Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization (Speech by SEC Commissioner Commissioner Hester M. Peirce)
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Getting into the specifics of the proposal, the safe harbor would provide network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met. This objective is accomplished by exempting (1) the offer and sale of tokens from the provisions of the Securities Act of 1933, other than the antifraud provisions, (2) the tokens from registration under the Securities Exchange Act of 1934, and (3) persons engaged in certain token transactions from the definitions of "exchange," "broker," and "dealer" under the 1934 Act.The initial development team would have to meet certain conditions, which I will lay out briefly before addressing several in more depth. First, the team must intend for the network on which the token functions to reach network maturity-defined as either decentralization or token functionality-within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal. Second, the team would have to disclose key information on a freely accessible public website. Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network. Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users. Finally, the team would have to file a notice of reliance.
The SEC's investigations revealed that misconduct by numerous industry participants had the effect of introducing "phantom" ADRs into the marketplace. At times of high demand for ADRs, or when supply from traditional lending sources was limited, a number of brokers sought pre-released ADRs from intermediary brokers, who obtained them from depositary banks. Many of the brokers seeking the ADRs could not represent that they owned the underlying foreign shares to support a pre-release, and so they used intermediaries, which, in turn, obtained pre-released ADRs under false pretenses, including by providing false certifications. The depositary banks that issued the pre-released ADRs and the brokers who took custody of them should have known that under the circumstances, it was highly unlikely that anyone in the chain of transactions actually owned the requisite underlying foreign shares. The pre-released ADRs that were not backed by ordinary shares were often inappropriately used for trading strategies such as dividend arbitrage or short selling, which could not have otherwise occurred.
From 2010 through 2018, FIMCO did not conduct the supervisory testing and verification required by NASD Rule 3012 and FINRA Rules 3120, or prepare an annual report documenting the results. Moreover, for eight of the nine years during the Relevant Period, FIMCO failed to prepare an annual certification attesting that the Firm had processes in place to ensure that its supervisory systems and WSPs were reasonably designed to achieve compliance with the laws, rules and regulations governing its business and the activities of its registered representatives. In fact, FIMCO's CEO completed only one annual certification for the year 2012; however, that certification was deficient because the Firm did not prepare an annual supervisory report for review.
Page 2 of the OHO DecisionEscobio became associated with Southern Trust Securities, Inc. ("Southern Trust"), a FINRA-registered firm, in June 2000.On August 29, 2016, a federal court in Florida entered a judgment against Escobio in an action the CFTC brought against him for allegedly engaging in a fraudulent commodities scheme. On September 7, 2016, FINRA notified Southern Trust and Escobio in writing that Escobio was deemed statutorily disqualified as a result of that judgment.On July 27, 2017, the National Adjudicatory Council ("NAC") denied a Membership Continuance Application ("MC-400") filed by Southern Trust to allow Escobio to continue to associate with the firm. Two days later, on July 29, FINRA filed a Uniform Disciplinary Action Reporting Form ("Form U6"), reporting that Escobio was "subject to a statutory disqualification." On August 7, 2017, Southern Trust filed its Uniform Termination Notice for Securities Industry Registration ("Form U5") for Escobio, which stated that Escobio's voluntary termination with the firm occurred on July 27, the day the NAC denied the firm's membership continuance application. Almost two years later, on June 28, 2019, Southern Trust filed an amended Form U5 for Escobio, changing his date of termination to June 30, 2017.
But Escobio's jurisdictional arguments are erroneous as a matter of law. FINRA's jurisdiction over Escobio is based not upon when he ended his employment or association with Southern Trust, but when his registration was terminated. Escobio's FINRA registrations were terminated on July 28, 2017, the day after the NAC denied Southern Trust's MC-400 application. FINRA filed a Form U6 for Escobio on the next day, July 29, 2017, reporting that Escobio was statutorily disqualified and that his MC-400 application had been denied. Southern Trust filed a Form U5 for Escobio on August 7, 2017, specifying that Escobio's association with Southern Trust ended on July 27, 2017.The fact that, two years later, Southern Trust amended the Form U5 to change Escobio's termination date to June 30, 2017, is irrelevant. What matters is when FINRA ended his registration. As the SEC has stated, "[a] person who becomes registered remains registered until FINRA (not the registered person) ends the registration based, among other things, on the Forms U5 it receives." Because Escobio's FINRA registration was not terminated until July 28, 2017, and the Complaint was filed within two years of that date, FINRA has jurisdiction over this proceeding.