Securities Industry Commentator by Bill Singer Esq

November 17, 2022



SEC Charges S&P Global Ratings with Conflict of Interest Violations (SEC Release)


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After receiving the other side's last-best-settlement-offer, a client says "no;" and then he tells his lawyer that he will fight on as a "matter of principle." Having heard that line before, the client's lawyer responds with the warning that "principle comes with interest." The client doesn't quite get the joke. Of course once you have to explain why something's funny, it isn't funny anymore. Speaking of something not be funny anymore, read about a recent FINRA arbitration in which a stockbroker declined to indemnify his former brokerage firm for a customer settlement. You got principle. You got a whopping amount of interest.
In the United States District Court for the Western District of North Carolina, an Indictment was filed charging tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons with conspiring to defraud the United States and helping clients file false tax returns based on their promotion and operation of the Gain Elimination Plan ("GEP"), an allegedly fraudulent tax shelter. As alleged in part in the DOJ Release:

[T]he defendants allegedly designed the GEP to conceal clients' income from the IRS by fraudulently inflating business expenses through fictitious royalties and management fees. These fictitious royalties and management fees allegedly were paid, on paper, to a limited partnership largely owned by a charitable organization. In reality, Kohn and Chollet allegedly fabricated the royalties and management fees. In total, the defendants allegedly caused a tax loss to the IRS of tens of millions of dollars. 

The indictment further alleges that Kohn and Simmons engaged in a scheme to defraud an insurance company by providing false information on insurance applications on behalf of their clients. The false information allegedly included fraudulent representations concerning the clients' financials and the purpose of the insurance policies. In total, Kohn and Simmons allegedly caused the insurance company to issue more than $200 million in insurance policies based on false application information. Simmons allegedly earned large commissions for selling the insurance policies, many of which he split with Kohn and Chollet. Simmons also allegedly filed false personal tax returns by underreporting his business income and inflating his business expenses.
In the United States District Court for the Northern District of Texas, a Superseding Indictment was filed charging lawyer Joseph Garza and tax professionals Kevin McDonnell, James Richardson and Craig Fenton with wire fraud, conspiracy to commit wire fraud, helping their clients file false tax returns, and conspiracy to defraud the United States. As alleged in part in the DOJ Release:

According to the original indictment, from approximately 2012 to 2021 Garza promoted a tax shelter that allowed high-income clients to claim fraudulent tax deductions that reduced the taxes they owed to the IRS. Garza and his co-conspirators allegedly directed the clients to transfer funds into shell companies, then returned this money to the clients, untaxed, for their personal use. To conceal the circular flow of funds, Garza and the co-conspirators allegedly commissioned fictitious business valuation reports, created invoices for fake business expenses, and drafted sham contractual agreements.

The superseding indictment alleges that Garza directed clients to use hand-picked CPAs and other tax professionals, including McDonnell, Richardson and Fenton. McDonnell and Richardson, both CPAs, allegedly owned and operated McDonnell Richardson, P.C., an accounting, tax preparation, and legal services business located in Waxahachie. McDonnell allegedly is also a licensed attorney. Fenton allegedly was employed as a tax manager at McDonnell Richardson.

McDonnell, Richardson and Fenton allegedly helped Garza run the illegal tax shelter by preparing and filing fraudulent tax returns for the high-income clients and the shell companies, among other entities. The scheme allegedly allowed clients to conceal $1 billion from the IRS and caused a total tax loss exceeding $200 million.
The United States District Court for the Southern District of New York entered a Final Consent Judgment against Charles Rustin "Rusty" Holzer, a manager of a family office, whom the SEC previously charged with insider trading; previously, the Court had entered a Final Consent Judgment against Fernando Motta Moraes, the former Chief Operating Officer of Holzer's family office, who was also previously charged with insider trading. As alleged in part in the SEC Release:

The SEC's complaints, filed on September 30, 2022, alleged that Holzer and Moraes traded in options of Dun & Bradstreet Corp. (NYSE: DNB) based on material nonpublic information ahead of the company's August 8, 2018 announcement that it had agreed to be acquired by a private investor group at a price of $145 per share, realizing ill-gotten profits of $96,091 and $8,842, respectively. The SEC alleged that Holzer and Moraes learned about the pending acquisition from a member of the investor group pursuant to a non-disclosure agreement, and that in addition to trading for themselves, Holzer and Moraes unlawfully tipped two other traders who realized profits of $672,000 and $65,332, respectively.

On October 4, 2022, Holzer consented, without admitting or denying the SEC's allegations, to a judgment in which he was permanently enjoined from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and barred from acting as an officer or director of a public issuer. The final judgment entered on November 14, 2022 orders Holzer to pay disgorgement of $91,509 plus prejudgment interest of $14,217.67 and a civil penalty of $763,509. 

Without admitting or denying the allegations, Moraes consented to the entry of a final consent judgment that permanently enjoins him from violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act, orders him to pay disgorgement of $8,842 plus prejudgment interest of $1,647, and a civil penalty of $48,646, and bars him from acting as an officer or director of a public issuer.

Thank you, Jennifer [Schulp], for the kind introduction. Good morning to everyone here in person and those participating virtually. I appreciate being part of your conference focusing on the rise of environmental, social, and governance (ESG) investing and the future of financial regulation. The conference raises a number of important questions, such as "what is ESG?," "what role should ESG play in investment decisions?," and "should ESG be considered in assessing financial stability?"[1] As you consider these issues, I wanted to share some thoughts that reflect my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

I. Sustainability of ESG Investing

First, let's discuss ESG and sustainability - but I am not referring to ESG and sustainability as interchangeable terms. Rather, the terms are meant to ask whether ESG investing, in its current form, is itself sustainable. The asset management industry has excelled in recent years in attracting fund flows to ESG-themed investment products.[2] Whether these trends can be sustained over the long run is an open question, especially if many ESG funds are essentially plays on over-weighting the technology sector while under-weighting the energy sector.[3] Meanwhile, on the corporate disclosure side, it is appropriate to inquire whether a specific E, S, or G factor will remain relevant in the future.

A. Disagreement on what is ESG

When evaluating whether any activity can be maintained, one should think about whether the long-term benefits outweigh the costs. For instance, the financial impact on enterprise valuations for various factors in the "G" category - such as the use of dual-class stock and classified boards of directors - have been known for a long time.[4] However, for ESG as a whole, whether there is a net benefit may be difficult to evaluate because interested persons may not agree on what particular factors constitute ESG, much less on how much weight each factor should be given. For example, the Commission has a pending stock buyback rulemaking proposal.[5] Should that disclosure be considered a "G" factor? Or an "S" factor? Or both? Or neither? Reasonable persons could reach different conclusions.

Not surprisingly, one need look no further than the so-called ESG rating agencies, whose evaluations reflect widespread disagreement. A recent study by professors at the Massachusetts Institute of Technology and the University of Zurich found that the average correlation among six prominent ESG rating agencies to be 54%, compared to 99% among credit rating agencies.[6] This study showed that the divergence in ESG ratings was due mostly to how rating agencies measure company data, followed by differences in the attributes assessed, and the weighting of those attributes.[7] One should not necessarily view the lack of correlation as a bad thing; to the contrary, it could simply reflect that ESG factors are so individualistic, it is difficult to consistently calibrate ESG on a uniform basis.

B. Additional Costs Seem Certain

Despite these disagreements on what constitutes ESG, one aspect seems certain - there will be increased costs and these costs will be ultimately borne by investors. As an example, one should look at the estimated costs associated with the Commission's proposed climate-related disclosure. In its March 2022 proposal, the Commission estimated that the total existing external cost burden on companies to register their offerings on Form S-1 and file their annual reports on Form 10-K was a little more than $2 billion.[8] The Commission then estimated that the marginal increase from the proposed climate disclosures alone would nearly triple these costs to over $6.3 billion.[9] These estimates were based on the assumption that the cost for external legal advice was $400 per hour - an amount that has remained flat since 2006.[10] Recently, the SEC adjusted the assumed cost to $600 per hour - and even this revision may be too low.[11] Using this $600 assumption, the total estimated external costs quadruples to $8.4 billion.[12]

One aspect of costs for ESG that may differ from costs associated with other disclosure rules is the potential difficulty for companies to achieve cost efficiencies or economies of scale in preparing ESG disclosures. In the climate-related disclosure proposal, the SEC assumed that compliance costs may decrease after the first year.[13] This assumption may or may not be true. The SEC's proposal permits the use of reasonable estimates, but in the future, technology may be developed allowing for more precise capture of greenhouse gas (GHG) emissions that may entail additional costs. Furthermore, companies may have costs arising from other ESG obligations.

Today, some persons, including non-investor ESG stakeholders, are focused on climate and GHG emissions. However, in the next few years, that focus could shift to other disclosures, such as water-related metrics or other topics that are not currently contemplated. This ever-changing focus of ESG, combined with a lack of consensus on what constitutes ESG, could make it difficult for companies to decrease compliance costs over time.

C. Additional Benefits are Uncertain

Unlike costs, which can be measured and quantified to some degree, the benefits of ESG investing can be more difficult to quantify. Even where quantifiable, the results are mixed. A study by two Vanguard investment strategists concluded that ESG funds have neither systematically higher nor systematically lower raw returns or risk than the broader market. [14] In contrast, a study by a sustainability data firm found that funds weighted towards companies with positive ESG scores outperformed the unweighted benchmark.[15] However, focusing on the portfolio consisting of North American companies, the excess returns were only 0.17%. Further, when broken down by E, S, and G categories, portfolios with strong governance metrics outperformed the benchmark by the most, at 0.70%, followed by portfolios with strong environmental metrics at 0.28%. In contrast, portfolios with strong social metrics underperformed the benchmark by 1.29%.

D. Investors Should Assess the Sustainability of ESG Investing

The uncertainty of benefits associated with ESG investing, combined with the certainty of costs for companies undertaking ESG activities, should motivate all market participants - whether public companies, investors, or asset managers - to question whether the ESG trend itself is sustainable over the long term. But as a starting point, it could be useful to define what exactly is ESG. Otherwise, it is difficult to implement a disclosure regime that is consistent, comparable, and decision-useful when ESG factors and weightings are all in the eye of the beholder.

II. Disclosure of Asset Managers' Engagement Efforts

One aspect of ESG investing, which is employed even with respect to certain non-ESG themed funds, is the idea of stewardship and engagement by asset managers with public companies. Specifically, some asset managers conduct extensive stewardship activities, even when their funds are marketed as "passive" or "index-tracking" investments. Companies often engage with these asset managers because of the influence and leverage that asset managers can have, as the funds advised by the asset managers hold the companies' voting securities. In the SEC regulatory regime, these asset managers are said to have "beneficial ownership" of companies' voting securities because they have the power to vote, or to direct the voting of, such securities.[16] If that beneficial ownership exceeds five percent, then asset managers are required to publicly report their ownership.[17]

Congress created this reporting regime in 1968 to "provide information to the public and the subject company about accumulations of its equity securities in the hands of persons who then would have the potential to change or influence control of the issuer."[18] Initially, all persons beneficially owning more than five percent of a public company were required to report their ownership on a Schedule 13D.[19] In 1977, pursuant to its rulemaking authority, the SEC began permitting certain categories of institutional investors to report their ownership on a shorter form.[20] This form - initially called Schedule 13D-5[21] and now called Schedule 13G[22] - requires less disclosure about the beneficial owner, is less costly to prepare, does not need to be initially filed as quickly, and does not need to be updated as frequently, when compared to Schedule 13D.[23]

A. Asset Managers' Use of Schedule 13G

Asset managers registered with the Commission under the Investment Advisers Act of 1940 are permitted to report on Schedule 13G if they satisfy two conditions.[24] First, they must have acquired the securities in the ordinary course of their business. Second, they must not have acquired, and do not hold,[25] the securities (1) with the purpose or effect of changing or influencing the control of the issuer of the securities or (2) in connection with, or as a participant in, any transaction having such purpose or effect.[26] While there are not precise statistics comparing asset managers' use of Schedule 13D versus Schedule 13G, my observation is that asset managers responsible for the largest mutual fund and ETF complexes nearly all report on the latter, implying that they believe both conditions are satisfied.

B. Asset Managers' ESG Stewardship and Voting in Director Elections

In reviewing any large asset manager's stewardship website, mentions of ESG seem ubiquitous, from voting guidelines to engagements statistics.[27] The information on these websites often document how an asset manager (1) establishes its expectations for ESG matters, (2) engages with companies that aren't meeting its expectations, and (3) may vote against one or more incumbent directors if those companies do not continue to meet expectations. For example, an asset manager publicly disclosed a case study where, following multi-year engagements, it voted against a director of a public company, who also chaired the board committee overseeing ESG matters, because the company had failed to disclose its forward-looking GHG reduction targets. This is one of many instances in which an asset manager did not support the election of a director on the basis of climate-related issues.

C. Asset Managers' Control Intent or Lack Thereof

The second condition for Schedule 13G eligibility requires that the asset manager must not have control intent with respect to the company. With respect to stewardship, does an asset manager truly lack control intent? The SEC staff has provided guidance that an asset manager's engagement with a company's management on social or public interest issues, including environmental policies, without more, would not preclude the asset manager from filing on Schedule 13G so long as the engagement is not undertaken with the purpose or effect of changing or influencing control of the company.[28] However, this guidance does not answer the question. The guidance merely reiterates that the asset manager cannot take any action with the purpose or effect of changing or influencing control. If an asset manager (1) develops ESG policies, (2) meets with companies to discuss how they are not following such policies, and (3) then votes against directors because the company's ESG practices do not match the asset manager's policies, has that asset manager done more than simply engage?

Furthermore, the staff guidance appears based on statements made in the Commission's 1998 release adopting amendments to Regulation 13D-G.[29] However, a very important change in corporate governance has occurred since then. In 1998, most board directors were elected by a plurality vote,[30] and proxy cards generally contained the voting choices of "for" or "withhold." Thus, the receipt of a single "for" vote was sufficient to elect a director in an uncontested election. Today, in contrast, a significant number of public companies have adopted some form of a majority voting provision in uncontested elections,[31] and directors may not be elected if they receive more "against" votes than "for" votes. Thus, the consequences of a company's engagement with asset managers are very different today than in 1998, as an asset manager's voting decision can be much more consequential.

With respect to whether an asset manager's engagement has the purpose or effect of changing or influencing "control" of the company, the SEC has provided a definition of "control" under the Securities Exchange Act, which means the power to direct or cause the direction of the management and policies of a company.[32] A company's ESG practices can include, among other things, its ESG strategy and goals, the timeline on which to execute, how much resources to dedicate to achieving its goals, and how much voluntary disclosure it provides with respect to the foregoing. All of these activities might be reasonably considered to be part of the "management and policies" of a company. A company's board, and particularly the members on a committee overseeing ESG matters, may have the power to direct or cause the direction of the company's ESG practices. So can an asset manager's stewardship and engagement activities - with the implicit threat of voting against a director standing for re-election - be described as having the purpose or effect of changing or influencing control of the company? In my view, that is an open question.

D. Disclosure of Asset Managers' Plans or Proposals for Director Elections

Even if an asset manager is determined not to have control intent - and therefore eligible to use Schedule 13G - the Commission should consider whether additional and more timely disclosure of the asset manager's discussions with a company's management and its voting intent should be required, either on Schedule 13G or elsewhere.

Regulation FD regulates the disclosure by a public company of material, non-public information provided to an asset manager.[33] However, other than Schedule 13D,[34] there is no requirement that an asset manager beneficially owning more than five percent of a company's voting securities disclose its communications with that company on ESG matters. To the extent that asset managers are not required to file on Schedule 13D, this dichotomy in disclosure obligations between a company and an asset manager seems at odds with a disclosure regime aimed at providing material information to all shareholders.

Another way to look at this issue is to consider a "traditional" activist shareholder that develops a financial model showing that a company would create more value for its shareholders by spinning off a business unit. The activist shareholder then approaches the company with its idea and suggests that it would vote against one or more incumbent directors if the company does not carry out its idea. If the activist shareholder beneficially owns more than five percent of the company's voting securities, then it would be generally expected to file a Schedule 13D and disclose its discussions with management. Thus, why should the conclusion be different when (1) it is the asset manager for a large mutual fund or ETF complex and (2) the idea involves ESG matters instead of a spin-off?

III. Conclusion

In conclusion, ESG investing has been a trending topic for the past several years. As with any new trend, market participants should evaluate how their activities within this space are consistent with their legal obligations, including any applicable fiduciary duties. Additionally, the Commission should consider whether current rules capture the activities and behavior associated with the new trend, particularly with the efforts of significant shareholders to change or influence the management and policies of public companies. If so, the Commission should enforce those rules, and if not, then the Commission should evaluate whether an update to those rules is needed.

Thank you, and I hope you enjoy the rest of today's conference.

[1] The Rise of ESG and the Future of Financial Regulation. The 2022 Cato Summit on Financial Regulation, Washington, D.C.

[2] Saijel Kishan, ESG by the Numbers: Sustainable Investing Set Records in 2021, Bloomberg (Feb. 3, 2022), available at

[3] Isla Binnie and Ross Kerber, Analysis: Money before climate; market downturn spurs ESG fund exodus, Reuters (Nov. 11, 2022), available at

[4] See, e.g., Martijn Cremers, Beni Lauterbach and Anete Pajuste, The Life-Cycle of Dual Class Firm Valuation (June 30, 2022). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 550/2018, available at
cremerslauterbachpajustefinal.pdf; Charles C. Y. Wang and Alma Cohen,
Reexamining Staggered Boards and Shareholder Value, Journal of Financial Economics 125, no. 3 (Sept. 2017): 637-647, available at

[5] Share Repurchase Disclosure Modernization, SEC Release No. 34-93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)].

[6] Florian Berg, Julian F Kölbel, and Roberto Rigobon, Aggregate Confusion: The Divergence of ESG Ratings, Review of Finance, Vol. 26, Issue 6, Nov. 2022, p.1315-1344, available at

[7] Id.

[8] The Enhancement and Standardization of Climate-Related Disclosures for Investors, SEC Release No. 33-11042 (Mar. 21, 2022) [87 FR 21334, 21461 (Apr. 11, 2022)] (current external cost burdens of $178,922,043 and $1,893,793,119 for Form S-1 and Form 10-K, respectively) ("Climate-Related Disclosure Release").

[9] Id. (requested change in external cost burdens of $1,134,929,102 and $5,166,632,876 for Form S-1 and Form 10-K, respectively).

[10] See Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158, 53214 n. 574)] ("We recently have increased this hourly rate estimate to $400.00 per hour after consulting with several private law firms").

[11] See Listing Standards for Recovery of Erroneously Awarded Compensation, SEC Release No. 33-11126 (Oct. 26, 2022).

[12] Climate-Related Disclosure Release, supra note 8 (current external cost burdens of $178,922,043 and $1,893,793,119 for Form S-1 and Form 10-K, respectively, plus 1.5 times increase in external costs of $957,722,059 and $3,288,799,757 for Form S-1 and Form 10-K, respectively).

[13] Id. at 21439.

[14] Jan-Carl Plagge and Douglas M. Grim, Have Investors Paid a Performance Price? Examining the Behavior of ESG Equity Funds, The Journal of Portfolio Management, Vol. 46, Number 3 (Feb. 2020), available at

[15] Cole Horton and Simon Jessop, Positive ESG performance improves returns globally, research shows, Reuters (July 28, 2022), available at

[16] See 17 CFR 240.13d-3(a)(1).

[17] 15 U.S.C. 78m(d)(1).

[18] See Modernization of Beneficial Ownership Reporting, SEC Release No. 33-11030 (Feb. 10, 2022) [87 FR 13625, 13850 n. 23 (Mar. 10, 2022)].

[19] See Adoption of Temporary Rules and Regulations Under Sections 13(d) and (e) and Sections 14(d) and (f), SEC Release No. 34-8370 (July 30, 1968) [33 FR 11015, 11016 (Aug. 2, 1968)]. Initially in 1968, beneficial owners of more than ten percent of a company's voting securities were required to report using Schedule 13D. In 1970, the threshold for reporting was lowered to five percent.

[20] See Beneficial Ownership Disclosure Requirements, SEC Release No. 34-13292 (Feb. 24, 1977) [42 FR 12355 (Mar. 3, 1977)].

[21] Id.

[22] Filing and Disclosure Requirements Relating to Beneficial Ownership, SEC Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 (Apr. 28, 1978)].

[23] See, generally, 17 CFR 240.13d-1(b)(2), 240.13d-2(b), 240.13d-2(c), and 240.13d-102.

[24] See 17 CFR 240.13d-3(a)(1).

[25] While Rule 13d-3(a)(1) does not reference holding securities, Item 10(a) of Schedule 13G imposes a holding requirement.

[26] This second condition contains an exception for activities solely in connection with a nomination under Rule 14a-11, which was the SEC's proxy access rule vacated by the U.S. Court of Appeals for the District of Columbia. Accordingly, the exception has no effect. However, even if it did have effect, the exception should be narrowly construed to activities in the proxy access context.

[27] See, generally, BlackRock, available at; Fidelity, available at; State Street Global Advisors, available at; and Vanguard, available at

[28] Question number 103.11 of Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting Compliance and Disclosure Interpretations. The guidance cites to an SEC release discussing whether a shareholder that submits, supports, or engages in exempt soliciting activity in favor of a shareholder proposal submitted pursuant to Rule 14a-8 lacks the control intent necessary to use Schedule 13G. The release provides, as an example, that most shareholder proposals on social or public interest issues, including environmental policies would lack control intent. This discussion in the release is not applicable to the discussion of control intent in the context of director elections because nearly all shareholder proposals on social or public interest issues are precatory in nature.

[29] Amendments to Beneficial Ownership Reporting Requirements, SEC Release No. 34-39538 (Jan. 16, 1998) [63 FR 2854 (February 17, 1998)].

[30] See Bo Becker and Guhan Subramanian, Improving Director Elections, Harvard Business Law Review, Vol. 3, Issue 1 (2013) (stating that majority voting in director elections began appearing in 2004), available at

[31] Corporate Board Practices (2021 Edition), The Conference Board (by 2021, more than 90% of S&P 500 companies and more than 65% of S&P MidCap 400 companies had some form of majority voting in director elections), available at

[32] 17 CFR 240.12b-2.

[33] See 17 CFR 243.100.

[34] Item 4(d) of Schedule 13D requires the shareholder to disclose plans or proposals that relate to or would result in any change in the present board of directors or management of the subject company.
Thank you, Professor Angel, for that kind introduction. I appreciate the opportunity to speak with you this evening, but first must remind you that I will be expressing my own views and not necessarily those of the Securities and Exchange Commission ("SEC") or my fellow Commissioners.

With a few exceptions, I am not a big fan of smartphone apps. I am in a fight now, for example, with an annoying cell phone alarm app that is trying doggedly to put me on a sleep schedule. Keep it simple is my mantra. In fact, on my first smartphone, I managed to delete the app store entirely. The wireless store geeks had never seen anyone do that, and they could not figure out how to put it back on the phone when I found an app I wanted. I do find the human ingenuity behind apps remarkable, however. Whatever problem you are confronting, there's usually an app for that![1]

Investment funds are similar to phone apps in their breadth and popularity: whatever your objectives, you will find a fund or a set of funds to serve them. Open-end funds allow investors-often at little cost-to pool their money, diversify their investments, receive professional money management, and sell their shares whenever they want. Since their launch nearly 100 years ago,[2] open-end funds have proliferated, and at the end of 2021 there were more than 10,000 mutual funds and exchange-traded funds in the United States with over $34 trillion in assets.[3] You can choose from equity funds, bond funds, index funds, sector funds, quant funds, faith-based funds, green funds, sin funds, and many more. While there may not be as many open-end funds in our marketplace as apps available to cell phone users, whatever want or need an investor is trying to address, there's usually a fund for that!

As popular and well-established as funds are, a fundamental fact about them is misunderstood. This misconception about funds has even crept into our regulations, so I want to spend my time this evening talking about a rather pedestrian fact: each fund-whether it is a mutual fund, exchange-traded fund ("ETF"), closed-end fund, or hedge fund-is a unique entity with its own objectives. Funds are distinct from their investors, their asset managers, and the other funds in the same complex. Too often, however, funds' interests are treated as being identical to those of their managers, their shareholders, their investors, or other funds in the same complex. Because of this, fund money, votes, voices, and choices about engagement are at risk. I will address each of these in turn, beginning with fund money.

Fund's Money
When an investor chooses a fund, she thinks about how it will serve her interests given her own circumstances, risk appetite, and portfolio. Fund disclosures, prepared in accordance with rules promulgated under the Investment Company Act, help her make that choice. Among other things, fund disclosures provide information about the fund's investment objective, fees and expenses, principal investment strategies, principal risks, performance, and management.[4] Once an investor has made her choice, her money is pooled with the money of other investors who have chosen to invest in the same fund.

Funds are usually part of a fund complex under the sponsorship of an asset manager. An individual or team manages each fund's portfolio under the oversight of the fund's board of directors. One board may serve all the funds in a complex.[5] Being part of the same fund complex and sharing a board of directors, however, does not change the fact that each fund is a distinct entity with its own shareholders, objectives, and strategy for achieving them. Sometimes these objectives and strategies conflict with one another. Just as you might have one app on your phone that helps you find the nearest bakery and another that helps you lose weight, you might have two funds in your investment portfolio with conflicting objectives. The portfolio manager is bound to carry out her fund's objective without regard for what other funds in the same complex are doing. The bakery-finding app and the diet app can sit side-by-side on one person's phone, each operating independently. So too can two funds with different, and even conflicting, objectives or strategies sit side-by-side in an investor's portfolio-and they nevertheless must operate independently, each in a manner consistent with its objective and strategy.

Let us create a seasonally appropriate hypothetical fund complex managed by mega-asset manager Leaf Pile Asset Management. Leaf Pile offers four funds. The Passive Pumpkin Index Fund's objective is to track the performance of a benchmark index of the 300 largest U.S. companies. It seeks to achieve this objective through a strategy of investing in the stocks that make up the index in the same proportion as the index weights them. The Scarecrow's Select Tech Fund's objective is maximum long-term growth of capital, which it seeks to achieve through a strategy of investing primarily in common stocks of technology companies believed to have the potential for growth. The Falling Leaf ESG Impact Fund's objective is to generate long-term total return. As indicated by its name, the Falling Leaf ESG Impact Fund seeks to achieve this objective through a strategy of investing primarily in U.S. companies that contribute to affordable housing, living-wage jobs, public health, green energy, pollution remediation and prevention, and sustainable food and water. Finally, the Crisp Autumn Energy Fund's objective is current income, with capital appreciation as a secondary objective. It seeks to achieve its objectives through a strategy of investing primarily in companies focused on oil and gas exploration and production.

An investor who buys into one of Leaf Pile's fund offerings is pooling her money with other investors who signed up for the same objective and strategy. She must be able to trust that each fund will operate consistently with its disclosures. The Investment Company Act and the fiduciary duty applicable to fund boards and advisers facilitate this trust. That fiduciary duty runs to each fund as a whole, so the investor has no reason to expect the fund to cater to any objectives that she, or any other shareholder, individually may have that are out of sync with the fund's objectives.[6]

All four of Leaf Pile Asset Management's funds share a board, but both the asset manager and the board owe a fiduciary duty to each fund they serve. An adviser has to adopt the goals, objectives, or ends of the principal.[7] Each fund's objective and disclosed strategy must guide the board and adviser in its actions with respect to that fund. Doing so may not be easy. In our hypothetical, Leaf Pile, as part of its own sustainability program, has signed on to the United Nation's Principles for Responsible Investing ("UN PRI").[8] Among other things, these principles require a signatory, when consistent with its fiduciary duty, to "incorporate ESG issues into investment analysis and decision-making processes."[9] Leaf Pile may find that doing so is consistent with its fiduciary duty with respect to the Falling Leaf ESG Impact Fund, but not with respect to Crisp Autumn Energy Fund.

Less obviously, an adviser's fiduciary duty does not run to individual fund shareholders. The portfolio manager of the Scarecrow's Select Tech Fund manages that fund's portfolio without regard for individual shareholders' idiosyncratic interests. An individual fund shareholder that works for a big tech company might not want the fund to buy shares in that company as it would increase her exposure to the company. Another shareholder might like to sell to the fund shares of a tanking technology company he holds elsewhere in his portfolio to dump his losses on the fund. The Scarecrow's Select Tech Fund's portfolio manager has to look out for the fund's interests, which run contrary to the unique interests of these two fund shareholders. The Scarecrow's Select Tech Fund is the client to whom the fiduciary duty flows. Once an investor puts money into a fund, she owns a piece of the fund, but her money belongs to the fund, and the fund's adviser must invest according to the fund's stated objectives.

The Commission has explained the "key difference between clients of investment advisers and investors in investment companies" this way:

A client of an investment adviser typically is provided with individualized advice that is based on the client's financial situation and investment objectives. In contrast, the investment adviser of an investment company need not consider the individual needs of the company's shareholders when making investment decisions, and thus has no obligation to ensure that each security purchased for the company's portfolio is an appropriate investment for each shareholder.[10]

The Commission itself sometimes needs to be reminded of the distinction between fund investors and clients of an investment adviser. In 2004, for example, the Commission adopted a rule that would treat hedge fund investors as clients of the adviser for purposes of assessing whether the adviser needed to register with the SEC.[11] The D.C. Circuit Court of Appeals vacated the rule because it departed from the basic principle that an adviser cannot owe a fiduciary duty to both the fund and its investors without impossible conflicts arising.[12]

Fund's Vote
This fundamental principle-that asset managers and boards of directors owe fiduciary duties to each distinct fund-has important consequence for our next topic of discussion: fund voting. Some asset managers, seemingly forgetting that funds are separate entities with unique interests, treat funds as an extension of themselves or as one with all the other funds they manage. Fund voting is an area in which this confusion manifests itself; fund votes sometimes betray a puzzling uniformity despite funds' varied objectives and strategies. Just as with investment decisions, fund voting decisions must be guided by the fund's best interests as assessed in relation to each fund's objective and strategy.

Funds have to decide whether and how to vote with respect to many matters at each of the fund's portfolio companies. A fund may choose to exercise, or not exercise, its voting power, but that choice-and the choice of how to vote-belongs to the specific fund that holds the securities to which the vote is attached. The exercise (or non-exercise) of a fund's vote should serve the interests of that fund and that fund alone. The board is responsible for voting, but the adviser typically makes the voting decision, sometimes with the input of a third party such as a proxy adviser.[13]

Rhetoric and action by advisers and their regulators do not always reflect that votes must be in the best interest of each particular fund. In a recent rulemaking on proxy voting by funds, for example, the Commission stated, without acknowledging the potential conflict between the two interests, that "fund advisers are subject to fiduciary duties and thus must make voting determinations in the best interest of the fund and its shareholders."[14] Advisers' voting guidelines or policies, at times, refer to "our vote," which suggests that funds' votes are an asset for the adviser to control for its own purposes. Voting practices by funds sometimes seem inconsistent with a fund-focused best interest analysis.[15] An adviser may be tempted to vote to further the interests of someone other than the fund on whose behalf it purportedly is voting, including itself. The Commission laid out a potential scenario in which the adviser might benefit from voting a fund's proxies a particular way: "when a fund's adviser also manages or seeks to manage the retirement plan assets of a company whose securities are held by the fund . . . a fund's adviser may have an incentive to support management recommendations to further its business interests."[16] In these and similar instances, a fund's votes may reflect the adviser's desire to gain new business rather than the fund's best interest.

Third-parties, with an interest in the outcome of a vote, might try to pressure advisers into voting the shares of funds in a particular way. Some organizations successfully target asset managers and ask that the firms commit to use the resources under their control to achieve non-investment goals such as cutting global carbon emissions, halting the loss of biodiversity, and overseeing portfolio companies' political engagement.[17] The objectives of these pledges may match the objectives of some funds, yet sometimes the pledge is a pledge to manage all assets in accord with the third-party organization's principles. Of course, merely signing on to a third-party's pledge does not mean an adviser has cast off its fund-specific fiduciary duty. But if Leaf Pile Asset Management has made such pledges, one must ask: does it consider its commitment to these pledges when casting a vote on behalf of the Crisp Autumn Energy Fund, which is required by its own fund objectives and strategies to invest in oil and gas? Leaf Pile could compromise its own ESG ratings if it does not comply with its ESG pledge commitments in votes by all four of its funds, but adhering to the pledge could set Leaf Pile at odds with its fiduciary duty to a particular fund.

The Commission has recognized the many potential interests at play in fund voting, but has taken a flawed approach that over-emphasizes voting to address them. In 2003, the Commission announced that "the time has now arrived for the Commission to require mutual funds to disclose their proxy voting policies and procedures, and their actual voting records."[18] The adopting release explained that:

Proxy voting decisions by funds can play an important role in maximizing the value of the funds' investments . . . . Further, shedding light on mutual fund proxy voting could illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders' best interests. [Note the concern for fund shareholders' interests rather than fund interests.] Finally, requiring greater transparency of proxy voting by funds may encourage funds to become more engaged in corporate governance of issuers held in their portfolios, which may benefit all investors and not just fund shareholders.[19]

Earlier this month, the Commission added to the 2003 requirements by requiring funds to categorize their votes, present them in machine-readable language, and disclose the number of shares loaned but not recalled and, therefore, not voted by the fund.[20]

The requirement to disclose how a fund votes can facilitate assessments of whether the fund's votes match its objectives. If the Passive Pumpkin Index Fund is voting in favor of shareholder proposals calling for companies to build affordable housing for employees, cut greenhouse gas emissions, or link executive pay to social metrics, a fund shareholder would be able to see that her purportedly passive fund might have an activist bent. By contrast, if a shareholder in the Falling Leaf ESG Impact Fund saw that the fund was voting in favor of those proposals, she might be reassured that her fund is behaving as it said it would. So fund vote disclosures theoretically can serve a positive role in ensuring that funds' votes are consistent with the fund's objectives and strategies. Practically speaking, however, fund shareholders might not peruse granular voting disclosure,[21] but a voting disclosure mandate might empower other parties who are interested in commandeering the votes for their own purposes.

Whether they want disclosure or not, fund shareholders will have to pay for mandatory disclosure of votes. For many funds, the cost of disclosing every vote likely outweighs the benefit. Understanding the general approach to voting might be sufficient for shareholders in the Scarecrow's Tech Picks Fund, whereas shareholders in the Falling Leaf ESG Impact Fund might want to know every vote. For some funds, making a voting decision on every proxy voting item for every portfolio company does not make sense. Voting comes with costs for proxy research, proxy advisory firm assistance with execution, and overseeing those services.

Requiring every fund to disclose its votes implicitly pressures funds to vote, even when voting is not in their best interest. A determination not to vote or always to vote in line with management might be the best approach, particularly for cost-conscious index funds. Indeed, as Professor Stephen Bainbridge has explained, expense-minimizing index funds have no reason to spend a lot on voting.[22] The Commission acknowledged recently that an adviser could agree with its fund client not to vote when "voting would impose costs on the client, such as opportunity costs for the client resulting from restricting the use of securities for lending in order to preserve the right to vote," to vote only on certain consequential matters, or not to vote "on certain types of matters where the cost of voting would be high, or the benefit to the client would be low."[23] The Scarecrow's Select Tech Fund, for example, has an objective of maximum long-term growth, and the portfolio manager lends portfolio securities to generate additional income.[24] Except on matters like mergers and acquisitions, the cost of voting outweighs the benefit to the fund. Now, however, pressured by the requirement to disclose how many shares were not recalled for voting, the portfolio manager may forgo the securities lending revenue and undertake the expense to vote on the full range of issues.

The rule's nudge effect is amplified because it serves as a monitoring mechanism for organizations to which an asset manager has pledged to vote the shares of the funds it manages in a particular way. For example, if Leaf Pile Asset Management signed on to the Asset Managers Net Zero Initiative, it would agree to "Implement a stewardship and engagement strategy, with a clear escalation and voting policy, that is consistent with our ambition for all assets under management to achieve net zero emissions by 2050 or sooner."[25] The requirement for all of Leaf Pile's funds to disclose their votes will put the asset manager in the position of explaining to a third party why it voted the shares of only one of its four funds-the Falling Leaf ESG Impact Fund-in favor of proxy items designed to force companies to adopt net zero emissions policies.

Portfolio managers may face pressure from within the fund complex to vote a particular way. Asset managers often have one set of specialists to make voting recommendations to all the funds it manages and these funds often default to a single voting policy. Differences in strategies across funds, or different value judgments as to voting may be underappreciated. Individual funds' portfolio managers must do extra work to buck the Leaf Pile Stewardship Hub, which is responsible for establishing default positions with respect to corporate governance and other proxy issues and developing voting recommendations on specific items for Leaf Pile Funds. A centralized process and default to uniformity deemphasize funds' uniqueness, but amplify the adviser's clout. For example, a portfolio company will pay a lot more attention to an adviser whose funds vote as a block.

Fund's Voice
Along with voting power comes influence over portfolio companies-their voice in meetings with portfolio company management. The exercise of this influence is known euphemistically as "engagement." Asset managers often meet with their funds' portfolio companies to urge them to do or not do things. Companies, eager to win investors' favor, are receptive to these meetings and often initiate them.

As with votes, however, an adviser is not engaging on its own behalf, but on behalf of its clients, meaning its funds (and any non-fund clients it has). Leaf Pile Asset Management's clients are its four funds. These funds' shares are Leaf Pile's entry ticket into engagement meetings. Given the divergent objectives and strategies of the different funds, Leaf Pile may not be able to say much in meetings with a portfolio company in which it purports to represent all four funds. Complicating matters further is Leaf Pile's status as a signatory of Climate Action 100+, which coordinates engagement on climate-related issues and requires that companies engaging on their own report to the broader group.[26]

How should Leaf Pile Asset Management approach discussions with any given portfolio company? For example, Falling Leaf ESG Impact Fund might want the engagement meetings to focus on whether and how the companies are working toward net zero targets. Crisp Autumn Energy Fund, by contrast, might insist that Leaf Pile not exert any pressure on those companies to set net-zero targets, but use the meeting instead to urge the company to lower operating expenses. Scarecrow's Tech Picks Growth Fund might be more concerned with the companies' acquisition plans than with anything related to net zero. In the case of Passive Pumpkin Index Fund, where investors have bought the fund for exposure to the underlying companies (and implicitly their management), the fund might view engagement between its adviser and any portfolio company-and any pressure on company management to make changes-as negative. How can one adviser, bound by its fiduciary duty to such diverse clients, speak with one voice? If a particular issue is important for one fund, will Leaf Pile intensify the message by not mentioning that some of its funds do not care about the issue or have a diametrically opposite view? "Stewardship" reports, which describe proactive engagement with portfolio companies, tend not to dwell on such fiduciary particulars.

Leaf Pile Asset Management, because of its own commitments and the interests of Falling Leaf ESG Impact Fund, might be tempted to walk into every portfolio company with the weight of the massive Passive Pumpkin Index Fund's holdings as leverage for inducing the company to take steps toward net zero or achieve some other milestone of interest to the Falling Leaf ESG Impact Fund. The promise that Passive Pumpkin Index Fund votes will be withheld from directors if these steps are not taken will amplify either Leaf Pile's or Falling Leaf's voice. But is that promise in accord with Passive Pumpkin Index Fund's own voice? As Professors Kahan and Rock explained, "a large index fund may increase the power of the portfolio managers of active funds in the same family in their interactions with portfolio companies."[27]

Passive index funds raise unique problems for asset managers seeking to exercise their fiduciary duty. When a shareholder buys the Passive Pumpkin Index Fund, she wants exposure to the 300 companies in the index. She is not expecting, and may not want, the adviser to expend its efforts to change those companies. She would be justified in wondering how Leaf Pile's decision to pursue an undisclosed activist voting and engagement strategy for this fund-whether on issues like executive compensation or the environment-is consistent with that passive strategy.

Some observers might respond that voting and engagement to maximize the value of portfolio companies in turn maximizes the value of the fund. But this raises other uncomfortable questions. For example, can Leaf Pile credibly argue that voting on all manner of contentious non-binding shareholder proposals has a link to value maximization at Passive Pumpkin Index Fund? The cost of activist voting and engagement may not make sense for that fund, which is marketed as a cheap way to get exposure to an index. Moreover, an activist voting and engagement strategy could turn Passive Pumpkin into an activist without any compass to guide its activism. If Leaf Pile plans to vote the fund's shares and engage actively on Passive Pumpkin's behalf with the goal of changing how companies are run, it ought to disclose that alongside the fund's objective and strategy.

Advisers to passive index funds often assert that they must vote the fund's shares in an active manner because the fund cannot vote with its feet and sell the companies in the index.[28] To match the performance of the index, index funds generally have to hold the companies in the index. Fund shareholders, however, can vote with their feet. They can sell their shares in the index fund whenever and for whatever reason they want. They can instead invest in a fund that is actively managed, tracks an index that includes only companies that adhere to ESG or other criteria, or explicitly offers a combination of index-tracking and activist engagement.

Boards and advisers of passive index funds face important decisions about their voting policies, but those decisions must be guided by their fiduciary duty to the fund and the fund alone. Whatever approach they choose, they must disclose it and adhere to it. A fund that was seeking to stick to its passive nature could not vote at all, vote according to the recommendation of the company's management, or vote proportionately to all other shareholders of the company. Others favor "pass-through" voting, pursuant to which the fund seeks and follows guidance from fund shareholders. Essentially, this approach would allow shareholders, rather than the sometimes conflicted asset manager, to shape the fund's voting strategy. Some interested third parties worry about pass-through voting because it would empower fund investors to override fund managers on ESG issues,[29] but that is the point if fund managers are voting fund shares to further their own interests, not those of the fund. Pass-through voting, if not designed to ensure broad shareholder participation, however, could empower a few activist shareholders whose interests are divergent from those of the fund to capture the fund's vote for their own ends.[30]

Regardless of which voting approach a passive index fund's board chooses, the fund's disclosures should state whether the fund will vote and, if it does, what principles it will follow in doing so. While voting disclosures are usually not in the fund prospectus,[31] if the fund adopts a voting strategy that does not obviously align with the fund's objective and principal strategy, highlighting it in the prospectus where the objective and principal strategy are described could help investors find funds that match their preferences. Passive funds with activist voting strategies would seem to fit in this category. Ensuring that a fund's votes line up with its disclosures is not enough. The substance and frequency of engagement with public companies also need to line up with the disclosures and interests of the fund purportedly being represented in those meetings.

The bottom line is that we need to respect funds' status as distinct entities, each of which serves investors in a specific way. Smartphone users expect each app on their phone to stick to its stated function. They do not expect their find-me-the-closest-bakery app to record their daily steps or monitor their caloric intake by photographing the cupcakes and cookies they buy. Similarly, asset managers who work hard to be able to say "there's a fund for that!" should ensure that each fund sticks to its "that."

Thank you for your indulgence on a topic that is important, but a lot to stomach over dinner. I am happy to speak with you about more scintillating topics during the Q&A.

[1] See, e.g. Brian X. Chen, Apple Registers Trademark for 'There's an App for That', Wired (Oct. 11, 2010), (explaining that Apple, which originated the phrase has a "trademark [that] covers usage of the phrase in relation to retail store services featuring computer software and services," but not its usage in "cheesy . . . jokes"). The Apple App Store offers roughly 1.6 million apps, which is second in size when compared the Google Play Store that offers 3.55 million apps. L. Ceci, Number of Apps Available in Leading App Stores as of 3rd Quarter 2022, Statista (Nov. 8, 2022),

[2] The Massachusetts Investors Trust launched the first fund in 1924. See, e.g., Jay Fitzgerald, Massachusetts Investors Trust, Boston Herald (May 25, 2009),; First Mutual Fund, Celebrate Boston (last visited Nov. 15, 2022),

[3] See, e.g., 2022 Investment Company Fact Book, Investment Company Institute at 21-22,

[4] See Final Rule No. S7-10-97, Registration Form Used by Open-End Management Investment Companies (Jun. 1, 1998), (requiring a "fund to disclose its investment objectives in the risk/return summary and to summarize, based on the information provided in its prospectus, how the fund intends to achieve those objectives"). See also Proposed Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Release No. IC-34-594 at 17 (May 25, 2022), ("Currently, funds and registered advisers are subject to disclosure requirements concerning their investment strategies. Funds must provide disclosures concerning material information on investment objectives, strategies, risks, and governance, and management must provide a discussion of fund performance in the fund's shareholder report.").

[5] See Overview of Fund Governance Practices, 1994-2020, Investment Company Institute at 5 (Oct. 2021), (based on survey data, reporting that "[a]s of 2020, 90 percent of participating complexes have a unitary board structure," and "[s]ome complexes, particularly large ones, have adopted a cluster structure, where there are several boards within the complex, each overseeing a designated group of funds").

[6] See, e.g., Commission Interpretation Regarding Standard of Conduct for Investment Advisers, SEC Interpretive Letter, Release No. IA-5248 at 8 n.23, 12 n.34, 23 n.58 (Jun. 5, 2019) (citing SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 2008) for the proposition that Investment Advisers Act section 206 "imposes a fiduciary duty on investment advisers to act at all times in the best interest of the fund."),

[7] See id. at 7-8 (citing Arthur B. Laby, The Fiduciary Obligations as the Adoption of Ends, 56 Buffalo L. Rev. 99 (2008)); see also Restatement (Third) of Agency: Scope of Actual Authority §2.02 (2006) (describing how a fiduciary's authority is based on the fiduciary's reasonable understanding of the principal's objectives).

[8] Principles for Responsible Investing is an international network of financial institutions that work together to implement six aspirational ESG-related principles. See About the PRI, Principles for Responsible Investment (last visited Nov. 16, 2022), Signatories of UN PRI, where consistent with fiduciary responsibilities, commit to the following: "Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. Principle 5: We will work together to enhance our effectiveness in implementing the Principles. Principle 6: We will each report on our activities and progress towards implementing the Principles." Id.

[9] Id.

[10] Status of Investment Advisory Programs under the Investment Company Act of 1940, 62 Fed. Reg. 15098, 15102 (Mar. 31, 1997),

[11] See Registration Under the Advisers Act of Certain Hedge Fund Advisers, 69 Fed. Reg. 72054 (Dec. 10, 2004),

[12] Goldstein v. SEC, 451 F.3d 873, 881 (D.C. Cir. 2006) ("If the investors are owed a fiduciary duty and the entity is also owed a fiduciary duty, then the adviser will inevitably face conflicts of interest. Consider an investment adviser to a hedge fund that is about to go bankrupt. His advice to the fund will likely include any and all measures to remain solvent. His advice to an investor in the fund, however, would likely be to sell. . . . While the shareholders may benefit from the professionals' counsel indirectly, their individual interests easily can be drawn into conflict with the interests of the entity. It simply cannot be the case that investment advisers are the servants of two masters in this way.") (footnote omitted).

[13] See Final Rule No. S7-36-02, Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies (Jan. 31, 2003) [hereinafter "Proxy Disclosure Rule"], ("Because a mutual fund is the beneficial owner of its portfolio securities, the fund's board of directors, acting on the fund's behalf, has the right and the obligation to vote proxies relating to the fund's portfolio securities. As a practical matter, however, the board typically delegates this function to the fund's investment adviser as part of the adviser's general management of fund assets, subject to the board's continuing oversight.").

[14] Final Rule No. S7-11-21, Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers at 32 n.95 (Nov. 2, 2022) [hereinafter "Expanded Reporting Requirements for Fund Votes"] (emphasis added),

[15] See, e.g., Sean J. Griffith & Dorothy S. Lund, Conflicted Mutual Fund Voting in Corporate Law, 99 B.U.L. Rev. 1151, 1173-74 (2019); ("When a mutual fund sponsor casts its portfolio shares uniformly, its corporate governance group will have the most influence. This reality helps explain why nearly all large mutual fund sponsors have a policy encouraging uniform voting, and why some refuse to allow individual fund managers any discretion to depart from it. But this preference for uniformity creates a new problem: the funds do not have identical portfolios or investors, and thus centralized voting may benefit one fund and its investors at the expense of others."); Paul G. Mahoney and Julia D. Mahoney, The New Separation of Ownership and Control: Institutional Investors and ESG, 2 Colum. Bus. L. Rev. 840, 865-66 (2021) (suggesting that private fund managers sometimes vote on ESG issues in a way that reflects their personal views).

[16] See Proxy Disclosure Rule, supra note 13; see also Final Rule S7-38-02, Proxy Voting by Investment Advisers (Jan. 31, 2003), ("An adviser may have a number of conflicts that can affect how it votes proxies. For example, an adviser (or its affiliate) may manage a pension plan, administer employee benefit plans, or provide brokerage, underwriting, insurance, or banking services to a company whose management is soliciting proxies.").

[17] For example, UN PRI boasts almost 5,000 signatories, many of which are described as "investment managers" (as opposed to "asset owners"). See Annual Report 2022, Principles for Responsible Investment (last visited Nov. 16, 2022),; see also Signatories, Principles for Responsible Investment (last visited Nov. 16, 2022), Climate Action 100+ describes itself as an "investor-led initiative to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change." Initiative Snapshot, Climate Action 100+ (last visited Nov. 16, 2022), However, over 350 of the 700 signatories are categorized as "asset managers" rather than "investors." See Investor Signatories, Climate Action 100+ (last visited Nov. 16, 2022), See also James Phillipps, Divested Interests: How Asset Managers Engage with Firms to Effect Change in Environment Policy, Citywire (last visited Nov 16, 2022),

[18] See Proxy Disclosure Rule, supra note 13.

[19] Id. (note added).

[20] See Expanded Reporting Requirements for Fund Votes, supra note 14, at 80.

[21] See, e.g., Comment Letter from The Mutual Fund Directors Forum at 2, Dec. 14, 2021, ("[T]he Commission provides no evidence that fund shareholders desire better disclosure of a fund's proxy votes. We believe that shareholders are most interested in the fund's investment strategy, its portfolio holdings, performance, the fees and expenses associated with investing in the fund and the risks inherent in the fund's investment strategy rather than in proxy voting. We believe that in most cases clear disclosure of the principles that funds use to vote proxies will provide shareholders with the information they desire regarding a fund's proxy voting."); see also Expanded Reporting Requirements for Fund Votes, supra note 14 at 88 (acknowledging that retail investors generally do not make use of the required Form N-PX to review funds' votes, but insisting that they will benefit from third parties (such as research analysts) having improved ability to access and evaluate proxy information).

[22] Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 632 n.82 (2006).

[23] See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release Nos. IA-5325, IC-33605 at 11-12,; see also Proxy Voting by Investment Advisers, supra note 16.

[24] Audience member Frank asked whether the scarecrow had a heart-a good question for a fund that is committed to counting the cost of voting, even when the matters up for a vote tug on the asset manager's heartstrings. In this way, our hypothetical scarecrow might distinguish itself from the brainless scarecrow in L. Frank Baum's The Wonderful Wizard of Oz.

[25] The Net Zero Asset Managers Commitment, Net Zero Asset Managers (last visited Nov. 16, 2022) (emphasis added),

[26] How We Work, Climate Action 100+ (last visited Nov. 16, 2022), ("Engagement with specific focus companies is conducted by investors, headed by a lead investor or investors and supported by a number of collaborating investors. Investors can also engage with companies on an individual basis, but are required to share information with the engagement working group and the coordinating investor network.").

[27] Marcel Kahan & Edward B. Rock, Index Funds and Corporate Governance: Let Shareholders be Shareholders, 100 B.U.L. Rev. 1771, 1783 (2020).

[28] Whether and how plain vanilla index funds vote and engage may be of broader concern because of the magnitude of their holdings. The Investment Company Institute reported that "[a]t year-end 2021, index mutual funds and index ETFs together accounted for 43 percent of assets in long-term funds, up from 21 percent at year-end 2011." 2022 Investment Company Fact Book, supra note 3, at 29. If each fund selected a voting strategy and highlighted the strategy in its disclosures, the resulting diversity of approaches likely would mitigate some of the concerns around ownership concentration.

[29] See, e.g., Comment Letter from Principles for Responsible Investment at 6, Dec. 14, 2021, ("However, it is paramount that moves to delegate greater authority to asset owners on voting decisions do not come at the expense of robust voting by managers to support shareholder proposals or to vote against directors at companies with misaligned ESG practices. Managers have greater resources, expertise and access to information, so the priority must remain ensuring that their voting approach adequately addresses ESG risks and impacts.").

[30] A pass-through approach, unless it is structured thoughtfully, could also be operationally difficult and costly. Passive index funds hold shares in many portfolio companies, each of which can have many votes on many different issues each year. Many fund shareholders might not weigh in at all. Shareholders in passive funds might be particularly unlikely to vote because passive index funds appeal to investors looking to hold a diversified portfolio in a low-cost, low-effort way. Proponents of pass-through voting have suggested different approaches to address these concerns. See, e.g., INDEX Act, S. 4241,; Comment Letter from the Mercatus Center, Nov. 11, 2021,

[31] This disclosure is in the Statement of Additional Information. See Proxy Disclosure Rule, supra note 13.

Thank you for that warm introduction.  It is a pleasure to be here today, and I thank Brooklyn Law School for the kind invitation to deliver today's keynote.  I must note at the outset that the views expressed here today are my own and do not necessarily reflect the views of the Commission or its staff, or those of my fellow Commissioners.

Speaking of SEC Commissioners, it is wonderful to know that Roberta Karmel, nominated by President Jimmy Carter as the first woman to serve as SEC Commissioner, is now a Distinguished Research Professor of Law here at Brooklyn Law.  I'm grateful to my fellow Commissioner Hester Peirce for first making me aware of Commissioner Karmel's amazing story.

It is also a particular honor to speak at an institution with such a deep commitment to diversity, equity and inclusion (DEI).  When founded in 1901, Brooklyn Law embraced inclusion when exclusion was the norm. 

Ahead of its time, Brooklyn Law offered legal education opportunities to women and persons of color when those options were limited or not available to them.  This founding commitment to DEI that breaks down barriers and expands educational opportunities for all benefits the legal profession, our economy and our country. 

I approach issues in the digital asset market from the perspective of a working family or working person who is considering purchasing or investing in digital assets.  To better understand that perspective, it's helpful to go back to the emergence of the digital asset market in the first place. 

In the fall of 2008, U.S. financial markets were on the verge of collapse.  As our nation grappled with the consequences of the most severe financial crisis since the Great Depression, many, understandably, questioned whether the traditional financial system best served their needs. Under those circumstances, an innovative and potentially more accessible alternative to traditional finance could seem very compelling.

The seeds of the digital asset market were initially planted around October 2008, when a person, or persons, using the pseudonym "Satoshi Nakamoto" published the Bitcoin whitepaper.  This paper introduced the idea of a "peer-to-peer" electronic cash payment system without trusted third parties. It described weaknesses in our traditional financial system, including the need to trust intermediaries, unavoidable levels of fraud and high transaction costs.

Since that whitepaper, and in the extraordinary aftermath of the 2008 financial crisis, the digital asset market did indeed grow and proliferate. And its growth skyrocketed during the pandemic.

Today, there are nearly ten-thousand tokens and hundreds of digital asset platforms on which customers can buy and sell these tokens. By some estimates, one in five adult Americans has purchased digital assets.

The market's rapid growth has often been accompanied by the narrative that it serves as a more effective and equitable wealth-building alternative to traditional finance. One key theme in this narrative is the promise of greater financial access for low-income and other underserved communities that the traditional financial system has left behind.  

This theme no doubt alludes to real problems and inequities in traditional finance.  There is a wealth gap in our country and banking the unbanked remains a persistent problem.

So recent surveys suggesting that persons in low-income and underserved communities are investing in digital assets in increasing numbers are not surprising.  Nor is it surprising that a greater share of unbanked and underbanked individuals may own digital assets than those who are fully banked. 

In light of all of this, has the digital asset market truly developed into a viable alternative to traditional finance? Does it offer genuine financial inclusivity and robust protections for digital asset purchasers and investors? In my opinion, as of now, and despite the best intentions of many, the answer is no. 

In March of this year, President Biden issued an executive order directing federal agencies and financial regulators to examine a range of issues in digital asset markets. Certain reports in response to this executive order outlined several risks: among them, increasing levels of fraud, concentration of wealth and control, highly centralized intermediaries, a lack of transparency and high volatility.

With regard to fraud, one estimate cited by the U.S. Treasury is $14 billion-worth of digital asset-based crime globally in 2021. This amount is nearly double the estimate for 2020. The number of scams in 2021 rose by over 60% year-over-year, while the value of stolen digital assets rose by over 80% in 2021. The Treasury report noted that digital asset crimes are based on self-reporting, so it is likely these numbers don't show a full picture. 

There is also a concentration of wealth and control in the digital asset market.  One study found that, at the end of 2020, the top 1,000 market participants owned roughly one-sixth of Bitcoin in circulation. The same study found that the top 10,000 participants owned roughly one-third of it. 

When so-called "whales" that hold large positions relative to the size of their counterparties liquidate a position or experience losses, those counterparties can face extreme financial pressure. 

A report by the interagency Financial Stability Oversight Council (FSOC) also notes that many digital asset governance tokens are held by the top 1 percent of holders of a given token, which can lead to governance problems if voting rights holders are anonymous or not subject to robust oversight. 

Contrary to the narrative that the digital asset market offers decentralization, there are high levels of centralization in the ecosystem.   Many digital asset platforms offer a wide gamut of services, such as trading, custody, maintaining order books, market-making, and borrowing and lending. 

Such platforms may have conflicts of interest due to their integrated, centralized structure.  In addition, their practice of commingling customers' assets with those of the platform poses risks to customers, such as in the event of the platform's insolvency. Asset commingling exposes the platform's customers to greater potential losses than if their assets are properly segregated.   

There is significant lack of transparency in the digital asset market.  According to FSOC, disclosures by digital asset promoters and issuers lack uniformity and vary widely in the amount of information provided to the public.  For stablecoins in particular, some issuers do not disclose, or fully disclose, their underlying asset holdings.  As a result, potential purchasers or investors often lack access to quality information necessary to make informed purchasing or investment decisions.

There is also a lack of transparency about technological vulnerabilities.  Digital asset activities have been the subject of many malicious attacks. But the scope of these attacks is difficult to measure given that the industry operates largely outside of the regulated space.  

Digital asset values are highly volatile.  Events this past week and even today, and the recent 2022 crypto winter, revealed how volatile the digital asset market can be. Historically, digital asset prices have vacillated between steep gains and drops that are outside the norm relative to traditional markets' routine fluctuations.  This volatility can have cascading effects in the broader digital asset market. 

These risks, in my view, are very concerning and can have an adverse impact on digital asset purchasers and investors, and on low-income and underserved communities in particular.  It is important to note that initial entry into this market necessarily involves the use of fiat currency to purchase digital assets for the first time.  As a consequence, either the erosion of value or significant losses can have a devastating impact on a working family's or a working person's financial security.  My sympathy goes out to the retail investors who are suffering an impact from the troubling digital asset market events of this past week.

The digital asset market today cannot, in my view, be described as free from intermediaries, with lower costs, or with reduced fraud, as Satoshi Nakamoto and proponents of this market envisioned.  In fact, many of the same problems its proponents claim it will solve are present in the current digital asset landscape. Frankly, the problems in the digital asset market are worse than those in the traditional finance system, because they occur in a largely unregulated space.

So, where does this leave us?  In light of recent events, this is a watershed moment that offers an opportunity for issuers and intermediaries in the digital asset market to reflect on their offerings and operations. A key question for them to consider is whether operating outside of the federal securities laws is in the best interest of investors and a fair and transparent market. 

To be clear, not every issued digital token necessarily represents a securities offering, and not every digital asset intermediary is necessarily operating as an unregistered market participant.  But I generally agree with SEC Chair Gensler that most of the nearly 10,000 digital asset tokens in the market are likely offered as securities.  In addition, and without prejudging any particular entity, I am also concerned that intermediaries that sell, trade or advise on digital assets that are securities may be operating as unregistered market participants. 

My view is that there is likely a considerable number of digital asset issuers and intermediaries illegally operating outside of the federal securities laws. This undermines the general principle of transparency as well as our ability to protect vulnerable investors in a market that is susceptible to volatility and fraud. 

It bears noting that it is not the SEC's responsibility to provide legal advice or analysis to any market participants under its purview. That applies in equal measure, in my view, to those operating in the digital asset market.  In light of this, it falls on the issuer or the intermediary and their legal counsel to determine whether their products, business practices, or assets require compliance with the federal securities laws. 

Some have suggested that the SEC has not provided guidance to the industry.  The reality is that there's an abundance of guidance, from the DAO Report, to the SEC FinHub Framework for "Investment Contract" Analysis of Digital Assets, and multiple no-action letters issued by the staff of the Division of Corporation Finance.  

Decades of legal precedent on what constitutes an "investment contract" or "note" under our securities laws also provides ample guidance to the industry, as well as the sophisticated securities law bar. It's not a matter of a lack of guidance but more that the existing guidance may not be what many market participants want to hear. 

There is also a narrative that the SEC is engaged in "regulation by enforcement." But I see something different.  The laws are well-established, and the cases brought to date have clear applications, as has been apparent in court rulings on these issues.  This is not regulation by enforcement, but enforcement of our securities laws as Congress intended.

I'd also like to address the gatekeepers, specifically, the securities bar advising those in the digital asset industry.  There is a well-established, highly specialized securities law bar with nearly a century of experience, whose counsel is readily available to digital asset issuers and intermediaries. Attorney gatekeepers play an important role here.  They have an obligation to be clear with their clients about the application of the securities laws to their client's businesses, even if it is not advice their clients want to receive. 

Finally, while I believe that the SEC should work with those who come to us with good faith plans and concrete timelines to meet the requirements of the federal securities laws, the SEC has an obligation to protect investors and to enforce our rules and regulations. Those who do violate our federal securities laws and harm investors and markets must face the consequences, pure and simple. Congress gave us the responsibility to enforce our securities laws to protect investors and the public interest. We have a duty to the public to fulfill those important responsibilities.

I want to end where I began, and directly address anyone considering purchasing or investing in digital assets. It is important to obtain as much information as possible on the risks involved. An informed investor is a protected investor. One key resource that aims to serve the public in meeting that goal is the Crypto Assets section of, the SEC's investor protection portal.

Innovative blockchain technology can exist side-by-side and be compatible with the existing federal securities law framework.  The current moment offers an opportunity to make a meaningful difference for the success of blockchain technology and, possibly, for the financial future of millions. But it requires a good-faith, honest and conscious choice to comply with the law and to put the interests of investors first.

Thank you again for the opportunity to speak before you today and best wishes for a productive and constructive discussion for the panel that follows.
The CFTC filed an Order settling charges against Lee Tippett, a former energy broker with Classic Energy, LLC, for participating in a scheme to pay kickbacks to Matthew Clark, a trader employed by one of Classic's brokerage customers. The CFTC Order requires Tippett to disgorge $695,000 in ill-gotten gains, imposes a $500,000 civil monetary penalty, permanently bans Tippett from trading commodity interests, and requires him to comply with undertakings never to apply for registration or engage in any activity requiring registration with the CFTC. As alleged in part in the CFTC Release:

[A]t Clark's request, Classic hired Tippett as a broker in November 2015 for the purpose of facilitating kickback payments to Clark. Tippett was a longtime associate of Clark and had no experience as a broker prior to being hired by Classic. As part of this kickback scheme, Tippett would broker natural gas futures block trades for Clark's employer, but would pay most of the commission income he earned on these trades back to Clark in exchange for Clark sending more brokerage business to Classic. Beginning on or around November 23, 2015, and continuing through August 2019, Tippett paid Clark approximately $3,185,775, and kept $695,000 of this commission income for himself. According to order, Tippett concealed these payments to Clark in a variety of ways, including by sending cash directly to Clark's family members or by transferring money to shell companies set up by Clark. Tippett admits the facts of this misconduct and acknowledges this conduct violated the Commodity Exchange Act (CEA).

In addition, the order finds Tippett engaged in a scheme to misappropriate confidential block trade order information from Classic's brokerage customers. Tippett did so by disclosing certain block trade order information provided to him by a trader acting at Clark's direction. The information was disclosed to Peter Miller, an individual proprietary trader. Miller in turn traded on the basis of this information and shared his trading profits with other scheme participants, but not Tippett. The CFTC previously filed complaints against Clark and Miller for their roles in this scheme. [See CFTC Press Release No. 8490-22] [See CFTC Press Release No. 8468-21]    

In addition, the order finds Tippett made false statements to ICE on September 15, 2016, in connection with ICE's investigation of certain block trades brokered by Classic. According to the order, Tippett made these false statements to conceal certain misconduct by Mathew Webb, Classic's owner and president, for which the CFTC previously charged Webb. [See CFTC Press Release No. 8030-19]

On August 17, 2021, Tippett entered a guilty plea in a separate, parallel criminal action against Tippett in the U.S. District Court for the Southern District of Texas (U.S. v. Tippett, 4:21-cr-364). 
[R]espondent Prieur engaged in fraudulent sales tactics in violation of the antifraud provisions of federal and state securities laws (Count I); that Respondent Prieur conducted unauthorized trading in liquidating Claimants' Individual Retirement Accounts ("IRAs") in violation of the antifraud provisions of federal and state securities laws (Count II); that Respondent Prieur fraudulently represented to Claimants Respondent Prieur was reinvesting the Premier Strategist Account in violation of the antifraud provisions of the securities laws (Count III); and that Respondent LFA failed to establish and maintain a system to supervise the activities of Respondent Prieur which would have prevented, detected or corrected Respondent Prieur's fraud (Count IV). The causes of action relate to Claimants' allegation that Respondents LFA and Prieur engaged in unauthorized panic selling, liquidating the entirety of Claimants' retirement accounts without their informed consent and failing to promptly re-establish Claimants' positions notwithstanding Claimants' clear and direct instructions to do so. 

Ultimately, at the close of the FINRA Arbitration hearing, Claimants sought $1,405,306.96 in damages and $475,731.69 in fees/costs. Respondents generally denied the allegations and asserted affirmative defenses. 

The FINRA Arbitration Panel denied Claimants' Claims I, II, and III. The Panel found Respondent LFA liable to and ordered it to pay to Claimants on Claim IV/Failure to Supervise $100,000 in compensatory damages. Further the Panel ordered that Claimant Lynn Crowe's IRA account "be reinstated as if it had remained invested as of March 11, 2020, to the present date. Finally, the Panel awarded $625 in filing fees as reimbursement to Claimants. The $17,220 in FINRA Hearing Sessions Fees were awarded solely against Respondent LFA.

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Previously, the SEC awarded Claimant a Whistleblower Award in the Covered Action; however Claimant now requests a separate Award for a Second Action. In denying the Award, the SEC asserts in part that: 

[T]he Second Action did not arise out of the same nucleus of operative facts as the Covered Action. The record demonstrates that the Covered Action and the Second Action involved different and unrelated parties and transactions, which Claimant concedes. The Second Action also was brought more than two years after the Covered Action. That the two enforcement proceedings allege similar violations of law does not mean that they arose from the same nucleus of operative facts.

"The Beatles and the Treasury Market:" Remarks Before the U.S. Treasury Market Conference SEC Chair Gary Gensler

Thank you. It's good to be here for the eighth annual U.S. Treasury Market Conference. Thank you to the conference organizers and my colleagues across the Inter-Agency Working Group on Treasury Market Surveillance (IAWG) for putting it together and issuing the latest IAWG report.

As is customary, I'd like to note that I'm not speaking on behalf of my fellow Commissioners or the SEC staff.

In March 1998, when I was an Assistant Secretary in the Department of the Treasury, I gave my first speech in public service. What was it about? The Treasury market.

I was fortunate to work with excellent colleagues on that speech, including a career public servant named Dave Monroe, then Director of Cash and Debt Management, who used to wear a different Beatles tie every day.

We had a few "hard day's night[s]"[1] working on that speech, but with "a little help from [our] friends,"[2] we described Treasury's three principal goals regarding debt management: "sound cash management," "lowest cost financing for the taxpayers," and "efficient capital markets."[3]

When you maximize the competitiveness, liquidity, and resiliency of the $24 trillion Treasury market, that lowers the cost of financing and helps American taxpayers save money. It helps the central bank administer monetary policy. It also helps the fluid functioning of our financial system, as Treasuries are the foundation of the capital markets.

Much has changed in our Treasury market since 25 years ago, "when I was younger, so much younger than today."[4] Now, a significant portion of this market is transacted and intermediated outside of commercial banks: by principal trading firms (PTFs) and hedge funds, on electronic trading platforms. Nevertheless, the three key principles we described in 1998 remain every bit as important.

We've also seen jitters in this market over the last decade: in 2014, 2019, and 2020.[5]

That's why, since the start of this Administration, the Treasury,[6] Federal Reserve Board, Federal Reserve Bank of New York, and the Securities and Exchange Commission have worked on a series of projects to enhance the competitiveness and resiliency of the Treasury market.

To enhance competition, the official sector can use tools such as promoting transparency, access, and fair playing fields.[7]

To enhance resiliency, we can address system-wide risks by closing regulatory gaps and promoting greater central clearing. Competition itself also improves resiliency because it broadens out the market.

Though no one policy could have prevented the "dash for cash" in March 2020, our goal was, and remains, to improve the smooth functioning of this market-so that, whether in good times or stress times, it can "carry that weight."[8]

Policy Projects

Today, I will review five important projects in the Treasury market.

The first two projects center on the intermediaries that provide liquidity or perform exchange-like functions in this market. These projects focus on the tools of a fair playing field, greater access, and transparency.

The second two projects deal with the central clearing and customer clearing processes. These projects rely upon the tools of access, a fair playing field, and shock absorbers to close regulatory gaps and lower interconnectedness in our market plumbing.

Finally, the fifth project focuses on post-trade transparency, an area that Under Secretary of the Treasury Nellie Liang just discussed.

Taken together, I believe that these projects would promote greater resiliency and competition, allowing more market participants to interact directly with one another, whether through anonymized all-to-all trading or otherwise.


First, I'll turn to our project on dealers.

The Commission proposed rules intended to ensure that market participants who are in the business of providing liquidity in Treasuries or other securities-or engaging in other similar activities-are appropriately registered with the SEC, become members of a self-regulatory organization, and comply with federal securities laws and regulatory obligations.

This project is rooted in some hard lessons of the 1980s[9]-a "sad song" that we can "make better."[10] Between 1982 and 1985, a dozen government securities firms failed. Thus, in 1986, Congress enacted the Government Securities Act, which, for the first time, set up a federal regulatory regime specific to government securities dealers, brokers, and clearing.[11] Congress addressed this regulatory gap. I think it's time we make sure this gap is sealed.

Registration of government securities brokers and dealers means that market participants must, among other requirements, keep important books and records, meet minimum capital requirements, and report certain data to regulators. Not registering, in turn, leaves the system more opaque and vulnerable than it should be.

In recent decades, certain market participants, including PTFs, started participating significantly in the Treasury cash market.[12] In general, these firms play an increasingly significant liquidity-providing role in overall trading and market activity-a role traditionally performed by entities registered with the Commission.

Some of these firms are registered, but not all.

Thus, in March, we proposed to further define a "dealer" and "government securities dealer" so that PTFs and firms performing dealer-like roles register with the SEC and comply with federal securities laws and regulatory obligations.[13] I believe this lowers risk and creates a fairer playing field by supporting transparency and market integrity.

Further, the Commission unanimously voted to re-propose amendments to Rule 15b9-1 to require broker-dealer participants in our fixed-income (and equity) markets to register with the Financial Industry Regulatory Authority (FINRA).[14]


The second policy project concerns the main platforms on which Treasuries are traded.

Specifically, the Commission proposed to require platforms that provide marketplaces for Treasuries to register as broker-dealers and comply with Regulation ATS.

Reflecting the electronification of and other significant changes to platforms in recent decades, the proposal also would modernize the rules regarding the definition of an exchange. It would subject to exchange regulatory framework certain interdealer brokers (IDBs) that, for example, provide request-for-quote protocols. This update would close a regulatory gap among platforms that act like exchanges but are not being regulated like exchanges.

It also would require Treasury platforms with significant volume to comply with the Fair Access Rule. This would prohibit platforms from unreasonably prohibiting or limiting access or applying their rules for access in an unfair or discriminatory manner.

Additionally, the proposal would bring Treasury platforms with significant volume under Regulation Systems Compliance and Integrity, a rule that protects the resiliency of technology infrastructure.

All told, the proposal would provide greater resiliency and competition for activities on these platforms.

Central clearing

Third, the Commission recently proposed rules[16] that would widen the scope of transactions brought into central clearing in the Treasury markets.

Clearinghouses help lower risk in the system and promote competition in the market by sitting in the middle: as the buyer to every seller and the seller to every buyer. Otherwise, the clearing process can be a "long and winding road."[17]

I think Congress understood the importance of clearinghouses when, in 1986, they added Treasury securities to our clearing authorities.

Initially, in the 1990s, we saw a rise in the amount of Treasury securities clearing. By 2017, though, given various changes in the marketplace, only 13 percent of trades were fully centrally cleared.[18]

Reduced clearing increases system-wide risk. Currently, IDBs often are bringing just one side of the trade into central clearing if the counterparty is not also a member of the clearinghouse.[19] Broadly speaking, our proposal would require clearinghouses to ensure that their members bring in all of their repurchase agreement (repo) transactions, both legs of the transactions for IDB trades, and certain additional cash transactions.

Repos, the funding instrument for much of the debt markets, were at the center of the jitters in the Treasury market in 2019. Moreover, in the last few years, many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied.[20] For repo transactions, the scope of the proposal is broader than proposed in the cash market and would cover any repo transactions entered into by a clearinghouse member.

On the cash transactions, the proposal applies to specific categories of transactions. The proposal would bring in transactions entered into by an IDB that I just mentioned. It also would scope in trades between clearinghouse members, on the one hand, and hedge funds, levered accounts, or registered brokers-dealers on the other hand. This would help address the potential contagion risk that could flow through to the markets if a hedge fund or levered fund were unable to deliver on a transaction.

Additionally, clearinghouses need robust governance and risk management practices in order to play that shock absorbing role. That's why the Commission voted to propose rules to strengthen the governance of registered clearinghouses, particularly with respect to conflicts of interest.[21]

That's also why, going forward, I've asked staff to make recommendations for the Commission's consideration around clearinghouse recovery and wind down processes.

Customer clearing

Finally, we also have proposed three key reforms to better facilitate customer clearing in Treasuries and increase access to this market.

The first reform would strengthen the Commission's rules for clearinghouses transacting trades in Treasuries, particularly with regard to gross and net margining. Under such rules, members of a clearinghouse would no longer be able to net their customers' activity against house activity when determining margin.

As the Beatles put it, "money can't buy me love,"[22] but it can help you post margin. (Let's just say it was a missed opportunity in their lyrics.)

The second reform would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, subject to requirements designed to protect the customer margin from the broker-dealer's default while it is held at the clearinghouse. This process sometimes is referred to as rehypothecation. These rules would enhance customer protection, free up broker-dealers' resources, and improve liquidity in the Treasury markets.

The third reform would require clearinghouses to have policies and procedures designed to facilitate access to clearing services, such as through the use of customer clearing models.

Post-Trade Transparency

Finally, the Treasury, Fed, SEC, and FINRA have taken up efforts to strengthen post-trade transparency in the Treasury market.

In September, the Fed implemented a new rule requiring large banks to report transactions to the Trade Reporting and Compliance Engine (TRACE).

The Commission's re-proposed amendments to Rule 15b9-1, along with the rulemaking ensuring that PTFs are appropriately registered, also would enhance transparency, as these firms would report transaction data to TRACE.

Treasury put out a request for information on enhancements to post-trade transparency in Treasuries.[23]

Lastly, FINRA has amended its rules to enhance the transparency and timeliness of reporting in Treasuries and other sovereign debt markets.


In sum, nearly 25 years after my first speech on the Treasury market, I still believe those three principles I discussed are every bit as important for our collective work: sound cash management, lowest cost to taxpayers, and efficient capital markets.

I am privileged to continue to partner with my colleagues throughout the government on these efforts. I "still need [them], when I'm 64."[24] (Actually, I turned 65 last month.)

I opened this speech talking about Dave Monroe's love of the Beatles, one of the United Kingdom's greatest cultural exports.

Well, that reminds me: Across the government, we had embarked on these efforts long before the recent hiccups in the U.K. bond market. Though I'm glad Beatlemania came to our shores six decades ago, we don't want to import those types of market jitters to our shores, too.

Yes, the Treasury market is larger than the gilt market. Yes, the facts of that situation are specific to the U.K.

Still, there's a lesson here. The tremors in the U.K.'s sovereign debt market speak to the importance of building resiliency and competitiveness in the U.S. sovereign debt markets.

Fortunately, the troubles in the gilt market still "[seem] so far away."[25] Let's do what we can to keep it that way.

Thank you.

[1] See "A Hard Day's Night," available at

[2] See "With a Little Help from My Friends," available at

[3] See Gary Gensler, "Assistant Secretary for Financial Markets Gary Gensler Addresses the Annual Meeting of the Bond Market Association" (March 6, 1998), available at

[4] See "Help!" available at

[5] See Gary Gensler, "Prepared Remarks at U.S. Treasury Market Conference" (Nov. 17, 2021), available at

[6] See "Remarks by Secretary of the Treasury Janet L. Yellen at the Securities Industry and Financial Markets Association's Annual Meeting" (Oct. 24, 2022), available at

[7] See Gary Gensler, "Competition and the Two SECs" (Oct. 24, 2022), available at

[8] See "Carry That Weight," available at

[9] See, e.g., "How Drysdale affair almost stymied US securities market" (May 27, 1982), available at, and "E.S.M. Collapse: A Lesson in Safety" (March 8, 1995), available at

[10] See "Hey Jude," available at

[11] See Government Securities Act of 1986, available at

[12] ". . . by 2014, [PTFs] represented the majority of trading activity in the futures and electronically brokered interdealer cash markets." See "Recent Disruptions and Potential Reforms in the U.S. Treasury Market:

A Staff Progress Report" (Nov. 8, 2021), prepared by staff of the IAWG, available at

[13] See Gary Gensler, "Statement on the Further Definition of a Dealer-Trader" (March 28, 2022), available at

[14] See Gary Gensler, "Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership" (July 29, 2022), available at

[15] See Gary Gensler, "Statement on Government Securities Alternative Trading Systems" (Jan. 26, 2022), available at

[16] See Gary Gensler, "Statement on Proposed Rules Regarding Treasury Clearing" (Sept. 14, 2022), available at

[17] See "The Long and Winding Road," available at

[18] See 2021 IAWG report: ". . . the expansion of PTFs' role in the interdealer market beginning in the mid-2000s resulted in a decreasing fraction of interdealer trades being centrally cleared. In recent years, approximately one-half of interdealer cash trades (representing about one-quarter of the total cash market) have been centrally cleared, compared with central clearing of virtually all interdealer trades (representing about one-half of the total cash market) before the entry of PTFs in the interdealer market." In addition: "Overall, the Treasury Market Practices Group has estimated that 13 percent of cash transactions are centrally cleared; 68 percent are bilaterally cleared; and 19 percent involve hybrid clearing, in which one leg of a transaction on an IDB platform is centrally cleared and the other leg is bilaterally cleared."

[19] Ibid.

[20] As a recent G30 report put it, "In principle, if all repos were centrally cleared, the minimum margin requirements established by FICC would apply marketwide, which would stop competitive pressures from driving haircuts down (sometimes to zero), which reportedly has been the case in recent years." See Group of 30 Working Group on Treasury Market Liquidity, "U.S. Treasury Markets: Steps Toward Increased Resilience" (2021), available at In addition, as a 2021 Federal Reserve Board report said, "Most of hedge fund repo is transacted bilaterally, with only 13.7% of the repo centrally cleared." See Federal Reserve Board Division of Research & Statistics and Monetary Affairs, "Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis" (April 2021), available at

[21] See Gary Gensler, "Statement on Proposal to Enhance Clearing Agency Governance" (Aug. 8, 2022), available at

[22] See "Can't Buy Me Love," available at

[23] See "Notice Seeking Public Comment on Additional Transparency for Secondary Market Transactions of Treasury Securities," available at

[24] See "When I'm Sixty-Four," available at

[25] See "Yesterday," available at
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, Lee Ray Diedrich submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Lee Ray Diedrich was registered from 1995 to March 2022 with Pruco Securities LLC. In accordance with the terms of the AWC, FINRA imposed upon Diedrich a $5,000 fine and three-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

Although Diedrich had received the firm's WSPs, he electronically signed fifteen customer names on thirty-three documents, including on thirty-one new account opening applications and two variable annuity applications. Diedrich also listed his own email address as the customer email address on eight of the account opening documents. Diedrich did not have prior permission or authority from any of the fifteen firm customers to electronically sign their names to the documents. 

By forging customer signatures, Diedrich violated FINRA Rule 2010. 

Additionally, Diedrich submitted the thirty-one new account opening applications and two variable annuity applications with forged customer signatures to the firm to be processed. Eight of the documents also listed Diedrich's own email address as the customer email address. By submitting documents with forged customer signatures and false customer email addresses, Diedrich caused the firm to create and maintain inaccurate books and records and thereby violated FINRA Rules 4511 and 2010.
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, Joan Ella Burgio submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joan Ella Burgio entered the industry in 2007 and was registered with Morgan Stanley during parts of 2020 and 2021 and with LPL Financial LLC during parts of 2021 and 2022. In accordance with the terms of the AWC, FINRA imposed upon Burgio a $3,500 fine and 60-calendar-day suspension from associating with any FINRA member in all capacities. The AWC asserts in part that [Ed: footnotes omitted]:

Throughout Respondent's associations with Morgan Stanley and LPL, the firms had written supervisory procedures that prohibited their associated individuals from engaging in any outside business activity unless they received prior written approval from the firms. 

Between April 2020 and May 2021, while registered and associated with Morgan Stanley, Burgio established Crane & Lotus LLC (C&L), a company she formed for the purpose of providing administrative services to a Florida-based private investment firm (Company A). In April 2020, Burgio incorporated C&L in Wyoming, was the sole owner and employee of C&L and opened a bank account in the name of C&L which she controlled. C&L provided administrative services that included reconciling trades at the direction of Company A, and ensuring Company A's vendors were paid timely. While associated with Morgan Stanley, Respondent was paid approximately $246,000 in compensation through C&L for the administrative services she provided to Company A. 

Between May 2021 and April 2022, after she became associated with LPL, Burgio continued to engage in the C&L outside business activities and provided services to Company A for which she received approximately $46,000 in compensation. In October 2021, several months after joining LPL, she finally disclosed and requested approval to engage in the activities of C&L, which LPL denied in November 2021. Burgio dissolved C&L as a corporate entity in April 2022. 

Respondent did not provide prior written notice to Morgan Stanley and LPL of her C&L outside business activities prior to engaging in them. Additionally, Respondent falsely attested on two Morgan Stanley compliance questionnaires in October 2020 and in January 2021 that she had accurately and fully disclosed her outside business activities. The attestations were false because Respondent did not disclose her outside business activities involving C&L. 

By engaging in outside business activities involving C&L without providing prior written notice to Morgan Stanley and LPL, Respondent violated FINRA Rules 3270 and 2010. 

Cybersecurity Alert - Ongoing Phishing Campaign (FINRA Alert)

This email is to warn member firms of an ongoing phishing campaign that involves fraudulent emails purporting to be from FINRA and using the domain name "". The domain of "" is not connected to FINRA, and firms should delete all emails originating from this domain. Member firms should be aware that they may receive similar phishing emails from other domain names in addition to those identified in this Alert.

The email states:

Dear Name,

I hope all is well!

I will be your FINRA relationship manager going forward and would appreciate the opportunity to have to discuss how you work with Finra account management (reports, exams and fillings) and where FINRA fits into your practice.

As of now, my schedule is relatively tight and I need to confirm an appointment that works for you before the end of today. Please click the "book a meeting" link in my signature to select a date and time.

PS: I'm unable to respond to unscheduled calls and you may be required to authenticate your email account to confirm a booking.

I look forward to speaking soon!




Principal Risk Monitoring Analyst
Phone Number

FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links. FINRA has requested that the Internet domain registrar suspend services for ""

For more information, firms should review the resources provided on FINRA's Cybersecurity topic page, including the Phishing section of our Report on Cybersecurity Practices - 2018.

Questions regarding this alert should be directed to FINRA's Cyber Analytics Unit (CAU) at

Note: If you would like to add or change who receives this email, please update your firm's Chief Information Security Officer (CISO) and/or Chief Compliance Officer (CCO) contacts in FINRA Gateway.

Crypto Asset Communications (FINRA Release / November 2022)

FINRA is conducting a targeted exam of firm practices regarding retail communications concerning Crypto Asset1 products and services.

Unless otherwise noted, the relevant period for each request is July 1, 2022 through September 30, 2022 (the "Relevant Period"). In addition, if your response varies over the Relevant Period, please explain the differences in your response.

1. For the Relevant period, provide all retail communications2 that were distributed or made available by the firm or its affiliate(s) on its behalf that refer to, relate to, or concern a Crypto Asset or a service involving the transaction or holding of a Crypto Asset ("Communication").

2. Provide a numbered tabular list identifying each Communication provided pursuant to Item 1 above. Within the tabular list please:

a. Include the date the Communication was first made available to the public:

b. Identify whether or not the Communication was filed with FINRA's Advertising Regulation Department. If the Communication was filed, include the FINRA Advertising Regulation reference number for the Communication;

c. Indicate whether or not each Communication provided pursuant to Item 1 was approved by a registered principal of the firm. If so, provide the date of approval in the tabular list and provide separately records that reflect such approvals; and

d. Identify each Crypto Asset and/or service involving the transaction or holding of a Crypto Asset that the Communication refers to, relates to, or concerns.

3. Provide the firm's written supervisory procedures concerning the review, approval, record keeping and dissemination of Communications in effect for any portion of the Relevant Period.

4. Provide any compliance policies, manuals, training materials, compliance bulletins, and any other written guidance in effect for any portion of the Relevant Period concerning Communications.

5. Provide any contracts or other written agreements in place between the firm and any affiliate concerning:

a. The firm's creation or dissemination of Communications on behalf of the affiliate or concerning services offered by the affiliate; and

b. The affiliate's use of information concerning the firm's customers to determine who will receive Communications.
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1 "Crypto Asset" means an asset that is issued or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called "virtual currencies," "coins," and "tokens." A Crypto Asset may or may not meet the definition of a "security" under the federal securities laws, provided, however, that the term "Crypto Asset" shall not include a security registered under the Securities Act and transferred through the system of a registered clearing agency.

2 "Retail Communication" is defined in FINRA Rule 2210(a)(5) as "any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period."  In addition to written communications, video, social media, mobile applications, and websites generally fall into this communications category.
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SEC Chair Gensler Speaks About Shakespeare and Hammurabi While FTX Dissolves ( Blog)
What follows is yet another bit of indulgence by those at the SEC who have serious things to do but, instead, find time to give speeches, attend seminars, make podcasts, film videos, and do all sorts of stuff that doesn't quite advance Wall Street reform, doesn't quite protect vulnerable investors, and doesn't quite pursue the scamsters and fraudsters. For several years there has been a clamor to implement some form of crypto regulation. Even if only first-stage in design and with the full intent to adapt on the run. Something, anything might have protected those now devastated by the FTX debacle. Instead, we got nothing. We got regulatory turf wars. We got petulance and inaction. 

The Securities and Exchange Commission today announced that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or "stand alone," enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 "follow-on" administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC's stand-alone enforcement actions in fiscal year 2022 ran the gamut of conduct, from "first-of-their-kind" actions to cases charging traditional securities law violations.

Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and up from $3.852 billion in fiscal year 2021. Of the total money ordered, civil penalties, at $4.194 billion, were also the highest on record. Disgorgement, at $2.245 billion, decreased by 6 percent from fiscal year 2021. Fiscal year 2022 was the SEC's second highest year ever in whistleblower awards, in terms of both the number of individuals awarded and the total dollar amounts awarded.
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, Boustead Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Boustead Securities, LLC has been a FINRA member firm since 2007 and has about 50 registered representatives at two branches. In accordance with the terms of the AWC, FINRA imposed upon Boustead Securities a Censure and $35,000 fine. The AWC asserts in part that [Ed: footnotes omitted]:

From March 2018 through March 2020, Boustead's WSPs required the use of new account forms to collect and record customer and investment profile information, but Boustead did not enforce this procedure with respect to certain customers in certain private placement offerings. In practice, Boustead did not require the use of new account forms for customers participating in private placements. Instead, the firm collected customer information through other methods such as an issuer-specific subscription agreement, the registration process conducted through an affiliated crowd funding portal, or an accredited investor questionnaire. The firm's WSPs did not address the collection of customer information through a crowd funding portal and did not provide any guidance as to the content of subscription agreements or accredited investor questionnaires or require them to solicit any specific customer information. In each sampled private placement transaction for this period, Boustead failed to collect at least one component of the customer and investment profile information required by Exchange Act Rule 17a-3 or FINRA Rules 4512 and 2111. 

By failing to supervise the collection and recording of required information about its customers participating in private placement offerings, including not enforcing its WSPs, Boustead violated FINRA Rule 3110. By failing to collect and record required customer information, Boustead violated Exchange Act Rule 17a-3 and FINRA Rule 4512. By violating those rules, Boustead also violated FINRA Rule 2010. 

. . .

From March 2018 through March 2020, Boustead's WSPs acknowledged the firm's obligation to comply with FINRA Rule 5110, but the firm did not establish any procedures to do so. For example, there was no reasonable process to ensure the firm made timely filings required by the rule. The firm did not assign an individual to be responsible for compliance with Rule 5110. In addition, although the firm authorized its outside counsel to make the filings required by Rule 5110, the firm did not have a process to ensure that its counsel or others made such filings in accordance with the rule. As a result, Boustead failed to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110. During this period, Boustead also failed to file with FINRA documents required by Rule 5110 on 19 occasions and failed to timely file with FINRA other documents required by Rule 5110 on 51 occasions, in violation of FINRA Rule 5110(b). 

By failing to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110, Boustead violated FINRA Rule 3110. By failing to file or timely file documents with FINRA required by FINRA Rule 5110, Boustead violated FINRA Rule 2010.

Bill Singer's Comment: FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would prepare a statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.  

If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions.  If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to  implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. 

Notwithstanding my opinion, Boustead Securities apparently determined that it was advisable to submit a Corrective Action Statement and hopefully that step will prove favorable to the firm. In part the Statement asserted:

Re: Corrective Action Statement to Letter of Acceptance, Waiver and Consent
Boustead Securities, LLC, Matter No. 2019060735601 

Dear Ms. Betcher: 

I am responding on behalf of Boustead Securities, LLC ("Boustead") to the above-referenced Letter of Acceptance, Waiver and Consent (the "AWC"). The AWC related to two (2) issues: Boustead's collection of customer information as required by Exchange Act, Rule 17a-3, and FINRA Rules 2111 and 4512; and the filing of certain information associated with public offerings of securities as required by the corporate financing rule, FINRA Rule 5110(b). The findings in the AWC have been addressed and mitigated as explained in this Corrective Action Statement. 

This Corrective Action Statement is submitted by Boustead and does not contain factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff. 

In response to the collection of customer information, Boustead has required the use of customer relationship forms to collect and record customer and investment profile information as set forth in Boustead's WSPs. The form and content of the forms are modeled on the FINRA Account Application Template short format which contains all components of the relevant rules. Boustead has also required that at least one (1) supervisor is responsible for reviewing the account forms to ensure they are complete and provide all the information required by the Exchange Act and FINRA rules. 

In response to the corporate financing rule, Boustead revised its WSPs to provide procedures for ensuring that filings for all public offerings with which Boustead is affiliated are filed within the timeframe required by the FINRA rules. Boustead has also assigned a designated principal to be responsible for ensuring that all public offering filings are filed in compliance with FINRA Rule 5110, whether by Boustead directly, or by a duly authorized representative associated with the public offering. In order to address the violations alleged by FINRA during the investigation, Boustead also directly communicated with FINRA representatives about the public filing reports regarding accessibility and requirements for compliance with FINRA Rule 5110, including changes made by FINRA to Rule 5110 thereafter. 

The AWC does not allege that customers were harmed. Boustead reviewed all customer-related information related to the violations noted in the AWC and did not identify any customer harm. Therefore, Boustead has not contacted any prior customers to request that they provide their investment profile information on a new profile form, nor has Boustead contacted prior issuers or representatives, but it will continue to monitor customer accounts to determine if any further corrective action is necessary in the event any customer harm is found. 

I greatly appreciate your attention to this matter. Please feel free to contact me at any time if you have any questions regarding the corrective actions taken. . . .

Enhancing Your Compliance Practice with the FINRA Institute at Georgetown CRCP Program (FINRA Unscripted)
Jim Angel, the FINRA Institute at Georgetown Certified Regulatory and Compliance Professional Program ("CRCP") Academic Director and Associate Professor with the Georgetown McDonough School of Business; and Susanne Goldsmith, a Senior Director with FINRA's Member Relations and Education team discuss the CRCP Program.

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When a government prosecutes criminal misconduct, the Defendant is protected by constitutional and due process rights. When a non-governmental actor like FINRA pursues industry misconduct, however, a Respondent is often deprived of constitutional and due process rights. That distinction explains why courts generally allow for the imposition of penalties in criminal cases but only the imposition of sanctions in civil and regulatory cases. All of which explains why alarms go off when FINRA imposes what it calls a sanction but what others might view as a penalty, as demonstrated in a recent FINRA regulatory settlement.

Watertown Man Arrested in Connection with African Sports Investment Fraud Scheme (DOJ Release)
SEC Charges Massachusetts Resident with Conducting $2 Million Fraudulent Investment Offering (SEC Release)

In the United States District Court for the District of Massachusetts, Adrian J. Kawuba was charged with one count of wire fraud. As alleged in part in the DOJ Release:

[K]awuba told his investors that he would invest their money in short-term financing of sports ventures in Africa and elsewhere overseas and that he would personally guarantee their investments. It is alleged however, that Kawuba did not invest any of the funds he received from victim investors. Instead, Kawuba allegedly used the money to pay for luxury goods and to pay purported returns to his investors - in some instances paying back an investor's earlier investment with money that investors had just sent Kawuba for a new investment.

with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and, the District Court entered an Order granting a temporary restraining order, asset freeze, and other emergency relief. Parallel criminal charges alleging wire fraud were filed against Kawuba. As alleged in part in the SEC Release:

Kawuba allegedly raised approximately $2 million from investors in a Ponzi scheme. According to the SEC's complaint, unsealed today, Kawuba promised investors they would receive returns of 25% to 50% in as little as twelve days to seven months and told investors he would use their money to finance lucrative short-term projects related to youth sports, entertainment events, and private soccer clubs. In fact, as alleged in the complaint, Kawuba used money from later investments to pay out on earlier investments, and he misappropriated investor money to pay for personal travel to the Greek islands and other destinations, to purchase a luxury automobile, and to buy tens of thousands of dollars' worth of designer goods at fashion and jewelry stores.
The SEC filed an Order charging nationally recognized statistical rating organization ("NRSRO") S&P Global Ratings, with issuing and maintaining credit ratings in violation of rules promulgated under the Securities Exchange Act. Without admitting or denying the findings in the SEC Order, S&P agreed to settle this matter by paying a $2.5 million penalty and agreeing to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings. registered with the Commission, with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings. As alleged in part in the SEC Release:

The SEC's order finds that an issuer engaged S&P to rate a jumbo residential mortgage backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees -- employees responsible for managing the relationship with the issuer -- on several occasions attempted to pressure the S&P analytical employees -- employees responsible for evaluating and assigning the rating -- to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error. Despite sending the communications through the compliance department as required by S&P's policies and procedures at that time, some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations. The order finds that, as a result of the content, urgent nature, high volume, and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.
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After discovering the circumstances surrounding the rating of the transaction, S&P self-reported the conduct at issue to the SEC, cooperated with the SEC's investigation, and took remedial steps to enhance its conflicts of interest policies and procedures.

Washington, D.C. - On Friday, November 11, 2022, counsel for LedgerX LLC, d/b/a FTX US Derivatives (FTX), submitted to the Commodity Futures Trading Commission's Division of Clearing and Risk a formal withdrawal of FTX's request, originally submitted on December 6, 2021, to amend FTX's Amended Order of Registration as a derivatives clearing organization to allow FTX to offer products that are not fully collateralized. The application was not approved.