• Posts by Thomas K. Potter, III
    Tom Potter
    Partner

    Tom Potter is a Partner in the firm's Nashville office and has over 35 years of experience representing business interests in securities, corporate and intellectual property disputes.

    Tom represents broker-dealers and ...

Every year the Financial Institution Regulatory Authority (FINRA) issues its “Report on FINRA’s Examination and Risk Monitoring Program.” The Report covers issues noted during the prior year’s exams and topics that examiners will look for going forward. It also foreshadows where Enforcement is likely to follow.

FINRA continues to improve the format, making it more user-friendly. This year’s Report highlights new material, includes expanded questions to ask about your firm’s activities, describes best practices, and provides resource links.

NEW FOR 2023

On July 27, 2022, FINRA filed a proposed rule change with the SEC that would “modernize” its supervision rule to make permanent pandemic-related temporary exemptions that allowed limited-scope work-from-home (“WFH”) for brokers.

The filing proposes “to adopt new Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision) that would align FINRA’s definition of an office of supervisory jurisdiction (“OSJ”) and the classification of a location that supervises activities at non-branch locations with the existing ...

Posted in: FINRA, SEC

On June 29, 2022, FINRA released the report of its independent investigation, concluding that allegations of a “secret agreement” to avoid certain arbitrators on an industry lawyer’s cases were untrue.

The allegations were the basis for a Georgia state court’s January 2022, vacatur of an award in favor of a large bank’s brokerage unit. The ruling is pending appeal.  Based on the Georgia court’s finding that the Respondents had “manipulated the arbitration process,” FINRA’s Audit Committee commissioned an independent review. The review was led by a Lowenstein ...

Posted in: Arbitration, FINRA

In its April 27 Weekly Update, the Financial Industry Regulatory Authority’s (“FINRA”) National Cause and Financial Crimes Detection program urged FINRA member firms to review a cyber-threat alert arising from Russia’s invasion of Ukraine.

The Cybersecurity and Infrastructure Security Administration (“CISA”) issued an April 20, 2022, Advisory warning of increased Russian state-sponsored and criminal cyber threats in retaliation for Western support for resistance to Russia’s invasion of Ukraine. The cybersecurity authorities of Australia, Canada, New ...

On March 31, 2022, the Securities Industry and Financial Markets Association (“SIFMA”) released its after-action report on Quantum Dawn VI – a global financial-markets cybersecurity exercise.

Quantum Dawn VI was conducted on November 18, 2021, with over 1,000 participants from 240 financial institutions and regulatory bodies representing 20 countries. The exercise simulated a large-scale ransomware attack by a state-actor against major global financial institutions and regulators. The scenario was chosen, in part, based upon an observed 93% increase in ransomware ...

In the securities industry, regulators like to say that the compliance professionals are their “partners.” But every so often, those regulators charge one of their compliance partners with rule violations. The compliance community understandably gets unsettled, expresses concern, and regulators respond with a “don’t worry” clarification explaining those charges were driven by unusual “facts and circumstances.” That cycle just completed again.

On March 17, the Financial Institution Regulatory Authority (“FINRA”) issued Regulatory Notice 22-10 to ...

Posted in: FINRA

Continuing its active regulatory agenda, the Securities and Exchange Commission on March 9, 2022, proposed new cybersecurity regulations for reporting public companies. Although couched as a series of “disclosure” requirements, the proposed list of required disclosures can be viewed as a de facto prescription of what public companies must do and say on cybersecurity; that prompted Commissioner Peirce to dissent.

The Proposed Rule would require reporting public companies to promptly disclose “material cybersecurity incidents” and their response, updating those ...

Posted in: Cyber Security, SEC

The regular “Weekly Update” email from the Financial Industry Regulatory Authority (“FINRA”) had an eye-catching warning February 16, urging broker-dealer member firms to heed the “Shields Up” cyber threat warning from the Cybersecurity and Infrastructure Security Agency (“CISA”) and the FBI.

That warning urged heightened cybersecurity vigilance “related to Russia’s potential destabilizing activities against Ukraine.” The CISA alert said, “While there are not currently any specific credible threats to the U.S. homeland, we are mindful of the ...

On February 9, the SEC proposed new cybersecurity risk management regulations for investment advisers, registered investment companies (funds), and business development companies.

Relying on the Commission’s mission to protect investors and ensure orderly markets, the Release cites increasing cybersecurity threats and emphasized the disruptive consequences and costs (to advisers, funds and investors) of unpreparedness. The Release grounds the Proposal in advisers’ fiduciary duty to clients and the anti-fraud “compliance rule” requiring written policies ...

Posted in: Cyber Security, SEC

Over the last couple of decades, the securities self-regulatory organization FINRA (f/k/a NASD) informs its membership each year of what compliance risks are noted by its examination program. Those are risks firms should address and also might be harbingers of enforcement focus for the coming year. Years ago, it was the “Errico Letter” - a friendly reminder from NASD’s Head of Member Regulation. Then it became the Examination Priorities Letter. Now it’s a Report, but with a more useful assemblage of the Rules and Resources applicable to each risk called out.

Some risks have ...

Posted in: Cyber Security, FINRA

Requiescat Diem. Launched with great fanfare three years ago as Libra, the Facebook/Meta-led blockchain stablecoin effort now called Diem announced January 31 that it will shut down and sell its assets to Silvergate Capital Corporation.

Libra was launched June 18, 2019, with support by many key finance and payments industry participants. Libra aspired to become a worldwide blockchain-based stablecoin payment system. Initially envisioned as a multi-currency stablecoin, Libra was to be backed by a basket of reserve assets including fiat currencies and short-term government ...

The Financial Crimes Enforcement Network (“FinCEN”) unit of the U.S. Department of the Treasury called this week for the nation’s financial institutions to be on the lookout for money flows indicative of environmental crimes. The Notice links environmental crimes to FinCEN’s traditional missions of combatting corruption and international terrorism and money-laundering, but also expressly recites a new ESG mission due to “environmental crimes’ contribution to the climate crisis, including threatening ecosystems, decreasing biodiversity, and increasing ...

In remarks this week at SEC Speaks, SEC Investor Advocate Rick Fleming mused that the “gamification” of securities trading might pose an undue risk that exploits a potential loophole in Regulation Best Interest (“Reg. BI”).

Recall that Reg. BI, adopted in 2019, imposes a “best interest” standard of conduct for broker-dealers when they make a recommendation to a retail customer of any securities transaction or investment strategy. (The Adopting Release). Reg. BI came about after many years of struggle to try to harmonize the fiduciary-duty standard for investment ...

In remarks this week at the SEC Speaks conference, new SEC Enforcement Director Gurbir Grewal said he’s bringing back admissions in SEC settled actions to help spur accountability.  Most SEC actions are settled on a “neither admit nor deny” basis.

“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.”  Grewal ...

Posted in: SEC
Tags: SEC

This past Tuesday, September 21, the chorus calling for more regulation over crypto reached a sort of crescendo.

The SEC

Earlier, in September 14 testimony before the Senate Banking Committee [1], former CFTC and current SEC Chair Gensler noted that cryptocurrencies sit astride several different regulatory regimes, posing broad risks:

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws ...

On August 27, the Securities and Exchange Commission (“SEC”) issued a broad request for information and comments on “gamification” in financial-market user interfaces, including artificial intelligence and machine learning, among others.

As the Release explains:  The SEC requests input on

broker-dealer and investment adviser use of “digital engagement practices” or “DEPs”, including behavioral prompts, differential marketing, game-like features (commonly referred to as “gamification”), and other design elements or features designed to engage ...

Tags: SEC

The Financial Industry Regulatory Authority (“FINRA”) recently kicked off a “sweep” examination with its August 2021 Targeted Exam Letter on “practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence.”  The exam covers both self-directed and rep-recommended retail accounts (not institutional or managed accounts) during January 1, 2020 through the present.

The sweep seeks:

  1. “Written Supervisory Procedures (WSP), compliance manuals and any other written guidance ...
Posted in: FINRA

On August 13, 2021, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 21-29, collecting guidance on outsourcing and vendor management.  The Notice was prompted by increased reliance on outsourcing (especially during COVID), some enforcement actions involving vendor-management issues, and similar proposed inter-agency guidance by banking regulators.

The Notice reminds firms that while they can outsource task or functions, they cannot outsource-away their regulatory compliance obligations.  In turn, that means the outsourcing process ...

Posted in: FINRA

Since the appointment of Allison Heron Lee as interim SEC chair, the SEC has pushed an ESG agenda in all things from corporate disclosures, to investment companies, international standards and even enforcement.  See this blog post here. Those moves have sparked discussion, and sometimes, skepticism.  Read more about that in this blog post here.

As April ended, the Street’s other main regulator, FINRA, joined the ESG discussion - but in a different way. Instead of contemplating new prescriptive rules or disclosure taxonomies, FINRA seeks constructive criticism. FINRA asked for ...

Tags: ESG, finra, SEC

Last week, FINRA issued Regulatory Notice 21-16 cautioning member firms against attempting to limit customer claims through language in mandatory pre-dispute arbitration agreements. Rule 2628 prescribes disclosure requirements for arbitration clauses and generally prohibits provisions that contradict other FINRA Rules.

The Notice specifically cautions against several provisions that improperly limit customer claims:

First, firms cannot specify hearing locations, because FINRA Rule 12213 provides the Arbitration Director will. FINRA usually schedules hearings ...

Posted in: FINRA

In a March 15, 2021 address to the Center for American Progress, SEC Acting Chair Lee was clear:

No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.

That’s been apparent from the steady stream of climate and ESG-focused initiatives she has been announcing since January.  Her reasoning is that because many investors (and indeed asset managers and other market participants) think these issues are significant, then they are:

On March 4, FINRA issued a Regulatory Notice warning member firms not to fall for phishing scam preying on compliance fears.  The scam uses a phony email address, supports@finra-online.com, demanding an immediate response to an “attached report” of “regulatory non-compliance.”  FINRA doesn’t have a “finra-online” domain and its gTLD is “.org” not “.com”.

Regulatory Notice 21-08 (Mar. 4, 2021) is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee ...

On March 4, Acting Chair Allison Herren Lee announced the creation of a “Climate and ESG Task Force” of 22 members from across the Enforcement Division:

Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential ...

The U.S. Securities and Exchange Commission (“SEC”) released its 2021 Examination Priorities on March 3.  The Examinations group – elevated last December to Division status (formerly the Office of Compliance Investigations and Examinations (“OCIE”)) --  covered the list of perennial concerns.  The 2021 priorities include some new subjects, however, reflecting the policy emphasis of the Biden administration.

“This year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns ...

Posted in: COVID-19, OCIE, SEC

The price of Bitcoin recently topped $57,000.  New York’s Attorney General issued an Investor Alert on Virtual Currency Risks, as did the SEC’s Division of Examinations. The SEC’s “crypto-mom,” Commissioner Hester Peirce has been speaking on it daily, and Chair-nominee Gensler touches on it in his March 2 remarks before the Senate Banking Committee.

SEC Chair Nominee Gary Gensler’s prepared remarks for his March 2 hearing before the Senate  Banking Committee indicate he will focus on FinTech:

Markets—and technology—are always changing. Our rules have to change ...

The price of Bitcoin recently topped $57,000.  New York’s Attorney General issued an Investor Alert on Virtual Currency Risks, as did the SEC’s Division of Examinations. The SEC’s “crypto-mom,” Commissioner Hester Peirce has been speaking on it daily, and Chair-nominee Gensler touches on it in his March 2 remarks before the Senate Banking Committee.

SEC Chair Nominee Gary Gensler’s prepared remarks for his Mar. 2 hearing before the Senate  Banking Committee indicate he will focus on fintech:

Markets—and technology—are always changing. Our rules have to change ...

In an SEC filing, Friday, February 26, Robinhood Financial and Robinhood Securities disclosed they are negotiating with FINRA, the SEC, and state regulators, attempting to settle investigations into options-trading and outages from March 2020.

The investigations focus on Robinhood’s options-trading approval processes and how the app displays cash and buying power to customers.  Similar issues were involved in the GameStop (“GME”) imbroglio earlier this year.  Congress and various regulators continue to examine the GME situation.

The Companies disclosed they have ...

Posted in: FINRA, SEC

Acting SEC Chair Allison Herren Lee issued a February 24 statement directing the Commission Staff to review public-company climate-change-related disclosures.  The Staff will assess current disclosures in light of the SEC’s prior 2010 guidance and “update” that guidance.

The prior guidance did not mandate specific climate disclosures, but instead focused on how climate-change issues might affect existing disclosure obligations regarding, for example, material legal compliance or litigation issues, material risks, and the effect of known trends, developments or a ...

The Deposit Trust & Clearing Corp. (“DTCC”) released a February 24 roadmap for shortening the settlement cycle for US equities by half over the next two years.  The proposal anticipates DTCC’s completion of its “Project ION” using distributed ledger technology (“DLT”) to integrate and speed clearing and settlement processes.  Moving to a shorter settlement cycle would reduce industry costs, market risk, and lower margin requirements.

The clearing and settlement process was front and center at the House Financial Services Committee’s February 18, 2021 hearing ...

Posted in: SEC

The U.S. Climate Finance Working Group released its February 18, 2021 policy statement, “Financing a U.S. Transition to a Sustainable Low-Carbon Economy.”  The Working Group comprises eleven of America’s leading financial-services industry associations, broadly representing “Wall Street.”

With climate-change initiatives among the top priorities announced by the new Biden administration, the Working Group

“seeks to engage with incoming leaders and members of Congress on a bipartisan basis to help establish a shared vision for U.S. climate policy. By so doing ...

The Securities Industry and Financial Markets Association (“SIFMA”) recently proposed sweeping modernization of industry self-regulatory rules to reflect firms’ successful pivot to remote operations over the past year.  SIFMA suggests significant remote work likely will continue, even after the COVID-19 “pilot program.”

SIFMA proposed a “location agnostic” overhaul of the Rules in its February 16 comment letter in response to FINRA’s call for “lessons learned” during the COVID-19 pandemic.  See FINRA Reg. Notice 20-42 (Dec. 16, 2020).

Firms’ ...

Posted in: COVID-19

Republican-appointee Commissioners Roisman and Peirce issued a statement on February 12 publicly disagreeing with Acting Chair Lee’s recent fiat discontinuing the Enforcement Division’s practice of proposing settlements that are contingent upon the Commission’s approval of waivers for collateral disqualifications arising from the settlement.

The Commission’s actions on enforcement settlements and waiver requests were separate processes until 2019, when the Commission changed its policy to allow them to be considered together.  That made sense, because they ...

On February 11, SEC Acting Chair Lee announced that the Commission no longer would permit settlements in enforcement actions to include, or be contingent on the grant of, waivers of statutory disqualifications that flow from certain securities offenses.

Various securities offenses statutorily disqualify Respondents from certain regulated activities, for example, participating in a Reg. D private offering or acting in some capacities for an investment company.  Those statutes, however, also vest the Commission with the discretion to waive those disqualifications, often ...

The Wall Street Journal reports traders on Reddit’s WallStreetBets forum – the same social medium that helped fuel the GameStop short squeeze – have started bidding up cannabis stocks.  Mentions on the forum jumping from near zero to over 8,000 in just a few days.  WallStreetBets Traders Set Cannabis Stocks Alight (Wall St. J., Feb. 11, 2021), is here.

Perhaps not coincidentally, the day before, FINRA issued a Special Alert reminding firms of their regulatory obligations regarding low-priced, often volatile, stocks.  The Alert is to

“help FINRA member firms that engage in ...

Posted in: FINRA

On February 9, Acting SEC Chair Lee announced she was restoring the delegated authority of Enforcement Division senior officials to issue subpoenas to compel document production and sworn testimony without the need of a Formal Order of Investigation by the full Commission.

Until 2009, the SEC could only issue compulsory processes (for document production and testimony) under a Formal Order of Investigation issued by the Commission.  In 2009, however, then-Chair Mary Shapiro delegated that authority to the Director of Enforcement for a trial period of one year.  The Final Order, No ...

Posted in: SEC

During the height of the GameStop (NYSE: GME) mania, Slate author Jordan Weissman explained that

“[A]t a moment that the markets are being overrun, for better or worse, by posters who’ve basically dedicated themselves to shredding the idea that markets are efficient, rational mechanisms for allocating capital and discovering value, tweeting about stonks seems far more appropriate than discussing something as reasonable and comprehensible as stocks. It’s an emotional onomatopoeia for talking about people throwing their money at the market when, lol, nothing ...

Posted in: FINRA

On Thursday, January 28, trading-app broker-dealer Robinhood – a self-styled disrupter democratizing trading – suspended its users’ ability to buy Gamestop stock or options (along with other stocks).  After playing a prominent role in the crowd-sourced short-squeeze on the meme stock, abruptly shutting the “buy” door prompted swift and fierce reactions.  NY Rep. Alexandria Ocasio Cortez tweeted that Robinhood’s freeze on Gamestop buys was “unacceptable” and called for Congressional hearings. Texas Sen. Ted Cruz quickly agreed (eliciting a snarky ...

Posted in: FINRA

On February 1, 2021, the Financial Industry Regulatory Authority (“FINRA”) released its “Report on FINRA’s Risk Monitoring and Examination Activities.”  The Report combines two of FINRA’s long-standing reports:  (a) the retrospective Report of Examination Findings from the prior year; with (b) its forward-looking Examination Priorities Letter.

The new format is more user-friendly for supervision and compliance professionals than the prior reports, setting out for each topic:

  • Regulatory Obligation with citation to relevant rules;
  • Related Considerations
Posted in: FINRA

On the new year’s first day, Congress passed the NDAA over President Trump’s veto and gave the SEC more clear – and longer – disgorgement authority for enforcement actions in the courts.  The National Defense Authorization Act for Fiscal Year 2021, H.R. 6395 (116th Cong. 2019-2020) is here.

First, Section 6501(a)(3) of the Act amends Securities Exchange Act Section 21(d), 15 U.S.C. § 78u(d) to provide express statutory authorization for SEC’s disgorgement remedy in court actions:

  • (7) Disgorgement.--In any action or proceeding brought by the Commission under any ...

Phishing FINRA 

October is cyber-security awareness month, so it’s only appropriate that FINRA started it with another Regulatory Notice warning member firms to beware of a false-survey phishing scheme.  The Notice warns of “a widespread, ongoing phishing campaign” soliciting survey responses in an email using the fake domain “@regulation-finra.org.”  See Reg. Notice 20-35 (Oct. 6, 2020), here.

That’s more of the same for FINRA.  It warned in August that fraudsters were using a fake FINRA domain (www.finnra.org – with an extra “n”) in Regulatory Notice 20-27 ...

On August 20, FINRA warned member firms about a rash of imposter websites, using registered representative’s names, pictures, CRD numbers and other information to gull investors into providing personally-identifying information to fraudsters.

FINRA suggests member firms should contact the FBI and financial regulators, and posting a notification to investors on their legitimate websites.  Other response measures include conducting a who-is search, complaining to host ISP or domain-name registrar, among others.

Websites maintained by FINRA member firms and their ...

The Financial Industry Regulatory Authority (“FINRA”) has issued a special alert to its member firms, alerting them to an imposter website: www.finnra.org (containing an extra “n”).

The fake site contains a purported “registration” form and firm gateway page, apparently phishing for credentials.  FINRA also warns members that the fake domain may be the source of phishing emails.

Both FINRA and the SEC have amped up their cybersecurity warnings during the pandemic.

Regulatory Notice 20-27 is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the ...

The SEC recently announced the creation of the Event and Emerging Risks Examination Team (“EERT”) in its Office of Compliance Inspections and Examinations (“OCIE”).  OCIE is the unit charged with conducting compliance exams on registered investment companies, investment advisors, and broker-dealers -- although primary responsibility for examining broker-dealers lies with their self-regulatory organization, FINRA (itself subject to OCIE exams).

The SEC said the EERT unit “will proactively engage with financial firms about emerging threats and current market ...

Posted in: OCIE, SEC
Tags: EERT, OCIE, SEC

The Commodity Futures Trading Commission’s (“CFTC”) Final Interpretive Guidance on the “actual delivery” exception to regulatory jurisdiction for digital assets became effective June 24, 2020.  See 85 Fed. Reg. 37734.  The CFTC unanimously adopted the Guidance in March:  Retail Commodity Transactions Involving Certain  Digital Assets, Rel. 8139-20 (Mar. 23, 2020).

The Final Guidance adopts the 2017 Proposed Interpretation with some minor changes.  The “actual delivery” exception to CFTC regulatory jurisdiction still requires unencumbered physical ...

On June 16, the SEC issued a temporary exemptive order, allowing registered municipal advisors to solicit banks, their wholly-owned commercial lenders and credit unions in connection with direct placements by municipal-issuer clients.  Ordinarily, that placement-agent activity would require broker-dealer registration under ’34 Act Section 15 (15 U.S.C. § 78o).

The Commission granted the temporary exemption to allow MAs to assist municipal issuers – especially smaller municipalities not otherwise eligible for the Fed’s Municipal Liquidity Facility – with ...

The Supreme Court allowed the SEC to seek “disgorgement” as a form of “equitable relief” in civil-actions, but limited the remedy to net profits for benefit of harmed investors.  Answering part of a question reserved in 2017’s Kokesh opinion, this week’s Liu opinion raised more questions than it answered.

The Liu’s raised investor funds for an EB-5 visa program under a private offering, but pocketed most of them.  In a civil enforcement action, the SEC obtained the Liu’s disgorgement of full amount raised from investors (not net), jointly and severally.  The Supreme ...

Effective June 30, SEC Reg. BI requires broker-dealers to make recommendations only in the “best interests” of retail customers, imposing additional disclosure, care, conflicts-of-interest and compliance obligations.  The disclosure obligations include dissemination of Form CRS educating customers on the nature of their relationship with the firm.

FINRA Regulatory Notice 20-18, issued June 19, makes corresponding changes to its Rules stressing the primacy of Reg. BI with respect to retail customers:

Capital Acquisition Brokers’ suitability (Rule 211).

Tags: finra, Reg. BI, SEC

On May 28, 2020, FINRA issued its Regulatory Notice 20-16 sharing firms’ WFH practices observed to date.  They include common practices adopted across most industries, as one would expect.

During the TRANSITION TO WFH, firm practices included:

  • Increased Customer Assistance through outreach and web-based communications, to ensure customers knew how to access representatives and other resources;
  • Location Monitoring & Contact Lists to know where staff were and ensure they knew how to stay in touch;
  • Increased Support for staff, including more frequent training and ...
Posted in: FINRA

On May 8, FINRA filed an expedited request for an immediate rule change that would allow service by email, extensions of time, and video-conference hearings in member-application, disciplinary proceedings and appeals.  FINRA notes that the COVID-19 work-from-home (“WFH”) environment makes it “exceedingly difficult to send and receive hard copy mail and conduct in-person meetings and hearings.”  The rule change is expected to be temporary through June 15, subject to another later filing extending the provisions if and as necessary.

FINRA previously made similar ...

The United States Department of Justice ("DOJ") has filed the first criminal action for fraud in connection with PPP loans.  Documents unsealed May 5 in the United States District Court for the District of Rhode Island accuse David A. Staveley, aka Kurt D. Sanborn, 52, of Andover, Massachusetts, and David Butziger, 51, of Warwick, Rhode Island, of seeking over $500,000 in PPP loans for four businesses that they did not own, or were closed prior to the pandemic.

The criminal complaint charges both men with conspiracy to make false statements to influence the SBA and conspiracy to commit ...

In a May 4 joint public statement, SEC Chair Clayton and Municipal Securities Office Director Rebecca Olsen urged municipal issuers to make voluntary disclosures specific to issuers, and their various outstanding municipal securities, regarding the effect of COVID-19 on present and expected future operating and financial status.

Municipal issuers are obligated under SEC Rule 15c2-12 to provide annual audited financial disclosures and disclosures of certain material events.  The MSRB’s description of the Rule is here.

The SEC’s statement emphasized the relative size and ...

Posted in: MSRB, SEC

On April 27, the SEC’s Division of Investment Management updated its COVID-19 FAQs to reflect the Staff’s position that small investment advisers must report the “nature, amounts and effects” of PPP loans if potentially material to their ability to serve clients and meet contractual obligations.

Question 11.4 provides:

Q. I am a small advisory firm that meets the requirements of the Paycheck Protection Program (PPP) established by the U.S. Small Business Administration in connection with COVID-19. If I receive or have received a PPP loan, what are my regulatory reporting ...

The Tenth Circuit joined a majority holding that the Federal Arbitration Act (“FAA”) permits modification of an arbitration award for a “material miscalculation of figures” if the miscalculation is “evident” on the face of the award and precludes consideration of the underlying record.

Section 11 of the FAA provides:

In either of the following cases, the United States court in and for the district wherein the award was made may make an order modifying or correcting the award upon the application of any party to the arbitration—

(a)         Where there was an evident material ...

Tags: FAA

The dispute-resolution arm of broker-dealer regulator FINRA has canceled all in-person arbitration hearings and mediation sessions through July 3, 2020.  In-person hearings originally were canceled through May 1, then extended through May 31.  The update also indicates that FINRA will waive postponement fees on stipulated postponements from July 6 through September 4.  FINRA will provide Zoom or telephonic hearings in matters where the parties agree or the Panel orders it.  FINRA staff will be notifying parties and counsel in individual matters and to discuss rescheduling ...

Posted in: FINRA

The Tennessee Court of Appeals has held that new arguments for vacatur or modification first raised over 90-days post-award do not relate back and may not be considered under the State’s version of the Uniform Arbitration Act.

The Court held that an amended pleading seeking to vacate an arbitration award delivered over 90 days earlier does not relate back to the original pleading date (within the 90 days) under Tenn. R. Civ. P. 15.03.

The 90-day limitations period within which to move to vacate under Tennessee’s Uniform Arbitration Act, Tenn. Code Ann. § 29-5-301 et seq., is ...

Posted in: Arbitration

On April 9, FINRA amended its customer arbitration rules to give customers more options when a Respondent firm or associated person becomes “inactive” during an arbitration.

The largest percentage of unpaid customer awards in FINRA arbitrations are those against Respondent firms or associated persons who are “inactive” – that is, whose FINRA membership has been terminated, suspended, canceled, or revoked.  Those “inactive” Respondents are out of the business – and often just out of business, period.

FINRA Rule 12202 requires a customer Claimant to ratify, by ...

Posted in: FINRA

On April 9, the Municipal Securities Rulemaking Board (“MSRB”) filed with the SEC a temporary rule change that waived certain late fees and delayed some key compliance deadlines.

Municipal securities dealers and municipal advisors are required to inspect each office of supervisory jurisdiction annually and to conduct annual testing, review and executive-management certification of their systems of supervisory controls and compliance.  See MSRB Rules G-27(b)(vi), 27(f)(i) and G-44(d).  The rule change provides that those functions will be “deemed” timely completed ...

In the past week, the Securities and Exchange Commission has suspended trading in five separate over-the-counter (“OTC”) stocks due to dubious COVID claims or related identity confusion.

The latest order came Thursday, April 9, when the SEC suspended trading in Turbo Global Partners, Inc. over claimed ability to provide non-contact testing equipment.

On Wednesday, April 8, when the SEC suspending trading in BioELife Corp. f/k/a US Lithium Corp. (“LITH”) over claimed production of a COVID-19 prevention product line, coupled with manipulative trading indicia.

On ...

On April 2, Chair Clayton said the SEC would hold firm on the June 30 compliance deadline for Regulation Best Interest (“Reg. BI”) and Form CRS, but suggested early examinations might focus more on compliance efforts than results.  The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued two April 7 Risk Alerts providing firms with guidance on what to expect during those early-phase examinations.

As expected, OCIE indicates its exams will focus on whether firms “have made a good-faith effort to implement policies and procedures reasonably designed ...

Securities and Exchange Commission Chair Jay Clayton issued an April 2 public statement that the SEC will hold firm on its June 30, 2020 deadline for firms to implement Reg. BI and Form CRS.  There had been industry speculation that the SEC might push that compliance deadline back in the face of the COVID-19 pandemic.

Regulation Best Interest (“Reg. BI”) was adopted by the SEC last June in the wake of the turmoil from the Department of Labor’s “Fiduciary Rule” – a preemptive regulatory incursion into financial markets outside DOL’s usual “portfolio” that resulted in a ...

The Municipal Securities Rulemaking Board (“MSRB”) on April 2 published its statistical analysis and list of COVID-19 continuing disclosures filed by municipal issuers during the first quarter of 2020.  Of 43,667 disclosures, 506 were related to the Coronavirus pandemic.

Securities and Exchange Commission Rule 15c2-12 requires all underwriters of municipal securities to require municipal issuers to enter an agreement that issuers will file continuing disclosures of events that may have a material effect upon bond repayment.  Although the COVID pandemic itself is not ...

On March 27, securities regulator FINRA extended its previous postponement of in-person hearings from May 1 through May 31.  FINRA also will offer virtual hearing options (including Zoom) by agreement or panel order.  Finally, postponement fees are waived through September with at least 20-days' notice.  All other case deadlines remain unaffected.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial ...

 

SEC Enforcement Co-Directors Stephanie Avakian and Steven Peiken issued a March 23 public statement warning that the novel Coronavirus pandemic increases material non-public information and reminding corporate insiders of their obligation to disclose or abstain.

“Corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater ...

The U.S. Department of Justice (“DOJ”) has filed its first criminal action against fraudulent activity taking advantage of the novel coronavirus pandemic.

DOJ filed suit on March 21 in Austin, Texas accusing the operators of “coronavirusmedicalkit.com” of wire fraud under 18 U.S.C. § 1343 by purporting to sell  WHO-approved COVID-19 vaccines online in return for credit-card payments of $4.95 for shipping.  But there are no approved vaccines yet, and WHO is not involved with the website.

The United States District Court for the Western District of Texas entered temporary ...

The New York Stock Exchange announced today that it will activate its Business Continuity Plan, temporarily closing its equities and options (Amer and Arca) trading floors, and will move to all-electronic trading starting at the open on Monday, March 23. Some Floor Broker order types will not be available.

The announcement is here.

The SEC has gathered its guidance in a single location. Topics covered include:

(a) The SEC’s own Business Continuity Plan (“BCP”) and its implementation;
(b) Increased market monitoring and surveillance;
(c) Issuer guidance regarding COVID-related disclosures;
(d) Conditional exemptive orders for registrants, including investment companies and investment advisers, easing meeting and certain reporting requirements;
(e) Delaying certain open rulemaking proposals until April 24.

The Enforcement Division remains active, having implemented temporary trading ...

The Massachusetts Securities Division adopted a watered-down fiduciary-rule for broker-dealers, effective March 6, with a compliance deadline of September 1, 2020. The move comes after years of announced intention to do so – especially after the Obama Labor Department’s fiduciary-rule got shot down in the courts.

The Rule requires a broker-dealer to act as a fiduciary for retail customers (excluding institutional accounts and investment advisers) when a broker:

• Has discretion (other than time and price);
• Has undertaken a contractual fiduciary duty; or
• Has ...

Paxos Settlement Service announced February 20, 2020 that it has commenced P2P settlement of US listed equity trades over a private, permissioned blockchain with Credit Suisse and Instinet (a Nomura Bank subsidiary). Paxos expects Societe Generale will join soon.

Paxos is registered with the New York Department of Financial Services and regulated as a limited-purpose trust company.

Late last year, Paxos obtained SEC No-Action relief from clearing-agency registration, limited to a “Feasibility Study No-Action Phase” restricted to a maximum of seven participants for 24 ...

Securities regulator FINRA has postponed all in-person arbitration, mediation, and disciplinary hearings through May 1, due to COVID-19 concerns.  All other case deadlines remain unaffected.  The guidance is here.
Tags: finra

This week FINRA issued Reg. Notice 20-08 on “Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief.”

FINRA urges member firms to review and update their Business Continuity Plans (“BCP”) to ensure they fit the effect of an infectious disease pandemic on each firm’s operations and risk profile.  See Rule 4370 (annual BCP review requires an update on any material change).

FINRA anticipates that firms may need to implement remote work arrangements (whether telecommuting or working from firm alternate or recovery sites).  In those instances ...

Posted in: FINRA

Former Louisiana deputy sheriff and Russian resident Steven Seagal agreed to a Cease and Desist (“C&D”) Order by the SEC, finding violations of the non-touting provisions of Securities Act § 17(b) and imposing civil penalties for acting as a Twitter and Facebook “brand ambassador” for cryptocurrency Bitcoiin2Gen without disclosing it was a paid endorsement.

The Order required Seagal to forego such opportunities for any issuer for three years, disgorge his endorsement fees and pay a civil penalty of a like amount over the coming year.

In 2017, the SEC’s Office of ...

FINRA held its bi-annual Cybersecurity Conference in January and recently published five take-away real-world experiences from the conference:

  • A firm’s social media posts about a charity golf tournament, tipped the scammers when to send an urgent email changing wire instructions, while most of the firm’s management was out on the course;
  • A thumb-drive planted in a parking lot labeled “bonuses,” “payroll,” or “commissions” proved bait too tasty for a firm’s personnel to resist;
  • Even the best vendor-based data systems have hidden vulnerabilities lurking ...
Posted in: Cyber Security, FINRA

FINRA issued a targeted-exam letter on February 20, 2020 seeking information on the effect of zero-commission trading upon compliance with related obligations of Best Execution, payment for order flow, and non-commission account fees.  The Exam Letter is here.

The zero-commission tide rose quickly throughout 2019, together with some industry consolidation as well.  Among those announcing no commissions:

  • Ally Invest, the investment affiliate of online Ally Bank;
  • E-Trade, to be acquired by Morgan Stanley, announced February 20, here.
  • Fidelity
  • Interactive Brokers
  • Robinhood
Posted in: FINRA

In a July 30 speech in Singapore, SEC Commissioner Hester Peirce compared renegade red pandas’ penchant for life “outside the fence” to the Fin-Tech innovation currently frustrating regulators’ efforts to keep up.

Eschewing calls for international regulation, she also compared the efforts of multiple national regulators to the oft-cited role of U.S. states as “laboratories of democracy.”  Cataloging some to date, she cited:

  • Singapore’s regulatory “clarity”
  • Thailand’s 2018 regulatory framework
  • Japan digital asset offering legislation and 2017 ...

Last week, the SEC’s Corporate Finance division issued its second no-action letter supporting a digital token issue.  On July 25, 2019, the Staff agreed it would not recommend enforcement action over the issuance of Quarters tokens for online gaming.

The issuer, Pocketful of Quarters, Inc. (“POQ”), states its use case as addressing “in-game currency fragmentation” by creating a “universal gaming taken” to solve “the inability to use gaming credits, coins or other units of value purchased in, or earned playing, one online video game in other online games.”

The ...

June 20, 2019 – Walmart (NYSE: WMT) and its subsidiary, WMT Brasilia, agreed to a combined criminal penalty and disgorgement of $282M, together with WMT’s criminal guilty plea and undertakings in an NPA, to reach a global resolution of the combined DOJ, SEC, and IRS-CI FCPA investigations on-going since at least 2012.  Walmart reports spending over $900M on the investigations and defense.  Walmart agreed to criminal penalties of $138M plus disgorgement of $144M to the SEC and admissions of fact in the criminal matter.  Walmart entered a 3-year NPA and agreed to retain Louis Freeh as ...

The SEC recently issued an investor alert warning about crypto advisory and trading websites.  The alert cautions investors to be especially wary of web-based crypto-currency sites with any of these red-flags:

  • Outsized “guaranteed” investment returns.
  • Complicated jargon or difficult-to-understand technologies.
  • Unlicensed sellers.
  • Sounds too good to be true.
  • Unsolicited offers.
  • Urgency to act.

…in short, the usual hallmarks of many scams.

The advisory comes on the heels of an indictment against two Nigerian citizens for wire fraud and conspiracy to commit ...

Posted in: Cryptocurrency, SEC

Last week, the D.C. Circuit held that the SEC can’t prosecute the same conduct as both willful and as negligent under the tandem sections found in most of the nation’s securities laws.  The ruling prevents the SEC from piling on an additional negligence-based offense as some sort of “lesser included offense” in enforcement actions.

The SEC brought an administrative enforcement action against the Texas-based Robare Group and its officers for inadequate disclosure of a revenue-sharing agreement with Fidelity over certain funds on Fidelity’s platform.  The firm’s ADV ...

Posted in: SEC

Late last week, the SEC issued a no-action letter widely hailed as its first on a blockchain-based digital token for private jet services.  In its TurnKey Jet letter, the Commission Staff indicated it would not recommend enforcement action over the operation of a private, permissioned, centralized blockchain network and smart-contract infrastructure for clearing and payment using a utility-token effectively functioning as a pre-paid jet card (or streetcar token).

See TurnKey Jet, Inc. (Apr. 3, 2019), here.

And the request, here.

CoinDesk reports that the no-action ...

Posted in: Cryptocurrency, SEC

This week, the Supreme Court held that knowing distributors of another’s false statements still could be primarily liable under parts of Rule 10b-5, even though they didn’t “make” the statements under prior precedent.  The Lorenzo decision seems clear and common-sense on its face, but represents a battle in the weeds of an administrative case that’s likely to have significant ramifications over who private civil litigants can sue under the Securities Laws.

Rule 10b-5 prohibits any person from:

  • "employ[ing] any device, scheme or artifice to defraud" [Scheme]
  • "mak[ing ...
Posted in: SCOTUS

This week, the SEC's Division of Investment Management issued a letter seeking industry and public input on custody issues arising from digital assets.

The "Custody Rule," Rule 206(4)-2 under the Advisers Act of 1940, provides it is a fraudulent act or practice to have custody of client assets, unless an adviser complies with Custody-Rule requirements, including among others, by a qualified custodian subject to annual independent audits.

The Division's recent Guidance Update on custody issues focused on inadvertent custody (e.g. where boilerplate in the adviser’s agreement ...

Posted in: Cryptocurrency, SEC

In an article published in the latest issue of the Journal of Robotics, Artificial Intelligence & Law (RAIL), Tom Potter discusses the current state of regulatory efforts by the U.S. Securities and Exchange Commission. Unlike the 1900's, today's cryptocurrencies rely on the internet, high-speed computing and higher-math cryptography, not stones.

Mt. Gox holds its infamous part of Bitcoin's history as the once biggest cryptocurrency exchange that went under in a chaotic fashion. After the 2014 collapse of Mt. Gox underscored the fraud potential posed by cryptocurrencies ...

Posted in: Cryptocurrency, SEC

In an article published in the latest issue of the Journal of Robotics, Artificial Intelligence & Law (RAIL), Tom Potter discusses the current state of regulatory efforts by the U.S. Securities and Exchange Commission. Unlike the 1900's, today's cryptocurrencies rely on the internet, high-speed computing and higher-math cryptography, not stones.

Mt. Gox holds its infamous part of Bitcoin's history as the once biggest cryptocurrency exchange that went under in a chaotic fashion. After the 2014 collapse of Mt. Gox underscored the fraud potential posed by cryptocurrencies ...

Earlier this week, SEC Enforcement staff lost a bid for a preliminary injunction against a prospective ICO in its pre-offering testing phase.

Blockvest was preparing for an ICO of "BLV" tokens. Its website touted the endeavor as the "first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States," and showed pictures of the seals of the SEC, CFTC, NFA and others. It also claimed to be regulated by the fictitious "BEC" (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.

So how ...

Posted in: Cryptocurrency, SEC

Last Friday, November 16, the SEC issued a pair of settled actions setting a de facto standard of compliance for unregistered ICOs wanting to "come in from the cold." In each of them, the ICO offeror paid a $250,000 monetary penalty, registered its ICO as a security, and entered a rescission undertaking respecting all tokens issued to date.

The first was a settled action by Paragon Coin - a digital token ("PRG") unregistered offeror in the cannabis industry. Paragon agreed to cease and desist, file a registration statement, and publicly offer rescission of the ICO. The Commission cited ...

On November 8, the SEC filed its first settled enforcement action against cryptocurrency trading platform for operating as an unregistered exchange trading securities, in violation of the Securities Exchange Act of 1934.

"EtherDelta" was a platform offering matched-book secondary market trading of ERC-20 tokens, many of which had issued in unregistered initial-coin-offerings ("ICOs") having attributes of "securities" under the Howey investment-contract analysis. The Howey test was applied by the SEC in its July 2017 Section 21A Report, The DAO, to conclude that digital ...

Posted in: Cryptocurrency, SEC

Frank Borger-Gilligan, Tennessee's chief securities regulator, last week was selected as President-Elect of the North American Securities Administrators Association ("NASAA") at the annual meeting in Anchorage, Alaska. Borger-Gilligan will serve as NASAA's president for the 2019-2020 term.

NASAA is the nation's oldest investor protection agency. The North American Securities Administrators Association (NASAA) was organized in 1919, making it the oldest international investor protection agency. NASAA's 67 members are state, provincial, and territorial securities ...

Posted in: Tennessee

So maybe it's not such a good idea for a volatile, impulsive chief executive to use his personal Twitter account to announce major policy shifts. No, no - not that one.

Everyone thought it would happen tout de suite, but the SEC finally filed its Tweet suit this week over Elon Musk's August 7 Tweet (to over 22 million followers): "Am considering taking Tesla private at $420. Funding secured."

Everyone cringed immediately about those last two words - a representation of fact. Especially because $420 a share was a substantial, if cannabis-tinged and arbitrary, premium. And because Tesla ...

Posted in: SEC

On September 11, FINRA announced its filing of an enforcement action accusing a Massachusetts broker of fraud and registration violations arising from his sale of an unregistered cryptocurrency, "HempCoin." It is FINRA's first cryptocurrency enforcement action.

FINRA alleges Timothy Ayre of fraudulently attempting to bolster his worthless public shell company, Rocky Mountain Ayre, Inc. (RMTN in the OTC pink sheets). Ayre alleged repackaged HempCoin as a security backed by RMTN common stock, marketing it as "the world's first currency to represent equity ownership" in a ...

Posted in: Cryptocurrency, FINRA

On September 11, the SEC announced a pair of settled cryptocurrency enforcement actions. The first was against an unregistered digital-asset hedge fund. The second shut down an "ICO Superstore" as an unregistered broker-dealer.

Crypto Asset Management LP ("CAM") ran an unregistered investment company while falsely marketing it as the "first regulated crypto asset fund in the United States." The unregistered offering raised $3.6 million over four months in late 2017, violating the '33 Act. Because the offering proceeds were used to buy digital assets that constituted over 40% of ...

Posted in: Cryptocurrency, SEC

FINRA recently proposed to remove the broker's "control" of a securities account as a required element of a "quantitative suitability" violation under Rule 2111.

For many decades, case law on broker-dealer fraudulent practices under Rule 10b-5 and others recognized a cause of action for "churning:" Knowingly recommending an unsuitable volume or frequency of trading in an account, by a broker exercising actual or constructive control over that account, as a form of self-dealing to generate commission revenue at the customer's expense.

When FINRA revised its "suitability" rule ...

A unanimous Supreme Court today held that "covered class actions" over exchange-traded securities are not removable from state courts under SLUSA when they assert only '33 Act claims.

The Court held the removal provisions of the Act are in aid of its state-law claim bar (removed to ensure dismissal), and do not otherwise affect the long-standing grant of concurrent jurisdiction for '33 Act claims.

"Under our reading of SLUSA, all covered securities class actions must proceed under federal law; most (i.e., those alleging 1934 Act claims) must proceed in federal court; some (i.e ...

Posted in: SCOTUS, SLUSA

It was the Ides of March for the Obama Administration's "fiduciary duty rule" that sought to remake much of nation's financial markets by back-door regulation of anyone dealing with IRA investors. The US Fifth Circuit vacated the regulation entirely in a stinging rebuke by Judges Edith Jones and Joy Clement; Chief Judge Carl Stewart dissented.

The Court held that the "novel assertion of DOL's power," Op. at 7, "fundamentally transforms over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries…." Op. at 3.

"The ...

Posted in: Fiduciary Rule

Last week, the unanimous Supreme Court clarified that the "clearing and settlement" exception to a bankruptcy trustee's avoiding powers covers only payments "to," not merely through, financial market participants.

The Bankruptcy Code provides trustees with various avoiding powers, including the ability to recoup for the estate actual or fraudulent transfers, under 11 U.S.C. § 548(a) (1). The Code also provides a number of exceptions to the trustee's avoiding powers, including some designed to protect the integrity of the clearing and settlement processes of the nation's ...

Posted in: Bankruptcy Code

In a triumph of positive statutory law over Chevron deference to the administrative state, the unanimous Supreme Court held this week that Dodd-Frank whistleblower protections require SEC reporting, because the statute defines "whistleblower" as someone who reports "to the Commission."

I'm relieved to know the Court agrees that "'When a statute includes an explicit definition, we must follow that definition,' even if it varies from a term's ordinary meaning. This principle resolves the question before us." Slip Op. § II at 9. The Ninth Circuit and the U.S. Solicitor General ...

Posted in: Dodd-Frank, SEC

After several years of examination focus and a series of enforcement actions, the SEC's Enforcement Division on February 12 announced a "Share Class Selection Disclosure Initiative" in an attempt to level-set industry compliance and bring investment-advisers in from the cold. See SEC Press Release No. 2018-15.

Investment advisers have a fiduciary duty to their customers. Investment Advisers Act of 1940 ("Advisers Act") § 206(2). That precludes self-interesting action and includes full disclosure of all compensation conflicts. And the Act prohibits Advisers from making ...

Posted in: SEC

A pair of FINRA Rule revisions designed to protect seniors from financial exploitation become effective February 5. The Rules require member firms to request "Trusted Contact Person" information and impose short account-disbursement holds upon reasonable suspicion of financial exploitation.

FINRA Rule 2165 applies to retail accounts held by a "Specified Adult," defined as at least 65 years old, or otherwise impaired and unable to protect her own interests. The Rule allows a 15-day temporary hold on disbursements from an account upon reasonable suspicion of financial ...

Posted in: FINRA

On January 12, the US Supreme Court agreed to review the constitutionality of the SEC's administrative law judges.

On November 29, 2017, the SEC did an abrupt about-face, telling the Court it now regards its ALJs as inferior officers and no longer would defend the lower-court decisions against Lucia. The next day, the SEC itself ratified the appointments of its ALJs. Nevertheless, the Commission argued that the Court should grant cert, appointing an amicus to defend the D.C. Circuit's opinion and considering the "for-cause" removal requirement for current ALJs.

It remains to be seen ...

Posted in: Supreme Court

The Sixth Circuit recently affirmed that failure-to-supervise claims against a brokerage firm over outside business activities it knew nothing about nevertheless were arbitrable under FINRA Rule 12200(2) as "arising in connection with the business activities of the member" firm.

The firm's representative worked together with an outside financial advisor and others to divert a firm customer's assets from an outside bank account to a fraudulent outside business activity. The customers' funds transferred into the brokerage account, out to a bank account and from there to the ...

On November 29, the SEC did an about-face and admitted its ALJs are "inferior officers" (not merely employees) subject to the Constitution's Article II appointment provisions. The Solicitor General's brief on behalf of the Commission sided with the argument of its opponent, Raymond Lucia; DOJ urged the Supreme Court to resolve a circuit split by ruling against the SEC's litigation position below and overturning the prior decision by the Court of Appeals for the DC Circuit.

The next day, the Commission took formal action ratifying the appointment of its ALJs, thus complying with the ...

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