent jurisdiction; and an $800 reimbursement for filing fees.
Bill Singer's Comment: A jaw dropping Award! Compliments to this Panel of FINRA Arbitrators for penning a comprehensive and thoughtful Award. Kudos to Claimants' lawyers:
Plaintiff Anthony Fletcher, by and through his attorneys, Stowell & Friedman, Ltd., and Ben Crump Law, PLLC, hereby files this Complaint against Defendants Morgan Stanley & Co. LLC, Morgan Stanley Smith Barney LLC, and Morgan Stanley (collectively “Defendant,” “Morgan Stanley” or “the Firm”).
Due to decades of entrenched race discrimination, Black professionals are nearly absent from the financial advisor, management, and executive ranks at Morgan Stanley. Unable to source, hire, or retain Black talent, Morgan Stanley hired Anthony Fletcher, a highly respected and successful Black professional recruiter. But Fletcher could not escape the same racial bias faced by Morgan Stanley’s Black employees. Though Fletcher presented Morgan Stanley with candidates of all races, Morgan Stanley limited Fletcher to “diverse” hires, who the Firm paid less and hired into lower roles. Morgan Stanley excluded Fletcher from standard tools for his job, hired Fletcher’s candidates without his knowledge and behind his back, denied him commissions he earned, and paid him lower rates for his work, all because of his race. When Fletcher had the courage to report the discrimination he and his candidates faced, Morgan Stanley retaliated against him and terminated his contract.
2. Fletcher files this lawsuit to challenge Morgan Stanley’s race discrimination against himself and others and to attain a fair recovery for his losses and meaningful and lasting reforms to achieve a level playing field and equal employment opportunities for all.
Slync Founder Chris Kirchner Indicted (DOJ Release) https://www.justice.gov/usao-ndtx/pr/slync-founder-chris-kirchner-indicted In the United States District Court for the Northern District of Texas, an Indictment was filed charging Christopher Kirchner on five counts of wire fraud and eight counts of money laundering. As alleged in part in the DOJ Release:
[K]irchner – who served as Slync’s CEO from 2017 until 2022, when he was terminated by the Board of Directors due to allegations of misconduct – allegedly converted at least $25 million in investor money to his own personal use.
Records indicate that Slync raised roughly $7 million in its Series A investment round and roughly $50 million in its Series B investment round. All investor funds, which were supposed to be used for “product development and other general corporate purposes,” were wired into the company’s account at Silicon Valley Bank.
Mr. Kirchner allegedly misappropriated the investor funds in various ways: Between April 2020 and March 2022, Mr. Kirchner allegedly initiated nearly 100 wire transfers moving money from Slync’s Silicon Valley Bank account into the company’s account at JPMorgan Chase Bank – an account only he had access to. He then allegedly wired much of the money from the Chase account to his personal bank accounts. In addition, Mr. Kirchner allegedly wired $20 million directly from Slync’s Silicon Valley Bank account into his personal checking account. He used some of those funds to buy a $16 million private jet and to secure a luxury suite at the stadium of a Dallas-area professional sports team.
When Slync, drained of funds, struggled to make payroll in the spring of 2022, Mr. Kirchner allegedly attempted to replace some of the money he had allegedly misappropriated by convincing at least four investors to wire approximately $850,000 to Slync as part of a purported Series C investment round. Slync’s Board of Directors never authorized this Series C investment round.
In the meantime, Mr. Kirchner offered various explanations for Slync’s payroll issues. He first claimed that the company’s cash was invested in illiquid assets that were difficult to divest. Later, he said that the U.S. government had frozen the company’s accounts because he had transacted in his personal capacity with sanctioned entities in Russia. Neither explanation was true.
In June 2022, Mr. Kirchner allegedly fired two Slync employees who expressed concern about his management of the company. One of the employees had reported that Mr. Kirchner may have falsely exaggerated Slync’s financial performance to investors.
Immediately following his suspension by the Board in late July 2022, Mr. Kirchner removed certain IT administrator privileges from key Slync employees, preventing the employees from accessing Slync’s computer systems. He then allegedly attempted to delete approximately 18 gigabytes of Slync data, including emails.
Network of Transnational Fraudsters Indicted for Racketeering in Scheme to Steal Millions from American Consumers’ Bank Accounts (DOJ Release) https://www.justice.gov/opa/pr/network-transnational-fraudsters-indicted-racketeering-scheme-steal-millions-american In the United States District Court for the Central District of California, an Indictment was filed charging Edward Courdy; Linden Fellerman, Guy Benoit, Steven Kennedy, Sayyid Quadri, Ahmad Shoaib, John Beebe, Michael Young, Lance Johnson, Jenny Sullivan, Veronica Crosswell, and Eric Bauer and additionally charging Randy Grabeel and Debra Vogel with racketeering conspiracy. As alleged in part in the DOJ Release:
Through various members and associates, the enterprise obtained identifying and banking information for victims, and created shell entities that claimed to offer products or services, such as cloud storage. The enterprise then executed unauthorized debits against victims’ bank accounts, which it falsely represented to banks were authorized by the victims. Some of the unauthorized debits resulted in returned transactions, which generated high return rates. To both conceal and continue conducting unauthorized debits, the enterprise’s shell entities also generated “micro debits” against other bank accounts controlled and funded by or for the enterprise. The micro debits artificially lowered shell entities’ return rates to levels that conspirators believed would reduce bank scrutiny and lessen potential negative impact on the enterprise’s banking relations.
Co-conspirator Harold Sobel was previously convicted for his role in the scheme in Las Vegas federal court and sentenced to 42 months in prison. In a related civil case also filed in Los Angeles federal court, injunctive relief and settlements totaling nearly $5 million were obtained against various persons, including several who are charged in this criminal indictment.
The Try2Check platform catered to cybercriminals who purchased and sold stolen credit card numbers in bulk on the internet, offering criminals the ability to quickly determine what percentage of the cards were valid and active. As such, Try2Check was a primary enabler of the trade in stolen credit card information, processing at minimum tens of millions of card numbers every year. Today, the U.S. government worked with partners in Germany and Austria to take offline Try2Check’s websites, thus dismantling the defendant’s criminal network. Along with the indictment and global website domain takedown, the State Department has announced a $10 million reward for information leading to the capture of Kulkov, who resides in Russia.
. . .
As alleged in the indictment and other court filings, Kulkov created Try2Check in 2005, building it into a primary tool of the illicit credit card trade. Cybercriminals who acquired large batches of stolen credit cards (for example, by hacking into credit card readers at stores) ran the cards through Try2Check to determine what percentage of the stolen credit card numbers remained active. These cybercriminals then used the resulting data to show prospective buyers of the stolen credit card numbers what percentage of the cards retained their value. Try2Check victimized not only credit card issuers and holders, but also a major U.S.-based payment processing company whose systems Try2Check misused to perform the card checks.
Try2Check ran tens of millions of credit card checks per year and supported the operations of major card shops that made hundreds of millions in bitcoin in profits. Over a nine-month period in 2018, the site performed at least 16 million checks, and over a 13-month period beginning in September 2021, the site performed at least 17 million checks. Through the illegal operation of his websites, the defendant made at least $18 million in bitcoin (as well as an unknown amount through other payment systems), which he used to purchase a Ferrari, among other luxury items.
In coordination with the unsealing of the charging documents in this case, Try2Check’s websites were taken offline and the State Department issued a $10 million reward for information leading to the defendant’s capture. If convicted, Kulkov faces 20 years’ imprisonment. The charges in the indictment are allegations, and the defendant is presumed innocent unless and until proven guilty.
[B]etween July 2017 and August 2021, the defendants acted as unregistered securities dealers by privately acquiring numerous microcap stocks at a discount and subsequently publicly selling the securities to the investing public. In addition, the complaint charged the defendants with orchestrating a fraudulent scheme in which they acquired shares in microcap issuer HempAmericana, Inc. and secretly arranged for HempAmericana to use a percentage of the stock proceeds to fund stock promotions while the defendants sold their shares into the market.
[B]eginning in 2017, HD View's CEO and majority shareholder, Dennis Mancino, along with William Hirschy, orchestrated a fraudulent scheme that moved the price of HD View stock from zero to over $5 per share. According to the SEC's complaint, Cohen joined the scheme in approximately July 2017, and operated a call room in the Philippines to generate buy orders for HD View stock from unsuspecting investors in the United States. The complaint further alleges that Cohen targeted senior citizens and other potential investors he believed were susceptible to cold call solicitations. Cohen's sales pitch was that HD View had excellent growth prospects and that there was an active and rapidly rising market for its stock. In reality, HD View was a failing start-up company that was later dissolved and its stock delisted by the Commission for failure to file any financial statements after September 2017. Cohen duped investors into placing buy orders at artificially high prices that closely matched the target prices being set by Mancino and Hirschy. The orders were then routed to matching sell orders placed by brokerage accounts that Mancino or Hirschy controlled. The purpose of the scheme was to allow Mancino and Hirschy to sell their shares of HD View stock into an artificially inflated market. In turn, Cohen received commissions based on a percentage of the sales he generated.
SEC Adopts Amendments to Enhance Private Fund Reporting (SEC Release) https://www.sec.gov/news/press-release/2023-86 The SEC adopted amendments to Form PF https://www.sec.gov/rules/final/2023/ia-6297.pdf to require large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain reporting events that will include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions. As asserted in part in the SEC Release:
[L]arge hedge fund advisers must file these reports as soon as practicable, but not later than 72 hours from the occurrence of the relevant event. Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter end.
The amendments will also require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.
It has been over a year since the Commission first proposed the amendments to Form PF that we seek to adopt today.[1] And, what a difference a year makes.[2] Since the filing of the proposal, we have seen a major geopolitical crisis unfold as Russia invaded Ukraine;[3] the U.S. Federal Reserve raised interest rates by nearly 5 percent;[4] and, we have witnessed the unraveling of three regional U.S. banks and one international financial institution, compelling government intervention to stem turbulence, losses, and to promote market confidence.[5],[6]
And, in parallel during that time, U.S. private funds have taken an even more prodigious position in our markets. As Chair Gensler pointed out in a speech yesterday, advisers now report more than $25 trillion in private fund gross asset value, surpassing the banking industry.[7] And, based on the data we had one year ago as compared to the most current data we have today, in the past year alone:
The number of Form PF reported private funds increased by over 6,000;[8]
The aggregate private fund gross asset value increased by approximately $1.8 trillion;[9] and
Retirement money invested in private funds through public and private pensions went up by approximately $286 billion.[10]
Now, none of the events I note here happens in a vacuum. Our interconnected world and financial markets mean that events that benefit or stress one financial institution may impact affiliates, counterparties, competitors, joint venture partners, peers, or investment strategies that co-exist time zones away. And while some of the aforementioned current events continue to unfold, they already serve to provide valuable lessons. Perhaps most poignantly for us today—providing the right regulators with timely and critical information in times of market stress or volatility can stem the tides on a potential crisis and help prevent investor harm; and, providing regulators with the right information before times of stress can be prophylactic.
Congress has given this agency the authority to mandate that investment advisers to private funds—this multi-trillion dollar industry—provide us with information that the Commission deems “necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”[11] Congress has put tools at our disposal and we must deploy them. And, that is why I am happy to support today’s amendments.[12]
***
The utility of Form PF should not be understated. The statistics I just read on the private funds industry were brought to us courtesy of data collected on Form PF. But, of course, the utility of the material goes far beyond my brief use of these statistics in a statement. The data collected on Form PF help us assess systemic risk, market weaknesses, and potential areas for investor harm. With this information, the staff has developed valuable tools to help identify and assess market trends, such as trends relating to liquidity, borrowing, leverage, the use of derivatives and high frequency trading, and exposure to certain risky products or markets. The Commission analyzes these data to inform policy and rulemaking; to help respond to registrant, market, or geopolitical events; to make the best use of our agency’s limited resources; and, to maximize our investor protection functions. The data are also shared with FSOC for its use in the assessment of systemic risk.[13]
Today’s adoption amends Form PF to gather additional pertinent information. Large hedge fund advisers to qualifying hedge funds will have to file contemporaneous reports relating to significant events that have the potential for broad impacts or investor loss. Those events include, among others: extraordinary fund losses, significant margin and default events by funds or their counterparties, termination or material restrictions in prime brokerage relationships, the inability to satisfy withdrawals, and suspension of redemptions. We are also requiring new quarterly reporting for private equity advisers relating to their adviser-led secondary transactions and investor elections to remove a fund’s general partner or terminate the investment period or life of a fund. This new information will not only help us assess trends, but potentially provide us with a roadmap during times of crisis or significant investor harm.
As our private fund industry grows in prominence, investor confidence in the integrity and stability of this industry must grow in tandem. But integrity and stability require some oversight and built-in protections. Today’s final rule is a step in the right direction of bringing additional, much needed transparency into this outsized, but largely opaque, part of the market.
I am indebted to the team in the Division of Investment Management that worked on today’s adopting release. Thank you for your thoughtfulness, guidance and hard work on this rule. Thank you also to the industrious staff in the Division of Economic and Risk Analysis, the Office of the General Counsel, the Office of the Secretary, the Office of Information Technology, the Chair’s Office, the offices of my fellow Commissioners, and to all of the staff who contributed. I am pleased to support this adoption.
[1] See Proposing Release, Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Rel. No. IA-5950 (Jan. 26, 2022).
[2] See generally Dinah Washington, “What a Diff’rence a Day Makes,” Mercury (1959).
[3] See, Matthew Mpoke Bigg, How Russia’s War in Ukraine Has Unfolded, Month by Month, N.Y. Times (Feb. 24, 2023).
[4] See Nick Timiraos, Fed Set to Raise Interest Rates to 16-Year High and Debate a Pause, Wall St. Journal (May 1, 2023).
[5] See Michael Barbaro and Jeanna Smialek, A Third Bank Implodes. Now What?, The Daily Podcast, NY Times (May 2, 2023).
[6] Arash Massoudi, Stephen Morris, James Fontanella-Khan, Laura Noonan and Owen Walker, UBS Agrees to Buy Credit Suisse for More Than $2 Billion, Financial Times (March 19, 2023).
[7] Chair Gary Gensler, “The ‘90s: Rom-coms, the Spice Girls, & MFA:” Remarks Before the Managed Funds Association (May 2, 2023) at nn. 2-4 and accompanying text (reflecting data from Form ADV filings through March 31, 2023, including registered investment adviser GAV and exempt reporting adviser GAV, less estimated overlap).
[8] See SEC Division of Investment Management Analytics Office, Private Fund Statistics, Third Calendar Quarter 2022 (April 6, 2023) at Table 1 (comparing 2021 Q3 to 2022 Q3).
[9] Id. Table 3.
[10] Id. Table 13 (including listed values for “State/Muni. Gov’t Pension Plans” and “Pension Plans”).
[11] 15 U.S.C. § 80b-4(b)(5).
[12] Adopting Release, Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers and to Amend Reporting Requirements for Large Private Equity Fund Advisers, Rel. No. IA-6297 (May 3, 2023).
[13] U.S. Securities & Exchange Commission, Annual Staff Report Relating to the Use of Form PF Data (Dec. 9, 2022).
Today, the Commission is updating a rule adopted after the 2008 financial crisis that strengthens our ability to assess risks in the private fund industry. In response to the catastrophic damage this crisis inflicted on our country, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, a landmark law designed to promote financial stability by improving accountability and transparency.
One key part of the Dodd-Frank Act addressed gaps in information and in the monitoring of risks in the private fund industry. The Act required advisers to certain private funds to file reports confidentially with the Commission.
Proponents of the Act’s private fund framework spanned industry associations, investor advocacy organizations, and other regulatory bodies.
Since first adopting a rule in 2011 to implement that framework, the Commission and the interagency Financial Stability Oversight Council (FSOC) have gained a better view into the size, strategies, and positions of the private fund industry. With the benefit of more than a decade’s worth of data, the Commission is taking appropriate action to update the reporting framework so as to meet the needs of current market realities.
As Chair Gensler noted in a recent speech, based on recent data, investment advisers now report more than $25 trillion in private fund gross assets. Investors in private funds are not only well-resourced sophisticated investors, but also pension funds and non-profits. Behind those institutional investors are millions of families and retirement funds who deserve the protections of an updated and improved rule that is more effective for assessing potential risks to financial stability.
Today’s amendments will enhance the Commission’s and the FSOC’s ability to assess these potential risks. Form PF will now require more timely reporting of events that could be harmful to investors or to the financial system. This is precisely the type of update that best serves the public interest.
Improved visibility into certain aspects of the private fund industry will help the Commission and the FSOC better identify patterns and potential systemic risks to our capital markets. It will also help regulators take appropriate action, if necessary, to protect investors with direct and indirect exposure to this market.
The Commission’s staff in the Division of Investment Management has done an outstanding job of harnessing over 10 years’ worth of data analysis to inform today’s actions. I am pleased to support the adoption of today’s improvements to Form PF, which strengthen the Commission’s implementation of Congress’ mandate to protect our capital markets against potential threats to financial stability.
Thank you, Chair Gensler. This expansion of Form PF data collection is the latest reflection of the Commission’s unquestioning faith in the Benevolent Power of More, a faith that I do not share. We have not explained sufficiently why we need the information we are mandating and why we need it so quickly. The additional information may tempt regulators to intervene in markets in ways that would undermine long-term market resilience and exceed jurisdictional bounds. Accordingly, I cannot support the rule.
The Financial Stability Oversight Council (“FSOC”) and the SEC do need high-quality information about the markets and the firms participating in those markets, but more is not always better. Congress envisioned Form PF primarily as a tool to assist the FSOC in carrying out its systemic risk monitoring role. Today’s amendments to Form PF, despite the release’s generally unconvincing nods to systemic risk, largely appear to be an SEC compliance exercise—part of an effort to recast private fund regulation in the mold of retail fund regulation.[i]Form PF is turning into a compiler of routine events for the purpose of sweeping private fund advisers into examinations and enforcement actions.[ii]The release, for example,highlights that certain disclosures are intended to facilitate the Commission’s policing of potentially conflicted activities, such as adviser-led secondary transactions, the administration of step-downs in fees following an investor election to terminate a fund’s investment period, and clawbacks.A cynical read of this release could even find an intent to discourage certain private advisers from engaging at all in certain activities.[iii]While the SEC has a role to play in protecting private fund investors, the statutory framework intentionally gives broader latitude to private funds vis-a-vis their relationship with investors than it does to registered investment companies. Investors who want more guardrails can invest in registered funds. As we shift retail-oriented rulemaking, examination, and enforcement resources toward protecting investors in private funds, we subtly depart from the statutory model.
The expansion of Form PF requirements ironically could be harmful from a systemic risk perspective. By demanding almost real-time data about some relatively commonplace events, we send a message to the markets that the government is a back-up risk manager for funds. To the extent reporting events are triggered during real periods of stress, private fund managers should focus on managing their risks, not filling out SEC forms. Far from improving our ability to understand what is going on with private funds in times of stress, requiring funds to provide granular information on a compressed timeline on a government form could impede free-flowing, productive communication between fund advisers and the SEC.[iv]
The release hints repeatedly that timely notification of a variety of new triggering events will allow the Commission and FSOC “to assess whether any regulatory action could mitigate the potential for contagion or harm to investors.”[v]The release does not explain what such a response would entail, which is not surprising given that the SEC is neither equipped nor authorized to tell private funds how to manage their risks, let alone to rescue private funds in times of stress. All we can do is respond to discrete calls for relief from regulatory obligations. While other agencies represented at FSOC have a few more arrows in their quivers, the shaft on which they sometimes rely is bailing out private entities that did not manage their risk properly.By definition, the entities from which Form PF seeks information should not be on the bailout list. The private fund industry is dynamic precisely because advisers can enter the industry easily and cannot count on anyone to rescue them if they fail.
In addition to being out of line with its statutory purpose, the newly expanded Form PF raises additional practical implementation problems, including:
Short and operationally difficult reporting timeline.Abandoning the proposed one business day reporting requirement following certain triggering events is a positive change, but the final rule requires reporting “as soon as reasonably practicable, but no later than 72 hours upon the occurrence of the event.” The tacking on of “as soon as practicable” lessens the benefits of backing off the one-day requirement. Moreover, measuring the reporting timeline in hours instead of days suggests rather unrealistically that the onset of each of these events occurs at a precise hour in time and that funds’ reporting systems are able to capture that precise moment.
Unnecessarily short compliance period.The release adopts two compliance dates—six months for the new sections of the form and one year for the amended sections of the form—both of which are unnecessarily short given the likely need for systems redesign to capture and report newly required information.[vi]The release does not offer any substantive explanation for why such haste is necessary.
Lack of coordination with the other Form PF rulemaking.A second rulemaking that we are conducting jointly with the Commodity Futures Trading Commission, if adopted, will also amend Form PF. We should have coordinated the rules’ adoption and compliance dates.[vii]
As always, my inability to support a particular rulemaking is not a criticism of the dedicated people who drafted it.Indeed, the recommendation before us seeks to respond to comments in a number of ways, including the decision not to lower the reporting threshold for large private equity fund advisers from $2 billion to $1.5 billion, the decision not to proceed with a proposed unencumbered cash report,and the decision not to base reporting of extraordinary investment losses and margin increase on outdated NAV figures. Thank you to staff in the Divisions of Investment Management and Economic and Risk Analysis, the Office of General Counsel, and others throughout the Commission who worked on this release. I know that much time went into this release, including many hours over at least one very taxing weekend put in by Melissa Roverts Harke, Robert Holowka, Sirimal Mukerjee, Adele Kittredge Murray, Neema Nassiri-Motlagh, Jill Pritzker, David Stevens, Thomas Strumpf, Sarah ten Siethoff, and Samuel K. Thomas.
Questions:
Please walk me through the compliance dates and explain why such short timelines are needed?
Why not wait and adopt these amendments at the same time as the joint CFTC amendments?
How is a firm to calculate the 72-hour timeline if it cannot precisely pinpoint the time at which a triggering event occurred?
[i] As I have pointed out before, “the Commission’s use of Form PF information in conducting its regulatory program is ancillary to the underlying purpose of facilitating FSOC’s monitoring for systemic risk.”See,e.g., Hester M. Peirce, Commissioner, SEC, Statement on Proposed Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers (Jan. 26, 2022), https://www.sec.gov/news/statement/peirce-form-pf-20220122#_ftnref1 (citing Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)], https://www.sec.gov/rules/final/2011/ia-3308.pdf at 17 (“Form PF is primarily intended to assist FSOC in its monitoring obligations under the Dodd-Frank Act, but the Commissions may use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers.”)). Some commenters share my concern that these amendments exceed our limited statutory mandate.See,e.g., Comment letter from the Alternative Credit Council and the Alternative Investment Management Association at 15 (March 21, 2022) (stating that the new reporting requirements go beyond Congress’s mandate and the current Form PF Rule’s stated objectives to foster the Commission’s more general objectives: data collection to support examinations, and its regulatory and enforcement programs) https://www.sec.gov/comments/s7-01-22/s70122-20120606-272794.pdf (“ACA/AIMA Comment Letter”); and Comment Letter from the American Investment Council at 6 (March 21, 2022) (explaining that gathering additional information that is merely potentially useful to the SEC as a compliance monitoring tool in administering its examination and enforcement programs is not an appropriate justification for significantly expanding reporting on Form PF and is inconsistent with the primary purpose of Form PF and the intent of Congress) https://www.sec.gov/comments/s7-01-22/s70122-20120742-272896.pdf.
[ii] As one commenter pointed out, not only are “[s]econdary transactions [] part of routine private-equity-fund business, designed to provide liquidity,” “subsequent reporting” of these transactions “will not serve the Commission’s stated policy goals.” Comment letter from the Investment Adviser Association at 12 (March 21, 2022) https://www.sec.gov/comments/s7-01-22/s70122-20120729-272886.pdf. (“IAA Comment Letter”) Similarly, with respect to the requirement that large hedge fund advisers report “extraordinary investment losses,” several commenters viewed the proposed threshold of 20% as too low and not indicative of insolvency or “material stress.” See IAA Comment Letter at 8. See also ACA/AIMA Comment Letter at 20 (“Unless the extraordinary investment losses are sufficient to trigger a suspension or cause the fund to be unable to meet redemption requests in accordance with the fund’s terms, which might then cause a fire sale of the fund’s remaining assets, the investment losses should not be the concern of the Commission.”). Another commenter questioned the value of reports triggered by significant, but discrete events that affected all market participants. See Comment letter from the Managed Fund Association at 8 (March 21, 2022) (“Consider that, for a $500 million Qualifying Hedge Fund, a Section 5.B. report would be triggered at a $100 million loss. When there are market corrections or significant market events [e.g., what recently happened in the markets as a result of Russia invading Ukraine], this is generally known to all market participants, and, accordingly, may result in a large number of filings for temporary events that do not show broader market implications.”) https://www.sec.gov/comments/s7-01-22/s70122-20120683-272854.pdf.
[iii] See, e.g., Adopting Release at note 170 (“[W]e view adviser-led secondaries as presenting significant, intrinsic conflicts of interest due to their nature as fund-level conflicted transactions that often affect all investor capital in a fund.”).
[iv] The release, however, optimistically “encourage[s] engagement with Commission staff in periods of stress or otherwise.” Adopting Release at note 34.
[v] See Adopting Release at pp. 12, 110. Similar language is used in other places in the release.
[vi] See, e.g., Comment Letter from the Managed Fund Association at 5 (March 16, 2022) (“The implementation of both Proposed Rules will require a significant amount of time because they will require significant changes to advisers’ systems as well as service providers’ systems that help many advisers prepare their Form PF filings. The need to develop, build, and test those systems will require significant time, especially because the Proposed Rules significantly change and expand the scope of information required to be reported on Form PF. . . . Given the complexity of these changes and the need for the same persons at a firm to design and test the new systems, it is far more efficient and costs-effective if advisers are able to implement all of the changes to Form PF at the same time when they can consider the effects of the changes together rather than having to update their Form PF reporting system only to fundamentally rebuild it again later.”). https://www.sec.gov/comments/s7-22-22/s72222-20159964-328328.pdf. (“MFA Comment Letter – March 16, 2022”)
[vii] See MFA Comment Letter – March 16, 2022 at 6 (“[W]e believe the SEC should not adopt the February Proposed Rules and require firms to comply with the new rules prior to the Commissions jointly adopting the September Proposed Rules.”).
Thank you, Chair Gensler. Today, we are voting on the recommendation to finalize the first of two outstanding proposals to amend Form PF. When Form PF was first adopted in 2011, then-Commissioner Paredes stated that “[t]he final rule fulfills Dodd-Frank’s statutory directive to the Commission to collect information on behalf of [the Financial Stability Oversight Council (“FSOC”)], and does so in a way that reduces the compliance burden on advisers in important respects as compared to the rule the Commission initially proposed.”[1] Today’s amendments are the first step to reversing those initial, fruitful efforts at effective regulation. The amendments significantly expand the scope of the Form’s reporting requirements and increase the frequency of filings for large hedge fund advisers and private equity fund advisers. Yet the Commission fails to identify any particular need for the additional information or provide a clear picture of how the information might further the Commission’s investor protection mission.
To collect information on Form PF, the Commission relies on amendments to the Investment Advisers Act of 1940 (“Advisers Act”) made by Title IV of the Dodd-Frank Act.[2] Title IV authorizes the Commission to require private fund advisers to file reports if “necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by [FSOC].”[3] Today’s amendments invoke the need to “enhance [FSOC’s] ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts.”[4] However, the Commission’s low threshold for imposing additional reporting requirements on private fund advisers is merely that particular events “could have systemic risk implications or negatively impact investors.”[5]
In contrast to the theoretical systemic risk and investor protection concerns that these amendments are intended to address, the Adopting Release acknowledges that the amendments “will” impose additional costs, which are “most likely to be borne by private funds, and therefore by private funds’ investors.”[6] So what has changed that compels the Commission to impose new costs on fund investors? According to the Adopting Release, after a decade of analyzing Form PF data, “the Commission and FSOC identified significant information gaps and situations where more granular and timely information would improve [their] understanding of the private fund industry and the potential systemic risk within it, and improve [their] ability to protect investors.”[7] The Adopting Release fails to explain how the Commission and FSOC identified these so-called “information gaps,” how receiving more information more frequently is appropriate in light of the known costs, or how receiving this information will specifically protect investors. After all, the Commission does not have any ability to bail out these funds, and the information reported on Form PF is reported to the Commission on a confidential basis, and therefore is not useful to investors for purposes of assessing a private fund’s risk-return profile.
Though not cited in the Adopting Release, FSOC appears to base its need for more information on an analysis conducted by FSOC’s Hedge Fund Working Group in 2021,[8] which “identified gaps in the availability of data related to hedge funds.”[9] According to the minutes of the February 2022 meeting of FSOC, the working group “identified two potential financial stability risks from hedge funds: market disruptions from forced liquidations of leveraged positions, and transmission of stress to large or highly interconnected counterparties.”[10] Rather than spelling out the specific information that might address these concerns, the minutes of that meeting merely state that council members “had a discussion regarding gaps in member agencies’ data regarding hedge funds and private funds, and potential approaches to address those data gaps.”[11]
Perhaps this is why the Adopting Release for today’s amendments makes broad and sweeping references to “systemic risk” and “investor protection” without providing any specific examples of private fund failures that would have been prevented or mitigated by the additional burdens the Commission seeks to impose. Instead, the undefined terms “systemic risk” and “investor protection” are used as shields to defend a kitchen-sink data collection effort with no discernable practical purpose. Balanced against the known costs of these burdens – which the Commission expressly states will be borne by investors – the recommendation that we are considering today may be characterized as arbitrary and capricious.
Exactly what burdens does the Commission seek to impose today? First, large hedge fund advisers will need to file new current reports with respect to certain triggering events at a qualifying hedge fund. The reports must be filed as soon as practicable, but no later than 72 hours after the occurrence of the reporting event. This timeframe arguably is even shorter than the proposed timeframe of one business day, since “as soon as practicable” might be shorter than one business day. In addition, commenters stressed that the low thresholds that trigger the current reporting requirements would cause advisers to file “false positive” reports that are not indicative of systemic risk. Instead of addressing these concerns, the Adopting Release touts that the amended Form will include “check boxes” providing additional context. Apparently, these check boxes will “allow the Commission and FSOC to review and analyze the current reports and screen false positives.”[12] A careful approach to regulation crafts a reporting regime that eliminates or minimizes false positives in the first place.
These amendments also will require all private equity fund advisers to provide new information on a quarterly basis upon: (1) the execution of an adviser-led secondary transaction, or (2) an investor election to remove a fund’s general partner or to terminate a fund’s investment period or a fund itself. In addition, Section 4 of Form PF will be amended to require large private equity fund advisers to annually report on the implementation of a general partner or limited partner clawback. As with the large hedge fund reporting items, the Adopting Release struggles to provide concrete examples of how the information obtained in response to these new reporting items will be used to address systemic risk or investor protection concerns. Indeed, the Adopting Release acknowledges that certain events, such as adviser-led secondary transactions, can “indicate strength in a particular investment in certain cases.”[13]
Perhaps most glaring is the statement in the Adopting Release that adviser-led secondary transactions “may present conflicts of interest that merit timely reporting.”[14] This justification ignores the fact that the Commission separately has proposed rules that would address perceived conflicts of interest with respect to adviser-led secondary transactions.[15] Those amendments would require an adviser to obtain a fairness opinion in connection with certain adviser-led secondary transactions, which, according to that proposing release “would provide an important check against an adviser’s conflicts of interest.”[16] This serves as yet another example of the Commission’s failure to assess the cumulative impact of its numerous and overlapping proposed rules. The potential for a conflict of interest is used to justify a new reporting requirement on Form PF, while a separate rule proposal purports to mitigate that very conflict. Accordingly, the economic analysis underlying the amendments is incomplete due to the failure to account for changes that might be made by parallel rulemaking proposals.
Using the Dodd-Frank Act’s mandate regarding systemic risk and investor protection, the Commission now seeks to expand Form PF to serve as a fishing expedition on private funds, the costs of which will be passed on to fund investors. If anything, today’s amendments will serve merely as a trigger to initiate enforcement actions or targeted examinations against private funds. In the absence of any articulated need or use for this information, I am unable to support today’s amendments. I thank the staff in the Divisions of Investment Management and Economic and Risk Analysis, as well as the Office of the General Counsel, for their efforts.
[1] See Commissioner Troy A. Paredes, Statement at Open Meeting to Adopt Form PF (Oct. 26, 2011), available at https://www.sec.gov/news/speech/2011/spch102611tap.htm.
[2] See 15 U.S.C. 80b–4(b).
[3] Id.
[4] See Amendments to Form PF to Require Current Reporting for Large Hedge Fund Advisers and Amend Reporting Requirements for Large Private Equity Fund Advisers, Advisers Act Release No. 6297 (May 3, 2023) (“Adopting Release”), at 1, available at https://www.sec.gov/rules/final/2023/ia-6297.pdf.
[5] Id., at 10. (Emphasis added.)
[6] Id., at 132. The Adopting Release notes that “some portion of these costs may be borne by advisers.” Id.
[7] Id., at 5.
[8] See Financial Stability Oversight Council (FSOC), 2022 Annual Report (2022), at 44, available at https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf.
[9] Id.
[10] See Minutes of the Financial Stability Oversight Council (Feb. 4, 2022), at 4, available at https://home.treasury.gov/system/files/261/February-4-2022-FSOC-Meeting-Minutes.pdf.
[11] Id., at 5.
[12] Adopting Release, supra note 4, at 13.
[13] Id., at 62.
[14] Id., at 63.
[15] See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Advisers Act Release No. 5955 (Feb. 9, 2022) [87 FR 16886 (Mar. 24, 2022)], available at https://www.sec.gov/rules/proposed/2022/ia-5955.pdf.
The amendments will require issuers to disclose daily quantitative share repurchase information either quarterly or semi-annually. The required disclosures include, for each day on which a repurchase was conducted, the number of shares repurchased that day and the average price paid, among other things. Issuers will also be required to include a checkbox indicating whether certain officers and directors traded in the relevant securities in the four business days before or after the announcement of the repurchase plan or program.
Further, the amendments will revise and expand narrative repurchase disclosure requirements to require that an issuer disclose: (1) the objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases; and (2) any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.
Finally, the amendments will add a new item to Regulation S-K to better allow investors, the Commission, and other market participants to observe how issuers use Rule 10b5-1 plans. New Item 408(d) will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.
Foreign private issuers that file on foreign private issuer forms will disclose the quantitative data in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024, and provide the narrative disclosure starting in the first Form 20-F filed after their first Form F-SR has been filed. Registered closed-end management investment companies that are exchange traded will disclose the quantitative data and provide the narrative disclosure on Form N-CSR beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. All other issuers will be required to include the quantitative data as an exhibit to their Forms 10-Q and 10-K and provide the narrative disclosure in their Forms 10-Q and 10-K beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.
Statement on Share Repurchases Adoption by SEC Commissioner Caroline A. Crenshaw https://www.sec.gov/news/statement/crenshaw-statement-share-repurchase-disclosure-modernization-050323
Good morning and thank you Chair Gensler and my fellow commissioners. And, most importantly, congratulations to the staff for completing this important rule. Your expertise, acuity, and hard work cannot be over-emphasized or over-recognized. You are true public servants who grapple with challenging questions every day, who provide well-reasoned analyses or responses, and are informed by decades of expertise and experience.
Today’s meeting is the culmination of that hard work. And before us is a final rule that advances the goals of the foundational statutes of our agency; statutes that provide investors and the markets with a continuous disclosure regime that evolves according to, and modernizes with, investor and market needs. More specifically, this rulemaking provides investors with more comparable, structured, and comprehensive disclosures about corporate share buybacks. This is no small issue. In 2021 alone, share buybacks of U.S.-listed companies amounted to $950 billion dollars, and the amount of disclosure available to investors has been relatively limited.[1]
Under today’s rule, disclosures would be enhanced to include tabular disclosure with date specific detail about the total number of shares purchased, the average purchase price,[2] whether such purchases are intended to satisfy the Rule 10b5-1 and Rule 10b-18 safe harbors,[3] whether insiders traded around buybacks announcement dates,[4] and the policies and procedures relating to officer and director transactions during a buybacks program.[5] Additionally, investors would be provided information about the objective or rationale of each buybacks program, and the process or criteria used to determine the amount of shares to be bought back.[6] Such disclosures would provide more comprehensive information for investors, allowing them to better understand how such programs are impacting the market, the corporation’s motivation and rationale to use funds to conduct buybacks rather than other projects, and executive transactions during buybacks announcements and activity - all ultimately shedding more light on corporate value.[7]
And, as I've noted before, this is bread-and-butter[8] work for the staff who have deep and unquestionable expertise. The Securities Act of 1933 and the Securities and Exchange Act of 1934 did not prescribe every possible iteration of disclosure and its presentation. As we all know, the markets, issuers, investors, and what informs the fundamental value of businesses evolves – and does so quickly at times. To put it quite simply, the SEC aims to provide a baseline of quantitative and qualitative disclosure, and presentation of that disclosure, so that investors may access it efficiently and with a high degree of reliability, which, in turn, promotes capital formation. This enables the functioning of the capital markets that American investors rely on to fund retirement, housing, education, and healthcare. And today’s rule supports that important objective.
Thank you to the staff in the Division of Corporation Finance, Division of Investment Management, Division of Economic and Risk Analysis, Office of the General Counsel, the Office of the Secretary, the Office of Information Technology, the staff of all the Commissioner’s offices, and to all of the staff who contributed.
[1] See, e.g., Share Repurchase Disclosure Modernization, Release No. 34-[] at V.A.2 (adopted May 3, 2023) [hereinafter Release].
[2] See Release at Item 601.
[3] See Release at id. See also Release at Item 408(d) would require quarterly disclosure about an issuer’s adoption and termination of 10b5-1 plans.
[4] See Release at id. See also Release at II.A (“by timing their sales to closely follow issuer purchases, executives can benefit in ways that confer a personal benefit to executives without necessarily increasing the value of the firm”); Commissioner Robert J. Jackson Jr., Stock Buybacks and Corporate Cashouts, (June 11, 2018) (finding insider transactions close in time to buybacks announcements and asserting that “[e]xecutives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is”).
[5] See Release at Item 703.
[6] See Proposal at id.
[7] See Proposal at V.A.2.
[8] Commissioner Caroline A. Crenshaw, Moving Forward in Our Lane (Oct. 2022); Commissioner Caroline A. Crenshaw, Late Summer Sunshine: Statement on the Adoption of Pay Versus Performance (Aug. 25, 2023).
Today, the Commission takes action to provide investors with the quantitative and qualitative information they need to better evaluate the impacts of repurchases on an issuer’s share price, as well as other key reforms in this space.
In 2022, S&P 500 companies set an annual record of $923 billion in share repurchases. By comparison, global IPO offerings in 2022 totaled less than $180 billion. Even in 2021, that figure was only $626 billion. It stands to reason that information on repurchases is material to investors.
Issuers conduct share repurchases for a number of reasons, with both upsides and downsides for an issuer’s securities market. Some studies have found that opportunistic insider behavior can motivate repurchases. For example, executives may try to manage repurchase activity in an effort to meet or exceed short-term earnings objectives or forecasts. CFO surveys have indicated that increasing earnings per share is an important factor affecting share repurchase decisions. And to the extent that repurchase activity may be motivated by such objectives, it can have real negative effects on the issuer and its shareholders -- for example, by foregoing investments that could have resulted in better returns.
Current disclosures providing for aggregated, monthly repurchases simply do not provide the detail investors need to assess the efficiency, purposes, and impacts of an issuer’s share repurchases.
With today’s actions, investors will be able to distinguish between repurchases intended to increase shareholder value, and those that are motivated by other reasons, such as short-term attempts to boost share price. It will provide greater transparency to investors, lessen the information asymmetry between insiders and investors, and improve price discovery.
The changes we adopt today will similarly require quarterly disclosure of repurchase activity for both domestic and foreign private issuers. When Congress unanimously enacted the Holding Foreign Companies Accountable Act in 2020, it reinforced the principle that absent compelling reasons, foreign issuers should not be treated differently than U.S. issuers; instead, there should be a level playing field for all companies that choose to raise capital in our markets. Stated another way, whether investing in a U.S. or a foreign issuer, investors should be equally protected. While our periodic reporting system for private foreign issuers differs from domestic issuers in several respects, wherever possible, it is in the interest of investor protection to strive for a level playing field.
Finally, by requiring issuers to disclose their rationale for repurchases, and the process or criteria used to determine the amount, investors will benefit from disclosures that aren’t just boilerplate. To the contrary, issuers are able to provide tailored disclosures of how a repurchase program compares to other investment opportunities that generate financial returns, such as capital expenditures or workforce investments, to improve their quality and help avoid boilerplate. The same applies to discussions of sources of funding that would make it more or less advantageous for an issuer from a tax, cost, or other perspective.
I’m pleased to support the adoption of today’s rule and would like to thank all of the Commission staff, particularly in the Division of Corporation Finance, for their hard work.
Thank you, Chair Gensler. As you have heard, the final rule scraps the proposed requirement to disclose share repurchases within one business day. Despite this commendable and much needed change, I cannot support a rule that mandates immaterial disclosures without sensible exemptions. Accordingly, I dissent.
The release fails to demonstrate a problem in need of a solution. The release hints at discomfort with issuer share repurchases and suggests that granular disclosure might unearth nefarious practices related to buybacks. The release points out that share repurchases could be “conducted to increase management compensation or to affect various accounting metrics,” rather than to increase firm value.[1] Some people would argue that issuers should use excess cash to increase employee wages or fund research and development. In some cases, these buyback critics may be correct, but share repurchases are not inherently problematic. To the contrary, they enable companies to return excess cash to shareholders with greater tax-efficiency than dividends.[2] Shareholders who choose to sell their shares back to the company then can reinvest the proceeds into companies that need cash. The net result is that capital flows to where it can best be used. Issuers also sometimes repurchase shares for other legitimate purposes, including to “offset dilution from equity compensation plans, or [as] an appropriate investment when shares are viewed as undervalued.”[3]
The implicit skepticism of issuer repurchases is out of step with the SEC staff’s work on the issue. A 2020 SEC staff study found that repurchases help issuers “maintain optimal levels of cash holdings and minimize their cost of capital” and “on average” have “a positive effect on firm value.”[4] The study also found that increasing or meeting executive compensation levels or meeting “earnings-per-share (EPS)-based performance targets” is “unlikely” to motivate “most repurchase activity.”[5] Other studies have made similar findings.[6] Regardless of whether the findings of the staff study or the sentiment in this release are correct, in a free economy government should not micromanage corporate decisions—even implicitly through onerous disclosure requirements—about whether to use excess cash to buy back shares or for some other purpose.
The final rule, although it wisely backs off essentially real-time disclosure of issuer buybacks, is flawed in its granularity. The reasonable investor does not need to know about every repurchase by every public issuer. Disclosure of daily repurchase information will “bury [investors] in an avalanche of trivial information[,] a result that is hardly conducive to informed decisionmaking.”[7] The release justifies the daily mandate by explaining that “investors cannot currently be certain that any given repurchase in fact conveys information about the issuer’s fundamental value.”[8] Even though the release acknowledges that “many, perhaps even most, share repurchases are not undertaken solely or primarily to benefit managers or to achieve targets, such as those based on EPS,” it worries that this “fact . . . does not aid investors who are attempting to assess the efficiency of, and information conveyed by, any given repurchase by a particular issuer.”[9] True, and they also cannot be certain that every decision regarding a research and development project and or capital investment is efficient and undertaken with pure motives. Yet we do not require the level of disclosure we are requiring here. In many areas, a company’s officers and directors could have wrong motives for their decisions, but the antidote is not requiring companies to describe in painstaking detail every corporate action. As several commenters noted, we risk creating “white noise,” the contextless volume of which could confuse investors. [10]
The immateriality of the mandated disclosure calls into question the benefits of the rule, but the rule’s costs are also a concern. Even with the delayed disclosure, the daily repurchase information could publicly release confidential information, including, in narrow cases, pending merger or acquisition activity[11] or other confidential corporate actions.[12] The provision of the required information, even on the timeline required by the final rule, will impose costs on companies, particularly as they will have to produce the data in structured format.[13] Other elements of the rule may also prove to be costly, including requiring issuers to disclose their rationale behind share repurchase activity, and provide their policies and procedures about executive sales during repurchase programs.
In light of the rule’s questionable benefits, the Commission’s refusal to make reasonable accommodations for small and foreign issuers is puzzling. For example, the Commission could have accommodated smaller reporting companies by providing an extended compliance period or at least temporary relief from the structured data requirements. The Commission also could have adhered to the historical treatment of foreign private issuers (“FPIs”).[14] Instead of deferring to FPIs’ home country regulators, the rule requires them to file on the same quarterly schedule as domestic issuers. If this immaterial information warrants quarterly reporting, will we stop making sensible accommodations to FPIs in other areas as well? The Commission also failed to respond adequately to the unique considerations raised about the new requirement’s application to closed-end funds and banks.[15] Finally, the release imposes unnecessarily aggressive compliance deadlines.
The final rule is not as bad as it could have been,[16] but better-than-it-might-have-been is not my standard for supporting a final rule. That said, I am thankful to staff across the Commission for their hard work on this release and for their engagement with me on it. As always, their work is excellent. Among others, I want to thank staff in the Divisions of Corporation Finance, Investment Management, Economic and Risk Analysis, the Office of General Counsel, and others throughout the Commission.
[1] Release at 20.
[2] Craig Lewis and Joshua White, Corporate Liquidity Provision & Share Repurchase Programs at 13, U.S. Chamber of Commerce Center for Capital Markets Competitiveness (Sept. 24, 2021),
https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/09/4-01-22-CCMC_StockBuybacks2022-9.pdf (hereinafter, Lewis and White study) (“Consider a dividend paid to all investors simultaneously. Tax laws typically treat the dividend as ordinary income and, thus, paying a dividend triggers potential tax obligations for all investors. In the case of a share repurchase, selling shareholders will be subject to capital gains taxes. If the capital gains tax rate is lower than the ordinary income tax rate, these investors will realize a higher after-tax rate of return on their investment. Moreover, only those investors that tender shares trigger tax obligations since shareholders that do not sell defer tax obligations to a future sale date. Yet, non-selling shareholders still benefit from any corresponding increase in the stock price. On net, share repurchases allow shareholders to determine when they are exposed to personal taxes rather than imposing taxes on retail investors.”).
[3] Letter from DLA Piper at 2 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122329-
278373.pdf.
[4] Staff of the Securities and Exchange Commission, Response to Congress: Negative Net Equity
Issuance at 6-7 (Dec. 23, 2020),https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf (hereinafter, “SEC study”).
[5] SEC study at 7 (“For example, the declining level of option-based compensation suggest that efforts to use repurchases to maintain the value of compensation grants do not account for most firms’ increased use of repurchases. Similarly, the relatively low incidence of firms having earnings-per-share (EPS)-based performance targets, as well as the rate at which boards of directors consider the impact of repurchases when setting EPS-based performance targets or determining whether they have been met, further supports the conclusion that efforts to increase compensation are unlikely to account for most repurchase activity.”); see also id. at 45 (“[M]ost of the money spent on repurchases over the past two years was at companies that either do not link managerial compensation to EPS-based performance targets or whose boards considered the impact of repurchases when determining whether EPS-based performance targets were met or in setting the targets, suggesting that other rationales motivated the repurchases.”).
[6] See, e.g., Lewis and White study at 4 (“[C]laims of opportunistic or manipulative use of share repurchases by insiders are not supported by economic analysis.”).
[7] TSC Indus. v. Northway, 426 U.S. 438, 448-449 (1976).
[8] Release at 24.
[9] Release at 24.
[10] See, e,g., Letter of ACLI at 2 (Feb. 22, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20117468-269587.pdf (“ [I]nvestors are already flooded with enormous amounts of information. Adding daily reporting of share repurchase information is only going to add to the avalanche of information and overwhelm investors. Life insurance companies already disclose in quarterly analyst calls the number and amount of shares repurchased during the quarter. In addition, companies disclose this information in the quarterly Form 10Q’s and the Form 10K. The reporting requirements included in the proposed rule are unlikely to impact an investor’s decision to invest in a company. Likely over time, the enhanced reporting will be white-noise that will be disregarded by investors, but will leave companies with the daily burden and cost of compliance.”); Letter of SIFMA at 13 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122315-278365.pdf (“In addition, SIFMA does not believe that daily reporting will provide useful information to investors on issuer share repurchase activity, as the sheer volume of data reported will create substantial ‘white noise,’ impeding rather than helping investors monitor and evaluate issuer activity. Many forms of disclosure are fundamental to an issuer’s valuation (and quickly reflected in an issuer’s stock price), but others can be more technical in nature. The proposed disclosure of daily corporate share repurchase activity on Form SR would be the latter. Without being relevant to an issuer’s earnings or valuation, daily disclosure of an issuer’s share repurchase activity could nonetheless influence an issuer’s stock price, assuming such information is not equally understood by all investors.”); Letter from Dow at 5 (“We are additionally concerned that daily reporting of share repurchases will provide large volumes of trading activity information which will be scrutinized by market participants and the press, but for which there will be no context, leading to speculation and noise in the capital markets instead of increasing investor confidence. While market participants will be able to use the Form SR disclosures to track such changes in activity in virtually real time, there will be no context for the information, which is likely to lead to speculation about why trading patterns have changed, perhaps abruptly. In particular, if an issuer suddenly stops trading, investors and others will ask themselves whether there is a pending acquisition, unexpected liquidity issues, a belief by the issuer that the stock is overvalued, or perhaps just unfavorable market conditions, with each investor guessing, and trading on, their own answers to these questions in light of any other speculation that may already have been occurring.”).
[11] See, e.g., Letter from Davis Polk at 2-3, Mar. 28, 2022, https://www.sec.gov/comments/s7-21-21/s72121-20121498-273485.pdf (“Similarly, it would not be unusual for public companies to halt their share repurchases when they are involved in M&A discussions. Under today’s reporting regime, companies can engage in such discussions and halt their share repurchases without fueling market speculation. Under the proposed rules, however, if two companies in the same industry have both halted their repurchase programs at the same time, and if there is no other likely explanation, market volatility based upon a presumed potential M&A transaction should be expected.”); Letter from PNC Financial Services Group at 5-6 (Mar. 30, 2022) (“Under the proposal, the issuer’s daily reporting would have established a market expectation for daily purchases (outside of earnings-related blackout periods). The issuer enters preliminary merger negotiations, and thereafter it deems these discussions to have crossed the line over into materiality. At this point, the issuer prudently ceases its repurchase activity, which the market learns of within days due to the sudden cessation of its prior daily Form SR filings. Generally, at this point the issuer would not otherwise be obligated to disclose the ongoing negotiations, and it is common for premature disclosure of merger negotiations to be potentially detrimental to successful completion of a transaction. For the market, without explanation from the issuer, it would be a logical conclusion at this point that something material had happened, and, depending on what else is known about the issuer at the time, the market may surmise that the cause was a pending merger. Or the market might jump to an unwarranted and inaccurate conclusion as to the source. In either event, the resulting rumors and possible impacts on trading volumes and prices could cause harm to the issuer and its shareholders, including by imperiling a transaction that otherwise might be in the issuer’s best interests or by introducing volatility in trading in its stock.”).
[12] See, e.g., Letter from Dow at 5 (“Companies, in the meanwhile, will be faced with the difficult choice between adopting a no-comment policy and letting speculation and potentially erratic trading continue, or continuously explaining reasons for confidential trading decisions, which may adversely affect the repurchase program or require revealing prematurely sensitive information about strategic developments or transactions.”).
[13] See Letter from New York City Bar at 3 (Apr. 1, 2022) (“The Committee is also concerned regarding the unnecessary and significant compliance costs and complexity that would result from the proposed Inline XBRL tagging requirements. The Committee would ask the Commission to consider allowing filers to amend their original filings within a limited additional window to address the concern that tagging requirements delay filings. To comply with such requirements, many issuers would be forced to incur the costs of training personnel or hiring new personnel with the specific technical knowledge required to properly complete the Inline XBRL tagging, and issuers unable to complete the Inline XBRL tagging internally would need to outsource such tagging to outside filing vendors, greatly increasing the time and expense for each filing.”).
[14] See, e.g., Letter from Sullivan & Cromwell at 7-8 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122211-278250.pdf (“We urge the SEC to exempt FPIs from the proposed new requirement to furnish Form SR. Rather, we believe the SEC should retain its historic approach of permitting FPIs to comply with the more tailored disclosure requirements established by their home country regulators, and to then promptly provide any such material disclosures to U.S. investors on a Form 6-K. Subjecting FPIs to the Form SR disclosure requirement would be inconsistent with the SEC’s historical treatment of FPIs and is not necessary for ensuring that U.S. investors receive material information regarding share repurchases by FPIs.”); Letter from SIFMA at 18 (“Requiring FPIs to file a Form SR would also be a departure from the Commission’s previous regulation of FPIs’ share purchases, which has favored allowing FPIs’ home countries to regulate how such purchases can be conducted and disclosed. In the context of share repurchases, allowing home country regulators to set disclosure standards is particularly important, given difference in market structure across jurisdictions. As the Commission noted in the Rule 10b-18 adopting release, that safe harbor was crafted based on the manner in which the securities markets operate in the United States, while FPIs were often subject to home country rules and disclosure requirements regarding issuer repurchase activity and often conducted share repurchases while benefiting from safe harbors available to them under the rules of their home country or other non-U.S. markets on which their shares trade . . . SIFMA would urge the Commission to retain its historic approach of permitting FPIs to comply with the more tailored disclosure requirements crafted by their home country regulators, and then continue providing any such material disclosure to U.S. investors on a Form 6-K.”).
[15] See, e.g., Letter from Bank Policy Institute and American Bankers Association at 6-7 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122500-278556.pdf (“Investors already have a great deal of information with respect to the capital actions of Regulated Banking Institution issuers due to the public information available about regulatory capital requirements and the regulatory capital planning process applicable to these issuers. Investors have access not only to the detailed capital and capital planning regulations with which these issuers must comply, but also to disclosure about firms’ performance under supervisory and, if applicable, firm-run stress tests. Although this information does not directly align with the share-repurchase-specific disclosure the SEC is proposing to require, it nevertheless provides investors with insights into firms’ capital planning processes and actions. In addition, the regulatory requirements and scrutiny applicable to Regulated Banking Institutions’ capital planning processes and actions act as a de facto constraint on any of the manipulative activity that the Share Repurchase Proposal is attempting to address in proposing additional disclosure with respect to share repurchase activity, both in Item 703 of Regulation Securities and Exchange Commission. Thus, in the context of Regulated Banking Institutions, the additional disclosure in the proposals is not necessary.)”; Letter from Investment Company Institute at 1-2 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122898-279268.pdf (“With the proposals, the Commission intends to address concerns that issuers and their ‘insiders’ could engage in abusive trading tactics either to increase company share prices to enhance executive compensation and insider stock values or otherwise to profit from insider trading information. These stated concerns, however, are misplaced for funds. Fund insiders have little to no ability or incentive to engage in these practices. Funds are pass-through investment vehicles that, by their nature, inhibit a fund insider’s ability to engage in the abusive trading tactics described. Fund market share prices are based primarily on a fund’s NAV, which is transparent, computed pursuant to strict pricing requirements, and promptly reflects share repurchases. The transparency provides fund shareholders with the requisite information to assess the impact that a share repurchase might have on fund share values and neutralizes any information asymmetries that fund insiders otherwise might have over fund shareholders, eliminating the need for funds to separately report repurchases. Also, fund compensation arrangements generally are not tied to fund market share prices or earnings per share directly, and we are unaware of any fund insiders who are directly compensated in fund shares or options, giving them little to no incentive to manipulate fund share prices. Accordingly, as we discuss further below, we strongly recommend that the Commission exclude funds from each proposal.”).
[16] Had the Commission made the rule as bad as it could have been, I could have conveyed that I was not in sync with that decision by titling my statement “Bye-Bye-Buybacks.” See *NSYNC, Bye Bye Bye, No Strings Attached, Zomba Recording LLC (2000), https://www.youtube.com/watch?v=C27NShgTQE4.
Thank you, Chair Gensler. Today’s amendments will significantly alter the quantitative and qualitative disclosure requirements for share repurchases. However, in the future, these amendments may be remembered as the beginning of the end for the Commission’s approach to foreign private issuers (“FPIs”). For more than 55 years, the Commission has allowed FPIs to satisfy their Exchange Act[1] reporting requirements by (1) filing an annual report with information comparable to disclosure provided by domestic companies and (2) furnishing a Form 6-K for any material information disclosed by the FPI under its home country laws, reported pursuant to stock exchange requirements, or provided to its shareholders.[2] Today’s amendments will require FPIs to make quarterly filings to report share repurchases regardless of their home country’s disclosure requirements. This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements. Given the significance of this shift in regulatory philosophy, the Commission should have undertaken a separate rulemaking on the issue, instead of including this change as part of a rulemaking focused on share repurchase disclosure.
Today’s amendments effectively send a message to our partners in the European Union, the United Kingdom, Japan, Australia, and elsewhere: regardless of their disclosure regimes, the Commission will sacrifice principles of mutual recognition and international comity to impose its own views on the rest of the world. This approach may ultimately harm U.S. investors and companies. If fewer foreign companies list their stock on a U.S. exchange, U.S. investors seeking portfolio diversification and exposure to individual foreign stocks may need to invest through foreign brokers, trade on foreign exchanges, pay higher costs, and lose any jurisdictional protections provided by the federal securities laws. Furthermore, if foreign regulators follow the Commission’s abandonment of mutual recognition, U.S. companies with international operations may be burdened by additional compliance costs due to foreign regulatory requirements. These costs may ultimately be borne by consumers, in the form of higher prices, or investors, in the form of lower returns.
Today’s amendments also fail to recognize important differences between FPIs and domestic companies. To justify the need for daily repurchase data, the adopting release cites two reasons for why a company might engage in share repurchases that are unrelated to an efficient use of cash: (1) increasing executive compensation and (2) achieving accounting targets.[3] The Commission speculates that daily repurchase data will better enable investors to determine whether repurchases were motivated, at least in part, by either or both of these ulterior motives.[4] However, the release glaringly omits any discussion of how the different reporting requirements between FPIs and domestic companies may eliminate this hypothetical benefit for FPI investors.
Unlike domestic companies, FPIs are neither subject to Section 16 of the Exchange Act[5] nor extensive executive compensation disclosure.[6] Thus, it will be nearly impossible for FPI investors to use the daily data to determine whether repurchases were motivated by executive compensation reasons. Further, while FPIs will be required to disclose repurchase data quarterly, they will not be required to report their financial results quarterly. If the cadence of an FPI’s disclosure of daily repurchase data is not aligned with its disclosure of financial results, investors will be hard pressed to use the repurchase data to assess whether the FPI was attempting to reach an accounting target.
Apart from FPIs, the amendments would also require closed-end funds that are listed on an exchange (“listed closed-end funds”) to provide the same quantitative and qualitative repurchase disclosure as corporate issuers. Listed closed-end funds, however, are distinguishable from corporate issuers in important ways. For example, listed closed-end funds generally do not have officers or employees in the way that corporate issuers do, nor do they compensate fund insiders with equity awards. Instead, listed closed-end funds are managed by an outside investment adviser that is compensated with a management fee. Given that the rationale for most of the new disclosure requirements apply only to corporate issuers, I question the need to include listed closed-end funds as part of these amendments.
A key means of preventing managers from acting in a self-interested manner is for a company to return excess cash to investors. I do not look fondly on the excessive waste of corporate assets during the conglomeration era of the 1960s and 1970s. Placing additional hurdles on returning cash through share repurchase programs in the name of investor protection is yet another misguided effort on the Commission’s regulatory agenda.
Because of these and other concerns that I have with today’s recommendation, I am unable to support it. However, I thank the staff of the Division of Corporation Finance, the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work on this rulemaking.
[1] Securities Exchange Act of 1934.
[2] See Adoption of Rules Relating to Foreign Securities, Release No. 34-8066 (Apr. 28, 1967). Additionally, FPIs, like domestic companies, may also be required to file a Form SD annually for activities relating to conflict minerals.
[3] See Share Repurchase Modernization Disclosure, Release 34-97424 (May 3, 2023), at Section II.B, available at https://www.sec.gov/rules/final/2023/34-97424.pdf.
[4] Id.
[5] 17 CFR 240.3a12-3
[6] See Form 20-F, Item 6.B and Item 402 of Regulation S-K.
In the United States District Court for the Central District of Illinois an Indictment was filed charging Brett Michael Bartlett and his companies, Dynasty Toys, Inc., and 7M E-group Corporation, with wire fraud, mail fraud, securities fraud, and money laundering. As alleged in part in the DOJ Release:
[B]artlett and his California-based companies, Dynasty Toys, and 7M E-group, devised a scheme to defraud investors and obtain their money by making materially false and fraudulent pretenses, representations, and promises. According to the indictment, Bartlett, thorough Dynasty Toys and 7M E-group, purchased items at liquidation sales and resold those items online, especially through Amazon. Bartlett solicited and accepted money from Central Illinois investors, first to purchase inventory to be resold by 7M E-group at promised annual returns of 20% to 40% and later to purchase Dynasty Toys’ preferred stock shares, which Bartlett claimed were expected to double in value.
According to the indictment, Bartlett induced investors to invest by dramatically overstating the success of the companies and the returns that the companies generated for investors, lying about the companies’ assets, failing to disclose the companies’ struggles even while continuing to solicit investments, and using investors’ funds for Bartlett’s own benefit. For example, Bartlett falsely told investors their existing shares were worth approximately $30 million in total, that Dynasty Toys owned hundreds of millions of dollars of gold assets, and that another company was going to purchase Dynasty Toys for $120 million. As a result, approximately 1,000 individuals, including over 50 investors from Central Illinois, invested over $20 million with Bartlett, 7M E-group, and Dynasty Toys.
According to the indictment, in May of 2020, Bartlett mailed to Central Illinois investors checks totaling millions of dollars, but the checks bounced. The indictment alleges that investors lost approximately $22.5 million as a result of Bartlett’s and his companies’ fraud.
In the United States District Court for the Central District of Illinois, the SEC filed a Complaint https://www.sec.gov/litigation/complaints/2023/comp-pr2023-84.pdf charging Brett M. Bartlett, his father-in-law Scott A. Miller, and their companies: Dynasty Toys Inc., The 7M eGroup Corp., Concept Management Company LLC, and Dynasty Inc. with violating the antifraud provisions of the federal securities laws; and, further (with the exception of 7Me) with violating the registration provisions of the Securities Act. Parallel criminal charges were filed against Bartlett, 7Me, and Dynasty Toys. As alleged in part in the SEC Release:
[F]rom at least June 2018 to May 2020, Bartlett and Miller raised funds from more than 1,000 investors nationwide by selling promissory notes, stock, and fraudulent gold contracts through their companies, Dynasty Toys Inc., The 7M eGroup Corp., Concept Management Company LLC, and Dynasty Inc. As the complaint alleges, when soliciting investors, many of them from a large church in central Illinois, Bartlett frequently invoked his Christian faith and attributed his alleged success to divine intervention to win investor trust. The complaint further alleges that, to stave off demand for cash payouts from their unsuccessful business ventures, Bartlett and Miller misled investors, made more than $11 million in Ponzi-like payments, and sent to investors $21 million in bad checks that bounced due to insufficient funds. In addition, Bartlett and Miller misappropriated more than $1.2 million for personal use, including vacations, entertainment, and payments for a luxury rental home.
Thank you Bryan. As is customary, I’d like to note that my views are my own as SEC Chair, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.
The 1990s
The 1990s was the decade of Michael Jordan and the Chicago Bulls. The Cold War was over. It was the dawn of the internet and the Spice Girls. Seinfeld was on TV. Bill Clinton brought blue jeans and Domino’s delivery to the White House.
The 1990s also was pretty relevant for the private fund field. The Managed Funds Association was founded in 1991.
Congress passed amendments in 1996 to the securities laws that included a new exception from registration allowing private funds to have an unlimited number of qualified investors.[1]
That same 1996 law included an important provision that SEC rulemaking had to consider efficiency and competition as well as capital formation, in addition to investor protection and the public interest.
The 1990s was when I became the father of three wonderful daughters and watched great Meg Ryan and Julia Roberts rom-coms. I also had a career shift that took me to Greenwich, Conn., that fateful weekend in 1998 prior to Long-Term Capital Management’s failure.
Private Funds and the American Economy
Let’s fast forward to the 2020s. I’m not talking about Biden versus Clinton or generative AI versus the internet or Taylor Swift versus the Spice Girls. Though there may be some things on which Taylor and I agree. Instead, I’m going to focus on private funds.
Advisers now report more than $25 trillion in private fund gross asset value[2] amongst tens of thousands of funds.[3] The reported assets surpass the size of the total $23 trillion banking sector.[4] In 1998, the industry had $800 billion to $1 trillion in assets with only a few thousand funds.[5] This represented 20-25 percent of the then $4-plus trillion banking sector.[6]
The private fund industry plays an important role in each sector of the capital markets, whether it’s equity, treasury, corporate bond, mortgage, municipal, loan origination, or many other markets. It’s intertwined with the derivatives and funding markets, such as the repo and reverse repo markets. It participates in capital formation for startups to late-stage companies.
It also plays an important role for investors, such as retirement funds and endowments. Standing behind those entities are a diverse array of teachers, firefighters, municipal workers, students, and professors.
Subsequent to the 1990s, as you know, we had the 2008 financial crisis. In response, Congress gave the SEC important new authorities, including with regard to private funds.
First, Congress repealed the exception that most private fund advisers previously relied on to avoid registration, causing private fund advisers, with some narrow exceptions, to register with the SEC.[7]
Second, Congress also directed the SEC to collect information from private funds “as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the FSOC.”[8]
We take congressional mandates seriously in the context of our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The markets should work for the benefit of investors and issuers—not the other way around. I recognize we may have different clients. The MFA’s clients are your members, largely investment advisers to private funds. The SEC’s clients, though, are the American public, investors and issuers alike.
Much of the SEC’s work in updating rules is to keep up with today’s ever-changing technology and business models. We are focused on promoting fair, orderly, and efficient markets, which helps protect investors and facilitate capital formation. In that context, I’ll speak to our work to enhance market efficiency, integrity, and resiliency.
Efficiency
You probably are familiar with Alfred Winslow Jones, the father of hedge funds, who started the first fund strategy in 1949. He created the 20 percent performance fee structure. It’s said that he modeled it on Phoenician sea captains who took the same in profits.[9] By my time on Wall Street, this had led to the traditional “2 and 20” model.
Today, private fund advisers receive multiple levels and types of fees—from management to performance to portfolio company fees. That’s not to mention consulting, advisory, monitoring, servicing, transaction, and director’s fees, among others.
Average private equity fees[10] were estimated to be 1.76 percent (annual management fee) and 20.3 percent (performance fee) in 2018 and 2019. For the largest private equity firms, those fees might even be higher.[11] Average hedge fund[12] fees were estimated to be 1.4 percent (annual management fee) and 16.4 percent (performance fee) in 2020.
Taken together, those fees might add up to 3-4 percent in private equity and 2-3 percent in hedge funds per year. Fees and expenses range well into the hundreds of billions of dollars each year.
We have a number of projects across the capital markets around efficiency. Most important to this group is the private fund adviser proposal.[13]
This proposal uses the tools of transparency and market integrity to promote competition and efficiency. This ties to those 1996 reforms, in which Congress said we had a role to consider efficiency and competition in the capital markets. Congress didn’t cabin those 1996 reforms only to retail investors or one segment of our markets. They didn’t leave out so-called sophisticated investors.
The proposal’s new transparency would relate to fees, expenses, performance, and side letters.
As to market integrity, annual audits would be required. The proposal also would prohibit certain activities, such as seeking reimbursement, indemnification, exculpation, or limitation of its liability, including a breach of fiduciary duty in providing services.
Integrity and Disclosure
Congress also gave the SEC an important role promoting market integrity and disclosure to help investors, facilitate capital formation, and build trust. This lowers the cost of capital for issuers, raises returns for investors, and helps increase participation. Integrity and disclosure facilitate what can be the best of capital markets and guard against the worst.
At the SEC, we have a number of projects focused on market integrity and disclosure. I’m going to focus on five, all of which relate to Dodd-Frank mandates and authorities.
Dodd-Frank mandated two rulemakings to bring greater transparency around securities lending[14] and short positions.[15] Thus, we have proposals that would reduce information asymmetries between borrowers and sellers in the securities-lending market[16] and make aggregate data about large short positions available to the public.[17]
Further, we have three outstanding proposals authorized in Dodd-Frank related to investment advisers’ custody of client assets, beneficial ownership, and large positions in security-based swaps.
In the wake of Bernie Madoff, Congress gave the SEC updated authorities that investment advisers should safeguard client assets over which they have custody.[18] Thus, we proposed a safeguarding rule, updating our prior custody rule.[19] In particular, Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities. Further, investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide, which helps protect assets should the adviser or custodian go bankrupt.
In 1968, Congress mandated that large shareholders of public companies disclose information that helps the public understand their ability to influence or control that company. Beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report ownership.[20] Today, markets move dramatically faster. Congress in Dodd-Frank gave the SEC authority to shorten this deadline;[21] thus, we proposed to cut it in half to five days.[22]
Lastly, after the 2008 crisis, Congress granted the SEC broad authority with regard to security-based swaps, including credit default swaps, which played a leading role in that crisis.[23] A critical part of Long-Term Capital Management’s risk-taking was in total return swaps, another form of security-based swaps. Given this history, Dodd-Frank authorities, and not to mention what happened in Archegos, I supported the Commission’s proposed rules to a) require prompt disclosure of large security-based swap positions and b) strengthen investor protection in security-based swaps.[24]
Resiliency
Let’s turn back to the 1990s for a moment. With my youngest daughter, Isabel, then a year old, on my lap, Secretary Rubin was calling.[25] He had just been discussing Long-Term Capital Management with Federal Reserve Chair Alan Greenspan.
After visiting the fund that weekend, I told Secretary Rubin it would be unlikely the fund would last past the upcoming Wednesday.
Though I shared with him estimates of the first-order losses of direct counterparties, I said at best it only would be a guess as to the possible systemic effect across the financial markets and into the economy. The fund had about $1.2 trillion in derivatives, booked in the Cayman Islands, on a $100-plus billion balance sheet, with only about $4-$5 billion of net asset value.[26]
Subsequently, I was asked to staff the President’s Working Group review. We found the event “highlighted the risks of excessive leverage, and the possibility that problems at one financial institution could potentially pose risks to the financial system as a whole.”[27]
History is replete with times when tremors in one corner of the financial system or at one financial institution spill out into the broader economy. When this happens, the American public—bystanders to the highways of finance—inevitably gets hurt. Investors and issuers inevitably get hurt.
Lest we forget that 10 years later, eight million Americans lost their jobs, millions of families lost their homes, and small businesses across the country folded as a result of the financial crisis of 2008.
In Dodd-Frank, Congress put in place new requirements regarding registration and reporting of private fund advisers.
Since the SEC put in place Form PF 12 years ago, a lot has changed. We have two proposals to update it. One is related to current reporting, and tomorrow we have calendared to consider its adoption.[28] Working with the Commodity Futures Trading Commission, the second proposal, among other things, would expand the reporting requirements for large hedge fund advisers on their large funds.[29]
Lastly, I’ll note we have important projects about the efficiency and resiliency of the Treasury market. Private funds have significant investments in this $24 trillion market.[30] These projects include registering and regulating Treasury dealers[31] and platforms,[32] as well as facilitating greater clearing of treasuries in both cash and funding markets.[33]
These projects are important, in part, because hedge funds can create risks for financial stability through the use of leverage and through counterparty exposures.[34] Hedge fund exposures to repurchase agreements, reverse repurchase agreements, and Treasury securities have increased in recent years. Moreover, in the last few years, many hedge funds are receiving repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied.[35]
Conclusion
So much has changed since the 1990s. My daughters are grown up. The technology of today makes the technology of that time seem quaint. Though I still do enjoy Sleepless in Seattle and Notting Hill.
The projects I have discussed are designed to update the rules of the road for private funds to meet today’s times and ensure these intermediaries, too, work for investors and issuers alike.
[1] Pub. L 104–290.
[2] Based on Form ADV filings through March 31, 2023. Represents sum of Registered Investment Adviser GAV and Exempt Reporting Adviser GAV, less estimated overlap.
[3] Based on Form ADV filings, registered investment advisers report more than 50,000 private funds and exempt reporting advisers report more than 40,000 funds. Form ADV filings may reflect double-counting or other forms of overlap between reported private funds.
[4] See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States” (April 28, 2023), available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets of approximately $22.9 trillion as of April 19, 2023 (Table 2, Line 33).
[5] See President’s Working Group on Financial Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management” (April 28, 1999), available at https://www.cftc.gov/sites/default/files/tm/tmhedgefundreport.htm.
[6] See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States” (April 23, 1999), available at https://www.federalreserve.gov/releases/h8/19990423/.
[7] See Securities and Exchange Commission final rule (June 22, 2011), available at https://www.sec.gov/rules/final/2011/ia-3221.pdf; 15 U.S.C. 80b-3(l); 15 U.S.C. 80b-3(m)
[8] 15 U.S.C. 80b-4(b).
[9] See Sebastian Mallaby, “Learning to Love Hedge Funds” (June 11, 2010), available at https://www.wsj.com/articles/SB10001424052748703302604575294983666012928.
[10] Average private equity fees in 2018 and 2019 estimated at 1.76 percent (annual management fee) and 20.3 percent (performance fee).See Ashley DeLuce and Pete Keliuotis, “How to Navigate Private Equity Fees and Terms” (October 7, 2020), available at https://www.callan.com/uploads/2020/12/2841fa9a3ea9dd4dddf6f4daefe1cec4/callan-institute-private-equity-fees-terms-study-webinar.pdf.
[11] SeeLudovic Phalippou, “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory” (July 15, 2020) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820.
[12] Average hedge fund fees in 2020 estimated at 1.4 percent (annual management fee) and 16.4 percent (performance fee) available at https://www.cnbc.com/2021/06/28/two-and-twenty-is-long-dead-hedge-fund-fees-fall-further-below-one-time-industry-standard.html (citing HRF Microstructure Hedge Fund Industry Report Year End 2020).
[13] SeeSecurities and Exchange Commission, “SEC Proposes to Enhance Private Fund Investor Protection” (Feb. 9, 2022), available at https://www.sec.gov/news/press-release/2022-19.
[14] Pub. L. 111-203, 984(b), 124 Stat. 1376 (2010).
[15] Pub. L. 111-203, 929X, 124 Stat. 1376, 1870 (2010).
[16] See Securities and Exchange Commission, “SEC Proposes Rule to Provide Transparency in the Securities Lending Market” (Nov. 18, 2021), available at https://www.sec.gov/news/press-release/2021-239.
[17] See Securities and Exchange Commission, “SEC Proposes Short Sale Disclosure Rule, Order Marking Requirement, and CAT Amendments” (Feb. 25, 2022), available at https://www.sec.gov/news/press-release/2022-32.
[18] Pub. L. No. 111-203, 411, 124 Stat. 1376 (2010).
[19] See Securities and Exchange Commission, “SEC Proposes Enhanced Safeguarding Rule for Registered Investment Advisers” (Feb. 15, 2023), available at https://www.sec.gov/news/press-release/2023-30.
[20] Section 13(d)(1) of the Exchange Act was enacted by the 90th Congress in 1968 through the approval of Senate Bill 510.
[21] Pub. L. 111-203, 124 Stat. 1900 929R (a)(1)(A) (2010).
[22] See Securities and Exchange Commission, “SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting” (Feb. 10, 2022), available at https://www.sec.gov/news/press-release/2022-22.
[24] See Securities and Exchange Commission, “SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps Transactions, to Prevent Undue Influence over CCOs and to Require Reporting of Large Security-Based Swap Positions” (Dec. 15, 2021), available at https://www.sec.gov/news/press-release/2021-259.
[25] See Roger Lowenstein, “When Genius Failed: The Rise and Fall of Long-Term Capital Management” (Random House, Oct. 9, 2000).
[26] See President's Working Group on Financial Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management” (April 28, 1999), available at https://www.cftc.gov/sites/default/files/tm/tmhedgefundreport.htm.
[27] Ibid.
[28] See Securities and Exchange Commission, “Sunshine Act Notice” (April 26, 2023), available at https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-050323.
[29] See Securities and Exchange Commission, “SEC Proposes to Enhance Private Fund Reporting” (Aug. 10, 2022), available at https://www.sec.gov/news/press-release/2022-141.
[30] For example, Qualifying Hedge Funds (a subset of all private funds) report $1.5 trillion in gross notional exposure to U.S. Treasury securities as of 2022Q3. See Securities and Exchange Commission, “Private Funds Statistics: Third Calendar Quarter 2022” (April 6, 2023), at Table 46, available at https://www.sec.gov/files/investment/private-funds-statistics-2022-q3-accessible.pdf.
[31] See Securities and Exchange Commission, “SEC Proposes Rules to Include Certain Significant Market Participants as ‘Dealers’ or ‘Government Securities Dealers’” (March 28, 2022), available at https://www.sec.gov/news/press-release/2022-54.
[32] See Securities and Exchange Commission, “SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS” (Jan. 26, 2022) available at https://www.sec.gov/news/press-release/2022-10
[33] https://www.sec.gov/news/press-release/2022-162. See also “SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information” (April 14, 2023), available at https://www.sec.gov/news/press-release/2023-77.
[34] See Gary Gensler, “Prepared Remarks Before the Financial Stability Oversight Council: Annual Report” (Dec. 16, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-fsoc-annual-report-121622. See also Department of the Treasury, “Financial Stability Oversight Council Releases 2022 Annual Report” (Dec. 16, 2022), available at https://home.treasury.gov/news/press-releases/jy1171.
[35]As a 2021 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.
FINRA Fines and Suspends Rep for Trading in Deceased Customer's Account In the Matter of Shahab S. TagnaviDinani, Respondent (FINRA AWC 2022073991601) https://www.finra.org/sites/default/files/fda_documents/2022073991601 %20Shahab%20S.%20TagnaviDinani%20CRD%20%202503652%20AWC%20gg.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Shahab S. TagnaviDinani submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Shahab S. TagnaviDinani was first registered in 1994 with Park Avenue Securities LLC. In accordance with the terms of the AWC, FINRA imposed upon TagnaviDinani a $5,000 fine, $1,998.77 in disgorgement plus interest, and a 45-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
Customer A maintained a non-discretionary account at Park Avenue Securities, with TagnaviDinani as her registered representative. Customer A was the only person with authority to authorize transactions in the account. Customer A died on January 17, 2021, which TagnaviDinani learned the following day. Between Customer A's death in January 2021 and November 2021, TagnaviDinani placed 48 unauthorized buy and sell orders in the account. TagnaviDinani discussed several of the trades with surviving members of Customer A's family, but those individuals did not have trading authorization over the account. TagnaviDinani received $1,998.77 in commissions from the unauthorized trades.
Therefore, Respondent violated FINRA Rule 2010.
FINRA Censures and Fines International Research Securities, Inc. for Net Capital In the Matter of International Research Securities, Inc., Respondent (FINRA AWC 2022075288901) https://www.finra.org/sites/default/files/fda_documents/2022075288901 %20International%20Research%20Securities%2C%20Inc.%20CRD %2019532%20AWC%20vr.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, International Research Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that International Research Securities, Inc.has been a FINRA member firm since 1987 with 10 registered representatives. In accordance with the terms of the AWC, FINRA imposed upon International Research Securities, Inc. a Censure and $10,000 fine. As alleged in part in the "Overview" portion of the AWC:
Between April 22, 2022, and September 30, 2022, International Research Securities conducted a securities business while failing to maintain the required minimum net capital. As a result, the firm violated §15(c) of the Securities Exchange Act of 1934, Exchange Act Rule 15c3-1, and FINRA Rules 4110 and 2010. Between April and August 2022, the firm also failed to maintain books and records reflecting an accurate computation of its aggregate indebtedness, required minimum net capital, and excess net capital, and it filed with FINRA an inaccurate Financial and Operational Combined Uniform Single (FOCUS) report. In addition, the firm filed late and inaccurate net capital-related notices with the SEC and FINRA between April and December 2022. As a result, International Research Securities violated Exchange Act § 17(a), Exchange Act Rules 17a-3, 17a-5, and 17a-11, and FINRA Rules 4511 and 2010.
[T]o enhance the investor-protection benefits of Rule 4111, FINRA has amended Rule 8312 (FINRA BrokerCheck Disclosure) to release information on BrokerCheck as to whether a particular member firm or former member firm is currently designated as a Restricted Firm pursuant to Rules 4111 and 9561. Releasing this information will alert investors to research more carefully the background of the firm. It also will create additional incentives for firms with a significant history of misconduct to change behaviors and activities to reduce risk.
Information that a firm is a Restricted Firm will display on BrokerCheck on a firm’s summary and detailed BrokerCheck reports while that firm is designated as a Restricted Firm.
Bill Singer, the publisher of the "Securities Industry Commentator" and the "BrokeAndBroker.com Blog," calls upon all industry and investor advocates to demand the immediate removal of all sitting FINRA Governors and to insist that the self-regulatory-organization reconstitute its Board with Governors who will ensure that the regulator's culture adheres to a "tone from the top" approach. Further, until such time as FINRA demonstrates a sincere commitment to reform, all FINRA member firms should instruct their Executive Representative to not cast a vote for any candidate in any FINRA election by way of a boycott.
Former Financial Advisor Sentenced for Scheme to Steal Funds from Elderly Bank Customers (DOJ Release) https://www.justice.gov/usao-edca/pr/former-financial-advisor-sentenced-scheme-steal-funds-elderly-bank-customers In the United States District Court for the Eastern District of California, Tyler Rigsbee, 33, pled guilty to one count of aggravated identity theft; and he was sentenced to two years in prison and ordered to pay $158,960 in restitution. As alleged in part in the DOJ Release:
[F]rom 2016 to 2021, Rigsbee worked as a FINRA-registered financial advisor at a major bank in Sacramento. During his employment, Rigsbee targeted elderly bank customers and stole $158,960 from these victims’ accounts.
Rigsbee stole $113,160 from one elderly victim’s account by using the name and identity of the account beneficiary to fraudulently transfer the funds into another account that Rigsbee had set up and controlled in the beneficiary’s name. Rigsbee next stole $45,800 from the account of a second elderly victim by transferring funds in incremental amounts into a separate account that Rigsbee had set up and controlled in the victim’s name. Rigsbee then pocketed the money by transferring these funds into his own personal bank account.
Toward the end of his scheme, Rigsbee attempted to conceal his theft by stealing $16,700 from a third elderly customer’s account and attempting to funnel that money into the second victim’s account to partially replace what he previously stole. However, this transaction was flagged, and the funds were reverted.
Daniel Alan Lewis and others conspired to create counterfeit U.S. Series I savings bonds. They then passed them at financial institutions using other people’s identities and split the proceeds.
As part of his plea, Lewis further admitted that in November and December 2021, he passed numerous counterfeit savings bonds at banks in both the Houston and Brownsville areas.
U.S. District Judge Fernando Rodriguez Jr. accepted the plea and set sentencing for Aug. 10. At that time, Lewis faces up to 20 years in federal prison and a possible $250,000 maximum fine.
Military impersonation scheme lands local man in prison (DOJ Release) https://www.justice.gov/usao-sdtx/pr/military-impersonation-scheme-lands-local-man-prison In the United States District Court for the Southern District of Texas, Ganiyu Abayomi Jimoh, 30, pled guilty to conspiracy to commit mail fraud; and he was sentenced to 36 months in prison plus three years of supervised release, and ordered to pay $405,427.80 in restitution. As alleged in part in the DOJ Release:
[A]t the hearing, the court heard additional evidence including that at least one of the victims was an 84-year-old man who was defrauded of money by an online “girlfriend” and how $13,500 of his losses were deposited into accounts Jimoh opened.
In 2019, Jimoh began working with co-conspirators pretending to be U.S. military soldiers deployed to Afghanistan. They would solicit victims wishing to assist soldiers stationed overseas and persuaded them to contribute monies toward non-existent real estate deals.
As part of his plea, Jimoh admitted to using counterfeit passports to open bank accounts to receive funds from the victims for his personal benefit.
SEC Charges Florida Trader with Microcap Stock Manipulation Scheme and Obtains Final Judgment (SEC Release) https://www.sec.gov/litigation/litreleases/2023/lr25703.htm Without admitting or denying the charges in an SEC Complaint filed in the United States District Court for the Southern District of New York https://www.sec.gov/litigation/complaints/2023/comp25703.pdf, Carlos Eduardo, Reyes Alvarez consented to the entry of a Final Judgment that permanently enjoins him from future violations of Section 17(a) of the Securities Act and Sections 9(a)(1), 9(a)(2), and 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Final Judgment orders Reyes to pay disgorgement of $368,045, prejudgment interest of $76,843, and a civil penalty of $160,000; and, further, prohibits Reyes from acting as an officer or director of a public company, and prohibits Reyes from participating in any offering of penny stocks; and, additionally, enjoins him from engaging in, or deriving compensation from, specified activities related to inducing the purchase or sale of securities, unless those securities are listed on a national securities exchange and satisfy specified capitalization requirements.As alleged in part in the SEC Release:
[F]rom about November 2017 and through at least April 2019, Reyes acquired large positions in thinly-traded over-the-counter stocks and then generated investor interest in these stocks through fraudulent means, most often by causing the issuance of press releases that had not been authorized by the companies. In connection with at least four companies, Reyes also allegedly engaged in wash trading to create the appearance of an active market and raise the company's stock price. The complaint further alleges that Reyes's fraudulent activity increased the prices of the securities he targeted and that he profited from these schemes by selling the securities at the inflated prices. As a result of these schemes, Reyes profited by $368,045.
The Response contends that the Commission launched and went forward with its investigation based on Claimant alerting the Commission staff via the Newspaper article of the Company’s continued violations. Furthermore, Claimant contends that it was not necessary to provide the same document that formed the basis for the Newspaper article to the Commission because the SEC launched and went forward with its investigation based on Claimant alerting the Commission staff of Company’s continued violations and not due to any particular document. As discussed above, Claimant’s argument that he/she prompted the opening of the investigation by being the source of the information published in the Newspaper article is without merit because the Commission staff was aware of the information in the Newspaper article from other sources. The declaration from the Enforcement staff, which we credit, explains that Enforcement staff did not open the investigation based on specific information contained in the Newspaper article or any other press article; rather it was news media attention following the Redacted Speech concerning Redacted that caused the opening of the investigation. Accordingly, Claimant’s information did not cause the opening of the investigation.
FINRA Censure and Fines Madison Avenue Securities Over Mutual Fund Sales Charges. In the Matter of Madison Avenue Securities, LLC, Respondent (FINRA AWC 2019061187802) https://www.finra.org/sites/default/files/fda_documents/2019061187802 %20Madison%20Avenue%20Securities%2C%20LLC %20CRD%2023224%20AWC%20lp.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Madison Avenue Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Madison Avenue Securities, LLC, has been a FINRA member firm since 1988 with over 240 registered representatives at 98 branches. As asserted in part in the "Background" portion of the AWC [Ed: footnotes omitted]:
In May 2022, Madison Avenue agreed to a settlement with the Securities and Exchange Commission regarding allegations that the firm (1) breached its fiduciary duty by failing to provide full and fair disclosures regarding conflicts of interest associated with its receipt of third-party compensation based on advisory client investments; (2) breached its duty to seek best execution by causing advisory clients to invest in share classes of mutual funds when share classes of the same funds were available to clients that presented a more favorable value for these clients; (3) breached its duty of care by failing to undertake an analysis to determine whether the particular mutual fund share classes and money market funds it recommended were in the best interests of its advisory clients; and (4) failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these breaches of the firm’s duties. The firm agreed to pay a $150,000 fine, disgorgement of $579,523.76 and prejudgment interest of $73,649.93, and to an undertaking.
In accordance with the terms of the AWC, FINRA imposed upon Madison Avenue a Censure, $50,000 fine, and $63,296 in restitution. and an undertaking to certify compliance with the cited issues. As alleged in part in the "Overview" portion of the AWC:
From January 2016 through December 2018, Madison Avenue's registered representatives had two options for the purchase of mutual funds: they could buy via direct application to the mutual fund company, or they could purchase the mutual funds for the customer's brokerage account at Madison Avenue through an electronic order entry system offered by Madison Avenue's clearing firm. For direct application business, the firm required its representatives to prepare and submit a customer-signed application, which included a "breakpoint worksheet." The reviewing principal then used these documents to assess whether there were any available sales charge discounts.
For mutual fund purchases made through the electronic order entry system, the firm relied on its representatives to ensure that customers received the appropriate breakpoints and received annual certifications from its representatives acknowledging their responsibility in this regard. The firm did not require use of the application form and breakpoint worksheet, and representatives did not otherwise memorialize the customer information needed to assess potential sales charge discounts. Instead, from January 2016 to February 2018, principals manually reviewed mutual fund transactions submitted through the electronic order entry system the day after the transaction. This process was called a "T-plus-1" review. From February 2018 through December 2018, the firm used an electronic trade monitoring program for the firm' suitability review of transactions entered into the electronic order entry system, along with a principal's review of the trade monitoring program's surveillance alerts, including for "Fund Family Diversification."
Neither the T-plus-1 or surveillance alert review process allowed for reasonable review of the suitability of customers' purchases of mutual funds in multiple different mutual fund families, either simultaneously or sequentially, resulting in missed sales charge discounts. Neither process included a review of customers' mutual funds holdings purchased away from the firm that could have been used to achieve sales charge discounts through a right of accumulation.
From January 1, 2016 through December 2018, 12 firm customer households, identified in Attachment A, purchased mutual funds in multiple different mutual fund families, either simultaneously or sequentially, in transactions submitted through the electronic order entry system. These customers' sales charges would have been reduced had they purchased mutual funds all within one mutual fund family, rather than among several fund families.
In addition to the customers identified in Attachment A, in June 2018 another firm customer simultaneously purchased six mutual funds in five different mutual fund families at the recommendation of a firm registered representative in transactions submitted via the firm's electronic order entry system. At the time, the customer already held mutual funds away from the firm. Although the strategy involved highly-rated funds, the customer's sales charges would have been reduced if he had purchased mutual funds in one mutual fund family, and reduced even further if he had invested in the mutual fund family of the funds he held away from the firm.4
Since December 2018, the firm has revised its supervisory system, including WSPs, regarding mutual fund supervision, including further describing the T-plus-1 and surveillance alert review processes for mutual fund transactions.
Therefore, Respondent violated FINRA Rules 3110 and 2010 by failing to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to supervise mutual fund transactions that the firm’s representatives effected through the electronic order entry system to confirm the suitability of the transactions regarding potential available sales charge discounts.