Securities Industry Commentator by Bill Singer Esq

March 21, 2023

FINRA Arbitration Panel Awards Customer Nearly $19,000 in Damages Against Morgan Stanley for Account Liquidation
In the Matter of the Arbitration Between Estate of Richard W. Shettle, Claimant, v. Morgan Stanley, Respondent (FINRA Arbitration Award)
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The Financial Professionals Coalition, Ltd. endorses a letter to FINRA authored by Ronald Filler, Esq, who is a Co-Founder of the Coalition, Professor Emeritus/Chair of the Ronald H. Filler Institute for Financial Services Law at New York Law School, and a Public Director of the National Futures Association (“NFA”). Filler petitions FINRA to eliminate the requirement that persons seeking to be employed in the securities industry must be sponsored by a Member Firm before they are allowed to take the Series 7 registration exam. 

Should FINRA stop requiring sponsorship to take the Series 7 Exam (Capital Advantage Tutoring  by Kenneth Finnen)

MIGUEL LUNA PEREZ, PETITIONER v. STURGIS PUBLIC SCHOOLS, ET AL. (Opinion, United States Supreme Court, 598 U. S. ____ (2023), No. 21–887 / March 21, 2023)
As set forth in SCOTUS's Syllabus: 



No. 21–887. Argued January 18, 2023—Decided March 21, 2023

Petitioner Miguel Luna Perez, who is deaf, attended schools in Michigan’s Sturgis Public School District (Sturgis) from ages 9 through 20. When Sturgis announced that it would not permit Mr. Perez to graduate, he and his family filed an administrative complaint with the Michigan Department of Education alleging (among other things) that Sturgis failed to provide him a free and appropriate public education as required by the Individuals with Disabilities Education Act (IDEA).See 20 U. S. C. §1415. They claimed that Sturgis supplied Mr. Perez with unqualified interpreters and misrepresented his educational progress. The parties reached a settlement in which Sturgis promised to provide the forward-looking relief Mr. Perez sought, including additional schooling. Mr. Perez then sued in federal district court under the Americans with Disabilities Act (ADA) seeking compensatory damages. Sturgis moved to dismiss. It claimed that 20 U. S. C. §1415(l) barred Mr. Perez from bringing his ADA claim because it requires a plaintiff “seeking relief that is also available under” IDEA to first exhaust IDEA’s administrative procedures. The district court agreed and dismissed the suit, and the Sixth Circuit affirmed.

Held: IDEA’s exhaustion requirement does not preclude Mr. Perez’s ADA lawsuit because the relief he seeks (i.e., compensatory damages) is not something IDEA can provide. Pp. 3–8.(a) Section §1415(l) contains two features. The first clause focuses on “remedies” and sets forth this general rule: “Nothing [in IDEA]shall be construed to restrict” the ability to seek “remedies” under“other Federal laws protecting the rights of children with disabilities.”The second clause carves out an exception: Before filing a civil action under other federal laws “seeking relief that is also available” under IDEA, “the procedures under [§1415](f) and (g) shall be exhausted.” Those provisions provide children and families the right to a “due process hearing” before local or state administrators, §1415(f)(1)(A), followed by an “appeal” to the state education agency, §1415(g)(1). Mr.Perez reads §1415(l)’s “seeking relief” clause as applying only if he pursues remedies that are also available under IDEA. And because IDEA does not provide compensatory damages, §1415(l) does not foreclose his ADA claim. Sturgis reads the provision as requiring exhaustion of§1415(f) and (g) so long as a plaintiff seeks some form of redress for the underlying harm addressed by IDEA. And because Mr. Perez complains about Sturgis’s education-related shortcomings, his failure to exhaust is fatal. Pp. 3–4.

(b) Mr. Perez’s reading better comports with the statute’s terms. Because §1415(l)’s exhaustion requirement applies only to suits that“see[k] relief . . . also available under” IDEA, it poses no bar where anon-IDEA plaintiff sues for a remedy that is unavailable under IDEA.This interpretation admittedly treats “remedies” as synonymous with the “relief” a plaintiff “seek[s].” But that is how an ordinary reader would interpret the provision, based on a number of contextual clues.Section 1415(l) begins by directing a reader to the subject of “remedies,” offering first a general rule then a qualifying exception. IDEAtreats “remedies” and “relief” as synonyms elsewhere, see§1415(i)(2)(C)(iii), (3)(D)(i)(III), as do other provisions in the U. S.Code, see 18 U. S. C. §3626(d); 28 U. S. C. §3306(a)(2)–(3). The second clause in §1415(l), moreover, refers to claims “seeking relief” available under IDEA. In law that phrase (or some variant) often refers to theremedies a plaintiff requests. Federal Rule of Civil Procedure 8(a)(3),for example, says a plaintiff’s complaint must include a list of requested remedies—i.e., “a demand for the relief sought.” Likewise, this Court often speaks of the “relief” a plaintiff “seeks” as the remedies herequests. See, e.g., South Carolina v. North Carolina, 558 U. S. 256,260. Pp. 4–6.

(c) Sturgis suggests this interpretation is foreclosed by Fry v. Napoleon Community Schools, 580 U. S. 154. But the Court in Fry went out of its way to reserve rather than decide this question. What the Court did say in Fry about the question presented there does not advance the school district’s cause here. Finally, Sturgis says the Court’s interpretation will frustrate Congress’s wish to route claims about educational services to administrative experts. It is unclear what this proves, as either party’s interpretation of §1415(l) would preclude some unexhausted claims. In any event, it is the not the job of this Court to “ ‘replace the actual text with speculation as to Congress’s intent.’ ” Henson v. Santander Consumer USA Inc., 582 U. S. 79, 89. Pp. 6–7.

3 F. 4th 236, reversed and remanded.

GORSUCH, J., delivered the opinion for a unanimous Court.

Sysco Says $140 Million Litigation Funder Blocking Lawyer Change/Buford Capital is blocking Sysco from settling price-fixing cases/Sysco dropped previous lawyer, who it accused of siding with funder (Bloomberg Law by Emily Siegel)
Wonderful coverage by Bloomberg Law's Emily Siegel of a complex -- perhaps troubling -- development in the way lawsuits are financed. What happens when the lawsuit-funder has invested $140 million and doesn't think the settlement offer is high enough?

Bulgarian Woman Charged For Role In Multi-Billion-Dollar Cryptocurrency Pyramid Scheme “OneCoin” And Extradited From Bulgaria To The United States / Dilkinska was Head of Legal and Compliance for Fraudulent Cryptocurrency Marketed and Sold to Millions of Victims Around the World, Resulting in Billions of Dollars in Losses (DOJ Release)
In the United States District Court for the Southern District of New York, an Indictment was filed charging Irina Dilkinska with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering. As alleged in part in the DOJ Release:

In 2014, RUJA IGNATOVA, a/k/a “the Cryptoqueen,” and KARL SEBASTIAN GREENWOOD co-founded OneCoin,[2] a company based in Sofia, Bulgaria, that marketed a purported cryptocurrency by the same name, which was in fact a fraudulent pyramid scheme.  OneCoin operated as a MLM network through which members received commissions for recruiting others to purchase cryptocurrency packages.  This MLM structure influenced rapid growth of the OneCoin member network.  Indeed, according to OneCoin’s promotional materials, over three million people invested in fraudulent cryptocurrency packages.  OneCoin records show that, between the fourth quarter of 2014 and the fourth quarter of 2016 alone, OneCoin generated €4.037 billion in sales revenue and earned “profits” of €2.735 billion.

DILKINSKA was the purported Head of Legal and Compliance for OneCoin, but rather than ensuring that OneCoin complied with the law, DILKINKSA assisted in the creation and management of shell companies in order to launder OneCoin proceeds and to hold property belonging to IGNATOVA.  For example, in 2016 and 2017, DILKINSKA helped co-conspirator MARK SCOTT, a former equity partner at a prominent international law firm, launder approximately $400 million in OneCoin proceeds through a series of fake Cayman Islands investment funds operated by SCOTT.  Among other things, DILKINSKA used a company named B&N Consult EEOD, which was falsely described as offering “proprietary consulting services, support and software solutions” to its clients and as generating €200 million in 2015 through 2016, to disguise the transfer of millions of dollars as purported “investments” into SCOTT’s funds.  In reality, B&N was a shell company that did not generate legitimate income and was used by DILKINSKA to launder OneCoin proceeds.  In or around September 2018, DILKINSKA learned of SCOTT’s arrest in connection with his laundering of OneCoin proceeds.  Shortly thereafter, DILKINSKA burned incriminating documents, sent co-conspirator KONSTANTIN IGNATOV a text message with a link to a newspaper article about the arrest, and then wrote a series of texts, including, “See this!!!!!”; “Something is going on!!!!!”; and “If this is true I need the mega lawyers for whom [co-conspirator FRANK SCHNEIDER] was talking!!!”

On October 12, 2017, IGNATOVA was charged with OneCoin-related fraud and money laundering charges in the United States District Court for the Southern District of New York, and a federal warrant was issued for her arrest. On October 25, 2017, IGNATOVA traveled on a commercial flight from Sofia, Bulgaria, to Athens, Greece, and has not been seen publicly since. IGNATOVA was added to the FBI’s Top Ten Most Wanted List in June 2022.  The FBI is offering a $100,000 reward for information leading to IGNATOVA’s arrest.

SEC Obtains Final Judgment Against Former CFO Charged with Fraud and Lying to Auditors (SEC Release)
In the United States District Court for the District of Maryland, a Final Consent Judgment was entered against Osiris Therapeutics, Inc.'s former Chief Financial Officer Philip R. Jacoby enjoining him from future violations of: Section 17(a) of the Securities Act; Section 10(b) of the Securities Exchange Act, and Rules 10b-5, 13a-14, and 13b2-2 promulgated thereunder; as well as aiding and abetting violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Further, Jacoby is prohibited from acting as an officer or director of a public company, and liable for reimbursement of $223,965.88 in Osiris stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (payment of all but $45,000 is waived based on his sworn statement of financial condition). As alleged in part in the SEC Release:

The SEC's complaint, filed November 2, 2017, charged Osiris with routinely overstating company performance and issuing fraudulent financial statements for a period of nearly two years. The SEC alleged that Jacoby caused Osiris to book fictitious and premature revenue and provided false information to Osiris's auditors. On February 2, 2021, the District Court found that Jacoby violated provisions of the federal securities laws prohibiting: fraud in connection with the offer, purchase, or sale of securities; false certifications of SEC filings; aiding and abetting false SEC filings; and lying to auditors.

. . .

Osiris previously settled the SEC's charges and paid a $1.5 million civil penalty. One of Osiris's former Chief Financial Officers, Gregory I. Law, was dismissed from the case in September 2019. In October 2019, Bobby Dwayne Montgomery, Osiris's former Chief Business Officer, consented to a judgment enjoining him from future violations of the provisions of the federal securities laws that prohibit falsifying books and records and lying to auditors, and ordering him to pay a civil penalty of $40,000. Osiris's former Chief Executive Officer, Lode Debrabandere, was dismissed from the case in November 2022. The final judgment entered against Jacoby concludes this litigation.

CFTC Revokes Registrations of Allianz Global Investors US LLC (CFTC Release)
The CFTC filed a Notice of Intent to Revoke the Registrations of Allianz Global Investors US LLC (AGI US) and an Opinion and Order accepting the settlement offer from AGI US and settling the action by revoking its registrations as a commodity trading advisor and commodity pool operator.
As alleged in part in the CFTC Release: 

Pursuant to the Commodity Exchange Act (CEA), the notice alleged AGI US was subject to statutory disqualification of its registrations based on a Securities and Exchange Commission (SEC) order that found AGI US violated multiple anti-fraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In re Allianz Global Invs. U.S. LLC, SEC No. 3-20855, 2022 WL 1644317 (May 17, 2022) (SEC order). 

The SEC order found that AGI US, through three portfolio managers, engaged in a massive fraudulent scheme in which it made numerous misrepresentations and omissions to the institutional investors of funds that employed a complex securities options trading strategy called Structured Alpha. Specifically, the SEC order found that AGI US misrepresented to investors the significant downside risks and actual performance of the Structured Alpha funds. According to the SEC order, the 2020 COVID-related market volatility exposed AGI US’s scheme and revealed that the Structured Alpha funds and their investors suffered billions of dollars in losses as a result of AGI US’s misconduct.

The CFTC’s order finds that AGI US is subject to statutory disqualification from registration with the CFTC pursuant to CEA Section 8a(2)(E)(i) and revokes AGI US’s registrations under the terms in the order. 

CFTC Orders Puerto Rico Commodity Pool Operator to Pay $150,000 for Supervision and Reporting Violations (CFTC Release)
The CFTC issued an Order simultaneously filing and settling charges against DARMA, LLC, a registered commodity pool operator and commodity trading advisor located in Puerto Rico, for filing to diligently supervise its fund administrator’s activities, resulting in DARMA’s failure to accurately prepare and distribute timely pool statements to pool participants -- which resulted in DARMA’s failure to timely file its annual audited pool financial statement (AFS) with the National Futures Association (NFA). The Order requires DARMA to pay a $150,000 civil monetary penalty and to cease and desist from further violations of CFTC’s regulations, as charged. As alleged in part in the CFTC Release:

[S]ince September 2018, DARMA operated two exempt commodity pools. In November 2018, DARMA hired a third-party fund administrator to calculate the pools’ net asset value (NAV), which was a necessary component of the pool statements that DARMA was required to prepare and distribute to its pool participants. The administrator was consistently late in providing NAVs to DARMA and, when provided, the NAVs were often inaccurate, resulting in the preparation of inaccurate pool statements that were repeatedly distributed to pool participants well past the regulatory deadline. Further, in many instances the pool statements needed to be revised and restated. DARMA also failed to file and distribute its AFS, which was to be prepared by the Administrator, with the NFA in a timely manner. 

The order further finds that despite these issues, DARMA did not begin the process of hiring a new fund administrator until November 2019 and did not end its relationship with the administrator until March 2020. This was almost 13 months after DARMA first became aware of the administrator’s lateness in preparing the pool statement for January 2019, and 10 months after it first became aware of the administrator’s inaccuracy. Accordingly, as the order finds, DARMA failed to establish and implement an adequate supervisory system through enforcement of adequate policies and procedures. DARMA also failed to diligently supervise its administrator and thereby ensure pool statements were accurately prepared and distributed to pool participants within the proper timeframe and that the AFS was filed with the NFA in a timely manner. 

The CFTC’s recognition of DARMA’s substantial cooperation and remediation is reflected in the form of a reduced civil monetary penalty.

FINRA Censures and Fines Hornor, Townsend & Kent, LLC Supervision of OBA
In the Matter of Hornor, Townsend & Kent, LLC, Respondent (FINRA AWC 2018059743301)
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, Hornor, Townsend & Kent, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Hornor, Townsend & Kent, LLC was first registered in. In accordance with the terms of the AWC, FINRA imposed upon Hornor, Townsend & Kent, LLC a Censure and $180,000 fine. As alleged in part in the AWC:

On July 12, 2013, RR 1’s supervisor reviewed RR 1’s OBA request and recommended that Home Office Supervision approve the OBA. RR 1’s supervisor recorded this recommendation in the firm’s systems. Home Office Supervision, however, did not review RR 1’s OBA request until February 2014, nearly seven months after RR 1 submitted the request. On February 9, 2014, Home Office Supervision informed RR 1’s supervisor that RR 1’s OBA request would not be approved. Although Home Office Supervision recorded the disapproval in the firm’s systems, no one at HTK ever communicated this decision to RR 1.

RR 1’s OBA request placed the firm on notice that RR 1 planned to commence selling FIP at an HTK branch office on July 20, 2013. Nonetheless, HTK did not reasonably supervise RR 1 or his HTK branch office. Had HTK conducted reasonable supervision, it would have learned that RR 1 was using firm resources to sell FIP to firm customers, including his firm email account, and his assigned sales assistant (a non-registered fingerprint person at HTK). As a result, HTK failed to detect RR 1’s sales of FIP. Between July 2013 and March 2016, when RR 1 voluntarily resigned from HTK, RR 1 sold over $7 million in FIP securities to 39 investors, including 16 firm customers.

Therefore, HTK violated NASD Rules 3010 and FINRA Rules 3110 and 2010.

FINRA Arbitration Panel Awards Customer Nearly $19,000 in Damages Against Morgan Stanley for Account Liquidation
In the Matter of the Arbitration Between Estate of Richard W. Shettle, Claimant, v. Morgan Stanley, Respondent (FINRA Arbitration Award 22-02487)
In a FINRA Arbitration Statement of Claim filed in November 2022, Claimant asserted account errors; breach of fiduciary duty; negligence; omissions. The causes of action relate to alleged "account assets liquidation." Claimant sought $18,954.82 in compensatory damages, fees, and costs. Respondent Morgan Stanley generally denied the allegations and asserted affirmative defenses. The sole FINRA Arbitrator found Respondent Morgan Stanley liable and ordered it to pay to Claimants $18,954.82 in compensatory damages.and $212.50 in filing fees.
Bill Singer's Comment: More nonsense masquerading in the form of a FINRA Arbitration Award. The ONLY allegation set out in the Award is that of alleged "account assets liquidation." As in what? As in how or why was there anything wrong with said liquidation? Why does some specificity with these things matter? Because there may be (and probably are) other similarly situated customers at Morgan Stanley or other FINRA member firms who may have experienced the same questioned liquidations and they are deprived of better understanding their legal remedies. Read the Award for yourself and tell me what Morgan Stanley did wrong and why it was sanctioned for just shy of $19,000. 

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The Financial Professionals Coalition, Ltd. is a diverse resource for over 1.2 million registered representatives, associated persons, traders, bankers, back-office staff, and owners of broker-dealers and registered investment advisors. The Coalition provides courtesy consultations with industry experts. Membership is free. 
The recent failures of Silicon Valley Bank (“SVB”) and Signature Bank have brought into question the diligence of the individuals and entities charged with overseeing financial institutions and the broader U.S. financial system. Our oversight responsibilities to the American people require that we evaluate the root causes of these bank failures as well as the failures of U.S. regulatory agencies to prevent these collapses from occurring. These responsibilities include obtaining full information about what appears to be glaring bank mismanagement, fundamental lack of prudence in bank risk and balance sheet management, and regulators’ lack of basic supervision and enforcement of safety and soundness rules, regulations, and principles. As the Committees of jurisdiction over the Federal Reserve System (“Federal Reserve”), we ask that you provide the following information no later than March 31, 2023:

1. A comprehensive timeline of events related to the Federal Reserve’s lending, supervisory, and examination activity for the last two years with regards to SVB and/or Signature Bank, as well as a comprehensive timeline of events supporting the recommendation to invoke the Systemic Risk Exception for these two banks; and

2. The names and titles of all officials or employees of the Federal Reserve (including, but not limited to, the Federal Reserve Board of Governors and the Federal Reserve Banks of San Francisco and New York) involved in any capacity with supervising, examining, or lending to SVB and/or Signature Bank and/or the recommendation to invoke the Systemic Risk Exception for these two banks.
Furthermore, this letter serves as a formal request to preserve all existing and future records and materials in your possession relating to the topics addressed in this letter. . . .  

Last individual admits role in nationwide fraud scheme targeting elderly victims (DOJ Release)
In the United States District Court for the Southern District of Texas, Anirudha Kalkote, 25, pled guilty to conspiracy to commit mail fraud. Previously, MD Azad, 26, Sumit Kumar Singh, 25, Himanshu Kumar, 25, and MD Hasib, 27 , pled guilty and are awaiting sentencing.. As alleged in part in the DOJ Release:

Anirudha Kalkote admitted he participated in a fraud ring from 2019-2020 which operated out of various cities including Houston. The scheme targeted elderly victims throughout the United States and elsewhere.

The ring tricked and deceived victims using various ruses and instructed them to send money via wire through a money transmitter business such as Western Union or MoneyGram, by buying gift cards and providing to the fraudsters or by mailing cash to alias names via FedEx or UPS.

Part of the scheme involved fraudsters contacting victims by phone or via internet sites for computer technical support and directing victims to a particular phone number. Once victims contacted the fraudsters, they were told various stories such as they were communicating with an expert that needed remote access to their computer in order to provide technical support services. The fraudsters then gained access to victims’ personal data and bank and credit card information.

Victims typically paid a fee to conspirators for the fake technical support but were later told they were due a refund. Through paying for “technical support” or through the “refund” process, the ring gained access to the victim’s bank account(s) and credit cards and manipulated the accounts to make it appear the victim was paid too large a refund due to a typographical error. Victims were then instructed to reimburse the ring by various means.

Victims were sometimes re-victimized multiple times and threatened with bodily harm if they did not pay.

Remarks to Investment Company Institute 2023 Investment Management Conference by SEC Commissioner Mark T. Uyeda

Thank you, Susan Olson, for that kind introduction.  After graduating law school in 1995, I became an associate with the asset management practice of a law firm in Washington, D.C.  The following spring, I remember the partners getting excited about the Investment Company Institute’s upcoming conference in Palm Desert, California.  Since attendance was largely a “partners-only” affair, this conference carried a bit of mystique to the associates and as a native Southern Californian, this event was doubly intriguing to me.  Thus, I was quite honored to be invited to speak with you here today and share some thoughts.  My remarks reflect solely my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

There is a common theme running through the conference program.  For example, today, there is a panel on “Fund Governance in an Era of Regulatory Deluge.” Tomorrow, there is a panel on “Addressing Compliance Challenges in Today’s Unprecedented Economic and Regulatory Environment.”  These titles aptly convey the sense of frustration in navigating the current regulatory challenges and what potentially may come. 

In the last 18 months, the Commission has adopted final rules affecting asset managers on:

    • Shortening the trade settlement cycle;
    • Additional proxy vote reporting requirements on Form N-PX;
    • Tailored fund shareholder reports; and
    • Proxy voting advice.

The Commission has further issued proposals on:

    • Cybersecurity for investment advisers and investment companies;
    • Amendments to Regulation S-P;
    • Custody for investment advisers;
    • Order competition;
    • Regulation Best Execution;
    • Open-end fund liquidity;
    • Outsourcing by investment advisers;
    • Environmental, social, and governance disclosures for investment companies and investment advisers;
    • Investment company names;
    • Short positions for institutional investment managers;
    • Money market reform; and
    • Reporting of securities loans.

Furthermore, the Commission has many other proposals affecting public company issuers for which the asset management industry is intended to be one of the primary beneficiaries because they will allow you to provide better returns and value for your clients – at least in theory.

That’s a lot of moving parts in a short period of time.  It makes you wonder whether the Commission believes that there is something fundamentally wrong with the markets in the asset management industry.  Because unlike the 2008 financial crisis, there has been no Congressional directive mandating our actions.

In the Commission’s rush to rulemaking, there is no question that significant compliance challenges and costs will result.  These costs are likely to disproportionately hurt smaller fund complexes and their advisers.  Raising the expenses to operate a registered investment company can make them less attractive as investment options for 401(k) and similar plans, which can choose less regulated vehicles that may also be cheaper, such as collective investment trusts (“CITs”).  While some might argue that the Commission should try persuade the banking regulators to improve their CIT regulations, after the events of the last several weeks, I suspect that they have more pressing issues on their minds.

I will begin my remarks by discussing my concerns with the Commission’s current regulatory approach and some significant regulatory topics, such as open-end fund liquidity, ESG, and fund names, before closing with some practical, common sense suggestions to improve the regulatory framework.

The Perils of Regulation by Theory and Hypothesis

This brings me to my first concern: the perils of regulation by theory and hypothesis.  The SEC has been focused on rulemakings based on unrealistic expectations of how the world functions and how it ought to be.  A good example is the proposal mandating that open-end funds institute swing pricing and a hard 4:00 pm Eastern Time close, among other requirements.[1]  This proposal looks to Europe and academic papers envisioning systems completely different from the U.S. experience. 

Many of the Commission’s rulemaking proposals are interrelated and interconnected, yet these proposals are not evaluated pragmatically and holistically.  Recent examples include the four equity market structure proposals[2] and the multiple proposals involving cybersecurity, such as amendments to Regulations S-P and SCI, and cybersecurity risk management programs for broker-dealers, funds, registered investment advisers, exchanges, and other entities.[3]  Notably, the economic analysis only considers the costs and benefits of each proposal in isolation, asking commenters to weigh in on any overlap.  Why should the Commission be asking the public to figure it out?  The SEC should publicly state its views on the overall problem being addressed and should not try to avoid its obligations under the Administrative Procedure Act to have a reasoned basis by dividing its regulatory response into small, compartmentalized proposals.

Unfortunately, the asset management industry will likely struggle to cope with the resource challenges and complexity of these multiple and overlapping rulemakings.  To what end?  What requires fundamental overhaul of all of these different areas at the same time?  Smaller firms, including many owned by women and minorities, are likely to be the hardest hit and it would not be surprising if the burdens cause some of these firms to stop doing business or seek to become acquired.  If the industry becomes smaller and less diverse, this could lead to a concentration of strategies, a decrease in choice for investors, and the potential for large financial monoliths that vote and invest the same way.   

Let me now turn to some specific areas of fund regulation.

Open-end Fund Liquidity

Since the 2008 global financial crisis, academics and prudential regulators around the world have been deeply concerned about the liquidity in open-end funds – and not solely money market funds – as a source of systemic risk.  Their narrative is that because open-end funds allow investors to purchase or redeem shares on a daily basis but hold assets that are generally less liquid (the so-called “liquidity mismatch”), these funds are engaged in “liquidity transformation.”  Liquidity transformation may incentivize investors to rush to the exits in market downturns to obtain the “first mover advantage” to redeem before other investors.  If the redemptions are sufficiently large, funds will engage in fire sales of portfolio assets.  These fire sales could adversely affect other market participants, such as through financial interconnections.  If conditions deteriorate, then central banks may have to intervene to restore financial stability.   The thought was that this type of run risk and threat to financial stability can only occur in open-end funds, but not banking organizations that are subject to prudential regulation.  Perhaps that now needs to be revisited. 

The liquidity transformation narrative for funds, which has been embraced by academics and organizations such as the Financial Stability Board and European central banks, has prompted certain policy proposals in the United States.  One SEC proposal would require mutual funds to engage in swing pricing, institute a 4:00 pm Eastern Time hard close, and implement restrictive liquidity requirements.[4]  As responsible regulators and market participants, we should want significant weaknesses in the system to be addressed – if they exist.  At the same time, however, we should be wary of unintended consequences of a prudential approach to fund regulation: if registered investment companies are regulated to the extent that they are less desirable options for 401(k) and other retirement plans, collective investment trusts and other less regulated investment options may fill the gap.  Importantly, investors will have fewer protections and will not have the robust fund disclosures, limitations on conflicts of interest, and board oversight that they do today – to name just a few of the substantive protections that fund investors receive.

In this regard, before the current system is completely changed, it is worth a closer look at the narrative and whether it stands up to scrutiny.  Here are a few concerns.

First, the academic studies postulating this narrative have certain limitations, such as the lack of U.S. regulatory data.  However, many of these papers use data sets that were incomplete.  A significant amount of this information is now publicly available on Form N-PORT, which the Commission adopted in 2016.[5]  In fact, one of the stated benefits of Form N-PORT was that “[m]ore timely portfolio investment information will improve the ability of Commission staff to oversee the fund industry by monitoring industry trends, informing policy and rulemaking, identifying risks, and assisting Commission staff in examination and enforcement efforts.”[6]  The Commission should be using this regulatory data to test whether the hypothesis is correct. 

Of course, information about fund trading activity and the prices at which funds purchase and sell each instrument are not publicly available – nor should they be.  Nonetheless, there is the ability to provide a more complete picture using this data that should be compiled, analyzed, and reviewed by the SEC.  In this regard, I appreciate the substantial effort that commenters have made in responding to the proposal on open-end fund liquidity, such as re-examining and questioning the academic hypothesis by incorporating data into the analyses, expressing their concerns as board members, and recommending certain improvements.

Second, this hypothesis generally has been focused on European funds and then applied to U.S. mutual funds with only glancing references to the fundamental differences that exist.  This is particularly true given the very different distribution channels, regulatory requirements, and types of investors between the United States and Europe.  The experience, for example, of swing pricing for Luxembourg funds during March 2020 may be applicable to fund regulation in Luxembourg and perhaps other parts of Europe, but the investor base, regulatory framework, and retirement plan channels in the United States are meaningfully different such that they should not be understated or assumed away.[7] 

I also am puzzled by some claims, such as in the SEC’s open-end fund liquidity proposal, that the events of March 2020 support the view that mutual funds present systemic risk and must be addressed through tools like swing pricing and more restrictive liquidity requirements.  The evidence that U.S. mutual funds as a whole were unable to meet their liquidity needs or that they transmitted systemic risk through interconnections in the financial system in March 2020 is questionable.  According to the proposing release, the Commission and its staff already had the tools to take emergency action, such as interfund lending and short-term funding, but they were not used.[8]

While the Federal Reserve intervened to establish the Secondary Market Corporate Credit Facility, among other actions, the events of March 2020 were due to a global pandemic that had – and continues to have – broad impacts on the economy.  Central banks were created to address severe crises in the markets – and one stemming from a global pandemic would qualify.  Notably, despite the vaunted use of swing pricing in Europe, the European Central Bank also intervened to provide liquidity to the fixed income markets.[9]  One wonders whether the events of March 2020 simply gave banking regulators an excuse to fulfill a longstanding goal to regulate the fund industry in a prudential manner.


With respect to environmental, social, and governance (ESG) factors in investing, I have noted my concerns about ESG-related strategies, including their potential underperformance and premium costs for investors.[10]  Moreover, there are concerns as to whether the various regulatory attempts are intended to benefit the financial returns of investors or alternatively to force particular investment or operational outcomes.  Seemingly pushed aside is the notion that the existing disclosure regime works well in requiring funds to disclose information that is material to an investment decision from an economic standpoint.  Investors that wish to pay for ESG strategies should continue have that choice and the current disclosure regime provides them with sufficient information to do so.  

But continuing on with the theme of overlapping, complex proposals that are not grounded in practical reality – the Commission has proposed three rules that attempt to address ESG issues: one for corporate issuers,[11] one for investment advisers and funds,[12] and one for the use of “ESG” in a fund name.[13]  It is not surprising that some concerns have been raised about the effects that these rules would have, particularly when one considers the experience of the European Union’s approach to sustainable finance for non-financial and financial entities.  

The EU’s sustainability finance regime ought to be taken as a cautionary tale.  In particular, the European Union has taken a sprawling approach to sustainable finance.  These efforts include the expansive Corporate Sustainability Reporting Directive, which requires certain companies to disclose information about how environmental, social and human rights, and governance factors affect their operations and how their business model impacts those factors.[14]  In addition, the EU’s Sustainable Finance Disclosure Regulation (SFDR) mandates sustainability reporting by investment firms, including assessing sustainability-related risks in investments, and how ESG funds are marketed and sold.[15]  The EU Taxonomy Regulation – at more than 500 pages – attempts to create a common understanding for organizations to identify “environmentally sustainable” economic activities.[16] 

The EU’s ambitious plan has had significant implementation challenges, including conflicting standards and interdependencies, and not to mention a potentially large drag on the economy.  The Commission should be considering the experience in the European Union.  The Commission also ought to consider the potential limitations on its authority, including the major questions doctrine outlined in West Virginia v. EPA.[17]  On a practical level, the Commission should give significant thought to how it sequences any final rules.  Given that fund and adviser disclosure – as proposed – rely in part on corporate disclosure, the Commission should avoid making the same sequencing and other mistakes as the European Union.[18]  Arguably, the failure to consider how these three rules should be considered and interact could weaken any final Commission rules under the arbitrary and capricious standard required by the Administrative Procedure Act.

Fund Names  

In keeping with the theme of Commission proposals that have significant challenges, let’s turn to the “Fund Names” proposal.  In May 2022, the Commission proposed extensive changes to Rule 35d-1 under the Investment Company Act of 1940.[19]  The existing Fund Names Rule requires that funds with certain names adopt a policy to invest 80 percent of their assets in the investments suggested by that name, among other conditions.  The current rule applies to names that suggest (1) a particular type of investment, (2) a particular industry, or (3) a particular geographic area.  The proposal would significantly extend the Fund Names Rule to names that imply investments that have, or investments whose issuers have, “particular characteristics.”  While the Commission did not define the meaning of “particular characteristics,” it used the terms “value,” “growth,” and “ESG,” among others.  

These terms, among other aspects of the proposal, would rely on subjective judgments.  Are the investor benefits, if any, worth the significant implementation costs?  For example, the SEC has estimated astounding costs of up to $5 billion, or $500,000 per fund, which likely be passed down to investors.[20]  The supposed benefits to investors – which include the presumption that investors solely look at the fund’s name in choosing an investment – do not appear compelling, at least as presented in the current proposal.  The Fund Names Rule would also provide no benefits to the vast majority of investors who rely on an investment adviser or a broker to select their funds for them.  Accordingly, it is difficult to understand why the proposed changes are needed to the Fund Names Rule in light of its supposed benefits and extraordinary costs.  Further, if the amendments are adopted, there will likely be a significant burden on staff resources to process the amended prospectus disclosures that will result.  I very much appreciate the comments that have been submitted on this proposal.

Practical Areas for Improvement

Having noted my concerns with an asset management rulemaking agenda that seems dominated by more theoretical concerns, are there other areas – which I call “good government” projects – that the Commission should be working on?  In other words, what should the Commission be doing as a careful steward of its resources?

Commission efforts should be focused on projects that provide tangible improvements for investors by providing clear guidelines to firms in meeting their regulatory obligations.  In considering areas of improvement, the Commission should be sensitive to the current economic environment, where investors and their investment advisers are struggling to cope with the effects of the pandemic and high inflation.  Crippling firms with new regulatory burdens may cause them to exit and/or increase costs, thus reducing investment returns and choices for investors and making it more difficult for investors to achieve their financial goals.  It is particularly important that in times of high volatility and uncertain markets, that the efforts of asset managers are focused on their core service – providing high quality investment advice to their clients.

In particular, the Commission should review the current rulebook to see what is not working, including issuing concept releases on important topics, producing thoughtful analysis of the data currently gathered by the Commission, holding public roundtables, and publishing views for public comment, rather than proceeding immediately to rulemaking. 

The Commission could seek to improve fund disclosure for investors, including through the use of investor testing, so that disclosure policy can be informed by data indicating how investors will use and benefit from changes.  For example, there are several outdated and dense fund forms that are likely information overload for investors and costly for funds to complete.  These include filings such as Form N-14, which is used by funds in certain reorganizations and often includes hundreds of pages of dense financial information, and Form N-2 for closed-end funds.  It should not take an act of Congress before the Commission makes efforts to tailor its registration forms for financial products of interest to investors.[21]

In this regard, I supported the Commission’s adoption of rule and form amendments to create streamlined shareholder reports for ETFs and mutual funds.[22]  This rulemaking was backed by an effort over the past 10 years to engage in investor testing on shareholder reports.  These types of rulemakings can yield big benefits so long as they are carefully calibrated, including staggered compliance dates for smaller entities.

In closing, I strongly believe that the regulatory approach to mutual funds, closed-end funds, and ETFs is not broken.  If the Commission continues on its current regulatory path, however, I am concerned that investors, and the markets as a whole, may be worse off.  The Commission’s thinking must be grounded in practical, real world costs and benefits that are informed by data and experience – not hypotheses.  The Commission should expose its views to public review through published guidance, rather than in remaining in a state of seclusion and isolation.  Finally, many of you have taken a significant amount of time and effort to comment on the multiple rulemakings, including providing data and suggestions for improvement.  Thank you – I very much appreciate your efforts and insights.

[1] Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, Securities Act Release No. 11130 (Nov. 2, 2022) [87 FR 77172 (Dec. 16, 2022)] (“OEF Liquidity”), available at

[2] Disclosure of Order Execution Information, Exchange Act Release No. 96493 (Dec. 14, 2022) [88 FR 3786 (Jan. 20, 2023)], available at; Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, Exchange Act Release No. 96494 (Dec. 14, 2022) [87 FR 80266 (Dec. 29, 2022)], available at; Order Competition Rule, Exchange Act Release No. 96495 (Dec. 14, 2022) [88 FR 128 (Jan. 3, 2023)], available at; and Regulation Best Execution, Exchange Act Release No. 96496 (Dec. 14, 2022) [88 FR 5440 (Jan. 27, 2023)], available at

[3] Cybersecurity Risk Management Rule for Broker-Dealers, Clearing Agencies, Major Security-Based Swap Participants, the Municipal Securities Rulemaking Board, National Securities Associations, National Securities Exchanges, Security-Based Swap Data Repositories, Security-Based Swap Dealers, and Transfer Agents, Exchange Act Release No. 97143 (Mar. 15, 2023), available at;    Regulation S‑P: Privacy of Consumer Financial Information and Safeguarding Customer, Exchange Act Release No. 97141 (Mar. 15, 2023), available at; Regulation Systems Compliance and Integrity, Exchange Act Release No. 97143 (Mar. 15, 2023), available at; and Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Securities Act Release No. 11028 (Feb. 9, 2022) [87 FR 13524 (Mar. 9, 2022)], available at; and Reopening of the Comment Period for Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Securities Act Release No. 11167 (Mar. 15, 2023), available at

[4] OEF Liquidity, supra note 1.

[5] Investment Company Modernization, Securities Act Release No. 10231 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)].

[6] Id. at 350.

[7] See, e.g., BlackRock, Swing Pricing - Raising the Bar (Sept. 2021), available at (suggesting that “alternate” methods of swing pricing should be considered, notwithstanding “insurmountable barriers” in the United States).

[8] Open-End Liquidity at n. 57.

[9] See European Central Bank, Pandemic Emergency Purchase Programme, available at

[10] See, e.g., Commissioner Mark T. Uyeda, Remarks at the ’40 Acts Group (Jan. 27, 2023), available at; Remarks at the 2022 Cato Summit on Financial Regulation (Nov. 17, 2022),  available at; and Remarks at the Georgetown Hotel and Lodging Summit (Oct. 25, 2022), available at

[11] The Enhancement and Standardization of Climate-Related Disclosures for Investors, Securities Act Release No. 11042 (Mar. 21, 2022) [87 FR 21334 (Apr. 11, 2022)], available at

[12] Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Investment Advisers Act Release No. 6034 (May 25, 2022) [87 FR 36654 (June 17, 2022)], available at

[13] Investment Company Names, Investment Company Act Release No. 34593 (May 25, 2022) [87 FR 36594 (June 17, 2022)], available at

[14] Directive (EU) 2022/2464 of the European Parliament and the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards corporate sustainability reporting, available at

[15] Regulation (EU) 2019/2088, available at

[16] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, available at 

[17] West Virginia v. Environmental Protection Agency, 142 S.Ct. 2587 (2022).

[18] BNY Mellon, ESG: Regulatory Change and Its Implications, available at (noting, among other things, challenges for financial market participants to disclose information with access to robust and reliable corporate sustainability data).

[19] Investment Company Names, Securities Act Release No. 11067 (May 25, 2022) [FR 36594 (June 17, 2022)] (“Fund Names”), available at 

[20] See Fund Names at 145.  Commenters have noted that these costs are understated.  See, e.g., Investment Company Institute letter (Aug. 16, 2022), available at, Stradley Ronon Stevens & Young LLP (Aug. 16, 2022), available at

[21] Consolidated Appropriations Act of 2022, Pub. L. 117-328, at Division AA, Title I.

[22] Commissioner Mark T. Uyeda, Statement on Final Rule Regarding Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, available at (noting, however, that the Commission should address concerns regarding the disclosure requirements related to acquired fund fees and expenses).

FINRA Suspends Rep For Inaccurate Customer Contact Notes
In the Matter of Derek John Rehill , Respondent (FINRA AWC 2020066887202)
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, Derek John Rehill submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Derek John Rehill  was first registered in 1998 with Joseph Stone Capital L.L.C.. In accordance with the terms of the AWC, FINRA imposed upon Derek John Rehill  a two-month suspension from associating with any FINRA member in all capacities; because he submitted a statement of financial condition and demonstrated an
inability to pay, no fine was imposed. As alleged in part in the AWC:

During the relevant period, Rehill was responsible for periodically calling customers whose accounts Joseph Stone had identified as “actively traded” to confirm, among other things, the investment objective and risk tolerance reflected on the customer’s new account form. For each call, Rehill was required to complete a customer contact form which included fields for Rehill to record whether the customer had confirmed his or her investment objective and risk tolerance.

On four occasions during the relevant period, Rehill completed customer contact forms that inaccurately stated that customers had confirmed their investment objectives and risk tolerances. On three of the four occasions, Rehill completed customer contact forms reflecting that customers had confirmed they had a speculative investment objective when, in fact, the customers had not. For example, one such customer told Rehill that he wanted to “do more of a long-term thing than keep buying and selling so much.” On the fourth occasion, Rehill completed a customer contact form reflecting that a customer had confirmed he had a speculative risk tolerance when Rehill had not asked the customer any questions about his risk tolerance.

Therefore, Rehill violated FINRA Rule 2010.