Securities Industry Commentator by Bill Singer Esq

September 28, 2021

The United States Attorney for the Southern District of New York announced that the United States has simultaneously filed and settled a civil fraud lawsuit against Wells Fargo Bank, N.A. ("Wells Fargo" or the "Bank") alleging that it violated the Financial Institutions Reform Recovery and Enforcement Act ("FIRREA") by fraudulently overcharging hundreds of commercial customers, many of them small and medium-sized businesses and federally-insured financial institutions, who used the Bank's foreign exchange ("FX") service. Specifically, the United States alleged that, from 2010 through 2017, Wells Fargo FX sales specialists defrauded 771 customers by systematically charging them higher markups on FX transactions than they represented the Bank would charge, and concealing these overcharges through various misrepresentations and deceptive practices. This matter was initially brought to the Government's attention by a whistleblower who filed a confidential declaration with the U.S. Department of Justice pursuant to the Financial Institutions Anti-Fraud Enforcement Act.

In the settlement, Wells Fargo acknowledged that it took adverse employment actions against more than 20 Wells Fargo employees who were involved in the FX business, including various disciplinary actions and separation of employment, and affirmed that it has taken various steps in an effort to comply with industry FX best practices. In accordance with the terms of the settlement, Wells Fargo will pay about $72.6 million, with about $35.3 million having been paid directly to the 771 customers collectively as restitution and about $37.3 million to be paid to the United States as civil penalties under FIRREA and as asset forfeiture. Also, Wells Fargo admitted that many FX sales specialists had overcharged hundreds of commercial customers via larger sales margins or spreads; and, when some customers inquired about the higher-than-agreed-upon pricing, FX sales specialists gave false explanations for the inflated prices. ownload wells_fargo_21cv8007_-_stipulation_2_signed.pdf

As alleged in part in the DOJ Release:

During 2010 through 2017 (the "Covered Period"), Wells Fargo offered FX services to commercial customers located throughout the United States, such as converting the customers' US dollars into foreign currency for outgoing wire transfers and converting incoming wire transfers of foreign currency into U.S. dollars.  Wells Fargo profited from these transactions by marking up the prices on currency it was selling to and marking down the prices on currency it was buying from its customers.  Wells Fargo employees referred internally to this currency mark-up as a "spread" or "sales margin." Wells Fargo FX sales specialists frequently entered into agreements with the Bank's customers pursuant to which they represented that the Bank would charge specific spreads or sales margins on their FX transactions.  These agreements, referred to internally as "fixed-pricing agreements," were both written and oral in nature. 

During the Covered Period, Wells Fargo defrauded 771 of its commercial customers with fixed-pricing agreements, many of them small or medium-sized companies and federally-insured financial institutions, by falsely representing to the customers that the Bank would charge specific fixed FX spreads on FX transactions, when, in fact, Wells Fargo was surreptitiously and systematically charging significantly higher spreads and pocketing tens of millions of dollars in ill-gotten FX revenue.  By financially incentivizing its FX sales specialists to overcharge FX customers while failing to take steps to ensure that FX sales specialists honored pricing representations, Wells Fargo created an atmosphere in which employees openly joked about and celebrated taking advantage of the Bank's customers. 

Wells Fargo FX sales specialists used a variety of misrepresentations and deceptive practices to defraud customers.  For example, instead of applying agreed-upon fixed spreads to customers' outgoing wires, FX sales specialists would charge inflated spreads that were as large as the FX sales specialists thought they could get away with.  Furthermore, rather than charging the agreed-upon fixed spread to the FX market rate at the time the outgoing wire was converted, FX sales specialists would select the best rate for the Bank and worst rate for the customer from the FX price fluctuations from the beginning of the trading day until the time of the transaction.  This practice was referred to internally as "Range of Day" Pricing.

In addition, FX sales specialists sometimes would give customers fictitious underlying FX market rates and spread calculations to create the false impression that Wells Fargo was complying with pricing representations when that was not the case. Other times, FX sales specialists would make intentional "errors" to the exchange rate given to a customer to make the Bank's spread much larger.  If caught, the FX sales specialist would falsely claim that digits in the price had been mistakenly transposed.  This practice was known as the "Big Figure Trick."

FX sales specialists also at times would charge a customer different spreads depending on which customer representative initiated the transaction.  Because Wells Fargo's online FX service tracked user identities, FX sales specialists would impose larger spreads on transactions initiated by those representatives thought to be less sophisticated or experienced in FX trading.  This practice was known internally as "User-Based Pricing."

FX sales specialists frequently would apply an even more egregious form of Range of Day pricing to customers' incoming wire transfers, called "BSwift" wires.  Because Wells Fargo generally did not notify customers when they received incoming wires of foreign currency or when those wires were converted, FX sales specialist could wait until the end of the day and select the best rate for the Bank and worst rate for the customer from price fluctuations throughout the entire trading day.  One FX specialist called this practice the "BSwift Pinata."

As part of the settlement, Wells Fargo admitted and accepted responsibility for the following conduct:
  • During the Covered Period, many FX sales specialists overcharged hundreds of commercial customers by applying larger sales margins or spreads to customer FX transactions than they represented they would.
  • Wells Fargo received millions of dollars from customers to which the Bank was not entitled.
  • FX sales specialists internally discussed and even celebrated transactions resulting in larger FX spreads than agreed to with customers or transactions generating large FX revenue.  For example, FX sales specialists on Wells Fargo's San Francisco FX desk would celebrate transactions with large spreads or sales margins by ringing a bell located on the trading floor.  Other FX sales specialists would use expressions such as, "back the truck up," and "when in doubt, spread them out," to jokingly describe how Wells Fargo and its FX sales specialists were making money on transactions by charging large FX spreads, including larger FX spreads than agreed to with customers.
  • Wells Fargo's own internal CMR database indicated that FX sales specialists were charging customers FX spreads that were higher than those the Bank had represented.  Certain CMR notes reflected that while a customer thought it would receive the rate that the Bank had represented to the customer, the Bank in fact charged the customer undisclosed higher spreads.  For example, an FX sales specialist stated in one CMR note concerning Customer A that there was an "agreement w/the customer" to charge "25 pips [points in percentage]on spot trades" but that the Bank would "take 30-35 . . . if possible."   
False Information

  • In certain instances, when customers contacted the Bank to inquire about higher-than-agreed-upon pricing, FX sales specialists would give false explanations for the prices such as "time fluctuations" or other supposed events in the market.
  • In a few cases, FX sales specialists provided customers false transaction data.  In one instance, an FX sales specialist represented to Customer E that it would charge a spread of 5 basis points on certain BSwift wire transactions.  Contrary to this agreement, the Bank actually charged higher spreads on a series of FX transactions.  Then, in email correspondence with representatives of Customer E, the FX sales specialist provided inaccurate market rate information to the customer to make the FX spread falsely appear consistent with the agreement terms.
The Big Figure Trick

  • For some customers, FX sales specialists also used what they internally called the "big figure trick" or the "transposition error game" to increase the FX sales margin by switching digits in the price of the transactions in a way that would cost customers more money.  For example, if the correct hypothetical price to purchase a Euro was 1.0123 dollars, an FX sales specialist would use the big figure trick to switch the price to 1.0213 dollars, thus taking more spread (in this example, an additional 89 basis points) from the customer.
  • If caught by the customer, the FX sales specialist would claim that it was simply a mistake of adjusting the wrong digit in the price.  One FX sales specialist explained, "You can play the transposition error game if you get called out."  Another FX sales specialist noted to a colleague about a previous transaction that a customer "didn't flinch at the big fig the other day.  Want to take a bit more?"

User-Based Pricing

  • At times, Wells Fargo's FX sales specialists charged the same customers different spreads depending on which representative of the customer happened to be involved in executing the trade.  Specifically, Wells Fargo's FX sales specialists would charge larger spreads on transactions requested by certain customer representatives thought to be less sophisticated or experienced in FX trading.

BSwift Piñata

  • As noted above, because Wells Fargo generally did not provide immediate notice to customers when they received incoming wires, known as BSwifts, Wells Fargo's FX sales specialists took advantage of this time delay to charge higher spreads than the Bank had represented it would. 
  • An FX sales specialist in a written instant message to another sales specialist referred to the Bank's pricing of BSwift wire transfers as the "BSWIFT pinata." An additional FX sales specialist noted in a recorded call that she preferred to book her own BSwifts to stretch the spread and could take more spread because she was doing the pricing herself.  She observed that she could "dance around it" if the customer called with questions.  
  • Another FX sales specialist observed in an internal email communication that customers would not notice higher spreads on BSwift wires.  He wrote, after noting that he "bumped spreads up a pinch," that "these clients who are in the mode of just processing wires will most likely not notice this slight change in pricing" and that it "could have a very quick positive impact on revenue without a lot of risk."

Financial Incentives and Lack of Meaningful or Effective Oversight

  • Wells Fargo incentivized its FX sales specialists to generate FX sales revenue by tying their bonuses exclusively to the amount of sales revenue they generated for the Bank from FX transactions.  Specifically, before 2017, Wells Fargo paid bonuses to FX sales specialists based upon the percentage of the FX sales revenue that each FX sales specialist and FX desk generated.  Each year during the Covered Period, Wells Fargo paid hundreds of thousands of dollars in bonuses to various FX sales specialists based on FX revenue.  Some FX sales specialists received bonus compensation exceeding $1 million in a single year.
  • Prior to 2017, Wells Fargo failed to put meaningful or effective safeguards in place to ensure that FX sales specialists priced customer FX transactions in accordance with the terms represented in fixed-pricing agreements.  For example, during the Covered Period, Wells Fargo:  (i) had no meaningful or effective policies or procedures governing how fixed-pricing agreements should be negotiated, memorialized, recorded, or implemented; (ii) provided no training to FX sales specialists concerning fixed-pricing agreements; (iii) had no meaningful or effective process to systematically track the existence or terms of fixed-pricing agreements; (iv) had no systemic process in place to monitor whether FX sales specialists were pricing FX transactions in a manner that was consistent with fixed-pricing agreements; (v) did not implement any electronic safeguards that would have prevented FX sales specialists from pricing transactions in a manner that deviated from fixed-pricing agreements; and (vi) did not conduct any audits or reviews of FX transactions to determine whether FX pricing matched fixed-pricing agreements until 2017. . . .
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged the Michael James Ferguson Jr. Foreign Private Trust ("Ferguson Trust") and the Trust's Chief Executive Officer Noble Mikhail Jabal Mohommet Firdaus El with aiding and abetting the Trust's violations of, Sections 17(a)(1), 17(a)(3), 17(b)(1), 17A(c)(2), and 17A(d)(1) of the Exchange Act and Rules 17Ac2-1 and 17Ac2-2 promulgated thereunder. As alleged in part in the SEC Release

[F]erguson Trust registered with the SEC in June 2019, but subsequently has failed to file required annual reports or amend its registration form to update inaccurate information. Ferguson Trust allegedly also failed to provide the SEC's Division of Examinations and the Division of Enforcement with a single record relating to its transfer agent activities and permit Commission staff to inspect its books and records. The SEC's complaint further alleges that Firdaus El signed each of Ferguson Trust's filings in question and, despite being repeatedly informed of the trust's legal obligations by the Division of Examinations and the Division of Enforcement, chose not to have Ferguson Trust comply with such legal obligations.
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged
 VerdeGroup Investment Partners, Inc. and its Principal Thomas Gaffney with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as the registration provisions of Section 5 of the Securities Act. Further, the Complaint charges Gaffney, as the control person of VerdeGroup under Section 20(a) of the Exchange Act, for VerdeGroup's violations of the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Gordon is charged with violating the registration provisions of Section 5 of the Securities Act and Section 15(a) of the Exchange Act. Cynthia Gaffney and Tommy's Pizza were named as Relief Defendants. As alleged in part in the SEC Release:

[F]rom January 2018 through July 2019, VerdeGroup and Gaffney raised funds from investors to ostensibly finance legal marijuana businesses. The complaint alleges that Gaffney and VerdeGroup misled investors about how their monies would be used, about VerdeGroup's business partners, and about VerdeGroup's initial public offering. As alleged in the complaint, to help disguise his involvement, Gaffney directed investors to send their funds to a third party account, from which investor funds were transferred to an account in the name of relief defendant Tommy's Pizza, founded and operated by Gaffney and his wife Cynthia Gaffney. The SEC alleges that investor funds were then used for a variety of Gaffney's personal expenses, including jewelry, travel, and his pizza parlor business. According to the complaint, defendant Lisa Gordon, hired to handle VerdeGroup investor relations, acted as an unregistered broker-dealer in connection with the unregistered offering.
The United States District Court for the Southern District of New York entered a final judgment against Defendants Nicholas J. Genovese, Willow Creek Investments, LP, and Willow Creek Advisors, LLC, whereby Genovese and Willow Creek Investments were permanently enjoined from future violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule l0b-5 thereunder; and Genovese and Willow Creek Advisors were permanently enjoined from future violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Further, Genovese was ordered to pay a $1 million civil penalty. As alleged in part in the SEC Release:

[G]enovese and his the Willow Creek entities raised more than $5.3 million from at least six investors by lying about his prior securities industry experience and size of operations, and by concealing his past criminal history. The court previously entered a preliminary injunction and asset freeze that remained in effect during the pendency of the case. In July 2021, the court granted the SEC's motions for summary judgment and default judgment, finding that Genovese misrepresented his background and expertise, as well as the nature of Willow Creek, to induce investments.

SEC Charges U.K.-Based Father and Son, and Two Others in Transatlantic Microcap Fraud Scheme (SEC Release)
In two Complaints filed in the United States District Court for the Eastern District of New York, the SEC charged nine Defendants with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. 
Further, the SEC charged Timothy Page, Trevor Page and three of the entity Defendants with violating the registration provisions of Sections 5(a) and (c) of the Securities Act, and Timothy and Trevor Page and one entity are charged with violating the reporting provisions of Section 13(d) of the Exchange Act and Rule 13d-1 thereunder. Also, Timothy Page and Trevor Page are charged with violating the market manipulation provisions of Section 9(a)(2) of the Exchange Act. 
Also, Defendants Daniel Cattlin and William R. Shupe are charged with aiding and abetting the Pages' violations of the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder. 
Timothy Page's wife, Janan Page, is named as a Relief Defendant. The SEC is seeking an order freezing the assets of Timothy, Trevor, and Janan Page and the five entity defendants. As alleged in part in the SEC Release:

According to the first of the two complaints, United Kingdom citizen Timothy Page, a recidivist, and his son, U.K. resident Trevor Page, schemed with associates to acquire millions of shares in U.S. publicly traded microcap companies, disguise their control over the companies, and then dump their shares into the public markets in violation of the securities laws. The Pages allegedly used nominee entities, including the five entity defendants, to conceal their holdings in the companies, and then engaged in manipulative trading and hired boiler rooms to generate artificial demand for their stock by making misleading statements to investors.

The SEC's second complaint alleges that two of the Pages' associates, Utah resident William R. Shupe and U.K. resident Daniel Cattlin, used their insider roles as officers or majority shareholders at several of the microcap companies to hide the Pages' control. At the same time, they helped the Pages secretly acquire and then sell millions of the companies' shares. Shupe allegedly enabled the Pages to disguise their control over the companies by, among other things, holding the Pages' securities through a company Shupe formed and by helping the Pages conceal their funding of the microcap companies. Cattlin is alleged to have coordinated with the Pages to provide false and misleading information in response to investigative subpoenas issued by the SEC staff, and during an interview conducted by SEC staff in June 2020.

SEC Sues Minnesota-Based Firm and Its Managing Partner for Acting as an Unregistered Securities Dealer (SEC Release)
In a Complaint filed in the United States District Court for the District of Minnesota, the SEC alleged that Carebourn Capital, L.P. and its Managing Partner Chip Rice violated the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act; and, further, that Carebourn Partners, LLC received illicit proceeds from Rice and Carebourn Capital's violations.  Carebourn Partners, LLC. was named as a Relief Defendant. As alleged in part in the SEC Release:

The SEC's complaint alleges that Rice and Carebourn Capital's business model was to buy convertible promissory notes - a type of security - from penny stock issuers, convert the notes into newly-issued shares of stock, and quickly sell those shares into the public market at a profit.

The complaint further alleges that, since January 2017, Rice and Carebourn Capital purchased more than 100 such notes from approximately 40 different penny stock issuers. The complaint alleges that Rice and Carebourn Capital negotiated and received highly favorable terms for these notes, including terms that gave them deep discounts from the prevailing market price for the shares of counterparty penny stock issuers. According to the complaint, by engaging in a regular business of buying convertible notes and then selling the resulting newly-issued shares of penny stock companies' stock into the public market, Rice and Carebourn Capital operated as unregistered securities dealers and collectively generated more than $25 million in gross stock sale proceeds and over $13 million in net profits, with many deals still outstanding.
In a Complaint filed in the United States District Court for the District of New Jersey, the SEC charged Suyun Gu and Song Lee with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. Without admitting or denying the SEC's allegations, Lee consented to the entry of a final judgment enjoining him from violating the antifraud provisions and ordering him to pay $51,334 in disgorgement, $515 in prejudgment interest, and a $25,000 civil monetary penalty. As alleged in part in the SEC Release:

[S]tarting in late February 2021, Suyun Gu became aware of the increased market volume and volatility driven by so-called "meme stocks" - stocks that were being actively promoted on social media platforms. Gu allegedly then devised a scheme to take advantage of the "maker-taker" program offered by exchanges by trading options of these stocks with himself.

Under the maker-taker program, a trade order that is sent to an exchange and executes against a subsequently received order makes liquidity and generates a rebate from the exchange. In contrast, an order that immediately executes against a pre-existing order takes liquidity and is charged a fee.

The SEC's complaint alleges that Gu was able to generate illicit profits by using broker-dealer accounts that passed rebates back to their customers to place initial orders on one side of the market, and then using broker-dealer accounts that did not charge fees for taking liquidity for his subsequent orders on the other side of the market. When identifying a product to trade, Gu and his friend and business associate, Yong Lee, selected far out-of-the-money put options on some "meme stocks," which they thought would be easier to trade against themselves because interest in buying the "meme stocks" and related price increases would make put options on those stocks less attractive. After certain broker-dealers closed Gu's and Lee's accounts in early March 2021, Gu was able to continue the scheme through mid-April 2021 by lying to broker-dealers about his trading strategy, using accounts in the names of other people, and accessing these accounts through virtual private networks to hide his activity. The complaint alleges that Gu executed approximately 11,400 trades with himself, netting at least $668,671 in liquidity-rebates, and that Lee executed approximately 2,300 trades with himself, netting $51,334 in liquidity-rebates. In addition to collecting these ill-gotten rebates, the wash trading scheme allegedly impacted the market as it skewed the volume in certain option contracts and induced other traders to place trades in otherwise illiquid option contracts.
The SEC's complaint charges Casurluk and Star Chain with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Without admitting or denying the allegations in the SEC's complaint, Casurluk and Star Chain each consented to the entry of an order permanently enjoining them from violating the charged provisions, and authorizing the court to determine at a later date the amount of disgorgement, prejudgment interest, and civil money penalties that each defendant shall pay. As alleged in part in the SEC Release:

The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that, from November 2016 until 2019, Casurluk and Star Chain raised approximately $9 million from unsophisticated investors, many of whom spoke little English and had recently emigrated from Turkey to the United States, under the guise of investing in several quick-serve restaurant franchises. Casurluk and Star Chain allegedly told investors that Star Chain and the investors would make equal capital contributions to acquire the restaurants and would be "50/50" owners. In reality, as further alleged, Casurluk and Star Chain inflated the restaurants' purchase price to make it appear that they had contributed to the purchases when only investors' funds had been used to purchase the restaurants. Moreover, contrary to their disclosures, Casurluk and Star Chain allegedly did not identify the investors as owners of the restaurants in franchise documents or otherwise. Finally, according to the complaint, Casurluk misappropriated investors' money for his own personal use and to support other businesses he owned, including a construction company and unrelated quick serve restaurants.
In a Complaint filed in the United States District Court for the Southern District of Florida, the SEC charged Sky Group USA LLC and its Chief Executive Officer Efrain Betancourt, Jr. with violations of the registration and antifraud provisions of the federal securities laws and, additionally, charged Betancourt with acting as an unregistered broker. Angelica Betancourt and EEB Capital Group LLC were named as Relief Defendants. As alleged in part in the SEC Release:

[S]ky Group and Betancourt falsely told investors that Sky Group would use investors' money solely to make payday loans and cover the costs of such loans, when, in reality, Betancourt misappropriated at least $2.9 million for personal use - including for his lavish wedding at a chateau on the French Riviera, vacations to Disney resorts and the Caribbean, costs associated with the purchase of a luxury Miami condominium, and service on his personal Piper airplane - and transferred at least another $3.6 million to friends and family, including his ex-wife, Angelica Betancourt, and to EEB Capital Group LLC, an entity whose bank accounts Betancourt and his current wife control. Sky Group and Betancourt also allegedly used at least $19.2 million of investors' money to make Ponzi-like payments to other investors. Finally, the SEC's complaint alleges that Sky Group and Betancourt misled investors by promising annual returns as high as 120% and representing that Sky Group's business was profitable, even though Sky Group did not generate sufficient revenue to cover principal and interest payments due to investors.

Thank you, Ed [Bernard]. I'm glad to be with the Asset Management Advisory Committee again. I appreciate the members' time and willingness to give us advice, and I look forward to hearing the readouts from today's discussions. As is customary, I'd like to note I'm not speaking on behalf of the Commission or the SEC staff.

Today, I'd like to speak about a topic that I know your Evolution of Advice Subcommittee regularly takes up: the way rapidly changing technology is changing user experiences and marketing, providing the ability to give individuals personalized advice and client service.

I'd like to discuss something underlying all of this: predictive data analytics.

We are living in a transformational time, perhaps as transformational as the internet itself. Artificial intelligence, predictive data analytics, and machine learning are shaping and will continue to reshape many parts of our economy.

To take just one example, I believe we're in an early stage of a transition toward driverless cars. Policymakers already are thinking through how to keep passengers and pedestrians safe, if and when these changes take hold.

Finance is not immune to these developments. Here, too, policymakers must consider what rules of the road we need for modern capital markets and for the use of predictive data analytics.

You see, new platforms can collect boundless amounts of data - from customers or from the world around them. With that data - say, the steps we've taken wearing our fitness bands, or the days of the week we buy pet food online - they can tune their marketing to each of us differently.

Therefore, fintech platforms have new capabilities to tailor marketing and products to individual investors, using predictive data analytics and other digital engagement practices (DEPs).

These technologies can bring increased efficiencies and greater access in finance. In many cases too, though, these individualized features may encourage investors to invest in different products or change their investment strategy.

Thus, in the case of robo-advisers or investment advisers, I question what are they doing within the predictive data analytics algorithms - if, statistically speaking, they are maximizing for our returns as investors, or, say, the revenues of the platforms.

In essence, predictive data analytics and other DEPs, including behavioral prompts and differential marketing, often are designed, in part, to increase platform revenues, data collection, and customer engagement.

This raises some key questions:

How are investors protected in light of the potential conflicts of interest that may exist when DEPs optimize for revenues, data collection, or investor behaviors?

There's a related policy question: if DEPs are affecting investors' behavior, when is that a recommendation or investment advice?

How do these new business models ensure for fairness of access and pricing? More specifically, this question arises when the underlying data used in the analytic models reflects society's data, with historical biases that may be proxies for protected characteristics, like race and gender.[1]

Advances in predictive data analytics also could raise some system-wide issues when we apply new models and artificial intelligence across our capital markets. This could lead to greater concentration of data sources, herding, and interconnectedness, and potentially increase systemic risk.

We're taking a look at these issues as part of a broader examination of predictive data analytics and the intersection between finance and technology.

In late August, the Commission published a request for public comment on the use of new and emerging technologies by financial industry firms.[2] I encourage investors in your funds to weigh in by Oct. 1.

Separately, I have asked SEC staff to develop proposals for the Commission's consideration on cybersecurity risk governance - both on the issuers' side and on the funds' side. These could address issues such as cyber hygiene and incident reporting.

I look forward to your thoughts on all these topics.

Thank you.

[1] See Gary Gensler and Lily Bailey, "Deep Learning and Financial Stability," available at

[2] See

Thank you, Ed [Bernard].  And thanks to all the hard-working Committee members and panelists.  When Chairman Jay Clayton announced the formal establishment of the AMAC nearly two years ago, he charged it with helping "the Commission ensure that our regulatory approach to asset management meets the needs of retail investors and market participants at a time when the industry is evolving rapidly."[1]  Over the next two years, the AMAC succeeded in addressing many of the pressing issues facing asset managers, and I for one have profited from the work and contribution each of you has made. 

Today's agenda is in keeping with AMAC's role to inform the Commission on pertinent matters affecting asset managers and their clients, and I am looking forward to hearing the presentations from the subcommittees on Private Investments and the Evolution of Advice.  The Private Investments Subcommittee's final report will become an important source of information and insight as the Commission continues to look for ways to increase retail investor access to the vibrant private markets.  I hope remedying the diminishing retail investor options in these markets will be added to the Commission's admittedly expansive agenda.  I am especially interested in hearing the update from the Small Advisers and Small Funds subcommittee.  Recognizing the important role that small advisers play in our markets and in the lives of our clients needs to be a key consideration in policy formulation.

One way to show our appreciation for the special challenges smaller advisers face is by taking the relatively simple step of amending our regulatory definition of just what a small adviser is for purposes of our regulatory analysis.  Currently, we define a small adviser as being a firm with assets under management of less than $25 million.[2]  As the presentation materials illustrate, almost 60% of advisers have assets under management of $100 million to $1 billion, most assets are managed by a small number of very large advisers,[3] and nearly 90% of all advisers have 50 or fewer non-clerical employees, with a median number of just eight employees.[4]  Regardless of what our rule says, these are small firms who feel keenly the cost of each additional regulatory requirement the Commission imposes.  Small advisers provide a bridge to prosperity, as they are engaged on a daily basis with retail investors in communities across the country, and it is incumbent on us to do all we can to encourage their growth and lower barriers.

I am looking forward to hearing what the subcommittees have to say, but I am even more excited to listen to the discussions that will follow.  Although I have not always agreed with AMAC's recommendations, I have always benefited from hearing the thoughts of this dynamic group. 

[1] U.S. Securities and Exchange Commission, "SEC Announces the Formation of Asset Management Advisory Committee," October 9, 2019, [Press release],   

[2] 17 CFR § 275.0-7. 

[3] "Presentation to the SEC's Asset Management Advisory Committee," Investment Adviser Association, Sept. 27, 2021, slide 7,  

[4] Id. slide 8.

Thank you, Carla [Garrett]. It's good to be with this Committee again. I'd like to thank the members for their time and willingness to represent the interests of America's small businesses. As is customary, I'd like to note I'm not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today's discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn't tap the capital markets like many small business owners today.

As a society, the U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world. Our companies, including small businesses, rely on our capital markets more than companies in other countries do.

Consider this: The U.S. capital markets represent 38 percent of the globe's capital markets.[1] This exceeds even our impact on the world's gross domestic product, where we hold a 24 percent share.[2]

Furthermore, corporate bonds, a $10 trillion market,[3] is about the same size of commercial bank lending in this country.[4]

Broadly speaking, as small businesses grow, they often migrate from borrowing in bank markets to borrowing in capital markets. Having that breadth and depth in our markets facilitates capital formation. That's why we want to make them as efficient as possible.

In that context, I'd like to touch on one topic this Committee will discuss today: special purpose acquisition companies (SPACs).

This year, there has been an unprecedented surge in SPACs, which provide an alternative to traditional initial public offerings (IPOs). As technology and markets evolve to challenge existing business models, it is important to think about how we protect investors and facilitate capital formation.

With SPACs, there are a lot of costs in between the companies and their investors. I think enhanced disclosures and other provisions can increase competition in this market.

SPACs are shell companies that raise cash from the public through what I call "blank-check IPOs." They generally have two years to find and merge with a target company.

SPAC sponsors generally receive 20 percent of shares of ownership up front - but only if they actually do a deal later. The first-stage investors can redeem when they find the target, leaving the non-redeeming and later investors to bear the brunt of that dilution.

Once they find a target company, SPACs often raise more capital through transactions known as private investments in public equity (PIPEs). These deals give new investors - mostly big institutions - an opportunity to put money into the target IPO.

These PIPE investors often can buy shares at a discount to what the share price will be after the target IPO, or receive other benefits or payments that are not available to ordinary investors.

The result? PIPE investors often get a better deal than retail investors, whose investment may be further diluted.

There are lots of costs that this structure is bearing - whether sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. These costs are borne by companies trying to access markets and by regular investors. It may be that those fees are coming out of the retail public's investment dollars.

I think for small businesses considering going public via SPACs, it is important to consider these costs as well, and whether it is the best approach for the target company.

I've asked staff for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.

I do think, however, that it is worth considering what we have learned from SPACs and direct listings, and whether there are any changes that might be appropriate for traditional IPOs.

I look forward to hearing from the public - including from this Committee - on these topics.

Thank you.
[1] See Securities Industry and Financial Markets Association, "2021 SIFMA Capital Markets Fact Book," available at

[2] See World Bank data:

[3] Statistics from Securities Industry and Financial Markets Association:

[4] See Federal Reserve, "Assets and Liabilities of Commercial Banks in the United States," available at

Remarks at SEC Small Business Capital Formation Advisory Committee Meeting by SEC Commissioner Hester Peirce

Thank you, Carla [Garrett] and thank you to the Committee members and today's panelists.  Welcome to Andrea [Seidt] to the Committee.  I am particularly happy to have a fellow Ohioan involved.  Thanks to Mike [Pieciak] for serving on the Committee.  I am looking forward to today's discussions on small business capital formation trends at this stage in the pandemic, and the changing dynamics of pre-IPO financing and going public.  Two trends to be featured today - SPACs and the significant increase of institutional investor participation in late stage private capital raising rounds - demonstrate the hunger for growth opportunities in our markets.  Making it possible for retail investors to get access to some of this early growth remains an important matter for the Commission's consideration.

The desire to expand private investment opportunities to more individuals was on full display at our May 2021 Small Business Forum.  The Forum's Report,[1] which was released this morning, includes valuable policy recommendations by the participants, many of which have been discussed by this Committee.  The Report includes some frustratingly non-committal responses by the Commission.  History teaches us that the Commission's non-committal responses with regard to Forum recommendations could translate into no action at all.  Now is not the time for a full response to all of the Forum's recommendations, but I will address a few of them and urge this Committee to continue pushing the Commission to show more of a commitment to facilitating small business capital formation. 

Forum participants recommended that we "expand the accredited investor definition to include other measures of sophistication, such as specialized industry knowledge or professional credentials."[2]   Another recommendation similarly suggested that we expand the definition "to include an investor certification course or test whose curriculum has been approved by FINRA or the SEC."[3] 

My response:  Ideally, the Commission would get out of the business of telling Americans that they are either not rich enough or smart enough to invest their money as they wish.  Short of that approach, the Commission should entertain proposals from the public to expand the accredited investor definition to cover additional certifications, designations, and other credentials.[4]  My preference would be to avoid anointing one institution or entity to design and administer a knowledge-based exam.  We might consider instead allowing multiple tests or crediting successful completion of two or more investing-related courses at any accredited college or university, but I am open to other options. 

Forum participants also recommended that we "revise Regulation Crowdfunding to remove the GAAP financial statement requirement for businesses looking to raise a small amount," preempt state law for secondary transactions for shares issued under Reg A and Crowdfunding rules, and establish a micro-offering exemption.[5]

My response:  We need to create workable options and remove regulatory barriers that prevent small businesses from using these options.  Since the beginning of the pandemic, Regulation Crowdfunding has emerged as a vital capital formation tool, and I am pleased that the Commission provided temporary relief with respect to the financial statement review requirements in Regulation Crowdfunding.  The positive feedback from that exercise suggests that we should be open to exploring other tweaks to Regulation Crowdfunding.  Likewise, changes to Reg A may help to expand its use, and a streamlined micro-offering exemption might be particularly helpful for early-stage founders in communities without many deep pockets or easy access to specialized legal help. 

Thank you, and I look forward to your thoughts and observations as today's agenda focuses at the other end of the spectrum of private companies-those close to going public.   

[1] Report on the 40th Annual Small Business Forum (May 24-27, 2021), available at

[2] Id. at 15. 

[3] Id. at 16.

[4] Proposals may be submitted to SEC staff at 

[5] Id. at 11-12. 

Remarks Before the Small Business Capital Formation Advisory Committee Meeting by SEC Commissioner Elad L. Roisman

Good morning and welcome. As is custom, I'll start by saying: my remarks this morning are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners. It's also customary for Commissioners to say that they are looking forward to an advisory committee's discussions, but I am especially looking forward to your discussions today. The topics you will be covering are crucial to our understanding of how smaller businesses are accessing capital, and I am particularly interested in hearing both your panelists and your discussion today.

Investment in private offerings has been a hot topic for several years now, as the private market has expanded. One of the key concerns that I have had is that there have been few opportunities for retail investors to capture much of the considerable wealth that has been generated by some of our country's most dynamic companies. It seems, however, that these opportunities have not been entirely missed as data show that pension funds and mutual funds have become active participants in late stage investments in these private companies, along with other types of "crossover investors."

I am pleased that, at least through some of those vehicles, some everyday Americans have been able to tap into the resilient growth in our private markets. Given that they are investing through highly sophisticated fund managers, and these managers are overwhelmingly investing at a point in a company's growth where risks have receded, this seems to be a good outcome for those beneficial owners. Our disclosure rules and the lines we have traditionally drawn between public and private offerings rely on the concept that our mandatory disclosures may not be necessary where an investor is sufficiently sophisticated to be able to request, receive, and evaluate the information needed to make an informed investment decision. These investments by mutual and pension funds would seem to meet that standard.

Of course, not all retail investors are able to access such opportunities. An individual non-accredited investor is still not able to invest in private offerings. As I have said frequently in this and other settings, we should continue to evaluate ways to expand the accredited investor definition to allow more individuals to access potentially valuable investments.

Also, not all of the crossover investors represent primarily retail investors. To the extent that the influx of crossover investor funds allow a greater chasm to grow between accredited investors with access to a rich array of investment options and retail investors who overwhelming cannot access these opportunities, this only underscores the fundamental unfairness of excluding people of moderate means from the investments with great growth potential. All this is to say: I hope that this Committee will continue to explore ways that all investors might participate in and benefit from our innovative and dynamic private markets.

I am also looking forward to your second panel today. As going public has become more challenging, companies have discovered or rediscovered alternative or novel ways to reach that goal. We have recently seen a considerable boom and rapid diminution in the number of SPACs. We have also seen a number of companies opt for the direct listing route.

Here at the SEC we see the numbers and the headlines, but often miss the stories on the ground. I am very interested to hear how today's panelists have navigated the various channels toward public listing, what challenges they have faced, and what regulatory changes might affect the markets.

Thank you again to our committee members and our guests. I look forward to your remarks and discussion.
Recently, SEC Commissioner Caroline A Crenshaw spoke about the aftermath of the 2008 financial crisis, better known in some circles as the "Great Recession." In recent years, I have welcomed the voices of a number of SEC commissioners, who have had the audacity to shake things up. Some voices have been strident -- at times, too much so. Some have voiced opinions that make me roll my eyes. At times, however, those same voices prompt me to reconsider long-held views or to ponder emerging issues that I had not anticipated. No, I do not favor the SEC or any big-government regulator devolving into a debating society. That's not their mandate and that's not effective regulation. On the other hand, sincere, rational, debate is the forge where we hammer out better regulations and enunciate developing enforcement policy. It is in that spirit that I applaud Commissioner Crenshaw's recent comments about the role of "risk" in our markets.