Securities Industry Commentator by Bill Singer Esq

June 8, 2022

Heslin Gallagher hoped to embark upon a Wall Street career. About the only obstacle in her way was the Series 7 exam, which she studied for and took . . . and took . . . and took.  What Heslin Gallagher was not going to take was what she thought was FINRA's manner of administering the exam that she failed three times. Heslin Gallagher was angry and she went about putting her anger into action.

The adoption of stablecoins worldwide has grown substantially in recent years, and more regulators and policymakers are showing an interest in stablecoin arrangements and the rules that apply to them. Recent public policy discussions have addressed prudential authority over stablecoins generally, as well as specific prudential concerns with stablecoins, such as the existence of appropriate reserves backing the stablecoins and the possibility of "runs" on the stablecoins similar to bank runs.[1] As the prudential regulator of companies engaged in virtual currency business activity in New York,[2] DFS has imposed requirements, standards, and controls on the stablecoins issued by its regulated entities since 2018, when DFS approved the first issuance of stablecoins by its regulated virtual currency companies.[3]

When a company applies for a license to engage in virtual currency business activity (a "BitLicense")[4] or a charter as a limited purpose trust company under the New York Banking Law, DFS reviews the company's business plan and product offerings in detail, and any stablecoin-related aspects of the company's business model are thoroughly evaluated as part of DFS's determination of whether to grant the license or charter. After licensure, BitLicensees must obtain DFS's written approval before introducing a materially new product, service, or activity,[5] and this prior-approval requirement applies to the issuance of a stablecoin. DFS imposes analogous requirements on New York State limited purpose trust companies that engage in virtual currency business activity and, accordingly, these companies also require DFS's written approval before they may issue a new stablecoin in New York.

The purpose of this Guidance on the Issuance of U.S. Dollar-Backed Stablecoins (this "Guidance") is to emphasize certain requirements that will generally apply to stablecoins backed by the U.S. dollar that are issued under DFS oversight. Specifically, this Guidance focuses on DFS requirements relating to:

i. the redeemability of such stablecoins;
ii. the asset reserves that back such stablecoins (the "Reserves"); and
iii. attestations concerning the backing by these Reserves.

Entities that issue stablecoins under DFS supervision, or that may be interested in doing so, can use this Guidance to better understand the baseline requirements in these three categories that they are expected to meet concerning U.S. dollar-backed stablecoins.

It is noted that, although stablecoins are a type of virtual currency that can be designed to maintain a stable value relative to any national currency or other reference asset, this Guidance applies only to stablecoins backed by the U.S. dollar, and only to stablecoins that are issued under DFS supervision by DFS-regulated virtual currency entities.

Baseline requirements for the issuance of U.S. dollar-backed stablecoins

DFS will generally impose the following conditions on all U.S. dollar-backed stablecoins whose issuance is subject to DFS approval.

1. Backing and redeemability

a. The stablecoin must be fully backed by a Reserve of assets, meaning that the market value of the Reserve is at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day.[6]

b. The issuer of the stablecoin (the "Issuer") must adopt clear, conspicuous redemption policies, approved in advance by DFS in writing, that confer on any lawful holder of the stablecoin a right to redeem units of the stablecoin from the Issuer in a timely fashion at par - i.e., at a 1:1 exchange rate for the U.S. dollar, net of ordinary, well-disclosed fees - subject to reasonable, non-burdensome conditions including otherwise applicable legal or regulatory requirements, such as the ability of the stablecoin holder to onboard successfully with the Issuer before redeeming. These redemption policies shall clearly disclose the meaning of "redemption" and the required timing of "timely" redemption, or shall expressly adopt the following default terms:

i. Redemption in U.S. dollars is deemed to have occurred when the Issuer has fully processed and initiated the outgoing transfer of funds to the holder's financial or other institution, if and as requested by the holder, or has credited the funds to the holder's cash account with the Issuer, if requested by the holder. And,

ii. "Timely" redemption means redemption not more than two full business days ("T+2") after the business day on which the Issuer receives a "compliant redemption order," meaning the business day on which (A) the Issuer has received a redemption order and (B) the holder or the holder's designee has onboarded successfully with the Issuer and all other conditions necessary to permit compliant redemption have been met.[7]

iii. In extraordinary circumstances, where DFS concludes that timely redemption would likely jeopardize the Reserve's asset-backing requirement or the orderly liquidation of Reserve assets, DFS has the authority to require or allow redemption that would not qualify as timely under item 1(b), as it deems necessary.

2. Reserve

a. The assets in the Reserve must be segregated from the proprietary assets of the issuing entity, and must be held in custody with (i) U.S. state or federally chartered depository institutions with deposits insured by the Federal Deposit Insurance Corporation ("FDIC") and/or (ii) asset custodians, approved in advance in writing by DFS. The Reserve assets shall be held at these depository institutions and custodians for the benefit of the holders of the stablecoin, with appropriate titling of accounts.

b. The Reserve shall consist only of the following assets:

i. U.S. Treasury bills acquired by the Issuer three months or less from their respective maturities.

ii. Reverse repurchase agreements fully collateralized by U.S. Treasury bills, U.S. Treasury notes, and/or U.S. Treasury bonds on an overnight basis, subject to DFS-approved requirements concerning overcollateralization. Such reverse repurchase agreements shall be either (A) tri-party or (B) bilateral with a counterparty that the Issuer has found to be adequately creditworthy and whose identity has been submitted to DFS in writing, without objection, together with the Issuer's credit assessment, at least 14 days prior to the Issuer's commencing to enter into contracts with such counterparty.

iii.Government money-market funds, subject to DFS-approved caps on the fraction of Reserve assets to be held in such funds and DFS-approved restrictions on the funds, such as a minimum percentage allocation to direct obligations of the Government of the United States and reverse repurchase agreements on such obligations. And,

iv. Deposit accounts at U.S. state or federally chartered depository institutions, subject to DFS-approved restrictions such as (A) percentage-of-Reserve or absolute-dollar-value caps on the assets to be deposited at any given depository institution and/or (B) limitations based on DFS's conclusions concerning the risk characteristics of particular depository institutions, taking into consideration the amounts reasonably needed to be held at depository institutions to meet anticipated redemption demands.

c. Issuers are expected to manage the liquidity risk of the Reserve in accordance with the redemption requirements discussed in paragraph 1 above.

3. Attestation

a. The Reserve must be subject to an examination of management's assertions, as set forth herein, at least once per month by an independent Certified Public Accountant ("CPA") licensed in the United States and applying the attestation standards of the American Institute of Certified Public Accountants ("AICPA"), where such CPA and such CPA's engagement letter shall have been approved in advance in writing by DFS. In each of these attestations, the CPA shall attest to management's assertions of the following as of the last business day of the period covered by the attestation and as of at least one randomly selected business day during the period: (i) the end-of-day market value of the Reserve, both in aggregate and broken down by asset class; (ii) the end-of-day quantity of outstanding stablecoin units; (iii) whether the Reserve was, at these times, adequate to fully back all outstanding stablecoin units as set forth in item 1(a) above, including reconciling items[8]; and (iv) whether all DFS-imposed conditions on the Reserve assets (whether set forth in paragraph 2 hereof or otherwise specified by DFS) have been met.

For purposes of item 3(a)(iv), the CPA shall be entitled to rely on the DFS-imposed conditions on the Reserve assets that applied as of each day in the period covered by the attestation as reported to the CPA by the Issuer, together with the Issuer's certification that such conditions are being accurately reported. In all events, the specific conditions on the Reserve assets against which the attestation was performed shall be included in the CPA's attestation report.

b. In addition to attestations referred to in item 3(a), the Issuer shall obtain an annual attestation report by an independent CPA licensed in the United States and applying the attestation standards of the AICPA, attesting to management's assertions concerning the effectiveness of the internal controls, structure, and procedures for compliance with the requirements described in items 3(a)(i) through 3(a)(iv) hereof. Such CPA and such CPA's engagement letter shall have been approved in advance in writing by DFS.

c. For each attestation described in item 3(a), the Issuer must make the CPA's reports available to the public, and produce a copy to DFS in writing, not more than 30 days after the end of the period covered by the attestation.

d. For each annual attestation report described in item 3(b), the Issuer must produce a copy to DFS in writing, not more than 120 days after the end of the period covered by the report.

Please note that the above requirements as to redeemability, the Reserve, and attestations are not the only requirements DFS places or may place on the issuance of stablecoins, and the risks connected to these factors are not the only risks DFS considers. DFS looks at a range of potential risks before authorizing a regulated virtual currency entity to issue a stablecoin, including risks relating to cybersecurity and information technology; network design and maintenance and related technology and operational considerations; Bank Secrecy Act/anti-money-laundering ("BSA/AML") and sanctions compliance; consumer protection; safety and soundness of the issuing entity; and the stability/integrity of the payment system, as applicable. DFS may impose requirements on a stablecoin arrangement to address any of these risks, or any other risks, consistent with DFS's statutory mandate and the laws and regulations relevant to the circumstances.[9]

This Guidance is not intended to limit, and does not limit, any power of DFS or the scope or applicability of any law or regulation. DFS may, at any time and in its sole discretion, prohibit or otherwise limit a stablecoin's issuance or use before or after a DFS-regulated Issuer begins issuing the stablecoin, and may require that any such Issuer delist, halt, or otherwise limit or curtail activity with respect to any stablecoin.

This Guidance is not intended to, and does not, affect obligations of Issuers to submit audited financial statements to DFS pursuant to the New York Banking Law, the virtual currency business activity regulation, 23 NYCRR Part 200, the Issuer's Supervisory Agreement with DFS, or any other relevant law or regulation. DFS may update this Guidance from time to time, or withdraw it.

Each DFS-regulated issuer of a stablecoin is responsible for understanding and complying with all applicable laws and regulations, including any applicable legal and regulatory requirements imposed by other state or federal regulatory agencies. This Guidance is not intended to address and does not address such other state, federal, or other requirements.

Issuers that currently issue U.S. dollar-backed stablecoins under DFS supervision are expected to come into compliance with this Guidance within three months of the date hereof, except as to the requirements set forth in items 3(b) and 3(d), with which these Issuers shall come into compliance in a reasonable period as determined by DFS in its sole discretion.

[1] See, e.g., President's Working Group on Financial Markets, et al. Report on Stablecoins (Nov. 2021) at 1-2.

[2] See 23 NYCRR Part 200.

[3] See DFS Continues to Foster Responsible Growth in New York's Fintech Industry With New Virtual Currency Product Approvals (Sept. 10, 2018).

[4] See 23 NYCRR Part 200.

[5] 23 NYCRR § 200.10.

[6] In this Guidance, a "business day" is defined as a business day (9 a.m.-5 p.m.) in the United States, New York time.

[7] A compliant redemption order received between the end of a business day and the start of the following business day shall be treated as having arrived during the following business day. Note that "receipt" of a redemption order shall be deemed to have occurred at the earlier of actual receipt and the time when actual receipt would have occurred but for Issuer negligence or willful ignorance.

[8] Reconciling items may exist, for example, in cases where the assets backing a newly minted stablecoin are in transit to the depository institutions and/or custodians.

[9] See, e.g., New York Financial Services Law §§ 102 and 201; New York Banking Law § 10; 23 NYCRR Part 200; and 23 NYCRR Part 500.
After a three-week jury trial in the United States District Court for the Northern District of Georgia:
  • Todd and Julie Chrisley were found guilty of conspiring to defraud community banks out of more than $30 million of fraudulent loans;
  • The Chrisleys and their accountant, Peter Tarantino, were found guilty of tax crimes including conspiring to defraud the IRS;
  • The Chrisleys were found guilty of tax evasion, and Peter Tarantino was found guilty of filing two false corporate tax returns on behalf of the Chrisleys' company; and 
  • Julie Chrisley was found guilty of wire fraud and obstruction of justice. 
As alleged in part in the DOJ Release:

[B]efore Todd and Julie Chrisley became reality television stars, they conspired to defraud community banks in the Atlanta area to obtain more than $30 million in personal loans. The Chrisleys, with the help of their former business partner, submitted false bank statements, audit reports, and personal financial statements to banks to obtain the millions of dollars in fraudulent loans. The Chrisleys then spent the money on luxury cars, designer clothes, real estate, and travel-and used new fraudulent loans to pay back old ones.  After spending all the money, Todd Chrisley filed for bankruptcy and walked away from more than $20 million of the fraudulently obtained loans.  

The evidence further showed that in 2014, while Todd Chrisley was in bankruptcy proceedings, Julie Chrisley again manufactured financial documents and lied to real estate agents to obtain a luxury rental house in Los Angeles, California.  As soon as the Chrisleys began renting the house, they failed to pay rent, and the homeowner filed an eviction lawsuit.

Around the time that Todd Chrisley filed for bankruptcy, the Chrisleys became the stars of their own reality show, which was recorded in Atlanta and later in Nashville..  The evidence at trial showed that while they were earning millions from their TV show, Todd and Julie Chrisley, along with their accountant, Peter Tarantino, conspired to defraud the Internal Revenue Service.

Throughout the conspiracy, the Chrisleys operated a loan-out company that received their income earned from their show and other entertainment ventures. To evade collection of half a million dollars in delinquent taxes owed by Todd Chrisley, the Chrisleys opened and kept the corporate bank accounts only in Julie Chrisley's name. One day after the IRS requested information about bank accounts in Julie Chrisley's name, the Chrisleys transferred ownership of the corporate bank account to Todd Chrisley's mother in an effort to further hide his income from the IRS.  All the while, Todd Chrisley operated the loan-out company behind the scenes and controlled the company's purse strings.

While the Chrisleys were earning millions and evading paying Todd Chrisley's delinquent back taxes, they also failed to file tax returns or pay any taxes for the 2013, 2014, 2015, and 2016 tax years. At one point, Todd Chrisley falsely claimed on a radio program that he paid $750,000 to $1 million in federal income taxes every year, even though he had not filed or paid his personal income tax returns for years. Tarantino was also convicted of filing two false corporate tax returns for the loan-out company, which falsely claimed that the company earned no money and made no distributions in 2015 and 2016. 

Finally, Julie Chrisley was convicted of obstruction of justice. After learning of the grand jury investigation, she submitted a fraudulent document in response to a grand jury subpoena to make it appear that the Chrisleys had not lied to the bank when they transferred ownership of the loan-out company's bank account to Todd Chrisley's mother. Julie Chrisley transmitted this document with the intent of impeding the grand jury's investigation into her and her husband and avoiding prosecution.
Martin Hogan, 53, was convicted in the United States District Court for the Western District of New York of conspiracy to commit wire and mail fraud; and he was sentenced to 111 months in prison. As alleged in part in the DOJ Release:

[B]etween September 2015 and March 2020, Hogan conspired with multiple co-defendants to defraud elderly victims using a fraudulent telemarketing scheme. Hogan placed telephone calls from Canada to victims in the United States, telling them that they had won the Canadian lottery. However, victims were told that they had to first pay the taxes, brokerage fee, and/or custom fees due in connection with the winnings. Some victims were instructed to mail cash to addresses in New York owned by co-conspirators. The cash was then smuggled over the border into Canada and given to Hogan. In total, elderly victims were defrauded out of more than $2,600,000.

Martin Hogan was on vacation in Jamaica where he was apprehended at the request of the United States and later extradited in January 2021. The money he used to pay for his vacation was money obtained from the scheme.
Mara Ficarra pled guilty in the United States District Court for the Eastern District of New York to conspiracy to commit mail, wire and bank fraud. As alleged in part in the DOJ Release:

[F]icarra and a co-conspirator owned, operated and held senior management positions in various companies, including Remington Biographies, Inc., Remington Bookkeepers, Inc., and Mentorship America1, Inc. (collectively, the "Remington Entities").  The Remington Entities purported to publish reference publications containing biographical information of individuals across the country.  Those publications included "Inspiring the Youth of America" and "The Remington Registry of Outstanding Professionals."

From 2013 to December 2018, Ficarra caused letters and pamphlets to be mailed to victims, primarily the elderly, indicating that the victim's biography would be published in one of the reference publications.  The letters, addressed "Dear Nominee," indicated, "Your 2 books and your plaque are paid for in full and ready for delivery.  Please send a check for $14.00 dollars for shipping and handling."  The pamphlet described the publication and stated in part, "The Remington Registry of Outstanding Professionals is more than a who's who.  It is the ultimate expression of achievements, hardships, and dedication that professionals have made in their lives and careers. . .. Sit back and be read for a wonderful experience."  The mailings induced hundreds of victims to send checks as payment for inclusion in the reference publications.  Ficarra then used the routing and bank account information on those checks to produce fraudulent checks for larger dollar amounts, which she then deposited into bank accounts she and a co-conspirator controlled at Citibank, Everbank, HSBC, JP Morgan Chase and Wells Fargo, among other financial institutions.  Ficarra then promptly withdrew cash from the accounts, stealing more than $1.5 million dollars from the victim subscribers and financial institutions.
After pleading guilty in the United States District Court for the Northern District of Florida:
  • Jennifer Woods, 46 was sentenced to 24 months in prison plus three years of supervised release for Conspiracy to Commit Bank Fraud, Aggravated Identity Theft, and Conspiracy to Commit Wire Fraud; 
  • Jeffrey Cannon, 48, was sentenced to 41 months in prison plus five years of supervised release for Conspiracy to Commit Bank Fraud and Conspiracy to Commit Wire Fraud;
  • Woods and Cannon were ordered to pay over $3 million in restitution to Centennial Bank and its customers; and
  • a $3,069,114.39 forfeiture money judgment was entered against Cannon. 
As alleged in part in the DOJ Release:

[B]etween October 2006 and August 2019, Woods was employed with Centennial Bank in Panama City, Florida, with her last position being the Vice President of Commercial Lending.  Court documents further reflect that Woods met Cannon, a real estate developer in Orlando, Florida, several years before Woods left Centennial Bank. Cannon was looking for private lenders to "invest" with him, and Woods connected Cannon with other Centennial Bank customers (against Centennial Bank's policies and procedures). Beginning in February 2018, Woods began embezzling funds from Centennial Bank customers and transferring the stolen funds to Cannon. At times, some of the embezzled funds were used to repay moneys owed by Cannon or to replace previously embezzled funds before the accountholders became aware that their funds were missing. In total, Cannon fraudulently obtained over $3 million from Woods as a result of their bank and wire fraud conspiracy.
After a four-week jury trial in the United States District Court for the Western District of Washington, Bernard Ross Hansen a/k/a Ross B. Hansen, 61, (the former President/Chief Executive Officer of the now-bankrupt Northwest Territorial Mint) was convicted on multiple counts of wire and mail fraud. Hansen was sentenced to 11 years in prison. The jury also convicted Co-Defendant Diane Renee Erdmann, 49, of multiple counts of wire and mail fraud; and she was sentenced to five years in prison. Hansen and Erdman failed to appear for two scheduled sentencing hearings. As alleged in part in the DOJ Release: 

Northwest Territorial Mint (NWTM) operated both a custom business that involved the manufacturing of medallions and other awards, and a bullion business that involved the selling, buying, exchanging, storing, and leasing of gold, silver, and other precious metals.  The company had offices in Federal Way and Auburn, Washington, but declared bankruptcy on April 1, 2016.

According to records in the case and testimony at trial, Hansen and Erdmann defrauded NWTM customers in a variety of ways. The evidence at trial showed that Hansen and Erdmann lied about shipping times for bullion, used customer money to expand the business to other states, and to pay their own personal expenses.  As a result, the company lacked enough assets to fulfill customer orders and used new customer money to pay off older customers in a Ponzi-like scheme.  In total, over 2500 customers paid for orders, or made bullion sales or exchanges, that were either never fulfilled or never refunded.  The total loss to these customers was more than $25,000,000.  

In addition to the bullion customer fraud, the evidence at trial demonstrated that Hansen and Erdmann defrauded customers who paid NWTM to safely and securely store bullion in the NWTM vaults.  Evidence and testimony at trial showed that Hansen and Erdmann used this bullion that was supposed to be in secure storage to fulfill other orders.  In April 2016, the NWTM vaults were inventoried and all or part of the stored bullion for more than 50 customers was missing.  The missing bullion was worth more than $4.9 million.  

Writing to the court, prosecutors pointed out the deception against the storage customers: "Mr. Hansen talked (the storage customers) into paying NWTM to steal from them-forking over fees, sometimes thousands of dollars' worth, to "securely" store their bullion at NWTM, only to have the defendants use the vault as a company piggy bank.  Mr. Hansen collected those fees and delivered phony storage account statements in return.  But unbeknownst to the storage customers, Mr. Hansen used the storage customers' bullion as his own - pulling it off the shelf to fulfill other orders, at times even melting down customers' property to makes something else to ship somewhere else."

"Company president Hansen apparently did not learn his lesson from his last trip to prison," said Donald M. Voiret, Special Agent in Charge of the FBI Seattle Field Office. "Together, Hansen and his co-conspirator Ms. Erdmann stole decades of savings and financial security from thousands of victims who thought they were making safe investments for themselves and their loved ones."

Prosecutors increased their sentencing recommendations for both Hansen and Erdmann to reflect the 11-day manhunt that followed their failure to appear.  When arrested in the small town of Port Hadlock on the Olympic Peninsula, they had three loaded firearms in a box behind the drivers' seat of their car.  In supplemental sentencing memos, prosecutors urged the court to increase both defendants' prison time due to their flight to avoid prison. "Ms. Erdmann and Mr. Hansen acquired a new vehicle, armed themselves with three loaded guns, and evaded supervision. Ms. Erdmann's conduct shows a lack of respect for the Court and the law enforcement authorities that she knew would attempt to find her." And of Hansen they wrote, "Recent events have shown that Mr. Hansen also presents a danger of violence. When he was apprehended by law enforcement in Port Hadlock, he was traveling with three loaded firearms in reaching distance of the front seat of his vehicle."

"Market Structure and the Retail Investor:" Remarks Before the Piper Sandler Global Exchange Conference by SEC Chair Gary Gensler

Thank you, Rich (Repetto), for that kind introduction. It is good to be with you again. As is customary, I'd like to note my views are my own, and I'm not speaking on behalf of my fellow Commissioners or the SEC staff.

Rich, at last year's conference, you and I spoke about how technology has transformed and continues to transform our equity markets.[1]

This has led to some good things. For example, retail investors have greater access to markets than any time in the past.

This technological transformation, though, also has led to challenges, including market segmentation, concentration, and potential inefficiencies.

Right now, there isn't a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges. Further, the markets have become increasingly hidden from view. In 2009, off-exchange trading accounted for a quarter of U.S. equity volume. Last year, during the meme stock events, that share swelled to a peak of 47 percent.[2] What's more, 90-plus percent of retail marketable orders are routed to a small, concentrated group of wholesalers that pay for this retail market order flow.[3]

It's not clear, with such market segmentation and concentration, and with an uneven playing field, that our current national market system is as fair and competitive as possible for investors.

In a recent report about last year's meme stock events, the SEC staff described four areas to consider in the interest of promoting our three-part mission in the equity markets overall. To date, the Commission has released proposals regarding two of those items: shortening the settlement cycle and enhancing short sale disclosures.[4] We also issued a request for comment on digital engagement practices.[5]

Today, I'd like to focus on the other item staff raised: "Trading in dark pools and through wholesalers."[6]

We haven't updated key aspects of our national market system rules, particularly related to order handling and execution, since 2005. Thus, last year I asked staff to take a holistic, cross-market view of how we could update our rules and drive greater efficiencies in our equity markets, particularly for retail investors. Today, I'd like to discuss that work across six areas:
  • Minimum Pricing Increment
  • National Best Bid and Offer
  • Disclosure of Order Execution Quality
  • Best Execution
  • Order-by-Order Competition
  • Payment for Order Flow, Exchange Rebates, and Related Access Fees

Minimum Pricing Increment

First, I'd like to discuss the minimum increments at which securities are priced - what's called the tick size.

Today, we lack a level playing field amongst the different trading venues. There are many disparities, but one in particular I'd like to focus on is the tick size.

In lit markets, investors see prices in one-penny increments. Wholesalers, though, can fill orders at sub-penny prices and without open competition.

More than half of the share volume in the first five months of this year was in stocks constrained by tick size.[7] In contrast, sub-penny trading, including at a tenth of a penny, accounts for 37 percent of share volume executed off-exchange.[8]

Given this activity, I wonder why lit markets should have that one-penny constraint. It raises real questions about whether this structure is fair and best promotes competition. Why not allow all venues to have an equal opportunity to execute at sub-penny increments?

Therefore, I've asked staff to make recommendations for the Commission's consideration around leveling the playing field with respect to two facets of tick size. These include, first, possibly harmonizing the tick size across different market centers - such that all trading occurs in the minimum increment; second, given the sheer volume of off-exchange sub-penny trading, as well as what is currently allowed in exchanges' retail liquidity programs, possibly shrinking the minimum tick size to better align with off-exchange activity.

National Best Bid and Offer

Next, I'd like to discuss the National Best Bid and Offer (NBBO).

The NBBO is a quote designed to aggregate information across different exchanges. It provides investors important pre-trade transparency. Those shares are subject to the Order Protection Rule.

I've asked staff to consider three issues related to the NBBO. The question is, what is included or excluded from the NBBO?

First, the NBBO currently includes only what's called round lots, which are quotes for 100 shares or more.

That seems to leave some critical gaps. Staff calculations using trade and quote data found that odd lots increased from around 15 percent of trades in January 2014 to more than 55 percent of trades in March 2022.[9]

Retail investors - the very investors who are more likely to buy or sell at odd lot prices - are unable to see these prices.

In 2020, the Commission adopted a Market Infrastructure Rule, which was recently upheld in court. This rule created a new round lot definition, which, depending upon share price, can be anywhere between 100 shared and 1 share. It also added odd-lot information to core market data.[10]

Under the transition schedule, the implementation of the new round lots could be several years away. Therefore, I've asked staff to consider whether we could accelerate implementation of the new round lot definition.

The Infrastructure Rule also enhanced transparency for quotation information with the remaining odd lots. I also asked staff to consider whether to accelerate implementation of this piece of the Infrastructure Rule as well. Together, I believe accelerating these timelines would allow retail investors to see better prices sooner.

Third, I also have asked staff to consider whether there should be an odd-lot best bid and offer so that investors would know the best price available in the market regardless of share quantity.

Disclosure of Order Execution Quality

Next, I'd like to turn to how we might enhance retail investors' ability to compare execution quality by their brokers.

Today, retail investors cannot compare execution across brokers, such as how much price improvement they provide to their clients. That's because only "market centers," such as dark pools, wholesalers, and exchanges, are required to provide these disclosures on monthly Rule 605 reports. Moreover, this rule hasn't been substantively updated since 2000.[11]

Thus, I've asked staff to make recommendations for the Commission's consideration around how we might update Rule 605 so that investors receive more useful disclosure about order execution quality. This could include mandating that broker-dealers, along with market centers, file monthly Rule 605 reports.

Further, I've asked staff to make recommendations considering whether to require that all reporters provide summary statistics of execution quality, such as the price improvement as a percentage of the spread.

Best Execution

Fourth, I'd like to turn to best execution.

Right now, while the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) have rules on best execution, the SEC does not.[12] These FINRA and MSRB rules require broker-dealers to exercise reasonable diligence to execute customer orders in the best market so that their customers receive the most favorable prices under prevailing market conditions.

I think investors might benefit if the SEC considered proposing its own best execution rule. In addition, broker-dealers and investors might benefit from more detail around the procedural standards brokers must meet when handling and executing customer orders.

Therefore, I've asked staff to consider recommending that the SEC propose its own best execution rule - for equities and other securities.

Order-by-Order Competition

Next, I'd like to talk about how to best promote as much competition as possible for retail investors on an order-by-order basis.

Competition promotes efficiencies where economic rents, or excess profits above market competition, might otherwise accrue.

As I mentioned, the vast majority of retail marketable orders are flowing to wholesalers that pay for this order flow.[13] What's more, this segmentation means that institutional investors, such as pension funds, don't get to interact directly with that order flow. This segmentation-which isolates retail orders-may not benefit the retail public as much as orders being exposed to order-by-order competition.

Some suggest that this segmentation, with such isolation, allows retail investors to receive slightly better prices compared to the NBBO. Price improvement without competition, though, isn't necessarily the best price improvement. Wholesalers may be saving more than they're passing along to investors in terms of price improvement.[14]

Further, as I previously discussed, the current NBBO has gaps and may not represent a level playing field. As a result, it may not be a precise measuring rod for assessing whether retail investors are receiving fully competitive prices.

Thus, I've asked staff to make recommendations for the Commission's consideration around how to enhance order-by-order competition. This may be through open and transparent auctions or other means, unless investors get midpoint or better prices.

The listed options exchanges have operated auctions for retail orders for many years. I've asked staff, in considering any recommendations for stock auctions, to draw upon lessons from the options market, focusing on assuring full competition among all market participants to provide the best prices for retail investors.

Payment for Order Flow, Exchange Rebates, and Related Access Fees

Last, let me turn to the topics of payment for order flow, exchange rebates, and related access fees.

Payment for order flow can raise real issues around conflicts of interest. As described in the Commission's settled enforcement action against Robinhood in 2020, payment for order flow can distort routing decisions. Certain principal trading firms seeking to attract Robinhood's order flow told them that there was a tradeoff between payment for order flow and price improvement for customers.[15]

As the staff wrote in the GameStop report, payment for order flow may incentivize broker-dealers to use digital engagement practices, such as gamification, to increase customer trading.[16]

The European Union is actively considering banning payment for order flow,[17] potentially joining regulators in the United Kingdom, Canada, and Australia.

Exchange rebates also may present conflicts.

Exchanges give rebates to traders. High-volume traders benefit more from these arrangements, and retail investors don't directly benefit from those rebates. Just as payment for order flow presents a conflict of interest in the routing of marketable retail orders, exchange rebates may present a similar conflict in the routing of customer limit orders.

Therefore, I've asked staff to make recommendations around how we can mitigate conflicts with respect to payment for order flow and rebates.

One thing I've asked them to consider is whether exchange fees - what somebody pays to access a quotation on an exchange - and rebates should be more transparent, so that investors can understand these amounts at the time of trade execution.

Finally, I've asked staff to consider how the access fees might change in light of a potentially lower minimum tick size. Currently, access fees for protected quotes that are priced at $1 or more are capped at three-tenths of a penny per share.[18] If we reduce the minimum pricing increment, it may also be appropriate to reduce these access fee caps proportionately.


In conclusion, I think we, at the SEC, need to look for opportunities to freshen up our rules to ensure America remains the gold standard of the world's capital markets.

We can't take our leadership in capital markets for granted. New financial technologies and business models continue to change the face of finance for investors and issuers. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well, seeking to surpass our own.

It's not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors.

I think we can do better here for retail investors. Thank you.

[1] See Gary Gensler, "Prepared Remarks at the Global Exchange and FinTech Conference" (June 9, 2021), available at

[2] See Nicholas Megaw, "SEC chair Gary Gensler to set out overhaul of US equity market" (June 6, 2022), available at

[3] Publicly available data from Rule 606 reports for large retail brokers in first quarter 2022.

[4] See U.S. Securities and Exchange Commission, "Shortening the Securities Transaction Cycle" (Feb. 9, 2022), available at See U.S. Securities and Exchange Commission, "Short Position and Short Activity Reporting by Institutional Investment Managers" (Feb. 25, 2022), available at

[5] See U.S. Securities and Exchange Commission, "SEC Requests Information and Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology" (Aug. 27, 2021), available at

[6] See "Staff Report on Equity and Options Market Structure Conditions in Early 2021" (Oct. 14, 2021), p. 44, available at

[7] Staff in the Division of Economic and Risk Analysis calculated the total trading volume of stocks that had a time-weighed quoted spread of 1.1 cents or less from January-May 2022 and divided their share volume by the total share volume to get 56% of total trading volume. Statistics were calculated by Commission staff based upon public NYSE Trade and Quote (TAQ) data.

[8] Excluding sub-penny midpoint trades. Statistics were calculated by Commission staff from public NYSE TAQ data. Off-exchange midpoint trades are off-exchange trades that occur at the midpoint of the NBBO, i.e. a trade price of 10.01 when the NBB is 10.00 and the NBO is 10.02. These percentages are based on off-exchange trades with trade prices greater than or equal to $1 occurring during the regular trading session between the hours of 9:30AM and 4:00PM between December 2021 and the end of February 2022 (i.e. opening and closing trades are not included). Filters are also applied to exclude trades if they have an irregular sale condition.

[9] See NYSE TAQ data.

[10] See "SEC Adopts Rules to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Equity Market Data" (Dec. 9, 2020), available at $250.00 or less per share: round lot = 100 shares; $250.01 to $1,000.00 per share: round lot = 40 shares; $1,000.01 to $10,000.00 per share: round lot = 10 shares; and $10,000.01 or more per share: round lot = 1 share.

[11] See Financial Industry Regulatory Authority, "SEC Rule 605," available at

[12] See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir.), cert. denied, 525 U.S. 811 (1998). A broker-dealer's duty of best execution to its customers predates the federal securities laws and is derived from an implied representation that a broker-dealer makes to its customers. The duty is established from "common law agency obligations of undivided loyalty and reasonable care that an agent owes to [its] principal." This obligation requires that a "broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances."

[13] Publicly available data from Rule 606 reports for large retail brokers in first quarter 2022.

[14] Publicly available data from Rule 605 reports for years 2020-2021.

[15] SeeSecurities Act Release No. 10906, "In the Matter of Robinhood Financial, LLC" (Dec. 17, 2020),available at

[16] See "Staff Report," p. 44.

[17] See Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders (Nov. 25, 2021), available at

[18] Rule 610(c) also imposes an access fee cap for protected quotes that are priced less than $1. For these, the access fee cannot be more than 0.3% of the quotation price.

   Without admitting or denying the findings in an SEC Order, CohnReznick LLP agreed to pay a $1.9 million penalty, to be censured, and to implement undertakings to retain an independent consultant to review and evaluate certain of its audit, review, and quality control policies and procedures, as well as to abide by certain restrictions on retaining new audit clients during the consultant's review. The SEC Order found that CohnReznick engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC's Rules of Practice, violated Rule 2-02(b)(1) of Regulation S-X, and was a cause of Sequential Brands Group Inc.'s violations and Longfin Corp. 's violations of Section 13(a) of the Securities Exchange Act of 1934 and related rules thereunder. 

   Without admitting or denying the findings in an SEC Order, 
CohnReznick Partners: 
  • Stephen M. Wyss and Stephen H. Jackson agreed to pay civil penalties of $30,000 and $20,000, respectively, and not appear or practice before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively; and
  • Robert G. Hilbert agreed to pay a civil penalty of $30,000 and a censure. All respondents also agreed to a cease-and-desist order.
The SEC Order against Wyss, Jackson, and Hilbert found that each partner engaged in improper professional conduct within the meaning of Rule 102(e) that was a cause of Sequential's violations of Section 13(a) of the Securities Exchange Act of 1934 and related rules thereunder, as well as CohnReznick's violation of Rule 2-02(b)(1) of Regulation S-X.

   As alleged in part in the SEC Release:

[C]ohnReznick improperly accepted Sequential's conclusion that its goodwill, an accounting term for the excess amount paid to acquire a company over its book value, was not impaired or reduced in value, in the third quarter of 2017. Despite CohnReznick's national office partners and the firm's own valuation specialists expressing concerns with Sequential's conclusion, the firm failed to obtain sufficient evidence or conduct additional procedures. The order finds that CohnReznick's deficient system of quality control led to failures to adhere to professional auditing standards. As to the Longfin audit, the order finds that CohnReznick and its national office failed to address known issues involving related party transactions, which were used by Longfin to fraudulently inflate its revenues.

A second related order finds that on multiple occasions from year-end 2016 through the second quarter of 2017, Wyss accepted Sequential management's assertions that goodwill was not impaired despite strong indicators of impairment. The order also finds that in the third quarter of 2017, Wyss, Jackson, and Hilbert were confronted with indications that Sequential's goodwill impairment test was not supported by sufficient evidence, but they still accepted Sequential's conclusion that goodwill was not impaired even though appropriate additional audit procedures had not been performed.

The United States District Court for the Southern District of New York entered a Final Order against Morningstar Credit Ratings, LLC, which agreed to pay a $1,150,000 civil money penalty. As alleged in part in the SEC Release:

[I]n 30 CMBS transactions that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction. The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions from to 2015 to 2017., the SEC charged LG Capital Funding, LLC and its Managing member Joseph Lerman with violating the registration provision of Section 15(a)(1) of the Securities Exchange Act; and charged Lerman with violating Section 20(a) of the Securities Exchange Act of 1934. LG Capital's two other members, Daniel Gellman and Boruch Greenberg, and LG Capital's primary employee, Eli Safdieh, were named as Relief Defendants. As alleged in part in the SEC Release:

[B]etween at least January 2016 and December 2021, LG Capital engaged in the business of purchasing convertible notes from penny stock issuers, converting the notes into shares of stock at a large discount from the market price, and selling those newly issued shares into the market at a significant profit. LG Capital allegedly purchased over 300 convertible notes from more than 100 separate issuers and sold more than 22 billion shares of newly issued penny stock into the market, generating sales proceeds of approximately $30 million and net profits of approximately $20 million. As alleged, neither LG Capital nor Lerman were registered as a dealer with the SEC or associated with a registered dealer, in violation of the mandatory registration provisions of the federal securities laws. By failing to register, LG Capital and Lerman avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Synchronoss Technologies, Inc. and seven senior employees. See, Complaint against Karen Rosenberger and Joanna Lanni As alleged in part in the SEC Release:

The Securities and Exchange Commission today charged Bridgewater, NJ-based Synchronoss Technologies, Inc. and seven senior employees, including the former CFO, in connection with their roles related to long-running accounting improprieties that ran from 2013 to 2017. In addition, the company's founder and former CEO, Stephen Waldis, while not charged with misconduct, agreed to reimburse the company for more than $1.3 million in stock sale profits and bonuses as well as to return previously granted shares of company stock pursuant to Section 304 of the Sarbanes-Oxley Act (SOX).

The SEC filed a complaint in federal district court in Manhattan against former CFO Karen Rosenberger and former Controller Joanna Lanni. Among other things, the SEC's complaint alleges that Rosenberger engaged in fraud through her role in improperly recognizing revenue on multiple transactions and that she also misled Synchronoss's auditor about multiple transactions. The SEC alleges Lanni was involved in improper accounting for one transaction.
. . .
In a July 2018 SEC filing, Synchronoss, a technology company that primarily provides products, software, and services to telecommunications companies, announced a restatement of its audited financial statements for the fiscal years ended December 31, 2015 and 2016 and restated selected financial data for the fiscal years ended 2013 and 2014 totaling approximately $190 million in revenues. Synchronoss acknowledged that during this period it had accounted for numerous transactions improperly and thus filed with the Commission materially misleading financial statements along with having material weaknesses in its internal controls over financial reporting.

As alleged in the various charging documents filed today, Synchronoss's improper accounting primarily concerned three categories of transactions: (1) transactions for which there was not persuasive evidence of an arrangement; (2) acquisitions/divestitures in which Synchronoss recognized revenue on license agreements rather than netting those purported amounts against the purchase prices; and (3) license/hosting transactions, in which it improperly recognized revenue upfront, instead of ratably over the term of the multi-year arrangement. In addition, the SEC alleged that certain Synchronoss employees entered into "side letter" arrangements, concealing facts indicating that the revenue that Synchronoss recognized upfront was in fact contingent on future events. The impact of the improper accounting was material and in many instances allowed the company to meet earnings targets.

Without admitting or denying the SEC's findings, Synchronoss agreed to cease and desist from violating Section 10(b) of the Securities Exchange Act of 1934 and other provisions of the securities laws, and to pay a civil penalty of $12.5 million. The following parties also agreed to settle:

  • Ronald Prague, the company's former general counsel, settled charges stemming from his involvement, along with others, in misleading the company's auditors regarding two transactions and to pay a civil penalty of $25,000 and to be suspended from appearing and practicing before the SEC as an attorney for 18 months; and

  • Clayton "Charlie" Thomas, Marc Bandini, Daniel Ives, former senior employees of the company, along with current employee, John Murdock, settled charges from their participation in at least one side letter agreement that concealed the revenue that Synchronoss recognized upfront was in fact contingent on future events and to pay civil penalties ranging from $15,000 to $90,000.

Investment - Overvalued and Up in Smoke: Securities Commissioner revokes investment adviser for fraudulent overvaluing scheme (TSSB Release)
TSSB entered an Order revoking the investment adviser registration of Swiftarc Capital, LLC and ordering the firm and Managing Director Siddarth Jawahar to cease and desist from engaging in fraud. As alleged in part in the TSSB Release:

Since September 2019, Swiftarc Capital and Jawahar have been engaging in fraud by overvaluing an illiquid, sizeable position owned by the Swiftarc Fund, LP (the "Fund"), which was managed by Swiftarc Capital and Jawahar.   

Beginning in 2015, the Fund began increasing its stake in one security: Philip Morris Pakistan ("PMP"). And by 2019, the Fund was almost exclusively (99%) invested in PMP. Shares of PMP were thinly traded. By September 2019, monthly trading volume had fallen below 3,500 aggregate shares. 

The price of PMP was similarly declining. And Jawahar instructed the Fund's administrator to report a value of PMP of 4,000 rupees per share on its investor reports rather than the price listed on the fund's brokerage account statements. According to Jawahar, the last time that PMP had breached the 3,500-trading threshold was March 2019, when the price temporarily hit 4,000 rupees, likely due to the fund's own purchases of PMP.    

The 4,000 rupee valuation of PMP became increasingly higher than the price at which PMP was trading. According to firm brokerage statements, mark-to-market fair value for PMP during this same time experienced a steep decline in trading price from 3,230 rupees per share in September 2019 to 1,760 rupees per share in May 2020. As of May 25, 2022, PMP was trading at a price of 541 rupees. 

Neither Swiftarc Capital nor Jawahar informed investors of the source of the valuation. Nowhere in any of the marketing materials, offering memoranda, investor reports, or capital statements did Swiftarc Capital or Jawahar disclose that the valuation came directly from Jawahar and was not reflective of legitimate independent mark-to-market statements. 

This overstated net asset value resulted in complications with respect to investor redemptions. As requests came in, the Fund could not sell PMP at a share price of 4,000 rupees. In fact, selling any shares would have driven the price down further. The Fund was effectively illiquid. 

Since the Fund's positions were illiquid and it had nearly $5,000,000 in outstanding redemption requests, it needed to generate cash. And how did it do that? It solicited new investors. 

In early 2020, Jawahar met with at least one potential investor and solicited a $250,000 investment into the Fund. Jawahar did not disclose to this investor that the Fund was 99% invested in one thinly traded security and needed an influx of cash to satisfy multiple outstanding redemption requests. Instead, Respondents described the fund in terms of its original investment objectives as described in the offering documents. All $250,000 of the investor's capital went to make payments to two other investors to partially satisfy their outstanding redemption requests.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Jorge Antonio Sonville submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jorge Antonio Sonville was first registered in 1995 with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporated until July 2021. In accordance with the terms of the AWC, FINRA found that Sonville violated FINRA Rules 3240 and 2010; and the regulator imposed upon him a $5,000 fine and an six-week-suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In February 2018, Sonville loaned $65,000 to a firm customer to assist the customer in paying personal expenses. At the time of the loan, Merrill Lynch's procedures prohibited representatives from loaning money to customers. Sonville did not notify Merrill Lynch about the loan to his customer and did not receive written approval from the firm to engage in the transaction. Additionally, in 2018, Sonville completed and submitted to the firm a compliance questionnaire in which he falsely stated that he had not loaned money to any customers.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Vanessa Koliver submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Vanessa Koliver was first registered with FINRA Member Firm UBS Securities LLC in July 2020 and discharged on July 9, 2021. In accordance with the terms of the AWC, FINRA found that Koliver violated FINRA Rules 1210.05 and 2010; and the regulator imposed upon her a $5,000 fine and an 18-month-suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On July 29, 2020, Koliver took the Series 7 General Securities Representative examination. Prior to the examination, Koliver attested that she had read and would abide by the FINRA Qualification Examination Rules of Conduct, which among other things, prohibits the use or attempted use of "personal notes and study materials" during the exam. The Rules of Conduct also require candidates to "store all personal items in the locker provided by the test vendor prior to entering the test room." During the exam, Koliver possessed personal notes containing test-related material in violation of the Rules of Conduct. . . .
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Letisha L. Clarke-Ekwunife submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Letisha L. Clarke-Ekwunife was first registered in 2016 with J.P. Morgan Securities LLC until her October 2020 discharge. In accordance with the terms of the AWC, FINRA found that Clarke-Ekwunife violated FINRA Rules 3270 and 2010; and the regulator imposed upon her a $5,000 fine and an two-month-suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Between March 2018 and October 2020, Clarke-Ekwunife engaged in business activities that were outside the scope of her relationship with J.P. Morgan. In particular, Clarke-Ekwunife formed and co-managed a photography and disc jockey business. During that time, Clarke-Ekwunife filed tax returns and corporate documents on behalf of the business. Moreover, the business generated revenue, which Clarke-Ekwunife reinvested into its operations. 

Clarke-Ekwunife did not provide prior notice to J.P. Morgan, written or otherwise, of her involvement in an outside business activity. On the contrary, she falsely attested in two annual compliance questionnaires provided to J.P. Morgan that she had not engaged in any undisclosed outside business activities.
I am not a fan of Wall Street Non-Compete/Non-Solicit agreements, which tend to be forced upon employees and are rarely, if ever, the byproduct of free and fair negotiation. All of which underscores that Wall Street's employment contracts are cynical take-it-or-leave-it propositions whereby the employer takes it all when the financial advisor leaves. Infuriatingly, the contribution of the men and women who cold call, open the new accounts, and service the customers is valued at next to nothing upon the cessation of the employment relationship.