Securities Industry Commentator by Bill Singer Esq

October 14, 2022





= = =
David E. Jennings, an associated person of a FINRA member firm, filed a claim in FINRA's arbitration forum seeking to expunge from his Central Registration Depository record information about a prior arbitration award entered against him. FINRA initially facilitated the parties' selection of an arbitrator and scheduled an arbitration hearing, but subsequently issued a letter denying Jennings's use of the arbitration forum. Jennings filed an application for review of FINRA's action denying Jennings's use of the arbitration forum with the Commission. 

In response to Jennings' motion to the SEC, FINRA opposed and sought to consolidate his case with the so-called Consolidated Arbitration Applications involving applicants who were denied the use of FINRA's arbitration forum for purposes of obtaining expungements of adverse arbitration awards. In denying FINRA's motion to consolidate, the SEC notes in part that:

[Un]like in those cases, FINRA denied Jennings's use of its arbitration forum after it had already appointed an arbitrator and scheduled an arbitration hearing. Indeed, FINRA administratively postponed the hearing on the date it was scheduled and denied Jennings's use of the forum two days later. . . .

In addition to denying the consolidation, the SEC denied FINRA's additional Motion to Postpone Briefings in Jennings pending the resolution of the appeals in the Consolidated Arbitration Applications. The SEC set November 14, 2022 for the deadline for filing of the Brief in Support of Review and December 14, 2022, for FINRA's Brief in Opposition; and December 28, 2022, for the Reply Brief (if any). 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96076; Whistleblower Award Proc. File No. 2023-03)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending that Claimant 1 and Claimant 2 each receive a Whistleblower Award of over $500,000. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Neither Claimant timely submitted a Form TCR to the Commission, and neither Claimant has established eligibility for a waiver under Exchange Act Rule 21F-9(e) of his/her initial noncompliance with the TCR-submission requirement. However, we have determined that it would be in the public interest and consistent with the protection of investors for the Commission to exercise our discretionary authority under Section 36(a) of the Exchange Act to waive the TCR-submission requirements of Rules 21F-9(a) and (b) as to each Claimant in light of the specific facts and circumstances present here. Both Claimants provided Redacted that were crucial to Enforcement staff's efforts Redacted Claimant 1 and counsel who represented Claimant 1 Redacted had miscommunications that led Claimant 1 to erroneously believe that no further steps were necessary for Claimant 1 to establish eligibility for a whistleblower claim. And even though Claimant 2 did not timely submit a TCR with his/her information, the Commission's Office of Market Intelligence generated a TCR based on the information Claimant 2 provided in his/her submission. Claimants 1 and 2 were both instrumental in alerting the Commission to the ongoing fraud. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96075; Whistleblower Award Proc. File No. 2023-02)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending denial of a Whistleblower Award. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Claimant does not qualify for an award. First, the record demonstrates that the Investigation was opened in Redacted approximately six months before Claimant submitted his/her initial tip to the Commission, in response to findings of an examination of the Company by Commission staff. Accordingly, Claimant's information did not cause the staff to open the Investigation. 

Second, the record shows that Claimant's information did not significantly contribute to the success of the Covered Action or cause the staff to inquire into different conduct as part of a current investigation. Claimant submitted three TCRs to the Commission. Claimant's first tip, submitted in Redacted was not forwarded to Commission staff assigned to the Investigation, but was forwarded to the Commission's Office of Investor Education and Advocacy ("OIEA"). Enforcement staff assigned to the Investigation confirmed, in a supplemental declaration, which we credit, that they do not recall receiving or reviewing any information from OIEA relating to Claimant or the subject matter of the Investigation. Claimant's second tip, submitted in Redacted was neither received nor reviewed by the staff assigned to the Investigation. submitted in Redacted Claimant's third tip, submitted in Redacted  and approximately three months after the Covered Action was filed, was likewise neither received nor reviewed by the staff assigned to the Investigation. And although Claimant spoke with Enforcement staff in Redacted approximately two months after the Covered Action was filed, the staff declaration confirms that Claimant's information did not advance the Investigation.

= = =
From August 2019 to August 2020, a former Raymond James SVP signed two letters of credit and one amendment totaling $3 million. In October 2020, the SVP was RIFed out of his job. In December 2020, his former employer amended his Form U5 to alleged that the SVP had signed and issued unapproved letters of credit. All of which set the stage for a 2022 FINRA regulatory settlement whereby the former SVP was fined and suspended. Except, the more we consider the facts, the more questions arise as to why a fine and why a suspension.
Bloomberg Law's Matthew Bultman is among an emerging group of savvy industry reporters who bring a refreshing Street-smart sensibility to their coverage. In a recent report, Bultman discusses the gamesmanship by which Plaintiffs/law firms are attempting to circumvent the Private Securities Litigation Reform Act's ("PSLRA's") prohibition against an individual's designation as lead plaintiff in over five securities class actions in a three-year period. A well-written and astute analysis -- compliments!!

Q. Under its fiduciary duty, may an investment adviser that recommends other investment advisers to or selects other advisers for its clients consider factors relating to diversity, equity, and inclusion, provided that the use of such factors is consistent with a client's objectives, the scope of the relationship, and the adviser's disclosures?

A. Yes.

An investment adviser is required to have a reasonable belief that the advice it provides is in the best interest of the client based on the client's objectives.[2] Such a reasonable belief that advice is in the best interest of the client typically includes consideration of a variety of factors.[3] Accordingly, an adviser that recommends other investment advisers to or selects other advisers for their clients may consider a variety of factors in making a recommendation or selection, including, but not limited to, factors relating to diversity, equity, and inclusion, provided that the use of such factors is consistent with a client's objectives, the scope of the relationship, and the adviser's disclosures.[4] Further, the adviser's fiduciary duty does not mandate restricting such a recommendation or selection to investment advisers with certain specified characteristics, such as a minimum amount of assets under management or a minimum length of track record.[5]

[1] This staff FAQ represents the views of the staff of the Securities and Exchange Commission ("Commission") and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved this staff FAQ. The staff FAQ, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

[2] Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Release No. 5248, 84 FR 33669, at 33673 (June 5, 2019).

[3] Id. at 33674. ("[A]n adviser would not satisfy its fiduciary duty to provide advice that is in the client's best interest by simply advising its client to invest in the lowest cost (to the client) or least remunerative (to the investment adviser) investment product or strategy without any further analysis of other factors in the context of the portfolio that the adviser manages for the client and the client's objective.").

[4] In addition, certain investment advisers who also may be subject to regulation by the Department of Labor should consider such applicable laws and regulations when providing advice.

[5] See also SEC Asset Management Advisory Committee - Subcommittee on Diversity and Inclusion, Recommendations for Consideration by the AMAC (July 7, 2021), available at (discussing that the use of minimum independent selection criteria such as performance, size (AUM), and length of track record can have the effect of disproportionately excluding non-traditional or diverse-owned advisers).
The staff has issued an FAQ on an adviser's fiduciary duty when considering factors relating to diversity, equity, and inclusion (DEI) in the selection or recommendation of other investment advisers.

The staff guidance can be found here on the SEC's website.

The FAQ is issued in response to the 2021 Asset Management Advisory Committee's (AMAC) report and recommendations to the Commission on diversity and inclusion, addressing the "well-known and widely acknowledged" lack of gender and racial diversity in the asset management industry.[1] 

The Subcommittee on Diversity and Inclusion of AMAC, which was formed during Chair Clayton's term, focused not only on studying the current state of DEI in the asset management industry, but also on studying investor interest in diversity matters, and investor need for transparency.[2]  It highlighted certain apparent inequities in the industry.  For example, the report noted that, of the $70 trillion in global financial assets under management, less than 1% were managed by minority- or women-owned firms.[3]  The report also found that information related to an asset manager's gender and racial diversity - in its workforce, leadership, ownership, boards, and business practices - was "increasingly accepted as a material consideration in the selection of and/or retention of an investment advisory firm."[4] 

The report made certain recommendations, the purpose of which was to shine light on potential discrimination and barriers to women and minorities in the industry, and to provide transparency around diversity practices and data, which carry considerable weight with investors.  As the report stated, its focus was on disclosure, not on mandating any business decisions or practices by SEC registrants.[5] 

While today's FAQ is a step in the right direction, we believe all of the recommendations laid out in the AMAC report deserve our prompt consideration.

We remain committed to working with the Chair and our fellow Commissioners in considering AMAC's recommendations at the Commission level and considering other potential ideas or actions that would help provide transparency on diversity practices, potential biases, and other DEI matters that are proving ever-important to the investing public. 

[1] SEC Asset Management Advisory Committee - Report and Recommendations on Diversity and Inclusion in the Asset Management Industry, July 7, 2021.  

[2] Id. at 1-2.

[3] Id. at 2.

[4] Id. at 8.

[5] Id. at 9

Raising the Bar on Diversity, Equity and Inclusion (Speech by SEC Commissioner Jaime Lizárraga)

Thank you Sarah for your kind introduction. It is a pleasure to join you today to offer a few thoughts about diversity, equity and inclusion (DEI). And to do so as this year's Hispanic Heritage Month comes to a close.

The asset management industry's contribution to our country's financial security is undeniable. You have a direct impact on the financial futures of millions of working families. From grocery store workers, and other essential workers who invest part of their weekly paychecks in a 401(k) managed by a registered fund, to the single mother whose investment adviser helps her save for her daughter's higher education. And, from seniors managing their retirement savings, to teachers, firefighters, and law enforcement officers planning their financial futures.

The industry's continuing growth is impressive by any measure. As of 2021, U.S.-registered fund assets totaled approximately $35 trillion and private fund assets totaled approximately $20 trillion. According to the Investment Adviser Association, registered investment advisers managed approximately $128 trillion in assets and served approximately 65 million clients. And by ICI's own estimate, almost 60 million U.S. households own mutual funds.

These numbers demonstrate the enormous wealth-building opportunities that the industry offers many working families and can offer to those who may not yet have been reached. And that is where DEI comes into the picture.

As most in this room are likely aware of, one of the most in-depth examinations of the state of DEI in the asset management industry was conducted by the SEC's Asset Management Advisory Committee (AMAC). This Committee conducted its work during Chairman Jay Clayton's tenure. One key finding, based on input from a wide range of stakeholders, including analysis of data provided by the ICI, was that investors increasingly deem DEI information material to their investment decisions.

AMAC, in its report, also cited an eye-opening 2017 statistic from the Government Accountability Office - the auditing arm of Congress: less than 1 percent of global assets under management, then $70 trillion, was managed by women- and minority-owned asset management firms.

By way of comparison, and according to the 2020 U.S. Census, nearly 40 percent of the U.S. population identifies as a member of a racial or ethnic group. And, women constitute slightly over half of the U.S. population.

While GAO's 1 percent statistic brings into focus the DEI challenge in the asset management space, it also represents an opportunity to reflect on the issue in the context of what it means to the investing public. 

My involvement in DEI issues spans the entirety of my nearly 32 years in public service. The issue can be challenging and often controversial. And statistics like the 1 percent, when cited, can have the unintended effect of discouraging investment in solutions, out of concern for limited or no returns on that investment. 

That is certainly not my intent here. Based on my longtime involvement with DEI issues, I'm keenly aware that progress can take time. The reality is that meaningful strides in advancing DEI takes a combination of commitment, leadership, and constructive engagement.

The Commission's own ongoing experience in the DEI space provides a useful perspective. And it's another way of conveying to you that you're not alone.

SEC Chair Gensler deserves much credit for his efforts to diversify the SEC's top leadership ranks. It was also great to see my fellow Commissioner Mark Uyeda recently deliver a thoughtful DEI keynote speech to the Association of Asian American Investment Managers. I'm encouraged by my fellow Commissioners' strong interest and commitment to DEI matters and I look forward to continuing our dialogue.

It has also been encouraging to engage with the Commission's Office of Minority and Women Inclusion - a product of the landmark Dodd-Frank Act. OMWI, as it's known, has made great strides in building a diverse pipeline, establishing partnerships with universities and high schools, fostering an inclusive workplace culture, providing mentorship and professional development opportunities, and several other critical initiatives.

But challenges remain. For instance, at nearly 6 percent of the SEC's workforce, Latinos and Latinas remain significantly underrepresented - compared to 9.5 percent of the federal workforce, and 13 percent of the civilian workforce. By comparison, the Latino community in our country is 63 million strong, and 19 percent of the U.S. population. In addition, other diverse groups, including people with disabilities and veterans, continue to be underrepresented in senior officer and other supervisory positions.

Despite these challenges, there are a few bright spots. The representation of certain diverse groups in these senior SEC positions is increasing steadily. On the asset management side, by some accounts, women- and minority-owned assets under management have been increasing over the years. Similarly, the representation of women on mixed-gender portfolio teams has grown.

It is also heartening to see many of the diversity initiatives undertaken by market participants, self-regulatory organizations, and industry trade associations. In fact, through its recently launched D&I RFP Framework, the ICI has worked to advance standardization and accountability on diversity and inclusion for its members.

In the face of deep challenges, many of these organizations have demonstrated a strong commitment to meaningful results. And many of them also recognize that an unwavering commitment is what it takes to tackle difficult DEI challenges.

Bearing in mind AMAC's conclusion about investor-driven materiality for DEI information, the optimist in me sees the 1 percent as enormous untapped potential - a future market opportunity that will likely continue to grow for some time. Of course, at the end of the day, you are the better judge of the validity of that intuitive statement.

That said, AMAC's four recommendations are premised on the view that diversity serves the public interest, which they believe is central to the Commission's mission, and that investors increasingly deem DEI information as material to their investment decisions. To that end, AMAC recommended that the Commission:

  • require investment advisers and funds to provide enhanced gender and racial diversity disclosures;

  • issue Commission guidance for fiduciaries selecting other asset managers;

  • establish a centralized mechanism for cataloging and maintaining records relating to discriminatory practices in the securities industry; and

  • conduct a study of how the pay-to-play industry has evolved in light of over a decade having passed since the Commission last conducted a deep examination of pay-to-play practices.

Yesterday, the staff of the SEC provided guidance on fiduciaries selecting other asset managers, in the form of an FAQ document. However, the FAQ is difficult to find on our website and could have been accompanied by a public announcement alerting market participants of its existence.

To help move the needle on that 1 percent diversity statistic, we must do more. I strongly believe the Commission must consider whether AMAC's four recommendations can be fully implemented, at the Commission level. If that isn't possible, I believe it is our responsibility to the public to explain why.

Beyond AMAC's recommendations, the Commission just released its fall 2022 rulemaking agenda. That agenda includes planned rules relating to enhanced board diversity and human capital management disclosures. These rules, if proposed, represent an opportunity for investors to benefit from more meaningful, standardized and transparent diversity-related disclosures that would help them make more informed investment decisions.

In closing, as we continue to advance DEI priorities in our respective spaces, it is my hope that you'll consider today's remarks as constructive and helpful in informing your own efforts. I, for one, look forward to engaging with you and other stakeholders on the DEI challenges ahead and on ways that we can work together on our shared goals. Overall, I strongly believe that there are many benefits that result from a long-term commitment to advancing diversity, equity and inclusion.

Thank you for your attention today and for all that you do to help working families build a brighter financial future.

Good morning. Thank you to our committee members for convening and to our panelists for joining today's meeting.[1] Thank you to Andrea Seidt from the great state of Ohio for lending your talents. Welcome to Bill Beatty, who will take Andrea's place as the NASAA representative. I am grateful that today's discussion will cover two vitally important topics for smaller businesses: entrepreneurial ecosystems and trends in going public.

Entrepreneurship Hubs

On a recent trip to Charleston, South Carolina I observed how entrepreneurial ecosystems work outside of the largest cities. An entrepreneurial ecosystem in a region like that can be key to fostering the growth of small business and, importantly, their ability to remain in the region, rather than being lured away by the bright lights and big dollar signs of New York and San Francisco. As discussed at this year's Annual Small Business Forum, "[d]ifferent regions can have advantages in terms of cost of living and the ability to find unique talent and work more closely with their customers."[2] While not among the top 20 recipients of investment dollars,[3] cities like Charleston and their surrounding regions can grow in that capacity under the right entrepreneurial ecosystem and regulatory framework.

Historically just a few regions have accounted for the vast majority of the flow of investment dollars. This trend is abating,[4] but too slowly. In 2021, according to Pitchbook data, almost 80% of venture capital went to just three regions: "the Bay Area; the Northeast corridor from Boston to Washington, D.C.; and Southern California."[5] Trends are similar for angel capital. According to the 2021 Small Business Advocate Report, nearly two-thirds of angel and seed deals occur in the top ten funding regions.[6]

Entrepreneurs who are committed to a region can change that dynamic. After building successful businesses of their own, many entrepreneurs enjoy investing in other businesses in their communities. In addition to funding start-ups, these investors draw upon years of business experience to provide sound advice; speak hard truths; explain how the capital raising process works; connect them with the necessary legal, accounting, and management expertise; and help them navigate the thorny issues that all new companies face. I heard how that is playing out in Charleston. As discussed at this year's SEC small business forum, "[o]ne of the biggest resources for new entrepreneurs is having relationships with entrepreneurs who have been through the process."[7] Investors dipping their toes into the private markets for the first time also receive needed mentorship. The result is a region that is hospitable to both start-ups and investors.

I hope this morning's panel explores how the Commission can improve entrepreneurship ecosystems by expanding the pool of investors in a region and fostering the ability of start-ups to stay in the communities in which they were born. I have several questions:

  • Would expanding the definition of "accredited investor" help facilitate vibrant entrepreneurship ecosystems, particularly outside of the largest cities? If so, how should the Commission expand this definition?
  • Should the Commission explore ways to make it easier for companies to find investors, particularly by creating a safe harbor from broker registration for finders?[8]
  • Should the Commission authorize the creation of a micro-offering safe harbor that exempts small raises of around $250,000 to $500,000 from state and federal securities registration requirements?[9]
  • Should the Commission expand the reach of angel funds under Section 3(c)(1) of the Investment Company Act by allowing them to be as large as $50 million with 500 investors, instead of $10 million and 250 investors?[10]

IPO Statistics

I am also looking forward to the afternoon discussion on the market for companies going public. This discussion could not be timelier, as a report from late last month found that the U.S. is expected to report the lowest proceeds from IPOs since 2003.[11] In light of this troubling news, I have several questions for this afternoon's panel.

  • Are these recent market trends a short-term phenomenon or indicative of broader, long-term developments? Market trends should inform Commission action, but only if they are long-term structural market changes, not flash-in-the-pan trends.
  • Is any of this drop-off attributable to an uncertain and increasingly costly regulatory environment for public companies, caused by new and pending SEC regulations and guidance?
  • Do these recent market trends speak to how the SEC can properly calibrate rules for traditional IPOs, direct listings, reverse mergers, and SPACs, without overly discouraging any particular method of going public, or creating unnecessary opportunities for regulatory arbitrage?

Thank you all again for your input and commitment. I look forward to the discussion.

[1] My views are my own and do not necessarily represent those of the Commission or my fellow Commissioners.

[2] Sec's & Exch. Comm'n, Report on the 41st Annual Small Business Forum: 04.04-07.2022 (Jul. 28, 2022) at 10, ("2022 Forum Report").

[3] For statistics based on flow of venture capital dollars, see Richard Florida, The Post-Pandemic Geography of the U.S. Tech Economy, Bloomberg: City Lab (Mar. 9, 2022),

[4] Beyond Silicon Valley: Coastal Dollars and Local Investors Accelerate Early-Stage Startup Funding Across the US, Rise of the Rest: A Revolution Fund (Dec. 8, 2021),

[5] See Florida, The Post-Pandemic Geography of the U.S. Tech Economy, supra note 3.

[6] See Sec's & Exch. Comm'n, Office of the Advocate for Small Business Capital Formation (Dec. 9, 2021) at 25, (citing PitchBook-NVCA, "Venture Monitor Q2 2021," (July 13, 2021) at 7, PitchBook-NVCA_Venture_Monitor-1.pdf).

[7] 2022 Forum Report, supra note 2, at 5.

[8] See Sec's & Exch. Comm'n, SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising (Oct. 7, 2020),; see also 2022 Forum Report at 12 (The Commission should "[f]inalize the Commission's finders order").

[9] See Sec's & Exch. Comm'n, Final Report of the 2021 SEC Government-Business Forum on Small Business Capital Formation (Sept. 27, 2021), at 11, (The Commission should "[e]stablish a micro-offering exemption with minimal disclosure requirements.").

[10] See 2022 Forum Report, at 16 (The Commission should "[i]ncrease the thresholds (number of investors and cap on fund size) allowed in 3(c)(1) funds to achieve greater diversity among startup investors and entrepreneurs.").

[11] See Paul Go, et al., EY Global IPO Trends Q3 2022, Ernst & Young, LLP (Sept. 28, 2022),
In a Complaint filed in the United States District Court for the District of New Jersey, the SEC charged National Realty Investment Advisors LLC ("NRIA") and its former executives Rey E. Grabato II, Daniel Coley O'Brien, Thomas Nicholas Salzano, and Arthur S. Scutaro with violating the antifraud provisions of the Securities Act and the Securities Exchange Act. The Complaint named as Relief Defendants:  Olena Budinska and Jamie Samul, a/k/a Jamie Samul Salzano. As alleged in part in the SEC Release:

[B]eginning in 2018, NRIA and its executives raised funds by promising investors their money would be used to buy and develop real estate properties, which would generate profits through a fund that NRIA set up to invest in the projects. The four executives, , of Bloomfield, New Jersey solicited investors in a nationwide campaign promising returns of up to 20 percent.

In reality, the complaint alleges, investor money was used to pay distributions to other investors, to fund an executive's family's personal and luxury purchases, and to pay reputation management firms to thwart investors' due diligence of the executives.

. . .

The complaint further alleges that NRIA manipulated the real estate fund's financial statements and the financial information in marketing material distributed to investors, intentionally disguising the misuse of investor funds and creating the false appearance that NRIA and the fund were generating more revenue than they actually were and that operations were successful. However, NRIA had little to no revenue, and it and the fund filed for Chapter 11 bankruptcy protection on June 7, 2022. requiring Hewko and MPC to pay $1,906,395 in restitution and a $5.7 million civil monetary penalty; and permanently prohibiting the Defendants from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and imposes a permanent registration and trading ban. As alleged in part in the CFTC Release:

The order finds that in approximately August 2014, Hewko and MPC began seeking investments into a pooled investment vehicle operated by MPC and marketed to prospective investors as the Global Opportunity Fund (Fund). From September 2014 to November 2014, MPC transferred more than $1.1 million collected from the investors into a futures trading account with a futures commission merchant (FCM). In December 2014, the funds from that FCM were transferred to an account at another FCM where they remained until approximately the summer of 2016. The accounts were used to conduct limited trading of futures contracts, including crude oil and E-mini S&P futures contracts, both of which were traded on designated contract markets. 

The order also finds Hewko and MPC began issuing quarterly statements in approximately January 2016; however, all investment returns claimed in account statements provided from the fourth quarter of 2015 through third quarter of 2018 were false. While the Fund suffered losses during this period, investors received statements indicating returns with wide ranging percentages of false growth. Hewko and MPC knew these statements were false as the Fund never earned any investment gains. 

The order further finds Hewko and MPC did not use investor funds in the manner represented to investors, and instead misappropriated funds for the benefit of Hewko, his family, and unrelated companies he owned or controlled.  

Further, the order finds that Hewko was the owner of MPC, held himself out to investors as MPC's manager, signed documents on behalf of the company, and opened and controlled the futures trading account in MPC's name. Hewko failed to register with the CFTC as an associated person of a commodity pool operator. MPC also failed to register with the CFTC as a commodity pool operator.
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, Steven Albert Bellino submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Steven Albert Bellino was first registered in 1984, and from September 2017 to November 2020, he was registered with Equitable Advisors, LLC. In accordance with the terms of the AWC, FINRA imposed upon Bellino a $7,500 fine and 14-month suspension from associating with any FINRA member in all capacities. As asserted in part in the AWC:

In April 2019, while associated with Equitable, Respondent solicited a family member to invest $750,000 in Company A, a privately held corporation with which Respondent was affiliated, in exchange for a 50% ownership interest. The family member was not a customer of the firm. 

In connection with this investment, Respondent met with FG, a firm customer and Company A's sole owner, on behalf of the family member, and provided information to the family member about Company A, including advising the family member on the amount of money to invest and the ownership interest that the family member would receive in exchange for his investment. Respondent facilitated the investment by effectuating four wire transfers totaling $750,000 between April 2019 and August 2020 from the family member to Company A to purchase 50% ownership shares in the company. Respondent did not notify or receive prior written approval from Equitable to participate in the family member's investment. 

By participating in a private securities transaction without providing prior written notice to, and receiving approval from Equitable, his member-firm employer, Respondent violated FINRA Rules 3280 and 2010. 

. . .

From April 2019 through October 2020, Respondent operated Company A with FG by opening commodities trading accounts to conduct trades, providing trading and financial consulting services, and effectuating trades in gold futures and physical gold investments, commodities, and foreign currencies on behalf of the company. Respondent also traveled to metal refineries on behalf of Company A to establish trading relationships, for which he received expense reimbursement and $10,000 in compensation from the company. 

Despite engaging in these activities on behalf of Company A, Respondent did not disclose these outside business activities to Equitable, or seek approval from the firm prior to engaging in them. Additionally, Respondent falsely attested on an Equitable March 2020 annual compliance questionnaire that his previous OBA disclosures submitted to the firm in September 2017, which stated that he did not participate in any OBAs, were accurate. In fact, Respondent had engaged in outside business activities with Company A from April 2019 through October 2020. 

By engaging in an outside business activity without providing prior written notice to Equitable, Respondent violated FINRA Rules 3270 and 2010.

  In a FINRA Arbitration Statement of Claim filed in August 2021, public customer Claimant Shalhoub asserted churning for commissions and quantitative unsuitability (fraud), violations of FINRA Rule 2111 and Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; qualitative and quantitative unsuitability (FINRA Rule 2111); failure to supervise and negligent supervision (FINRA Rule 3010); breach of fiduciary contract and implied covenant of good faith and fair dealing; negligent misrepresentations and omissions; and violation of standards of commercial honor and principles of trade (FINRA Rule 2010). The AWC asserts that the " causes of action related to Claimant's allegations that Respondents churned his account, excessively traded and charged commissions and recommended and executed unsuitable transactions." At the FINRA Arbitration Hearing, Claimant sought $87,571 in damages and $97,271 in disgorgement. Respondents Worden Capital and Jamie Worden generally denied the allegations. Claimant filed a Notice of Settlement and Dismissal with Prejudice as to Respondent Laidlaw, Respondent Connors, and Respondent Lambert; and, accordingly, the FINRA Hearing Panel made not determination against those two parties.
  At the hearing, Claimant requested an adverse inference on the control of supervision issue based
upon the failure of Worden Capital and Worden to preserve records. The Panel granted Claimant's
  The FINRA Arbitration Panel found Respondent Worden Capital and Respondent Worden jointly and severally liable to and ordered them to pay to Claimant Shalhoub $73,000 in compensatory damages; $83,000 in commission/expense damages; and $300 in filing fees. 

= = =
I get angry when I see the Department of Justice or the Securities and Exchange Commission take ill-deserved victory laps because what gets prosecuted and who comes under the crosshairs is too often determined by whether the ensuing press releases will go viral. Prosecutors and regulators waste time and money and staff on nonsense. On half-assed studies. On useless advisory committees. On ever-dubious initiatives. On the likes of Kim Kardashian. Sadly, the amount of press often determines the amount of justice. Which brings up Kim Kardashian, yet again. Which never quite brings up the likes of Kenny Osas Okuonghae. Kenny who?
In separate Informations filed in the United States District Court for the Southern District of Florida, David Joseph Varrone and his wife Sherry Varrone were charged with conspiring to commit wire fraud. As alleged in part in the DOJ Release:

[F]rom 2018 through 2021, the Varrones offered individuals with good credit a short-term "Credit Leasing" investment program tied to a purported hedge fund that would yield a guaranteed return on investments plus fully repay the loans within 36 months or less. The Varrones and their co-conspirators helped victims apply for the high interest, short term loans and the victims "leased" the proceeds to The Credit Engineers and David Varrone. However, there was no hedge fund and victims' funds never were invested. Instead, the proceeds were used to enrich the Varrones and to pay back earlier victims-i.e., a Ponzi scheme. In total, the scheme funneled over $6.4 million of misappropriated victims' funds into the Varrones' accounts. Additionally, David Varrone fraudulently applied for and received approximately $650,000 in C.A.R.E.S. Act, Economic Injury Disaster Relief Loans from the U.S. Small Business Administration (SBA). These loans are intended to keep small businesses afloat and retain employees.
Ana Amador and Sunilda Casilla pled guilty to Conspiracy to Commit Wire Fraud and Aggravated Identity Theft in the United States District Court for Southern District of Florida. Amador was sentenced to 72 months in prison plus three years of supervised release, and ordered to pay over $1.6 million in restitution. Casilla was sentenced to 60 months in prison plus three years of supervised release, and ordered to pay over $1.6 million in restitution. As alleged in part in the DOJ Release

[A]mador and Casilla submitted fraudulent loan applications in connection with sham real estate transactions. The two would look for vacant properties with a high market value. They used the personal identifying information of former clients to apply for the mortgages from private mortgage lenders. The lenders would fund the loans for the purported purchase of the properties, and Amador and Casilla would pocket the loan proceeds. There never was a genuine sale or property purchase.    

Amador and Casilla were well versed in the mortgage industry and knew the details of the loan process, including the documents to be completed to obtain a loan. Amador worked as the president of a title company for a number of years. Casilla was a former attorney who worked with Amador doing real estate closings. They knew that "hard money lenders" would loan money for the purchase of properties as long as the property had sufficient value to serve as collateral to the loan. These lenders loaned money to high-risk clients unable to obtain a conventional mortgage for various reasons, to include poor credit risk, no verifiable income, or insufficient employment history. Amador and Casilla also knew that if they could convince the mortgage lenders to loan money for the purported purchase of a property, they could obtain the loan proceeds before anyone knew that a property wasn't being purchased.    

Amador and Casilla located high-end vacant residences that they would purportedly "buy" using someone else's name, credit and identity to secure a hard money lender mortgage. Once the "sale" was complete, the mortgage proceeds would be wired from the hard money lender to a fictitious title company controlled by Amador and Casilla. The owner of the property did not know the real estate transaction occurred. The buyer of the property did not know they had purchased it. Instead, they made it seem as if a sale had been completed, thereby having the mortgage company wire the mortgage proceeds to their title companies, after which they would withdraw the money. Utilizing this scheme, they were responsible for an intended loss of more than $3.3 million and an actual loss to the victims of more than $1.6 million. They each were ordered to pay more than $1.6 in restitution.
In an Information filed in the United States District Court for the Eastern District of Michigan (former majority owner/Chief Executive Officer/Chief Investment Officer/Portfolio Mmanager of EIA All Weather Alpha Fund 1 Partners) was charged with one count of wire fraud. As alleged in part in the DOJ Release:

[F]rom May 2017 through May 2022, Middlebrooks solicited clients for EIA by telling them he was able to exploit "inefficiencies" in global equity markets which would result in large returns for investors.  From the beginning of the scheme to defraud, however, EIA's fund failed to produce the predicted returns and suffered catastrophic losses.

Instead of informing EIA's existing investors that the fund was failing, Middlebrooks solicited new investors with false statements about the fund's performance and lulled existing investors by lying to them about the returns their investments generated. Middlebrooks also created and distributed false documents claiming that EIA's performance was exceptional. In one document, created in the fall of 2019, Middlebrooks falsely claimed that EIA's track record included a cumulative return of 476.81% with 81.82% of monthly trading showing a profit.

Middlebrooks also lied to investors about how their money would be used. During the scheme, Middlebrooks routinely took money from the fund for living expenses and transferred money from the fund to his wife's business. By the Spring of 2022, Middlebrook's scheme to defraud began unraveling, and EIA's fund collapsed. Losses to at least 100 investors exceeded $27 million.

Santa Barbara Man Sentenced to Over 11 Years in Federal Prison for $14 Million Ponzi Scheme, Tax Evasion, ID Theft and Other Felonies (DOJ Release) 
Darrell Arnold Aviss, 64, pled guilty in the United States District  for the Centraql District of California to five counts of wire fraud, one count of money laundering, five counts of engaging in monetary transactions in criminally derived property over $10,000, three counts of tax evasion, six counts of willful failure to report foreign bank and financial accounts, and one count of aggravated identity theft. Aviss was ordered him to pay $14,486,169 in restitution and to forfeit his interest in a Santa Barbara home worth approximately $4 million. As alleged in part in the DOJ Release:

Aviss ran his Ponzi scheme from at least 2012 through the summer of 2020, soliciting money from people who wanted to purchase annuities from insurance companies based in Switzerland. Aviss claimed the Swiss annuities he offered were safe and secure, and, in some instances, he told victims the annuities would pay interest rates ranging from 5% to 7%.

But Aviss did not use the victims' money to purchase annuities, even though he arranged for the victims to receive fabricated statements showing the purported value of the annuities, which the false documents showed were increasing over time.

Victims, most of whom were over the age of 60, gave Aviss more than $14 million, with most of that money coming from just one victim. Some money was paid back to victims to keep the scheme running.

Instead of purchasing annuities, Aviss used the victims' money for his own purposes and to support his lavish lifestyle. He used the money for, among other things, Ponzi payments to victims, mortgage payments, luxury car leases, expensive watches, trips to Monaco, more than $170,000 in purchases at a Santa Barbara nightclub, and 20 tickets to a U2 concert and after-party.

One victim lost more than $9.7 million in Aviss' Ponzi scheme. Aviss stole $400,000 from another victim whom he knew recently had been diagnosed with cancer, according to the prosecution's sentencing memorandum.

. . .

Aviss also defrauded the United States by failing to file tax returns for 2014, 2015 and 2016 and failing to pay any income taxes for those years. Aviss evaded paying more than $3 million in income taxes.

Aviss also failed to file with the Department of the Treasury Reports of Foreign Bank and Financial Accounts for the years 2015 through 2020 in an attempt to conceal accounts he controlled in Monaco, where he deposited some of his ill-gotten gains. He transferred victims' money to these offshore accounts, one of which was established with information from an identity theft victim.
The SEC's broker-dealer electronic recordkeeping rule currently requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format, known as the write once, read many format. The amendments add an audit-trail alternative under which electronic records can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased. The audit-trail alternative is designed to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems so they more closely align with current electronic recordkeeping practices while also protecting the authenticity and reliability of original records. The amendments apply the same requirements to nonbank SBSDs and MSBSPs.

Among other things, to facilitate examinations and make them more efficient, the amendments also require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format.
Recordkeeping is not an especially flashy topic. However, for regulators, a robust recordkeeping regime is fundamental to our ability to oversee our regulated entities. Without accurate and complete records, it is difficult or impossible to assess compliance with our rules.

Today's amendments make common-sense updates to modernize the broker-dealer and security-based swap ("SBS") entity recordkeeping regime, taking into account advances in technology over the last two decades.[1]

The current framework requires broker-dealers and non-bank SBS entities to maintain and preserve electronic records exclusively in a write-once, read-many, or "WORM" format. This means that the records are non-rewriteable and non-erasable, which is intended to ensure the integrity of the records. The amendments we are voting on today would add flexibility by allowing these entities to use an alternative "audit trail" method to satisfy their electronic recordkeeping obligations. Instead of preserving each version of a record in a non-rewriteable and non-erasable format, entities would be permitted to use an electronic recordkeeping system that maintains an audit trail that permits the recreation of an original record if it is altered, over-written, or erased. The amendments would also make other common-sense updates to the recordkeeping regime, including with respect to the use of third-party recordkeeping services and the prompt production of records.

The comment file reflected broad support for the proposed amendments.[2] Commenters also provided helpful feedback, which led to certain changes from the proposed approach. For example, the final amendments include a provision designed to accommodate cloud storage solutions, changes to the rule text designed to be more technology-neutral, and the removal of certain requirements that might be duplicative or redundant.[3]

While the amendments provide significant additional flexibility, they are also designed to maintain the same level of protection for the authenticity and reliability of original records. Some commenters suggested that the SEC provide even greater flexibility by imposing only a high-level requirement for "appropriate systems and controls."[4] However, we must be able to actually test and assess the effectiveness of the system. Such a high-level approach simply would not provide us the ability to do our jobs effectively. As the release explains, we need to be able to identify specific outcomes that the electronic recordkeeping system must achieve in order to promote the authenticity and reliability of the records.[5]

Winston Churchill is often quoted as saying "History will be kind to me, for I intend to write it."[6] His point, as I understand it, was that as the recorder of certain historical events, he would shape how future generations understood them, including his role. One problem: Winston Churchill probably did not actually say the words I attributed to him just now. At least, there is no reliable record of him doing so.

Going back to the records, we can see that he did say something similar during a meeting of Parliament, for which a transcript is available.[7] But it is not the pithy statement so often attributed to him. This confusion perhaps underscores the point of the original quote: without a record of events, we risk misunderstanding them. And the quality of the records informs the accuracy and completeness of our understanding.

Today's amendments are designed to make common-sense updates to our recordkeeping framework for SBS entities and broker-dealers, while continuing to protect the authenticity and reliability of original records. It accomplishes that goal thoughtfully, with what I believe is an appropriately tailored and balanced approach. Thank you to the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel, for your hard work on these amendments. I am pleased to support them.

[1] Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Release No. 34-96034 (October 12, 2022) (the "Adopting Release").

[2] See, e.g., Letter from John Trotti, NCC Group (Dec. 29, 2021); Letter from Ian J. Frimet, Senior Vice President, Associate General Counsel, LPL Financial (Jan. 3, 2022), Letter from William C. Anderson, Senior Vice President and Chief Compliance Officer, American Funds Distributors, Inc. (Dec. 31, 2021).

[3] Adopting Release at 4-10.

[4] See Petition 4-713 (Nov. 14, 2017) filed by the Securities Industry Financial Markets Association, Financial Services Roundtable, Futures Industry Association, International Swaps Derivatives Association, and Financial Services Institute.

[5] Adopting Release at 4-11.

[6] See, e.g., BrainyQuote (accessed 10/11/2022).

[7] Hansard Online, Commons Chamber, Volume 446: debated on Friday 23 January 1948 ("For my part, I consider that it will be found much better by all parties to leave the past to history, especially as I propose to write that history myself.")
In 1997, Netscape was the dominant web browser and the hottest tech item was a Tamagotchi - a virtual pet on a keychain. Sony marketed a data storage product called the Minidisc that was quickly overtaken by CD-R technology.

Streaming music was possible in 1997, but the well-known apps most of us are familiar with today weren't around yet. Chances are that RealPlayer was the go-to streaming platform for most. And many may recall the Pilot 1000, the first generation personal digital organizer that as the New York Times reported, "shared data with a desktop computer and synchronized information quickly on both machines."

Although the contours of the digital lifestyle we take for granted today were starting to emerge back then, technology has evolved significantly since the Commission first adopted its electronic recordkeeping rules in 1997. Optical disks were the predominant electronic storage method then, instead of the cloud of today.

To catch up with rapid technological change, the Commission is modernizing its recordkeeping rules. Today's amendments will make these rules more technology neutral. The amendments address the maintenance and preservation of records; use of third-party services, including cloud-based services, to hold records; and prompt production of records.

The amendments are designed to provide market participants with flexibility in determining how to preserve their records. The adoption of these amendments could result in significant market efficiencies and cost savings without compromising market stability or smooth market operations.

Recordkeeping by some broker-dealers and security-based swap entities in recent years has shifted to servers or other storage devices owned or operated by cloud service providers. Unlike the relationship with traditional third-party recordkeeping providers, firms using cloud services retain control of their recordkeeping system, as well as access to the records held in the cloud.

With these amendments, broker-dealers would no longer be required to notify their designated examining authority before deploying a recordkeeping system. The amendments would also permit firms to designate an executive officer for the purpose of executing an undertaking that provides the Commission access, directly or indirectly, to its records.

To meet the current recordkeeping requirement that records be preserved in an exclusively write once, read many, or WORM, format, the amendments provide for an audit-trail alternative. This alternative is meant to balance the concerns with current WORM requirements while preserving the goal of the Commission's recordkeeping rules, which is to protect the authenticity and reliability of original records.

The amendments also include an alternative undertaking for cloud service providers that is tailored to how these third party providers hold electronic records.

In addition, the amendments requires records maintained by a firm to be provided to the Commission in a reasonably usable electronic format.

Finally, the Commission is designating FINRA as the Commission's designee for purpose of accessing its members' records.

Today's Commission updates to electronic recordkeeping are long overdue, strike the right balance between market oversight and flexibility, and I'm pleased to support them.

I would like to thank the staff from the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel for their work on these amendments. I appreciate your dedication and extensive work on these highly technical amendments.
The Commission finally is considering the adoption of a rule that will allow broker-dealers[1] to retire the antiquated systems using CD-ROMs or other similar write-once-read-many (or, appropriately primitive, WORM) technology that our current rules require.

This day has been long in coming. The current rule, which was adopted in 1997, specified that a broker-dealer must preserve its records "exclusively in a non-rewriteable, non-erasable format."[2] This requirement was more flexible than the proposal, which had specified that firms keeping records electronically had to use "optical storage technology."[3] Commenters on that proposal objected that the requirement was overly restrictive.[4] In the adopting release, the Commission acknowledged these concerns. Noting that other technologies also were "available in a WORM, non-rewriteable version," the Commission declined to "specify[] the type of storage technology that may be used," and instead established standards that the storage media had to satisfy to be acceptable under the rule.[5] In other words, the Commission moved from a proposed approach that would have required optical storage technology because it recorded data in a non-rewriteable, non-erasable manner to a final rule that simply articulated an apparently technologically neutral standard that specified only that the medium needed to be in a non-rewriteable and non-erasable format.

The standard soon showed its true colors. Only six years later, the Commission found it necessary to respond to repeated requests from broker-dealers that suggested that the original rule was not as technologically neutral as the Commission initially thought. Broker-dealers were asking "for guidance on whether this requirement limits them to using optical platters, CD-ROMs, DVDs, or similar physical mediums to achieve" preservation of their records "exclusively in a non-rewriteable and non-erasable format" as required under rule 17a-4.[6] The Commission explained that the rule "does not require that a particular type of technology or method be used to achieve the non-rewriteable and non-erasable requirement" and that a broker-dealer could use an integrated system of hardware and software control codes to comply with the rules.[7] However, the Commission expressly excluded from this interpretation any system that relied exclusively on software controls, as they do not prevent modification or destruction of records and thus were not compliant with the rule.[8]

Given the limitations of this interpretation, it appears that many, perhaps most, broker dealers continued to use various forms of optical storage technology to meet the requirements of rule 17a-4,[9] notwithstanding its many deficiencies. Many broker-dealers incur significant costs to maintain a system that has little or no business use; that may be incapable of capturing, in a usable form, the types of dynamic information that contemporary information systems produce; and that, by all appearances, regulators almost never use.[10] Significantly, broker-dealers bear these burdens while investment advisers and CFTC-regulated entities, some of which are also registered as broker-dealers, do not.

Given the inflexibility and costs of our current rules, I am happy to see this recommendation come before the Commission. The rule provides what appears to be a viable, less expensive, and more useful alternative to WORM that I hope will benefit both our regulated entities and the Commission as it supervises and examines them.

At the same time, our experience with the rule we adopted in 1997 nags at me. The release we are considering states that one of the goals of this rulemaking is to make the requirement "more technology neutral." I hope these amendments achieve this goal, but, to be frank, our experience over the past quarter century with the existing rule leaves me in doubt. As commenters pointed out, even in the mid-90s, it would have been foolish to assume that optical storage technologies would continue to be a commonly used form of storage. Many people probably thought that a standard that required records to be kept in a non-rewriteable, non-erasable format would be much more durable. As I have already described, we had to revisit this question six years after we finalized the current rule. As a consequence, both firms and the Commission have been burdened with an expensive, obsolete, and probably, as a practical matter, unusable storage methodology for the better part of two decades.

What guarantees do we have that a rule that requires an "audit trail" will be any different? If the past twenty-five years have taught us anything, it is that technological developments consistently surprise us all. I hope that "audit trail" is sufficiently expansive to include all future technological solutions to identify changes to records and to reconstructing earlier versions of altered documents, but I fear that audit trail is to 2022 what WORM was to 1997.

We could be far more confident in the staying power of our rule if we were instead considering a principles-based approach that specified the objective we expected firms to achieve and allowed them to find the best technology available to them to reach this goal. For example, we could have specified that a broker-dealer needs to be able, upon request from the Commission, to retrieve any record it is required to maintain, as of any date specified by the Commission. This kind of rule would ensure that firms are capable of doing what we expect them to be able to do under the rule we are considering today. For many of them, an audit trail might be the best solution. For others-or for firms doing business a decade from now-other, more economical solutions might be available. Under a principles-based approach, the Commission could hold any firm liable for not maintaining a system capable of producing records required under the rules, but would not hold firms liable for failing to have systems that checked particular technological boxes.

Notwithstanding these concerns, I believe that this rule represents an improvement over our current, outdated requirement and am happy to support it. To be clear, however, I view this as an initial step toward a truly principles-based, technologically neutral future where our registrants are free to find the best solutions available to meet our regulatory requirements.

I would like to express my thanks to the staff for all the hours they have spent engaging with market participants to find a way to move beyond WORM, in discussing recordkeeping with me, and in drafting this rule.

[1] The rule also sets out generally similar provisions for security-based swap dealers and major security-based swap participants. See amendments to Exchange Act rule 18a-6.

[2] Exchange Act rule 17a-4(f)(2)(ii)(A).

[3] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934; Proposed Amendments, Exchange Act Rel. No. 32609 (July 9, 1993), 58 Fed. Reg. 38092, 38094 (July 15, 1993). See also id. at 38093 (noting that "[o]ptical storage technology allows for digital data recording in a non-rewriteable, non-erasable format, such as write once, ready many ('WORM'), which provides a non-alterable, permanent record storage medium").

[4] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934; Final Rule, Exchange Act Rel. No. 38245 (Feb. 5, 1997); 62 Fed. Reg. 6469, 6470 (Feb. 12, 1997) ("Several commenters explained that the description of optical storage technology in the Proposing Release included only one specific type of writing technology known as ablative writing, and requested clarification that the final rule would apply to other forms of optical disk technology that met the requirements of the rule.").

[5] Id.

[6] Electronic Storage of Broker-Dealer Records; Interpretation, Exchange Act Rel. No. 47806 (May 7, 2003), 68 Fed. Reg. 25281, 25282 (May 12, 2003).

[7] Id.

[8] Id. at 25282-25283.

[9] See SIFMA, Financial Services Roundtable, Futures Industry Association, Financial Svcs. Inst., International Swaps and Derivatives Association, Petition for Rulemaking to Amend Exchange Act Rule 17a-4(f) (Nov. 14, 2017), available at

[10] See id. at 5 (noting that "regulators . . . do not typically ask for production of records from WORM storage because the information or data is not readily sortable or searchable [but] instead request customized extracts or views of data collected from active storage systems where the record was originally created, that has not yet been transferred to a WORM system").
Thank you, Chair Gensler. I appreciate the staff's presentation on the recommendation to finalize amendments to the Commission's recordkeeping rules applicable to broker-dealers, security-based swap dealers, and major security-based swap participants.

On July 9, 1993, the Commission proposed amendments to its broker-dealer records preservation rule to allow such entities to employ optical storage technology to maintain records that were required to be retained.[1] Two notable features of this 1993 proposal were: (1) it took up less than four pages in the Federal Register; and (2) like today's recommendation, the first name listed as a staff contact was Associate Director Michael Macchiaroli.

In 1997, when the Commission adopted these amendments to Rule 17a-4, it stated that its actions to require the use of write once, ready many, or WORM formats "reflect a recognition of technological developments that will provide economic as well as time-saving advantages for broker-dealers by expanding the scope of recordkeeping options."[2] However, the "optical storage technology" addressed by that rulemaking, such as optical platters, CD-ROMs, and DVDs was already on the way to becoming outmoded.

Twenty-five years later, the Commission is finally addressing antiquated technology. I am pleased that the Commission is reviewing rules that are woefully in need of updating so that the rules achieve their intended purposes while being sensitive to their costs and benefits. In particular, the responsibility to preserve records is foundational not only to the Commission's Exams and Enforcement programs, but also for regulated entities to efficiently run their businesses. The previous rules effectively required firms to keep two sets of records: one using outdated "WORM" technology solely for SEC purposes; and the other for their businesses. This approach to regulation is unproductive and costly.

I support the recommendation before us because it amends the existing rules in a manner that is technology-neutral and does not seek to entrench a specific format. While I am hopeful that today's amendments achieve this important goal, I encourage the Commission not to wait twenty-five more years to revisit the rules if they do not.

As the Commission continues to consider how advances in technology might impact its regulations, we should be mindful of the potential benefits and risks. For example, technologies such as cloud storage and distributed ledger technology may make it easier and more efficient to maintain and preserve records.

The ease at which these technologies and other systems can record, preserve, and index large amounts of otherwise innocuous data on an automated basis, however, should be carefully evaluated. In this regard, I am concerned about overly intrusive surveillance that tracks employees' every keystroke, constantly takes facial images and screen snapshots, and logs every turnstile entry and exit.[3] America has a long history of respecting privacy, and the need to regulate the conduct of the financial services industry should not override these long-established norms. While financial services firms may have business justifications for engaging in extensive surveillance practices, the notion of doing so for regulatory compliance at the behest of government regulators can be unsettling.[4]

As a regulatory body that has an obligation to act in the public interest, the Commission has a responsibility to monitor its rulebook to see what is working and what is outdated. Rulemaking must be conducted in a methodical and deliberative process, based on a thorough review of the costs and benefits, and meaningfully seek and consider public comment. In that respect, I believe that the administrative file for this proposal would have been improved had the Commission not provided a short comment period that began last year just before Thanksgiving and ended on January 3rd. This comment period occurred at the same time as several open or recently closed comment periods for other rulemakings. The rulemaking process should - as a matter of good government - seek robust engagement from the public. The Commission can and should do better.

I am also disappointed that the Commission did not consider a more rational compliance period for smaller broker-dealers. Six months is an extremely abbreviated time frame, particularly for smaller firms that are already facing substantially increased compliance burdens as a result of the Commission's ambitious rulemaking agenda.

According to the data in the adopting release, 3,363 broker-dealers have total customer assets of less than $1 billion, which represents only 1.4% of overall assets. On the other hand, approximately $5.26 trillion, or 98.6% of total assets, are held at only 145 broker-dealers above that threshold.

Size of Broker-Dealer (Total Assets)Total Num. of BDs Cumulative Total Assets ($bln) Cumulative Num. of Customer Accounts
> $50 billion21 3,68275,808,084
> $ 1 billion to $50 billion124 1,581153,243,391
> $500 million to $1 billion $50 billion30 22518,545
> $100 million to $500 million147 319,559,082

Let's face it - by not staggering the compliance date based on firm size and recognizing the disparate impact on small businesses, today's action effectively favors Wall Street interests over Main Street brokers. Extending the compliance date for smaller broker-dealers, including the nearly 1,600 broker-dealers that have less than $1 million in assets, would have helped to alleviate burdens for these small businesses without affecting investor protection.[5]

Notwithstanding my concerns, on balance, I support today's amendments as important updates that provide useful alternatives to WORM for records preservation. I thank the staff in the Divisions of Trading and Markets, and Economic and Risk Analysis as well as the Office of the General Counsel for their efforts.

[1] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Release No. 34-32609 (July 9, 1993) [58 FR 38092 (July 15, 1993)], available at

[2] Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Release No. 34-38245 (Jan. 31, 1997) [62 FR 6469, 6469 (Feb. 12, 1997)], available at

[3] See Danielle Abril and Drew Harwell, Keystroke Tracking, Screenshots, and Facial Recognition: The Boss May Be Watching Long After the Pandemic Ends, The Washington Post (Sept. 24, 2021), available at

[4] See, e.g., George Orwell, 1984 (1949).

[5] Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Release No. 34-96034 (Oct. 12, 2022) at 95, available at

SEC Obtains Court Order to Enforce Investigative Subpoenas Against Two Principals of Broadway Musical Fund (SEC Release)
The United States District Court for the Southern District of New York granted an SEC application to enforce subpoenas for production of documents and testimony issued to Curtis Wayne Cronin and John Joseph, Managing Partners of Broadway Strategic Return Fund, LP. As alleged in part in the SEC Release:

[T]he SEC is investigating whether Cronin and Joseph or others violated the federal securities laws by, among other things, making materially misleading statements to existing or prospective investors concerning the valuation of the Fund assets, and whether, after the SEC had begun a formal investigation of the Fund, they falsely represented in due diligence questionnaires disseminated to actual or prospective investors that there have not been any investigations of the Fund or the Fund's general partner. As stated in the filing, SEC staff served both Cronin and Joseph with investigative subpoenas requiring the production of certain documents and compelling their testimony. According to the filing, however, and despite numerous attempts to secure compliances with the subpoenas, Cronin and Joseph refused to produce documents and failed to comply with the testimonial obligations.

The SEC's application sought a court order directing Cronin and Joseph to comply fully with the subpoenas. Following a hearing on September 14, 2022, the court granted the SEC's application and ordered the respondents to produce non-privileged responsive documents to the Commission's subpoena and to appear for testimony. The Court's order also states that in the event Cronin and Joseph do not produce the documents and appear for testimony, the Court may hold them in civil contempt. The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.
The United States District Court for the Southern District of New York entered a Final Consent Judgment against Lev Parnas permanently enjoining him from violating the antifraud provisions of Section 17(a) of the Securities Act and Sections 15(a) and 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Judgment orders Parnas to pay disgorgement of $1,400,746 and prejudgment interest of $378,844.76; however, the disgorgement shall be deemed satisfied by the restitution order entered against Parnas in the parallel criminal proceeding in which he had pled guilty. Previously, the SEC imposed an associational and penny stock bar on Parnas, and settled its case against Co-Defendant David Correia. As alleged in part in the SEC Release;

[F]rom 2013 through mid-2019, Parnas, along with another individual, David Correia, raised over $2 million from investors through investments in their entity, Fraud Guarantee. According to the complaint, Parnas and Correia told potential investors that their funds would be used to develop products that would help customers recoup losses resulting from investment or consumer fraud. The complaint further alleged that contrary to Parnas's and Correia's representations, the funds were instead largely used for personal expenses including travel, jewelry, cars, and disbursements at a casino.  As alleged, Parnas and Correia also falsely told potential investors that they had raised millions of dollars from other investors and that they had invested hundreds of thousands of dollars of their own money into Fraud Guarantee.

= = =
Financial Planning's Victoria Zhuang reports about a brewing, puzzling, troubling federal lawsuit that pits a veteran in-house Wells Fargo lawyer against his former employer. Wells Fargo alleges that its former lawyer Steven Satter wrongly facilitated the departure of a $1.2 billion advisory group; and that he did so on its dime when still employed and the producers were still affiliated with the firm. Oh boy, talk about potentially opening a can of worms when a company sues a former staff lawyer! 

OFAC Settles with Bittrex, Inc. for $24,280,829.20 Related to Apparent Violations of Multiple Sanctions Programs (Department of the Treasury, Enforcement Release)
As asserted in part in the Treasury Department Release:

Bittrex, Inc. ("Bittrex"), a private company based in Bellevue, Washington, that provides an online virtual currency exchange and hosted wallet services, has agreed to remit $24,280,829.20 to settle its potential civil liability for 116,421 apparent violations of multiple sanctions programs. As a result of deficiencies related to Bittrex's sanctions compliance procedures, Bittrex failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions. The applicable sanctions programs generally prohibited U.S. persons from engaging in transactions with these jurisdictions. Based on internet protocol ("IP") address information and physical address information collected about each customer at onboarding, Bittrex had reason to know that these users were in jurisdictions subject to sanctions. At the time of the transactions, however, Bittrex was not screening this customer information for terms associated with sanctioned jurisdictions. The settlement amount reflects OFAC's determination that Bittrex's apparent violations were not voluntarily self-disclosed and were not egregious.

DOL asserts that its Proposed Rule will provide guidance on properly classifying workers as independent contractors or employees in accordance with the Fair Labor Standards Act ("FSLA"). In part the DOJ Release states:

Specifically, the proposed rule would do the following:

  • Align the department's approach with courts' FLSA interpretation and the economic reality test.
  • Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. 
  • Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
  • Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer's business, is also included.
  • Assist with the proper classification of employees and independent contractors under the FLSA.
  • Rescind the 2021 Independent Contractor Rule. 

Former Comptroller Of Investment Adviser Firm Sentenced To 80 Months In Multimillion-Dollar Investment Fraud (DOJ Release)
Former Executive Compensation Planners, Inc. ("ECP") Comptroller/Chief Compliance Officer Vania May Bell, 57, pled guilty to one count of conspiracy to commit wire fraud in the United States District Court for the Southern District of New York, and she was sentenced to 80 months in prison plus three years of supervised release, and ordered to pay $8,041,233 in restitution, and forfeit $589,942. Previously, Bell's father and former ECP President Hector May pled guilty to charges of conspiracy to commit wire fraud and investment advisor fraud, and he was sentenced to 13 years in prison plus three years of supervised release, and ordered to pay $8,041,233 in restitution and forfeit $11,452,185. As alleged in part in the DOJ Release:

Beginning in 1982, HECTOR MAY was the president of ECP and provided financial advisory services to numerous clients.  In 1993, BELL joined ECP, where she held various titles including comptroller and chief compliance officer.  ECP worked with a broker dealer ("Broker Dealer-1"), of which MAY became a registered representative in 1994. 

In order to obtain money from the Victims' securities accounts with Broker Dealer-1, MAY advised the Victims, among other things, that they should use money from those accounts to have ECP, rather than Broker Dealer-1, purchase bonds on their behalf.  With BELL's assistance, MAY guided the Victims, first, to withdraw their money from their Broker Dealer-1 accounts, and second, to send that money to the ECP Custodial Account by wire transfer or check.  At times, when ECP was running out of cash and desperately needed to make supposed bond interest payments to avoid exposing the Ponzi scheme, BELL reached out to Victims directly.  After the Victims sent their money to the ECP Custodial Account, MAY and BELL did not use the money to purchase bonds.  Instead, BELL and MAY transferred the money to ECP's "operating" account and spent it on business expenses, personal expenses, and to make payments to certain Victims in order to perpetuate the scheme and conceal the fraud.  In this way, from the late 1990's through March 9, 2018, BELL and MAY induced Victims to forward them more than $11,400,000.

To help perpetuate the fraud, BELL and MAY created phony "consolidated" account statements that they issued through ECP and sent to the Victims.  These "consolidated" account statements purported to reflect the Victims' total portfolio balances and included the names of bonds MAY falsely represented that he purchased for the Victims and the amounts of interest the Victims were supposedly earning on the bonds.  In order to create the phony consolidated account statements, MAY provided BELL with bond names and false interest earnings, and BELL created ECP computerized account statements and had them distributed to the Victims.  As part of the scheme, MAY personally drove to the home of a stroke victim he and BELL had been defrauding of millions of dollars in order to retrieve the legitimate statements being sent by Broker Dealer-1 and later replace them with BELL's fake consolidated statements purporting to show the victim's investments had been growing.

BELL was instrumental to the scheme in multiple ways.  BELL processed and spent client money from ECP's custodial and operating accounts, watching the money dwindling and helping her father achieve more thefts at many months' ends; BELL faked account statements that made people believe that they held millions, even when she knew that their money was gone; and BELL wielded her role as Chief Compliance Officer and Comptroller to help conceal the fraud from Broker Dealer-1.

In an audio recording made in 2016, after more than sixteen years in the scheme, BELL said the following about MAY:  "I am his daughter, I am his confidante, I am the backbone that saves his butt in every promise he makes out of there. . . . The virtue of my knowledge is just by the presence of time here.  There is nothing in this office that I don't know, haven't touched, haven't seen, haven't done, haven't taught.  Everyone is always intimidated by the time I come in or the things I get to do personally that I've earned over time based on my life circumstances. It's what we call the perk of being the boss's daughter."  At the end of that year, MAY thanked BELL in a handwritten note: "My Dearest Vania: you have always been there for me.  You always watch my back.  I couldn't do it without you[.] Love, Daddy".

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96012; Whistleblower Award Proc. File No. 2023-01)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending that Claimant receive a Whistleblower Award for about $825,000. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[C]laimant, Redacted expeditiously provided detailed information that prompted the opening of the investigation and thereafter met with Commission staff in person and provided additional information after submitting the initial TCR. Redacted

Federal Court Orders Texas Fraudulent Forex Trader and His Company to Pay Over $940,000 (CFTC Release)
The United States District Court for the Southern District of Texas entered a Consent Order against Troy Mason and Ztegrity, Inc. requiring Mason and Ztegrity to pay $643,570 in restitution and a $300,000 civil monetary penalty; and, further, permanently prohibits the Defendants from further violations of the CEA and CFTC regulations, as charged, and imposes permanent registration and trading bans. As alleged in part in the CFTC Release:

The order finds that from approximately October 2019 to June 2021, the defendants used various websites and social media platforms to fraudulently market their forex trading pool as a version of a savings account that offered a greater yield with similarly low or no risk. The defendants called this forex trading pool "The Black Club" and "The Forex Savings Club," which their website claimed had received over $460,000 from 411 participants.

The order further finds the defendants induced participation in their forex trading pool by falsely claiming to "guarantee" to repay participants the funds they contributed to their individual "Forex Savings Accounts" and falsely offered participants "with a 100% certainty" portions of the "substantial profit[s]" to be generated using participants' pooled funds to trade forex. In truth, the defendants knew or recklessly failed to appreciate that no forex trader can guarantee profitable trading, or the avoidance of losses required to guarantee all participants' contributions, and knew, but failed to inform participants, they had no U.S.-based forex trading accounts. 

Finally, the order finds the defendants illegally operated their commodity pool by failing to register as commodity pool operators, in violation of the CEA and CFTC regulations.
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, Charles V. Malico submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Charles V. Malico was first registered in 1987, and from June 2016 through April 2022, he was registered with Network 1 Financial Securities Inc. In accordance with the terms of the AWC, FINRA imposed upon Malico a $5,000 fine and six-month suspension from associating with any FINRA member in all capacities. The AWC includes this admonition:

Respondent understands that this settlement includes a finding that he willfully violated Rule 15l-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes him subject to a statutory disqualification with respect to association with a member.

As asserted in part in the AWC:

From July 2020 through November 2021, Malico recommended to one of his retail customers (Customer A) at Network 1 a series of transactions that was excessive in light of that customer's investment profile. In so doing, Malico placed his and Network 1's interests ahead of the interests of the customer. Customer A was a 63-year-old tax preparer with an annual income of approximately $100,000 and a liquid net worth of approximately $50,000. Although Customer A's average account balance during the relevant period was less than $30,000, Malico recommended that he make more than 350 trades in his account, which caused Customer A to pay more than $54,000 in commissions and other trading costs. 

Malico frequently recommended that Customer A buy and then sell a security, only to repurchase the same security weeks or even days later. For example, between January and July 2021, Malico recommended that Customer A buy and then sell shares of the same biotechnology company on six separate occasions. On four of those occasions, Malico recommended that Customer A buy shares of the company only to sell them on the same day or the next day. Such in-and-out trading caused Customer A to lose more than $6,000, while generating more than $3,200 in commissions and trading costs to Malico and Network 1. 

Collectively, the trades that Malico recommended in Customer A's account resulted in an annualized cost-to-equity ratio exceeding 158 percent-meaning that Customer A's account would have had to grow by more than 158 percent annually just to break even. As a result, Malico's recommendations made it virtually impossible for Customer A to realize a profit and, in fact, Customer A lost more than $17,500 during the relevant period.

Therefore, Malico willfully violated Exchange Act Rule 15l-1 and violated FINRA Rule 2010. 
= = = = =
Footnote 2: This AWC does not require that Malico pay restitution to Customer A because Network 1 has already compensated Customer A in connection with the settlement of an arbitration claim filed by the customer.

= = =

( Blog)
In today's featured case, we start things off in 2011, when NMS Capital Group, LLC  (wholly owned by Trevor Saliba) purchased MCA Securities LLC (whose name was changed to NMS Capital Securities). By 2016, Saliba came within FINRA's crosshairs, but six years later, his case is still not fully resolved. As with far too much of what is passed off these days as Wall Street regulation, we got periods of activity, periods of inactivity, and, ultimately, things that never quite move forward or backward but spin their wheels. 

As set forth in part in the SEC Release:

[D]ue to a technological error that resulted in a number of public comments submitted through the Commission's internet comment form not being received by the Commission. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021.

To ensure that interested persons, including any affected commenters, have the opportunity to comment on the affected releases or to resubmit comments, the Commission is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register.

As further described in the reopening release, all commenters who submitted a public comment to one of the affected comment files through the internet comment form between June 2021 and August 2022 are advised to check the relevant comment file on to determine whether their comment was received and posted. If a comment has not been posted, commenters should resubmit that comment.

. . .

Affected Releases:
  • Reporting of Securities Loans, Release No. 34-93613 (Dec. 8, 2021)

  • Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Release No. 34-93784 (Feb. 4, 2022)

  • Money Market Fund Reforms, Release No. IC-34441 (Feb. 8, 2022)

  • Share Repurchase Disclosure Modernization, Release Nos. 34-93783, IC-34440 (Feb. 15, 2022)

  • Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313 (Mar. 16, 2022); see also Notice of the Text of the Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection, Release No. 34-94314 (Mar. 16, 2022)

  • Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11038, 34-94382, IC-34529 (Mar. 23, 2022)

  • Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Mar. 24, 2022)

  • The Enhancement and Standardization of Climate-Related Disclosures for Investors Release Nos. 33-11042, 34-94478 (Apr. 11, 2022)

  • Special Purpose Acquisition Companies, Shell Companies, and Projections, Release Nos. 33-11048, 34-94546, IC-34549 (May 13, 2022)

  • Investment Company Names, Release Nos. 33-11067, 34-94981, IC-34593 (June 17, 2022)

  • Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release Nos. 33-11068, 34-94985, IA-6034, IC-34594 (June 17, 2022)

  • Request for Comment on Certain Information Providers Acting as Investment Advisers, Release Nos. IA-6050, IC-34618 (June 22, 2022)
Heightened Threat of Fraud: FINRA Alerts Firms to Recent Trend in Fraudulent Transfers of Accounts Through ACATS (FINRA Regulatory Notice 22-61)
As set forth in part in the "Summary" portion of the FINRA Regulatory Notice:

FINRA alerts member firms to a rising trend in the fraudulent transfer of customer accounts through the Automated Customer Account Transfer Service (ACATS), an automated system administered by the National Securities Clearing Corporation (NSCC), that facilitates the transfer of customer account assets from one firm to another. 

As more fully explained in part on Page 3 of the Notice [Ed: footnotes omitted]:

ACATS fraud is related to the growing threat of new accounts being opened online or through mobile applications using stolen or synthetic identities. In connection with the COVID-19 pandemic, FINRA previously advised member firms that bad actors may be "targeting firms offering online account opening services and perhaps especially, firms that recently started offering such services" by using stolen or synthetic identities to establish new accounts at member firms as a way to "divert congressional stimulus funds, unemployment payments or to engage in automated clearing house (ACH) fraud." Similarly, with ACATS fraud, bad actors may be taking advantage of the efficiencies of the account transfer process offered through ACATS to fraudulently transfer assets out of an existing account of a legitimate customer whose identity is stolen to a new account the bad actor established at another broker-dealer using the stolen identity.