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News

Press Release

Investors, Innovation, and Performance Top SEC’s Draft Strategic Plan

https://www.sec.gov/news/press-release/2018-109

FOR IMMEDIATE RELEASE
2018-109

Washington D.C., June 19, 2018 —

The Securities and Exchange Commission today published a draft strategic plan that focuses on investors, innovation, and performance as the top strategic goals in coming years.

The SEC is seeking public comment on the proposed draft that will guide the SEC’s priorities through FY 2022.  The plan highlights the SEC’s commitment to serving the long-term interests of Main Street investors; becoming more innovative, responsive, and resilient to market developments and trends; and leveraging staff expertise, data and analytics to bolster performance.

“This plan focuses on the most important goals and initiatives that will best position the SEC to fulfill our mission of protecting investors, ensuring fair, orderly, and efficient markets and facilitating capital formation,” said SEC Chairman Jay Clayton. “We are presenting the plan in a more concise and readable format this year, which we hope will further encourage investors – particularly our Main Street investors – and market participants to share their views on how we can meet and exceed their expectations of our agency.”

The draft plan was prepared in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four year period.

To comment on the 2018-2022 Draft Strategic Plan, send an email to PerformancePlanning@sec.gov.

 

Press Release

https://www.sec.gov/news/press-release/2018-107

Daniel J. Wadley Named as Regional Director of Salt Lake Office

FOR IMMEDIATE RELEASE
2018-107

Washington D.C., June 18, 2018

The Securities and Exchange Commission today named Daniel J. Wadley as Regional Director of its Salt Lake office.  Mr. Wadley succeeds Richard R. Best, whom the agency named Regional Director of its Atlanta office in January.

Mr. Wadley, who served as acting Regional Director after Mr. Best’s move to Atlanta, began at the SEC in 2010 as a trial counsel in the Salt Lake office.  He also has served as counsel to the Co-Directors of the Division of Enforcement.

“Dan possesses excellent judgment and deep institutional knowledge of the Salt Lake office and the Commission that is so critical to this position,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “I am confident of the office’s continued success under his leadership.”

“Dan is well known in the Salt Lake office and region as a tough-but-fair litigator who has a keen mind and sound judgment,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “We are very fortunate to have him lead the Salt Lake office.”

Mr. Wadley said, “I am honored by this appointment and look forward to continuing the Salt Lake office’s strong tradition of enforcement in complex and cutting-edge cases as well as its effective collaboration with the Commission’s law enforcement and regulatory partners.”

As a trial counsel in the agency’s Salt Lake office, Mr. Wadley handled an array of litigation including:

Before joining the SEC, Mr. Wadley was in private practice in Salt Lake City and in the Washington, D.C. area.  He received his law degree with honors from Georgetown University Law Center in 2000 and his undergraduate degree with honors from Brigham Young University in 1997.

###

 

RELEASE Number

7741-18

https://www.cftc.gov/PressRoom/PressReleases/7741-18

June 15, 2018

Giancarlo, Tuckman Discuss Swaps Reg Version 2.0 on CFTC Talks

Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo and CFTC Chief Economist Bruce Tuckman discuss Swaps Reg Version 2.0, the white paper the two co-authored, on today’s edition of “CFTC Talks,” the agency’s podcast hosted by Andy Busch, CFTC’s Chief Market Intelligence Officer.

The white paper formally titled, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps was released in April this year.

On the show, Giancarlo and Tuckman provide insight on the five key areas the paper addresses: Swaps Central Counterparties (CCPs); Swaps Reporting Rules; Swaps Execution; Swaps Dealer Capital; and End User Exception

When asked how this paper compares to the one Chairman Giancarlo wrote in 2015 (Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank.), Giancarlo explained this paper is not intended to further develop that paper, but it does try to achieve the same objectives, which is to “demystify a subject matter.” His earlier paper focused on swaps execution only, the current paper looks at a range of aspects of the global swaps market and explains why refreshing how swaps are being regulated is important and pivotal at this time. “This paper also looks forward as to what swaps reform will look like not only in the months to come, but in years to come and well into the future. The process of swaps reform is not a one-and-done approach,” he said.

Tuckman says that, in working with the Chairman to write the paper, he sought out the enormous amount of wisdom and insight across Commission staff. “I collected and organized those pieces of wisdom and worked with the Chairman to mold this significant knowledge and insight into a cohesive, easy to read, easy to understand explanation of the current state of affairs of swaps reform and the vision going forward.”

Giancarlo and Tuckman comprehensively discuss the five key areas the paper addresses to ultimately explain why the concepts presented are important.

 

News Release

http://www.finra.org/newsroom/2018/registration-systems-transformation

For Release: 

Thursday, June 14, 2018

Contact(s): 

Michael Rote (202) 728-6912
Michelle Ong (202) 728-8464

FINRA Announces Initiative to Transform CRD, Other Registration Systems

New Technology Will Lead to Enhanced Efficiencies and Reduced Compliance Costs for Firms

WASHINGTON—FINRA today announced details of a multi-phased effort to overhaul its registration and disclosure programs, including the Central Registration Depository (CRD)—the central licensing and registration system that FINRA operates for the U.S. securities industry and its regulators and that provides the backbone of BrokerCheck. The first phase of the transformation—a new WebCRD interface that highlights important information or activities requiring immediate attention of firms, branches and individuals—goes into effect June 30.

The transformation aims to increase the utility and efficiency of the registration and disclosure process for firms, investors and regulators, as well as to reduce compliance costs for firms. FINRA’s Board of Governors has approved moving forward with the project, which FINRA expects to complete in 2021.

“This important initiative will strengthen an essential function of the securities industry,” said FINRA President and CEO Robert W. Cook. “The transformation will allow FINRA to develop systems that help firms effectively maintain compliance programs and reduce compliance costs, while continuing to operate and enhance BrokerCheck as an essential tool for investors.”

“The CRD is an important tool for the financial services industry, regulators, and investors. We applaud FINRA for undertaking this initiative to upgrade the system’s operations,” said Joseph Borg, President of the North American Securities Administrators Association (NASAA) and Director of the Alabama Securities Commission.

FINRA developed and operates several systems that support registration and disclosure requirements for the securities industry, and works closely with the SEC and NASAA on policy and program requirements for the systems. Securities firms use these systems to register and maintain the records of associated persons who operate within the securities industry, and investors use them—through BrokerCheck—to research the professional backgrounds of brokers and brokerage firms. These registration systems are essential to the operation of the securities industry, and experience consistently high usage volume.

The redeveloped registration systems will facilitate more efficient interaction for users and leverage information from other FINRA regulatory programs, resulting in a more accurate and complete set of information about registered individuals, branches and firms—enhancing firm compliance programs and reducing compliance costs. The transformation also allows FINRA to leverage the information security benefits of cloud-based technology, and architect systems that address dangers associated with current and anticipated cyber threats and risks.

The changes are being made in response to feedback FINRA has received through various channels during its ongoing organizational improvement initiative—FINRA360—including via recommendations from firms in response to FINRA’s 2017 Special Notice on Engagement. FINRA is working closely with member firms throughout the multi-year project, and will continue to solicit their input and feedback to ensure the enhanced systems are meeting the industry’s needs.

More information about the registration system transformation is available at www.finra.org/newcrd.

FACT SHEET

Background of the Registration Systems

The systems that support registration and disclosure requirements in the securities industry include the following:

  • Central Registration Depository (CRD) – maintains the registration records of close to 3,800 SEC-registered broker-dealers (more than 3,700 are member firms) and over 630,000 FINRA-registered professionals
  • Web CRD – the online registration system that allows the securities industry, federal and state regulators, and securities exchanges to interact with CRD
  • Investment Adviser Registration Depository (IARD) – the registration system for investment advisors and their federal and state regulators
  • Investment Advisor Public Disclosure (IAPD) – the public disclosure system for investment advisers
  • Private Fund Reporting Depository (PFRD) – the SEC private fund reporting system
  • BrokerCheck – a free online tool where investors research the professional backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers

FINRA operates CRD and works with the SEC and NASAA on policy and program requirements for the program. FINRA operates and maintains the WebCRD system in accordance with these requirements. FINRA operates and maintains the BrokerCheck system to provide CRD-based information to investors and other users. In addition, FINRA operates IARD, IAPD and PFRD under contract with the SEC. Throughout the envisioned transformation, FINRA will collaborate closely with the SEC, NASAA and state regulators to ensure alignment with their regulatory programs, operational requirements and contractual commitments.

Reasons for System Overhaul

These registration systems are essential to the operation of the securities industry, and experience consistently high usage volume (e.g., in October 2017, Web CRD processed its 50 millionth registration since launching in 1999, and throughout 2017 processed over 2.1 million filings, more than 60,000 disclosure filings, and over 285,000 fingerprint cards). FINRA has regularly enhanced these applications to address regulatory requirements and the needs of the industry over time, but the technology upon which the systems were built now creates development and maintenance challenges. These factors limit opportunities to expand the registration systems in response to regulatory changes and industry needs.

Benefits of the Registration Systems Transformation Project

The changes will facilitate more efficient interaction for users and leverage information from other FINRA regulatory programs, resulting in a more accurate and complete set of information about registered individuals, branches and firms—enhancing firm compliance programs and reducing compliance costs. The transformation also allows FINRA to leverage the information security benefits of cloud-based technology, and architect systems that address dangers associated with current and anticipated cyber threats and risks.

Scope of Multi-Phase Transformation Project

Near-Term

FINRA is currently running a pilot program of the first step of the multi-phased transformation—replacing functionality in Web CRD with a new user interface focused on important information and activities that firms, branches and individuals should address immediately. The new functionality becomes available for all firms on June 30. Other near-term enhancements include overhauling functionality for firm staff to review information about an individual, branch or firm, and implementing an automated feature for notifying registered representatives when a new Uniform Termination Notice for Securities Industry Registration (Form U5) is available for review.

Longer-Term

Longer-term, FINRA plans to revamp the process for completing required submissions, including by allowing efficient, paperless information updates without requiring full form submissions, expanding the ability for firms to delegate work and collaborate with registered staff, introducing e-signature functionality, and developing capabilities for bulk transactions (e.g., filings that impact many individuals and firms). In addition, FINRA plans to include as part of the system transformation customized reporting options for users.

ABOUT FINRA

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

 

NR 2018-61

https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-occ-2018-61.html

FOR IMMEDIATE RELEASE
June 14, 2018

Contact: Bryan Hubbard
(202) 649-6870

Comptroller of the Currency Discusses Priorities for the Federal Banking System

WASHINGTON—Comptroller of the Currency Joseph M. Otting today discussed his priorities for the agency and the federal banking system during testimony before the Senate Committee on Banking, Housing, and Urban Affairs.

  • The Comptroller’s testimony highlighted agency effortsto modernize the regulatory approach to the Community Reinvestment Act to promote investment where it is needed most;
  • to encourage banks to meet customers’ needs for short-term, small dollar credit;
  • to promote more efficient compliance with the Bank Secrecy Act and anti-money laundering regulations that protect the nation’s banking system from being used for illegal purposes;
  • to simplify regulatory capital and the Volcker Rule, particularly for small and midsize banks; and
  • to ensure the agency operates as effectively and efficiently as possible.

The testimony also provides an overview of the condition of the federal banking system and the key risks it faces.

Related Links

Oral Statement (PDF)

Written Testimony (PDF)

# # #

 

RELEASE Number

https://www.cftc.gov/PressRoom/PressReleases/7740-18

7740-18

June 13, 2018

CFTC Charges Omega Knight 2, LLC, Aviv Michael Hen, and Erez Hen with $5.5 Million Precious Metals Fraud

CFTC Also Charges Defendants with Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Southern District of Florida against Defendants Omega Knight 2, LLC (Omega Knight), its owner and president, Aviv Michael Hen (Aviv Hen) of Great Neck, New York, and Erez Hen(Eric Hen) of Florida.

The CFTC’s Complaint charges Defendants with fraud and engaging in illegal, off-exchange transactions in precious metals.  The Complaint also charges Omega Knight with failing to register with the CFTC as a Futures Commission Merchant (FCM), as required, and alleges that Aviv Hen, as controlling person for Omega Knight, is liable for Omega Knight’s violations of the Commodity Exchange Act (CEA).

Specifically, from March 2013 and continuing through at least June 2017, Omega Knight allegedly engaged in a scheme to defraud customers located throughout the United States in connection with precious metals transactions.  The Complaint alleges that Defendants made numerous false statements to induce customers to enter into leveraged, financed, and fully-paid precious metals transactions, and they received at least $5.5 million from at least 90 customers in connection with these transactions.

According to the Complaint, Defendants failed to use all of the customer funds they collected to purchase metal for their customers’ precious metals transactions.  Instead, Defendants allegedly misappropriated customer funds to pay personal expenses, to distribute purported “profits” and disbursements to other customers, and to fund Omega Knight’s operations.  Through the issuance of false trade confirmations and account statements and other communications to customers, Defendants allegedly concealed their misappropriation and the fraudulent scheme.

Moreover, the Complaint alleges that Defendants’ leveraged or financed precious metals transactions constituted illegal, off-exchange retail commodity transactions.  Notably, Defendants’ leveraged or financed precious metals transactions never resulted in actual delivery of the full amount of metal purchased to customers, according to the Complaint.  The Complaint also alleges that Omega Knight accepted customer orders and funds in connection with those transactions and therefore acted as an FCM, but failed to register with the CFTC as an FCM, as required.

In its continuing litigation against Omega Knight, Aviv Hen, and Erez Hen, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the CEA, as charged.

CFTC Division of Enforcement staff members responsible for this action are Patricia Gomersall, Jason Wright, Kassra Goudarzi, A. Daniel Ullman II, and Paul G. Hayeck.

*   *   *   *   *   *

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

 

RELEASE Number

https://www.cftc.gov/PressRoom/PressReleases/7738-18

7738-18

June 12, 2018

CFTC Charges Florida-Based Mark Olsen Mining Company and Betty Lea Grimes with Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action charging Florida-based Defendants Mark Olsen Mining Company (MOMC) and Betty Lea Grimes with engaging in illegal, off-exchange transactions in precious metals with retail customers on both a fully paid as well as a leveraged, margined, or financed basis.  Grimes is MOMC’s president, controlling person, and managing member.  Grimes has used the following names, and/or combinations of these names, in various legal documents: Betty Grimes, Lea Grimes, Lea Lauren, Betty Nehme, and Lea Nehme.  Neither MOMC nor Grimes has ever been registered with the CFTC.

The CFTC Complaint, filed in in the U.S. District Court for the Southern District of Florida, further alleges that Grimes, as controlling person for MOMC, is liable for MOMC’s violations of the Commodity Exchange Act (CEA).

According to the Complaint, from at least April 2013 and continuing through at least February 2014, MOMC, by and through its employees, including Grimes, solicited retail customers by telephone to engage in fully paid as well as leveraged, margined, or financed precious metals transactions.  During that period, MOMC collected more than $870,000 from three customers for the purported purpose of investing in precious metals.  Instead, as alleged, MOMC customers never received precious metals, and the Defendants misappropriated all MOMC customer funds.  The Defendants used the misappropriated funds to pay for Grimes’ personal expenses, with the remaining funds wire transferred to a person purporting to be Mark Olsen in South Africa, according to the Complaint.

Defendants Made Material False and Misleading Representations and Omissions

The Defendants in their solicitations to actual and potential customers allegedly used a website and marketing materials that contained false representations to defraud customers who wished to purchase precious metals from MOMC.  Also, the Defendants allegedly made additional misrepresentations in direct oral and written communications with customers.

In its continuing litigation against the Defendants, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction from future violations of the CEA, as charged.

This is not Grimes’ first violation of the CEA.  In 2007, using the fictitious name Lea Lauren, Grimes signed a Consent Order with the CFTC.  CFTC v. Madison Forex LLC, No. 05-61672 (S.D. Fla. July 16, 2007).  The Consent Order found that Defendants fraudulently solicited more than $4.5 million from customers, in connection with the trading of forex options.  As a salesperson for one of the Defendants, Grimes was similarly charged with making false statements and omissions.  (See CFTC Press Releases 5134-05 and 5379-07.)

The CFTC thanks and acknowledges the assistance of the Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board (FSB), of South Africa for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this action are Maura Viehmeyer, Aimée Latimer-Zayets, and Rick Glaser.

*   *   *   *   *   *

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

 

Press Release

SEC Modernizes the Delivery of Fund Reports and Seeks Public Feedback on Improving Fund Disclosure

https://www.sec.gov/news/press-release/2018-103

FOR IMMEDIATE RELEASE
2018-103

Washington D.C., June 5, 2018 —

Yesterday, the Commission voted to improve the experience of investors who invest in mutual funds, ETFs and other investment funds.  In three related releases, the Commission provided a new, optional “notice and access” method for delivering fund shareholder reports, invited investors and others to share their views on improving fund disclosure and sought feedback on the fees that intermediaries charge for delivering fund reports.  These actions are part of a long-term project, led by the Division of Investment Management, to explore modernization of the design, delivery and content of fund disclosures for the benefit of investors.

“These actions are an important part of the Commission’s effort to better serve Main Street investors in our ever changing marketplace,” said SEC Chairman Jay Clayton.  “The new rule significantly modernizes delivery options for fund information while preserving the right of fund investors to receive information in paper form as they do today.  I look forward to public feedback on next steps, and encourage everyone with an interest in fund disclosure—especially Main Street investors—to give us their ideas on how to improve the design, delivery and content of fund disclosures.”

In the first of three releases, the Commission adopted new rule 30e-3.  The rule creates an optional “notice and access” method for delivering shareholder reports.  Under the rule, a fund may deliver its shareholder reports by making them publicly accessible on a website, free of charge, and sending investors a paper notice of each report’s availability by mail.  Investors who prefer to receive the full reports in paper may—at any time—choose that option free of charge.  Funds may rely on the new rule beginning no earlier than January 1, 2021.

The Commission is also seeking public comment on additional ways to modernize fund information.  Investors, academics, literacy and design experts, market observers, and fund advisers and boards of directors are invited to visit www.sec.gov/tell-us to provide feedback on how to improve the experience of fund investors.  This input will help inform the Commission on how to modernize the design, delivery and content of fund information, including how to make better use of 21st century technology to provide more interactive and personalized disclosure.

Finally, the Commission is seeking comment on the framework for certain processing fees that broker-dealers and other intermediaries charge funds for delivering fund shareholder reports and other materials to investors.

The Commission requests that commenters provide feedback on the requests by October 31, 2018.

###

FACT SHEET

Investment Company Disclosure and Delivery Rulemaking Package
June 5, 2018

The Commission adopted a new rule and related rule and form amendments that provide certain registered investment companies (“funds”) with an optional method to transmit shareholder reports to investors.  The Commission also issued two requests for comment: the first seeking comment from individual investors and others on enhancing fund disclosures to improve the investor experience; and the second seeking comment on the framework for processing fees charged to funds by intermediaries for the forwarding of fund shareholder reports and other materials to investors. These actions are part of the Commission’s larger initiative to improve and modernize the design, delivery, and content of information provided to fund investors.

Highlights

Adoption of an Optional Delivery Method for Fund Shareholder Reports

New rule 30e‑3 under the Investment Company Act provides an optional “notice and access” method to allow funds to satisfy their obligations to transmit shareholder reports.  Subject to conditions in the rule, a fund may make its reports and other required materials publicly accessible at a specified website address, free of charge, and send investors a paper notice of each report’s availability by mail.  Funds will be permitted to satisfy their delivery obligations for shareholder reports by mailing reports in paper, delivering reports electronically to investors who have chosen this method under the Commission’s electronic delivery guidance, providing notice and website accessibility under rule 30e-3, or a combination of the above.

Investors who prefer paper could—at any time—elect to receive all future reports in paper that are sent by the fund complex or forwarded by the financial intermediary, or request to receive particular reports in paper on an ad-hocbasis.  Each notice provided to investors under the rule is required to explain how investors may access the report and request paper copies.  The final rule provides for an extended transition period that is intended to better inform current investors of the coming change and better enable them to easily continue to receive paper reports if they wish.

The conditions of new rule 30e‑3 include:

  • Report accessibility.  The shareholder report and the fund’s most recent prior report must be publicly accessible, free of charge, at a specified website.
  • Availability of quarterly holdings.  Quarterly holdings for the last fiscal year must also be publicly accessible at the website.  These holdings would include those in the shareholder reports, which would cover the second and fourth fiscal quarters, and would also include holdings for the first and third fiscal quarters.
  • Format.  Funds must satisfy conditions designed to ensure accessibility of reports for shareholders, including format and location.
  • Notice.  Investors will receive a notice of the availability of each report that includes a website address where the shareholder report and other required information is posted and instructions for requesting a free paper copy or electing paper transmission in the future.  The notice may include certain additional information, including, (1) instructions by which an investor can elect to receive shareholder reports or other documents by electronic delivery, and (2) additional content from the shareholder report.
  • Print upon request.  Funds must send a free paper copy of any of these materials upon request.
  • Investor elections to receive reports in paper.  At any time, an investor may elect to receive all future reports in paper by calling a toll-free telephone number or otherwise notifying the fund or intermediary.  Elections to receive reports in paper with respect to one fund will apply to other funds held currently or in the future in the same account with the fund complex or financial intermediary.
  • Extended transition period.  During the extended transition period, the earliest that notices may be transmitted to investors in lieu of paper reports is January 1, 2021.  In general, funds will be required to provide two years of notice to shareholders before relying on the rule, if relying on the rule before January 1, 2022.

Request for comment on enhancing fund disclosure to improve the investor experience

The Commission seeks public input, particularly from individual investors, on enhancing fund disclosures.  This request for comment is the first major step in a long-term initiative, led by the Division of Investment Management, to improve the investor experience by updating the design, delivery, and content of fund disclosure for the benefit of individual investors.  The request for comment investigates whether fund information is presented in a way that works best for individual investors. The release requests feedback directly from individual investors, academics, literacy and design experts, market observers, and fund advisers and boards of directors on the design, delivery, and content of fund disclosure, including shareholder reports as well as prospectuses, advertising, and other types of disclosure.  It also solicits feedback on investor preferences for means of delivery and how to make better use of 21stcentury technology, including how to make disclosure more interactive and personalized.  In order to encourage feedback from individual commenters, the release includes a short Feedback Flier, which includes key questions from the request for comment and can be submitted to www.sec.gov/tell-us.

Request for comment on processing fees intermediaries charge for forwarding fund materials

With the adoption of rule 30e‑3, the Commission believes that it is appropriate to consider more broadly the overall framework for the processing fees that broker-dealers and other intermediaries charge funds.  These fees are charged in connection with forwarding shareholder reports and other materials to beneficial shareholders under current rules of the New York Stock Exchange and other self-regulatory organizations.  The Commission seeks public comment and additional data on the current processing fee framework for fees charged by intermediaries for the distribution of disclosure materials other than proxy materials (e.g., shareholder reports and prospectuses) to fund investors to better understand the potential effects on funds and their investors.  The Commission is requesting comment on topics such as, but not limited to, the assessment of processing fees, transparency of these fees, remittances received by financial intermediaries for delivery of fund documents, whether the structure and level of processing fees should be set by another entity, and the appropriateness of these fees in cases where intermediaries are separately paid shareholder servicing fees from fund assets.

What’s Next?

New rule 30e-3 and the related amendments to rules and forms will be published on the Commission’s website and in the Federal Register.  Funds will be permitted to rely on the new rule as early as January 1, 2021.

The Commission will seek public comment on the two requests for comment until October 31, 2018.  These extended comment periods will permit retail investors and other interested parties the opportunity to review the releases, and potentially to gather relevant data for submission in the comment file.

###

 

SPEECHES & TESTIMONY

Opening Statement of Chairman J. Christopher Giancarlo before the Open Commission Meeting

https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement060418?utm_source=govdelivery

June 4, 2018

Good morning.  This meeting will come to order.  This is a public meeting of the Commodity Futures Trading Commission (CFTC).

I am pleased to be joined today by my colleagues, Commissioners Brian Quintenz and Rostin Benham in our first public meeting together as a Commission.

These hearings require great preparation.  I would like to thank the CFTC staff for their hard work and input.

We are here today to consider one final rule amending the swap data access provisions and two proposed rules amending the Volcker Rule and Swaps Dealer de minimis calculations.

Indemnification Rule

I turn first to the final rule on amendments to the swap data access provisions of Part 49, also formerly known as the swap data repository (SDR) indemnification rule.

Eight years ago, Congress included in the Dodd-Frank Act a requirement that foreign and domestic regulators indemnify SDRs and the Commission for any expenses arising from litigation relating to the information provided by SDRs.  Foreign and domestic regulators were unable or unwilling to provide this indemnification hindering the ability to share swaps data.  The indemnification requirement also hindered the ability of foreign and domestic regulators to access SDR data to assess risks their regulated entities are assuming, and the impact of such risks on the broader markets.

I am pleased that Congress has since amended the Dodd-Frank Act to take out the indemnification requirement.  We therefore can change our regulations accordingly, which we propose to do today.

In addition to the removal of the indemnification requirement, the final rule adds a category of “other regulators” that the Commission may deem to be appropriate to receive access to SDR swap data.

The final rule sets out the process by which appropriateness is determined for those entities that are not already specifically enumerated.  This process is a change to current Commission regulations, as it would apply to any such entity, including domestic regulators not enumerated in Commission regulations and foreign regulators.

The statute also now requires a SDR to receive a written agreement from each requesting entity stating that the entity shall abide by the confidentiality requirements described in the CEA prior to sharing information with the requesting entity.  Commission regulations currently require the SDR and the requesting regulator to execute a confidentiality agreement, but do not provide a form or details of such an agreement.

The final rule modifies the current Commission regulations by providing a form of confidentiality arrangement, as Appendix B to part 49, and by requiring the confidentiality arrangement to be between the requesting regulator and the Commission.  The Commission expects that this will benefit SDRs in that most, if not all, confidentiality arrangements will be exactly the same, and the Commission will be in the place of entering into the confidentiality agreements with regulators.

We received comments from the affected CFTC-registered SDRs on the proposed rule that I believe that we have sufficiently addressed.  The final regulations provide long-awaited clarity to the official sector regarding the CFTC’s requirements to determine access to, and safeguard the confidentiality of, transactional information reported to SDRs.

In my experience as a Commissioner and Chairman of the CFTC, I have found, as have other foreign and domestic regulators, that conducting oversight of global derivatives markets can be difficult as a result of the current fragmented financial regulatory structure.  In this regard, I expect that the final rule will enable authorities to enhance their oversight of derivatives markets across product and asset classes by marrying up the trading and position data they receive from regulated entities with the data sets obtained directly from SDRs.  In so doing, I believe we have made significant progress towards cross-border data sharing and enhancing transparency in the global swaps market.

Because today’s swaps markets are global in scope, utilizing the data and information available in only one jurisdiction does not provide a complete picture of cross border trading activity and systemic risk.  To that end, I expect that CFTC staff will seek to facilitate access to SDR data for authorities with which we have a history of regulatory assistance and that similarly seek to facilitate CFTC access to data maintained by trade repositories in their jurisdiction.  Such data sharing represents an opportunity for greater cooperation among market and prudential regulators, as well as among foreign and domestic regulators, providing more effective financial market oversight, expanding data driven policymaking, and improving early warning systems to reduce the probability or severity of a financial crisis.

These regulations will have a direct positive impact on the operational readiness of the official sector, providing authorities with critical information to make sound near-term and long-term policy and oversight decisions.

I am particularly pleased that this rule represents a final step in eliminating a major legal impediment to sharing swaps market data with overseas regulators.  The Dodd-Frank Act’s original insistence on an indemnification requirement may have been well-intentioned to protect the safety of data held in SDRs, but Congress wisely determined that any such benefit is outweighed by the greater public interest of allowing international regulators to share and access information to carry out the regulatory and supervisory functions necessary to protect the global financial markets.

It is essential that policymakers in other jurisdictions make determinations similar to these before us today concerning current legal barriers to information sharing.  Even a law, like the new EU General Data Protection Regulation (GDPR), which has laudable objectives, must not be applied in ways that hinder the sharing and access of information between European and U.S. regulators for regulatory and supervisory purposes.  Such a result could have dangerous implications for our global markets.  I hope today’s action by the CFTC will encourage international regulators and policymakers to take affirmative steps to address other existing legal barriers to information sharing and access.

The Volcker Rule

I turn next to the proposal for amendments to the Volcker rule.

Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding Company Act of 1956 (BHC Act) that is commonly known as the Volcker Rule.  The new section generally prohibits “banking entities” from engaging in “proprietary trading” for the purpose of selling financial instruments to profit from short-term price movements.  Section 13 of the BHC Act also generally prohibits banking entities from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or a private equity fund (“covered funds”).

As we know, the Volcker rule is named for former Federal Reserve Chairman, Paul Volcker.  The basic premise of the Volcker Rule is to restrict use of insured bank depositors’ money for bank proprietary trading but permit it for market making, hedging and other traditional financial service activities. It is a sound premise, but one that relies on correctly identifying and separating these activities, a task that is far from simple.  No other major economy outside of the United States has adopted restrictions similar to the Volcker Rule.

Recognizing that the “devil is in the details,” Congress left the finer points of developing Volcker Rule regulations to five agencies: the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the CFTC (together, the “Agencies”).  The Agencies issued the final rule in December 2013.

We now have four years of experience with the initial version of the Volcker Rule.  In that time, concern has grown that US regulators’ first pass at the rule was not ideal in several respects.  Specifically, the current rule causes confusion as to what is acceptable activity, presumes unacceptable activity in various cases and imposes highly intensive compliance burdens in all cases unfairly benefitting large Wall Street banks over smaller regional ones.

A year and a half ago, I had the opportunity to speak about the rule with Chairman Volcker.  Chairman Volcker said that he was proud of the rule that bears his name.  But he also said told me that regulators should have come up with something more straightforward than what is currently in place, especially for smaller banks.

The amendments to the Volcker Rule in the proposal before us today address that concern.  The proposal seeks to simplify and tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow banking entities – especially smaller ones – to more efficiently provide services to clients.  It adopts a risk-based approach relying on a set of clearly articulated standards for both prohibited and permitted activities and investments.

The proposal addresses a number of targeted areas of widespread concern.  First, it tailors the application of the Volcker Rule to a firm’s risk profile and size and scope of trading activities.  In particular, it further streamlines compliance obligations for firms with smaller trading operations.  These changes reflect the experience of the Agencies that the costs and uncertainty faced by smaller and mid-size firms of complying with the 2013 final rule have been disproportionately high relative to the amount of their typical trading activity.

Second, the draft proposal seeks to streamline and clarify for all banking entities certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investments.  To this end, and where appropriate, the Agencies have sought to codify, or otherwise address, matters currently covered by staff guidance through responses to Frequently Asked Questions (FAQs).  Additionally, the Agencies are seeking in this proposal to reduce reporting, recordkeeping and compliance program complexity where appropriate.

This proposal will provide banking entities and their affiliates, including a number of swap dealers, FCMs and commodity pools subject to CFTC oversight, with greater clarity and certainty about what activities are permitted under the Volcker Rule.  For the CFTC, “banking entities” subject to the Volcker Rule include primarily swap dealers and FCMs that are:  insured depository institutions, certain foreign banking entities operating in the U.S. and affiliates of either of those two categories.  In addition, certain commodity pools that are owned or controlled by any such entity may also be banking entities or covered funds under the Volcker Rule.

Third, this proposal will address the implicit bias against market making in the current version of the Volcker Rule.  Last year, I testified to Congress that the 2013 Volcker Rule presumes that some activities are impermissible proprietary trading that really should be permissible market-making.  That presumption creates a bias against market activity and healthy trading liquidity – a first order concern for the CFTC as a market regulator.  Today’s proposal would remove the presumption, and that bias, by allowing banking entities the ability to more effectively and efficiently engage in routine market making. It will benefit CFTC registrants by allowing them to support trading markets more actively without having to prove that each trade was not on the wrong side of this presumption.

So why are these modest changes important?  Because, as monitored by the CFTC’s Market Intelligence Branch, current market conditions are becoming increasingly volatile as a result of a range of factors, including changes in US monetary policy, strong US economic growth and increased global political risk.  In higher volatility markets, such as we saw last week in European sovereign debt, durable trading liquidity and vigorous market making are essential to smooth out trading gaps in price and supply and avoid potential panic.[1] That is why these amendments to the Volcker Rule simplifying legitimate market making activity will enhance market orderliness and resiliency in times of market stress.

As important as are these improvements on their individual merits, equally important is that we and the other Agencies are today re-endorsing as a foundational element of US financial market regulation the Volcker Rule and its prohibition on bank proprietary trading with depositor funds. This fact must not go unrecognized in accounts of the important, but relatively modest amendments, before us today.

Today’s proposal is the product of a collaborative effort with the Federal Reserve, FDIC, OCC, and SEC.  I thank my fellow regulators for close cooperation, especially my fellow agency Chairman and friend, Martin Gruenberg, who will soon step down.  Marty worked with us to make sure today’s amendments do not disrupt the “core principles” of Volcker and that its prohibitions on proprietary trading remain “robust.”

I also thank CFTC staff for their fine work that resulted in today’s proposal. I look forward to reviewing comments from the public.

Swap Dealer de minimis

Finally, I want to turn to the proposal for the swap dealer de minimis definition.

Since becoming Chairman, I have committed to resolving this outstanding issue and giving market participants the regulatory certainty they need.  Still, as you know, last year I requested that the Commission postpone a decision on the de minimis threshold for a year.  That decision was understandably disappointing to some, including my fellow Commissioners, who said they were then ready to vote on it.

Yet, as I told Congress at the time, I did not just want to address the de minimis threshold; I wanted to get it right.

Today, I believe the staff has had adequate time to analyze the most current and comprehensive trading data and arrive at a recommendation for the best path forward in terms of managing risk to the financial system.  The staff has provided Commissioners with full access to the data they have used in their analysis.  They have also conducted additional and specific data analyses requested by Commissioners.

The data shows quite clearly that a drop in the de minimis definition from $8 billion to $3 billion would not have an appreciable impact on coverage of the marketplace.  In fact, any impact would be less than one percent – an amount that is truly de minimis.

On the other hand, the drop in the threshold would pose unnecessary burdens for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers.  That would likely cause non-financial companies to curtail or terminate risk-hedging activities with their customers, limiting risk-management options for end-users and ultimately consolidating marketplace risk in only a few large, Wall Street swap dealers.

In my travels around the country over the past four years on the Commission, I have met numerous small swaps trading firms that make markets in local markets or in select asset classes.  These firms are often housed in small community banks, local energy utilities or commodity trading houses.  They all trade below the $8 Billion threshold.  Almost all of them say that if the de minimis threshold were to drop to $3 Billion, they would reduce their trading accordingly.  They just cannot afford to be registered as swap dealers.

Who are the winners if these small firms reduce their market making activities? Big Wall Street banks.  Who are the losers if these small firms reduce their market making activities?  Small regional lenders, energy hedgers and Ag producers, who become more dependent on Wall Street trading liquidity.  Who is the really big loser?  The US economy, which becomes more financially concentrated and less economically diverse.

That is why I think the proposed rule rightly balances the mandate to register swap dealers whose activity is large enough in size and scope to warrant oversight without detrimentally affecting community banks and agricultural co-ops that engage in limited swap dealing activity and do not pose systemic risk.  Leaving the threshold at the $8 billion level allows firms to avoid incurring new costs for overhauling their existing procedures for monitoring and maintaining compliance with the threshold.  It fosters increased certainty and efficiency in determining swap dealer registration by utilizing a simple objective test with a limited degree of complexity.  And it ensures that smaller market makers and the counterparties with which they trade can engage in limited swap dealing without the high costs of registration and compliance as intended by Congress when it established the de minimis dealing exception to begin with.

The changes proposed today will also not count swaps of Insured Depository Institutions (IDIs) made in connection with loans.  They would allow, for example, an insured depository institution swap dealer to write a swap with a customer 181 days after entering into a loan without counting it towards the $8 billion threshold.  These types of changes will allow small and regional banks to further serve customers’ needs without the added burden of unnecessary regulation and associated compliance costs.

This proposal incorporates feedback and input from my two fellow Commissioners and their fine staffs.  We now look forward to feedback from the public and market participants.  We ask numerous questions about whether any additional exceptions or calculations should be included in the final rule.  Three years ago, I raised the question of whether there should be an exclusion from counting cleared swaps towards the registration threshold and that question is asked again.  Your response to questions regarding adding other potential components will help the Commission assess whether further adjustments to the de minimis exception may be appropriate in the final rule.

As discussed in the adopting release, staff continues to consult with the SEC and prudential regulators regarding the changes in the proposal in particular some of the questions regarding exclusions.   I remain committed to working with Chair Jay Clayton and the SEC in areas where harmonization is necessary and appropriate.

I also remain committed to finalizing this rule before the end of the year.  I recognize that market participants need certainty.  Today’s proposal is a major step forward in doing just that.  I applaud staff for this proposal and look forward to feedback.

Thank you.

 

[1] It was widely reported that last week’s extraordinarily high volatility in European sovereign debt markets was exacerbated at least in part by the reluctance of large banking institutions to commit trading capital due to regulatory constraints on use of capital. See, Kate Allen & Miles Johnson, Italian Rout Points to Strains in Post-Crisis Regulatory Structure, Financial Times, June 1, 2018; and In Italy, A Hair-Trigger Market, Riva Gold & Jon Sidreu, Wall Street Journal, June 1, 2018.

RELATED LINKS

CFTC to Hold an Open Commission Meeting on June 4

 

SPEECHES & TESTIMONY

Opening Statement of Commissioner Brian Quintenz, Open Meeting on Final Rule: Indemnification (Amendments to the Swap Data Access Provisions of Part 49 and Certain Other Matters), Proposed Rule: Volcker Rule (Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds), and Proposed Rule: De Minimis Exception (Amendments to Swap Dealer Registration De Minimis Exception)

https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement060418?utm_source=govdelivery

June 4, 2018

Mr. Chairman, thank you for calling this meeting.  It is a great pleasure to participate today with you and my fellow Commissioner in my first open meeting, as well as the first under your Chairmanship.  The matters before us today are important and timely.

Proposed Rule: De Minimis Exception (Amendments to Swap Dealer Registration De Minimis Exception)

This rulemaking which governs swap dealer registration is fundamental to the Commission’s effective oversight of the swaps market.

Swap dealers are subject to extensive and costly regulatory requirements: registration fees; minimum capital requirements; posting margin for uncleared swaps; IT costs for trade processing, reporting, confirmation, and reconciliation activities; costs to create and send clients daily valuation reports; costs for recordkeeping obligations; third party audit expenses; legal fees to develop and implement business conduct rules and many, many more. If that sounds like a big bill, it is. A prominent economic research firm estimated the present value of the cost for swap dealer registration compliance at $390 million per firm.[1]

Those significant requirements and costs are imposed to advance equally significant policy objectives, such as the reduction of systemic risk, increased counterparty protections, and enhanced market efficiency and integrity.  Therefore, the registration threshold, as the trigger mechanism for those costs and objectives, must be appropriately and specifically calibrated to ensure that the correct market group shoulders the burdens of swap dealer regulations because they are best situated to realize the corresponding policy goals of that registration.

I have stated previously, in great detail and with considerable evidence, the importance of appropriately calibrating the de minimis threshold so that entities posing no systemic risk and with a relatively small market footprint are not regulated under a regime that is more appropriate for the world’s largest, most complex financial institutions.[2]  If we fail to calibrate this threshold appropriately, firms at the margin will likely reduce their activity to avoid registration as opposed to serving their clients’ interests and accepting the burdens of registration. A public policy choice which drives away market participants and reduces market activity is undeniably flawed.

From my first confirmation hearing in 2016 to the present day,[3] including meetings with elected representatives, my second confirmation hearing,[4]interviews with the press,[5] discussions with market participants, and in public remarks at event forums, [6] I have been adamant that notional value is a poor measure of activity and a meaningless measure of risk, and therefore, by itself, is a deficient metric by which to impose large costs and achieve substantial policy objectives.[7]  Therefore, I have some reservations about this proposal’s continued reliance on a one-size-fits-all notional value test for swap dealer registration.

I still, and will continue to, believe that the criteria for determining swap dealer registration should be more closely correlated to risk.  However, if any final rule is going to settle for an activity-based threshold, a notional value metric should at least be combined with additional measures (such as dealing counterparty count and dealing transaction count) to determine what constitutes a de minimis quantity of swap dealing activity.  Including additional measures should mitigate instances of “false positives” that could result from the use and deficiencies of any one activity-based metric.[8]

While it would have been my preference that this concept appear in this proposal’s rule text as the operative standard, I am very grateful to the Chairman and the Division of Swap Dealer and Intermediary Oversight (DSIO) for including a robust discussion in the preamble on the merits of replacing the current notional value de minimis threshold with a three-prong test. Specifically, the preamble suggests an entity could qualify for the de minimis exception if its dealing activity is below any of the following three criteria: (i) a notional threshold, (ii) a proposed dealing counterparty count threshold, or (iii) a proposed dealing transaction count threshold.  In other words, an entity would have to surpass all three hurdles collectively in order to lose the de minimis exception’s safe harbor.

I have included several questions in the proposal that ask for feedback on this approach, particularly with respect to the dealing counterparty and transaction count thresholds which I believe would provide market participants with additional flexibility to serve their clients’ needs without triggering a very costly and burdensome registration process. I thank the staff of DSIO for including my questions in the proposal and welcome market participant’s feedback on this potential approach.

I also welcome comments on the Proposed Rule’s preamble discussion on accounting for exchange-traded or cleared swaps in an entity’s de minimis calculation.  Many of the policy goals of swap dealer regulation are accomplished when a swap is exchange-traded and cleared.  For example, systemic risk concerns are diminished with respect to cleared swaps: the swaps are standardized, the executing counterparties do not incur counterparty credit risk because they face the clearinghouse and not each other, and each side is required to post margin that helps guarantee performance and prevent unfunded losses from accumulating. Removing such swaps from the de minimis calculation would better align the registration threshold with risk and would also, I believe, encourage additional liquidity on SEFs.  I am hopeful that with the benefit of additional industry comment and further Commission analysis, the Commission will either adopt an exclusion for exchange-traded and cleared swaps or adjust their notional weighting in an entity’s de minimis calculation.

We must remember, the Commission is not establishing the de minimis exception in a vacuum. Subsequent to the adoption of the swap dealer definition, other regulatory requirements have gone into effect which also advance the goals of swap dealer registration, such as mandatory clearing, SEF trading, reporting swap data to repositories, and margin requirements for uncleared swaps. For example, regardless of whether an entity is registered as a swap dealer, its swap activity is transparent to the Commission because of the swap data and real-time reporting requirements that apply to all market participants.

When the Commission first established the $8 billion de minimis threshold in 2012, it did so without the benefit of swap data.[9]  Now almost six years later, staff has conducted a comprehensive analysis of the available swap data collected by Commission-registered SDRs and presented estimates about the impact that lower or higher notional amount thresholds would have on swap dealer registration.  Although much work remains to be done to further refine the data, particularly with respect to the non-financial commodity asset class, I commend staff for their hard work, progress, and thoughtful analysis.  I believe the data in the Proposed Rule clearly supports maintaining the de minimis threshold at $8 billion or potentially increasing it.  For example, at a $20 billion notional threshold, the estimated amount of notional swap activity that would no longer be covered by swap dealer regulation is approximately only 1/100th of 1 percent of the $221 trillion market analyzed.  I am interested to hear from commenters about the policy and market implications of maintaining or raising the de minimis threshold.

Finally, I would like to commend the Chairman and DSIO for including many important improvements to the de minimis exception in this proposal which I fully support.  For instance, I support an appropriate Insured Depository Institution exemption that will allow for banks to serve their clients’ needs. By removing unnecessary timing restrictions and expanding the types of credit extensions that qualify for the exclusion, the proposal should improve the ability of IDIs to help their customers hedge loan-related risks as the statute intended.  I also support the proposed rule’s clarification that swaps that hedge financial risks may be excluded from an entity’s de minimis count.  Market participants should be able to use swaps to manage their financial and physical risks without concern that such activity may trigger swap dealer registration.

I will vote in favor of issuing this proposal to the public for feedback and look forward to hearing from market participants about how these proposed amendments may be further refined or calibrated to increase the efficacy of the de minimis threshold to meet the goals of swap dealer registration.

Proposed Rule: Volcker Rule (Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds)

I support today’s proposal to amend the Volcker Rule and efforts to acknowledge core elements of banking entities’ trading activities in a manner consistent with the statutory provisions that established the Volcker Rule.

I am pleased that the proposal would revise elements of the prohibition on proprietary trading to provide banking entities, including CFTC-registered swap dealers and futures commission merchants, with greater flexibility in their trading activities and to simplify their compliance with the rule.

Banks and financial intermediaries are in the business of taking risk. When a bank extends a mortgage to a home buyer, it is taking a proprietary risk.  When a bank provides working capital to a farmer, it is taking a proprietary risk.  When a bank provides a revolving credit facility to a small business, it is taking a proprietary risk. And, in the context of the CFTC’s jurisdiction, when a financial firm allows a client to hedge its exposures so that the client can focus on its core competency and better predict its operations, that financial institution is taking a proprietary risk.  All of these financial functions provide crucial support to our economy and go to the heart of the complexity of implementing the Volcker Rule – the distinction between taking a proprietary risk that serves clients and a proprietary trade that is generated purely by the financial institution.

This proposal intends to tailor the requirements of the Volcker Rule to focus on entities with relatively large trading operations, and to simplify regulatory requirements by clarifying prohibited and permissible activities.  I am particularly pleased that the proposal requests public input regarding key exceptions to the proprietary trading ban, concerning market-making, loan-related swaps, and risk-mitigating hedging.

I would like to highlight that today’s proposal serves as an example of effective cooperation among five regulators: the CFTC; the Securities and Exchange Commission; the Federal Reserve Board; the Office of the Comptroller of the Currency; and the Federal Deposit Insurance Corporation.  I firmly believe in inter-agency cooperation over areas of joint jurisdiction and applaud the Chairman for his hard work to develop productive and positive relationships with fellow regulators.

Finally, I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for their efforts on this matter.

Final Rule: Indemnification (Amendments to the Swap Data Access Provisions of Part 49 and Certain Other Matters)

I would like to thank the staff in our Division of Market Oversight for their work to amend Part 49 of the Commission’s Regulations to implement provisions of the Fixing America’s Surface Transportation Act of 2015 (Fast Act)[10].

The Fast Act amended provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[11] that proved unworkable. Most significantly, the Fast Act repealed the Dodd-Frank Act’s requirement that to obtain data from swap data repositories (SDR) registered with the CFTC, domestic and foreign authorities must indemnify the CFTC and SDRs from any claims arising from a SDR’s production of information to those authorities. Foreign regulators unfamiliar with the U.S. tort law concept of “indemnification” that is inconsistent with their traditions and legal structures, have opted against requesting any information from SDRs. Domestic regulators have also opted against requesting information from SDRs because of the indemnification requirement. Removing the indemnification requirement will facilitate the sharing of SDR information with domestic and foreign authorities and better enable regulators in the United States and abroad to monitor risk across the global financial system.

[1] See National Economic Research Associates, Cost-Benefit Analysis of the CFTC’s Proposed Swap Dealer Definition 1(Dec. 20, 2011) (“NERA Report”),http://www.nera.com/content/dam/nera/publications/archive2/PUB_SwapDealer_1211.pdf. It is difficult to estimate the initial and incremental, ongoing costs of swap dealer regulation. NERA’s report regarding the costs of registration for non-financial energy firms remains one of the only comprehensive analyses produced.

[2] Keynote Address of Commissioner Brian Quintenz before the Smart Financial Regulation Roundtable (Nov. 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz3.

[3] Transcript, “Hearing to Consider Pending CFTC Nominations,” Senate Agriculture, Nutrition, and Forestry Committee, September 15, 2016, 2016 WL 4938280 p.12)

[4] Transcript, “Hearing to Consider Pending CFTC Nominations,” Senate Agriculture, Nutrition, and Forestry Committee, July 27, 2017, 2017 WL 3215667 p.14 (“With regard to the de minimis threshold level, I think when this threshold was set originally it was really done without the benefit of a lot of data. I think if there is a scenario where this shortfall reduces from $8 billion to $3 billion. And instead of increasing registration, it would drive participants out of the market or force them to reduce their activity because of the cost that would be imposed upon them.”).

[5] Bain, Benjamin, “CFTC Swaps Dealer Threshold Criticized by Its Newest Republican,” Bloomberg (Oct. 9, 2017); and DeFrancesco, Dan, “CFTC’s Quintenz: Dealer Threshold Could Exclude Cleared Swaps – Commissioner Suggests Risks should be Better Considered in De Minimis Reappraisal,” Risk.Net (Oct. 24, 2017)

[6] “Fireside Chat: CFTC Commissioners,” FIA Expo Chicago (Oct 19, 2017) available at:https://expo2017.fia.org/articles/fireside-chat-cftc-commissioners, at 9’30” through 10’25”.

[7] For further discussion, see comment letter to CFTC from Financial Services Roundtable dated January 19, 2016 (“We do not see a benefit to requiring an entity that enters into a small number of swaps with a large notional amount but little exposure to choose between exiting the market or registering as a swap dealer, nor should entities that are taking on very large exposures without crossing a notional threshold, or a trade or counterparty count metric, be unregulated because they have concentrated risk in a small number of trades.”).

[8] For further discussion, see letter from Institute of International Bankers dated January 19, 2016.

[9] See Hearing to Review the 2016 Agenda of the Commodity Futures Trading Commission Before the H. Comm. on Agric., 114th Cong. 17 (2016) (response of Timothy Massad, former CFTC Chairman, to question posed by Congressman David Scott (D-GA)),https://agriculture.house.gov/uploadedfiles/114-40_-_98680.pdf.

[10] Public Law 114–94, 129 Stat. 1312 (Dec. 4, 2015).

[11] Public Law 111–203, 124 Stat. 1376 (Jul. 21, 2010).

 

Press Release

SEC Charges 13 Private Fund Advisers for Repeated Filing Failures

https://www.sec.gov/news/press-release/2018-100

FOR IMMEDIATE RELEASE
2018-100

Washington D.C., June 1, 2018 —

The Securities and Exchange Commission today announced settlements with 13 registered investment advisers who repeatedly failed to provide required information that the agency uses to monitor risk.

According to the SEC’s orders, the advisers failed to file annual reports on Form PF informing the agency about the private funds they advise, including the amount of assets under management, fund strategy, performance, and use of borrowed money and derivatives.  Private fund advisers managing $150 million or more of assets have been required to make annual filings on Form PF since 2012.  The orders found that the 13 advisers were delinquent in their filings over multi-year periods.

“These advisers’ repeated reporting failures deprived the SEC of important information they were required by law to provide,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “We encourage investment advisers to take a fresh look at whether they are meeting their reporting obligations and adjust their compliance programs accordingly.”

The SEC uses Form PF data to monitor industry trends, inform rulemaking, identify compliance risks, and target examinations and enforcement investigations.  The SEC publishes quarterly reports with aggregated information and statistics derived from Form PF data to inform the public about the private fund industry.  It also provides Form PF data to the Financial Stability Oversight Council to help it evaluate systemic risks posed by hedge funds and other private funds.

The SEC’s orders find that the advisers violated the reporting requirements of the Investment Advisers Act of 1940.  Without admitting or denying the findings, the advisers agreed to be censured, to cease and desist, and to each pay a $75,000 civil penalty.  During the course of the SEC’s investigation, the advisers also remediated their failures by making the necessary filings.

The SEC’s investigation was conducted by Oreste P. McClung and Lisa M. Candera of the Enforcement Division’s Asset Management Unit with assistance from the Private Funds Unit in the Office of Compliance Inspections and Examinations and the Analytics Office in the Division of Investment Management.  Brendan P. McGlynn supervised the investigation.

The SEC’s orders are:

Bachrach Asset Management Inc.

Biglari Capital LLC

Brahma Management Ltd.

Bristol Group Inc.

CAI Managers & Co. L.P.

Cherokee Investment Partners LLC

Ecosystem Investment Partners LLC

Elm Partners Management LLC

HEP Management Corp.

Prescott General Partners LLC

RLJ Equity Partners LLC

Rose Park Advisors LLC

Veteri Place Corp.

###

 

Press Release

SEC Charges Investment Banker in Insider Trading Scheme

https://www.sec.gov/news/press-release/2018-97

FOR IMMEDIATE RELEASE
2018-97

Washington D.C., May 31, 2018 —

The Securities and Exchange Commission today charged an employee of a prominent investment bank with repeatedly using his access to highly confidential information in order to place illicit and profitable trades in advance of deals on which the bank was providing investment banking advisory services.

According to the SEC’s complaint, Woojae “Steve” Jung, a Vice President of Investment Banking who worked in the bank’s San Francisco and New York offices, used sensitive client information in order to trade in the securities of 12 different companies prior to the announcement of market-moving events.  The SEC alleges that between 2015 and 2017, Jung used an account held in the name of a friend living in South Korea to place these illegal trades and generate profits of approximately $140,000.  As alleged in the complaint, by using his friend’s brokerage account, Jung attempted to evade detection by skirting his employer’s requirements that he pre-clear his trades and that he use an approved brokerage firm that would have reported the trading to his employer.

“Jung tried to insulate himself by allegedly placing trades in the brokerage account of a friend who lived overseas,” said Joseph G. Sansone, Chief of the SEC’s Market Abuse Unit.  “Like others before him, Jung’s alleged scheme failed when our data analysis uncovered the account’s suspicious trading pattern and, despite Jung’s attempts at evasion, traced the trading back to him.”

The SEC’s complaint, filed in federal district court in Manhattan, charges Jung with fraud and seeks disgorgement of allegedly ill-gotten gains, pre-judgment interest, penalties, and injunctive relief.  The complaint also names Jung’s friend, Sungrok Hwang, as a relief defendant to have him disgorge illicit gains that Jung generated by trading in his brokerage account.  The U.S. Attorney’s Office for the Southern District of New York today unsealed criminal charges against Jung.

The SEC’s investigation was conducted by Megan Bergstrom, David Brown, and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office with assistance from John Rymas of the unit’s Analysis and Detection Center.  Gary Leung will lead the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

###

 

Press Release

SEC Announces Agenda for June 14 Investor Advisory Committee Meeting in Atlanta

https://www.sec.gov/news/press-release/2018-95

First-Ever Off-Site Meeting Will Take Place in Atlanta

FOR IMMEDIATE RELEASE
2018-95

Washington D.C., May 30, 2018 —

The Securities and Exchange Commission today announced that the SEC Investor Advisory Committee (IAC) will hold its first-ever meeting outside Washington, D.C. on June 14, 2018 at 8:30 a.m. in Atlanta.

In another first, all five SEC Commissioners are planning to hold an “Investing in America” Town Hall in Atlanta on June 13 from 2 p.m. to 4 p.m. to meet with, and hear from, Main Street investors. For details, please see the event’s webpage.  Both the Town Hall and Investor Advisory Committee meeting will take place at Georgia State University College of Law, 85 Park Place NE, in Atlanta.

The June 14 IAC meeting will include two panel discussions with outside speakers: “Discussion of the Commission’s Proposed Regulation Best Interest and Proposed Restriction on the Use of Certain Names or Titles,” and “Discussion Regarding the Commission’s Proposed Form CRS Relationship Summary, including Effective Disclosure and Design.” In addition, the committee will discuss disclosure enhancements for municipal and corporate bonds and may discuss a possible recommendation on that topic. For the full agenda, please see the IAC’s webpage.

The committee welcomes three new members: Paul Mahoney, David and Mary Harrison Distinguished Professor of Law, University of Virginia School of Law; Lydia Mashburn, Managing Director, Center for Monetary and Financial Alternatives, Cato Institute; and J.W. Verret, Associate Professor of Law (with tenure), Antonin Scalia Law School, George Mason University and Senior Scholar, Mercatus Center.

Members of the IAC represent a wide variety of investor interests, including those of individual and institutional investors, senior citizens, and state securities commissions. For a full list of IAC members, see the committee’s webpage. The June 14 IAC meeting will be open to the public and webcast live, and it will be archived on the IAC’s website for later viewing.

The IAC was established under Section 911 of the Dodd-Frank Act to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations to the Commission.

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Press Release

SEC Charges Long Island Investment Professional in $8 Million Scam Targeting Long-Standing Brokerage Customers

https://www.sec.gov/news/press-release/2018-96

FOR IMMEDIATE RELEASE
2018-96

Washington D.C., May 30, 2018 —

The Securities and Exchange Commission today charged a former registered representative with defrauding long-standing brokerage customers in an $8 million investment scam.

According to the SEC’s complaint, Steven Pagartanis, who was affiliated with a registered broker-dealer, told some investors – including retirees who had been Pagartanis’s customers for many years – that he would invest their funds in either a publicly-traded or private land development company.  He promised that the funds would be safe and also promised guaranteed monthly interest payments on the investments.  At Pagartanis’s direction, his investors wrote checks payable to a similarly-named entity that was secretly controlled by Pagartanis.  In all, the customers invested approximately $8 million, which Pagartanis used to pay personal expenses and make the guaranteed “interest” payments to his customers.  To conceal the scam, which unraveled earlier this year when Pagartanis stopped making the so-called interest payments to customers, Pagartanis created fictitious account statements reflecting ownership interests in the land development companies.

The Suffolk County District Attorney’s Office today filed criminal charges against Pagartanis.

“As part of the alleged scam, Pagartanis preyed on his customers’ trust, duping them to write checks payable to his own entity,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Regardless of how long investors have worked with their brokers, they should always confirm that recommended investments are approved for sale by their brokerage firm before transferring funds.”

The SEC’s Office of Investor Education and Advocacy (OIEA) and the Division of Enforcement’s Retail Strategy Task Force (RSTF) today issued an Investor Alert educating investors about warning signs that a broker may be offering investments outside of the broker’s firm.  According to the alert, even if you are investing through a broker you have known for years, you should be cautious if your broker asks you to make out a check or to wire money to an individual or to a different firm.  OIEA and RSTF’s ongoing collaboration, including through Investor Alerts and other deterrence and detection initiatives, aims to help prevent frauds targeting retail investors.

The SEC’s complaint, filed in federal district court in Brooklyn, charges Pagartanis with violating the antifraud provisions of the federal securities laws.  The SEC is seeking a judgment ordering Pagartanis to disgorge his allegedly ill-gotten gains plus prejudgment interest, and to pay financial penalties.

The SEC’s investigation, which is continuing, is being conducted by Gerald Gross, Haimavathi Marlier, Sheldon Mui and Neil Hendelman of the New York Regional Office.  The litigation will be led by Ms. Marlier and Mr. Mui.  The case is being supervised by Lara Shalov Mehraban.  The SEC appreciates the assistance of the Suffolk County District Attorney’s Office and FINRA.

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RELEASE Number

7735-18

https://www.cftc.gov/PressRoom/PressReleases/7735-18?utm_source=govdelivery

May 29, 2018

CFTC Orders X-Change Financial Access LLC to Pay a $150,000 Civil Monetary Penalty for Supervisory and Recordkeeping Failures

Washington, DC – The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against X-Change Financial Access LLC (XFA) of Chicago, Illinois, for failure to diligently supervise its employees’ handling of its customer accounts and failure to preserve complete records.  At the time of the conduct charged, XFA was registered with the CFTC as a Futures Commission Merchant and is now registered as an Introducing Broker.

Specifically, the Order finds that, between at least January 2013 and January 2014 (the Relevant Period), a client registered as a commodity pool operator and commodity trading adviser (Client) engaged in an unlawful post-execution allocation scheme in which the Client disproportionately allocated profitable trades to the accounts in which the Client or the Client’s associates had a proprietary interest, and unprofitable or less profitable trades to customer or pool accounts.  The Order finds that during the Relevant Period, XFA had no written policies or procedures concerning the post-execution allocation of bunched orders and did not train its staff on their obligations regarding the handling of such bunched orders.  As a result, an XFA floor broker (Broker) processed the Client’s allocations despite various red flags indicating that the Client was not complying with CFTC regulations governing such allocations, the Order finds.

The Order also finds that during the Relevant Period, the National Futures Association issued two regulatory actions prohibiting the Client from soliciting funds or withdrawing money from managed accounts, and ultimately, banning the Client from trading.  Despite these regulatory actions, the Client was nonetheless able to allocate trades to a new account in the name of the Client’s spouse (Spouse Account), and the Broker executed trades in the Spouse Account after the trading ban took effect.  The Order finds that XFA’s failure to identify the relationship between the Client and the Spouse Account demonstrated the insufficiency of XFA’s policies and procedures regarding compliance with regulatory actions.

In addition to supervisory failures, the Order finds that XFA failed to preserve complete records of its orders subject to post-execution allocation and to preserve electronic records in native (i.e., as originally created) file format.

The CFTC Order requires XFA to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act, as charged.

The CFTC thanks the National Futures Association for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this case are Lucy C. Hynes, George H. Malas, Christine M. Ryall, and Paul G. Hayeck.

 

PRESS RELEASES

Treasury, IRS To Issue Proposed Rule on State and Local Tax Deductions

https://home.treasury.gov/news/press-releases/sm0396

MAY 23, 2018

Washington – The U.S. Department of the Treasury and the Internal Revenue Service (IRS) will issue proposed regulations in the near future addressing legislation adopted or being considered by state legislatures that allow taxpayers to receive a credit against their state and local taxes for contributions to certain organizations or funds designated by the state. In addition to cutting income tax rates, expanding the child tax credit, and nearly doubling the standard deduction, the Tax Cuts and Jobs Act limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000.

In the notice issued today, Treasury and the IRS informed taxpayers that proposed regulations will be issued addressing the deduction of contributions to state and local governments, and other state-specified funds, for federal tax purposes. The proposed regulations will make clear that the Internal Revenue Code, not the label used by states, governs the federal income tax treatment of such transfers. The proposed regulations will also assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction of state and local income taxes.

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NR 2018-53

FOR IMMEDIATE RELEASE
May 24, 2018

https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-occ-2018-53.html

Contact: Bryan Hubbard
(202) 649-6870

Comptroller of the Currency Congratulates Jelena McWilliams on Her Confirmation as Chairman of the Federal Deposit Insurance Corporation

WASHINGTON—Comptroller of the Currency Joseph M. Otting released the following statement on the U.S. Senate’s confirmation of Jelena McWilliams as Chairman of the Federal Deposit Insurance Corporation (FDIC).

Congratulations to Jelena McWilliams on being confirmed as the Chairman of the Federal Deposit Insurance Corporation.

Chairman McWilliams will bring a breath of fresh air, energetic leadership, and a real spirit of collaboration to the agency and the board and to our interagency regulatory process.

I look forward to a positive relationship and to open and constructive communication as we work closely together to eliminate unnecessary regulatory burden so that the nation’s banks and savings associations can realize their full potential as a positive force for job creation and economic opportunity by serving the needs of consumers, businesses, and communities across the country.

I also commend the outgoing FDIC Chairman Marty Gruenberg on his tenure and service to the nation, which helped ensure our banking system remains safe and sound, provides fair access, and treats customers fairly. Chairman Gruenberg saw the FDIC through one of the most challenging periods in its 85-year history. I look forward to serving alongside him as a member of the board through the completion of his term in November.

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RELEASE Number

7733-18

https://www.cftc.gov/PressRoom/PressReleases/7733-18?utm_source=govdelivery

May 24, 2018

CFTC Charges Los Angeles, California Resident Jin Choi and His Companies, Apuro Holdings Ltd. and JCI Holdings USA with Forex Fraud and Registration Violations

Washington, DC –The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Central District of California, Western Division, charging Defendants Jin Choi of Los Angeles, California, and his companies, Apuro Holdings Ltd. (Apuro) d/b/a ApuroFX and JCI Holdings USA (JCI) d/b/a JCI Trading Group, LLC, with off-exchange retail foreign currency (forex) fraud and failure to register with the CFTC as a Commodity Trading Advisor and Associated Person of a Commodity Trading Advisor, as required.

The Complaint alleges that, from at least January 2014 through the present, Choi, individually and as agent and principal of Apuro and JCI, has fraudulently solicited at least $350,600 from not less than six individuals (clients) for the purported purpose of trading off-exchange leveraged or margined retail forex contracts on their behalf.  Choi allegedly solicited and continues to solicit clients and prospective clients in person and at investor seminars hosted by Choi in the United States and abroad, through social media services (including Facebook and Instagram), and through various websites operated by Choi.  As alleged, in their solicitations, Defendants, by and through Choi, made material misrepresentations and omissions concerning Choi’s trading expertise and successful track record.  Defendants also allegedly misrepresented that all of clients’ funds would be used to open trading accounts in their names to trade forex on their behalf and that ApuroFX is a CFTC-registered Futures Commission Merchant.

Client Funds Allegedly Misappropriated to Support Choi’s Lavish Lifestyle  

In fact, however, the Complaint alleges that Defendants never opened any trading accounts in clients’ names and never conducted any trading on behalf of clients.  Instead, Defendants misappropriated all of the at least $350,600 in client funds to support Choi’s lavish lifestyle and to return approximately $24,000 to certain clients as purported “profits” in the manner of a “Ponzi” scheme, as alleged in the Complaint.  Defendants allegedly used the majority of clients’ funds to pay for Choi’s personal expenses, including paying for the rental of a Beverly Hills condominium; the purchase and lease of luxury automobiles; shopping sprees at high-end retailers mostly located on Rodeo Drive in Beverly Hills, California; travel to Las Vegas, Nevada, for gambling and luxury hotel stays; the purchase of cell phones; and for cash withdrawals.

In its continuing litigation, the CFTC seeks full restitution to defrauded investors, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against future violations of the Commodity Exchange Act, as charged.
The CFTC appreciates the assistance of the Hong Kong Securities and Futures Commission, the Financial Services Agency of Japan, and the British Virgin Islands Financial Services Commission.  CFTC Division of Enforcement staff members responsible for this case are Timothy J. Mulreany, Danielle Karst, Jim Holl, George H. Malas, Anthony Homer, Erica Bodin and Paul G. Hayeck.

*   *   *   *   *   *

CFTC’s Foreign Currency (Forex) Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Foreign Currency Trading (Forex) Fraud Advisory, which states that the CFTC has witnessed a sharp rise in Forex trading scams in recent years and helps customers identify this potential fraud.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

 

Press Release

Investing in America: SEC Commissioners are Heading to Atlanta to Interact with Investors

https://www.sec.gov/news/press-release/2018-91

FOR IMMEDIATE RELEASE
2018-91

Washington D.C., May 23, 2018 —

The Securities and Exchange Commission today announced that the five-member Commission and staff from across the agency will be in Atlanta on June 13 for an interactive event with investors at Georgia State University College of Law. The event is an opportunity for all Main Street investors—from those who just started their first job to those approaching retirement—to hear directly from, and share feedback with, the SEC’s leaders on topics that directly affect their personal finances and the regional and national economies.

“With its dynamic population, innovative ideas, and thriving economy, Atlanta is an ideal place for us to discuss the work we do and hear directly from the people we serve,” said SEC Chairman Jay Clayton, who will be joined in Atlanta by Commissioners Kara Stein, Michael Piwowar, Robert Jackson, and Hester Peirce.

The Commissioners will kick the day off with a town hall-style event covering a range of topics from choosing a financial professional, to initial coin offerings and digital assets, to cybersecurity. Directly after the town hall, attendees are invited to join the Commissioners and SEC staff at one of the interactive breakout sessions to gain greater insight into some of the most requested topics before the SEC today.

Breakout session topics:

  • The Investor Experience: Does the Information You Get From Mutual Funds and ETFs Work for You?
  • Tips for Savers, Including Military and Early Career
  • Stopping Fraud
  • Bitcoin & ICOs
  • Investing in, and Raising Money by, Small Companies

“As anyone in the Atlanta Regional Office can tell you, this area has no shortage of people with great ideas, and I know their input will make this event a meaningful learning opportunity both for our agency and the region,” said Richard Best, Director, SEC Atlanta Regional Office.

Seating is first come, first served and attendants are encouraged to RSVP via the SEC’s Atlanta Regional Office’s webpage, which has event details. There is convenient parking and a MARTA Station nearby. The event is free and open to the public and the media.

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RELEASE Number

7732-18

https://www.cftc.gov/PressRoom/PressReleases/7732-18?utm_source=govdelivery

May 22, 2018

CFTC Opens Access for U.S. Customers to Trading in Australian Markets

Washington, DC — The Commodity Futures Trading Commission (CFTC) today announced the approval of Australian Securities Exchange Limited’s (ASX 24) application to permit direct access for U.S. customers to trade on its platform. By this order, issued May 15, 2018, ASX 24, a foreign board of trade (FBOT) is registered with the CFTC and allowed to permit members and other participants in the U.S. to trade by direct access on the exchange without having to trade through an intermediary.  In order to be registered with the CFTC, an FBOT must be legally organized under its home country regulatory regime and must be subject to relevant regulations and appropriate supervision.

The ASX 24 Order follows in the spirit of the CFTC’s regulatory deference program, which reflects the Commission’s confidence and trust in the oversight of market infrastructures and participants by the relevant home country regulators, especially in matters of market practices, transparency, and price formation. In the case of ASX 24, such supervision is carried out by the Australian Securities and Investments Commission (ASIC), which oversees ASX 24’s compliance with relevant requirements, including customer protection and market integrity measures.

“By their very nature, derivatives instruments trade in global markets,” said CFTC Chairman J. Christopher Giancarlo. “Cross-border competition, growth, and innovation are stifled if we impose piecemeal or inconsistent regulatory requirements which cause inefficiencies and higher costs.  To mitigate such an outcome, the CFTC continues to lead by example to adopt regulatory deference and support market-led activity taking place across these markets.

“Derivatives allow American agriculture producers, industrial manufacturers and financial service providers to transfer or bear exposure to the risk of variable commodity prices, foreign exchange rates, or rate of interest around the world.  Without robust and orderly global derivatives markets, American firms would bear greater risk in their international commercial activities. As a result, they would either curtail operations or be less competitive than their overseas counterparts. That would mean fewer jobs at home and diminished U.S. economic activity. This is why the CFTC seeks to ensure that global markets are salutatory and suitable for the risk transfer needs of American agriculture producers, industrial manufacturers and financial service providers, and why it is important for global regulators to take a cooperative approach to pursuing market integrity and customer protection.”

The CFTC began accepting FBOT applications for registration in accordance with Part 48 of the CFTC regulations, which became effective on February 21, 2012. With this order, the CFTC has registered 19 FBOTs from 12 countries.  ASX 24 previously offered direct access to U.S. participants in accordance with no-action relief issued to its predecessor, the Sydney Futures Exchange Limited, in CFTC Letter No. 99-37 (August 10, 1999).  According to CFTC regulation 48.6, this no-action letter is automatically withdrawn with the issuance of the ASX 24 Order.

ASX 24 submitted an application for registration that included, among other things, representations that its regulatory regime under its regulator satisfies the requirements for registration under CFTC regulations.  After reviewing the ASX 24 application, the CFTC determined that ASX 24 has demonstrated its ability to comply with the requirements of CFTC regulations.  ASX 24 must also continue to fulfill each of the representations it made in support of its registration application.

The CFTC issued the Order in accordance with Part 48 of the CFTC regulations, which provides that such an Order may be issued to an FBOT that satisfies the requirements for registration in CFTC regulation 48.7 and, among other things, possesses the attributes of an established, organized exchange and is subject to continued oversight by a regulator that provides comprehensive supervision and regulation that is comparable to the supervision and regulation exercised by the CFTC.

 

RELEASE Number

7726-18

https://www.cftc.gov/PressRoom/PressReleases/7726-18?utm_source=govdelivery

May 16, 2018

CFTC Staff Issues Report Assessing Market Impacts of LNG

The Report Summarizes Key Factors and How the LNG Market Outlook Has Evolved

Washington, DC — Staff of the Market Intelligence Branch of the Division of Market Oversight of the U.S. Commodity Futures Trading Commission (CFTC) today issued a report assessing the market impacts from expanding liquefied natural gas (LNG) trade and exports.  In 2016, the U.S. transitioned from being a net importer to a net exporter of LNG.  In aggregate, U.S. LNG export plants in operation and under construction have a capacity of 10 Bcf/day, which is about 13% of current U.S. dry production.  The report synthesizes public source evaluations of the impact of LNG market changes.  The report attempts to summarize key factors and how the LNG market outlook has evolved; it does not attempt to offer any views or opinions.

The three main takeaways of this report are:

  1. Global LNG trade growth is expected to continue with U.S. LNG exports having the most rapid growth rate and a competitive price advantage.
  2. U.S. LNG export growth may put upward pressure on U.S. natural gas prices and expose a heretofore relatively isolated North American market to global market dynamics.
  3. Burgeoning U.S. LNG exports are affecting global LNG market dynamics, including contracting and risk management practices in CFTC regulated markets.

“Over $30 billion in construction capital has been invested by the two firms with operational LNG plants.  Further, significant investments in support of these plants have been made in new natural gas pipeline assets.  The LNG firms and their customers use CFTC regulated futures and swaps to manage investment, commodity, and operational risks.  It is important for the CFTC and the public to understand the changing physical market dynamics.  In this regard, the CFTC must foster stable, vibrant, and liquid derivatives markets to support risk management practices,” according to Amir Zaidi, Director of the CFTC’s Office of Market Oversight.

This is the first in a series of reports from staff of the Market Intelligence Branch.  Staff of the Branch will publish additional reports on issues of current market interest, such as market liquidity and volatility.   The Market Intelligence Branch’s role is to analyze and communicate current and emerging market issues to CFTC leadership and the public and assist the CFTC in making informed policy.

 

RELEASE Number

https://www.cftc.gov/PressRoom/PressReleases/7725-18?utm_source=govdelivery

7725-18

May 16, 2018

CFTC Reduces Marketplace Barriers for Global Development Initiatives

Washington, DC — The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) today granted relief to non-US counterparties who enter into swaps with International Financial Institutions (IFIs), such as development banks.

“International financial institutions like the International Monetary Fund and North American Development Bank play a vital role in the global community by promoting infrastructure projects, encouraging employment, and reducing poverty,” said DSIO Division Director Matt Kulkin. “DSIO is providing relief so that these entities can more easily access over-the-counter derivatives markets to hedge risk associated with financing projects in developing countries in order to promote global economic growth.”

In the no-action letter, released today, DSIO announced it would not recommend that the Commission take action if non-U.S. persons do not include swaps with IFIs when determining whether such non-U.S. persons meet or exceed agency-prescribed registration thresholds. The relief granted today is consistent with the Commission’s prior treatment of IFIs for purposes of foreign futures and options transactions, the swap dealer definition, and mandatory clearing.

The IFIs referenced in the no-action letter include the North American Development Bank, International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development Association, International Finance Corporation, Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, Inter-American Investment Corporation, Council of Europe Development Bank, Nordic Investment Bank, Caribbean Development Bank, European Investment Bank and European Investment Fund. The IFIs listed in this letter are the same international financial institutions referenced in the Commission’s Cross-Border Guidance, with the addition of the North American Development Bank.

 

Press Release

SEC Files Charges in International Manipulation Scheme

https://www.sec.gov/news/press-release/2018-85

FOR IMMEDIATE RELEASE
2018-85

Washington D.C., May 15, 2018 —

The Securities and Exchange Commission today charged four individuals for their roles in a fraudulent scheme that generated nearly $34 million from unlawful stock sales and caused significant harm to retail investors.

According to the SEC’s complaint, the defendants manipulated the market for and illegally sold the stock of microcap issuer Biozoom Inc.  As part of the alleged scheme, the defendants hid their ownership and sales of Biozoom shares by using offshore bank accounts, sham legal documents, a network of nominees, anonymizing techniques, and other deceptive practices.  The defendants also allegedly directed a wide-ranging promotional campaign and employed sophisticated, manipulative trading techniques to artificially inflate Biozoom’s share price.  The alleged scheme culminated in the defendants’ illegal sales of Biozoom, which netted them nearly $34 million in unlawful proceeds.

“Manipulative and deceptive conduct undermines the integrity of our markets,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.  “The charges announced today demonstrate our commitment to unraveling even the most sophisticated international schemes that exploit retail investors.”

The SEC’s complaint, which was filed in federal district court in the Southern District of New York, charges Francisco Abellan Villena, Guillermo Ciupiak, James B. Panther Jr., and attorney Faiyaz Dean with violating antifraud and registration provisions of the federal securities laws and seeks monetary and equitable relief.  The SEC previously obtained a judgment against Abellan for his role in another market manipulation scheme. In separate actions, the SEC charged two registered representatives for their roles in the unregistered sales of Biozoom stock and a brokerage firm for supervisory and recordkeeping failures.

The SEC obtained a court order in 2013 freezing proceeds from the unlawful Biozoom sales.  It subsequently obtained a default judgment and established a fair fund, which has returned more than $14 million to harmed investors.  The SEC also previously charged a lawyer and officer of Biozoom’s predecessor entity.

The SEC’s continuing investigation is being conducted by Marc E. Johnson and Jennie B. Krasner with the assistance of the Enforcement Division’s Information Technology Forensics Group, and under the supervision of Deborah A. Tarasevich and Ms. Chion.  The litigation is being conducted by Duane K. Thompson and Daniel Maher, and supervised by Cheryl Crumpton.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the British Columbia Securities Commission, the Comision Nacional del Mercado de Valores of Spain, the Cyprus Securities and Exchange Commission, the Hong Kong Securities and Futures Commission, the Ontario Securities Commission, and the Supertendencia del Mercado de Valores of Panama.

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Press Release

SEC Names James Reese Chief Risk and Strategy Officer of the Office of Compliance Inspections and Examinations

https://www.sec.gov/news/press-release/2018-86

FOR IMMEDIATE RELEASE
2018-86

Washington D.C., May 15, 2018 —

The Securities and Exchange Commission today announced that James Reese has been named the Chief Risk and Strategy Officer of the agency’s Office of Compliance Inspections and Examinations (OCIE). Mr. Reese has served as Acting Chief since February 2017.

The Chief Risk and Strategy Officer leads the Office of Risk and Strategy (ORS), which was established in 2016 to consolidate OCIE’s risk assessment, market surveillance, large firm monitoring and quantitative analysis teams, and provide operational risk management and organizational strategy for the National Exam Program. ORS is responsible for supporting the NEP’s risk-based and data driven processes through the identification of risks and emerging issues in the financial markets, exam targeting and selection efforts, resource allocation, and investment in quantitative-based examination initiatives.

“Jim is a strong, talented leader with a depth of experience, background, and expertise that is a valuable asset to the Commission and to OCIE,” said Peter B. Driscoll, Director of the Office of Compliance Inspections and Examinations. “I’m excited Jim will serve as OCIE’s Chief Risk and Strategy Officer and lead our Office of Risk and Strategy.”

Mr. Reese added, “I am truly honored and excited to have been given the opportunity to serve as the Chief Risk and Strategy Officer for OCIE.  It continues to be a great privilege to work alongside of the dedicated and talented examiners and senior staff in OCIE and across the agency.”

Mr. Reese joined the SEC in 1999 as an examiner in the Investment Adviser/Investment Company program area.  He later served as a branch chief, senior staff accountant, and Assistant Director in OCIE’s Office of Risk Analysis and Surveillance.  Mr. Reese has participated in more than 500 examinations and assisted on numerous rulemaking efforts, including Investment Company and Investment Adviser Reporting; Use of Derivatives by Funds; Dodd-Frank Act Amendments to the Investment Advisers Act; and Private Fund Systemic Risk Reporting.  Mr. Reese was also part of the Commission’s Aberrational Performance Inquiry team, which was comprised of staff from across the agency.

Mr. Reese graduated from Virginia Wesleyan University, where he received a Bachelor of Arts in Accounting and Finance.  He holds the Certified Fraud Examiner (CFE) designation and is a frequent speaker for the SEC’s Technical Assistance Programs with the Office of International Affairs.

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NR 2018-45

FOR IMMEDIATE RELEASE
May 7, 2018

https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-45.html

Contact: Stephanie Collins
(202) 649-6870

OCC Hosts Operational Risk Workshop in Pennsylvania

WASHINGTON — The Office of the Comptroller of the Currency (OCC) will host a workshop in Harrisburg, Pa., at the Crowne Plaza Harrisburg-Hershey, June 20, for directors of national community banks and federal savings associations supervised by the OCC.

The Operational Risk workshop focuses on the key components of operational risk—people, processes, and systems. The workshop also covers governance, third-party risk, vendor management, internal fraud, and cybersecurity.

The workshop fee is $99. Participants receive course materials and assorted supervisory publications. The workshop is limited to the first 35 registrants.

The workshops are taught by experienced OCC staff and are offered nationwide to enhance and expand the skills of national community bank and federal savings association directors. To register for this workshop, visit www.occ.gov/occworkshops.

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Speech

Keynote Address at the New York City Bar Association’s 7th Annual White Collar Crime Institute

https://www.sec.gov/news/speech/speech-peikin-050918

Steven Peikin
Co-Director, Division of Enforcement

New York, New York

May 9, 2018

Good afternoon and thank you for that overly-generous introduction. Before I begin, let me give the required disclaimer that the views I express today are my own and do not necessarily represent the views of the Commission or its staff.

Introduction

I’m delighted to be here today among so many friends and colleagues, and I extend my thanks to the New York City Bar for hosting this important event. Because New York plays such a pivotal role in our financial system, members of the New York City Bar have long taken a leading role in many of the most significant securities and white collar matters. And the City Bar has been a key forum for education and dialogue about these important issues. I am honored to join today’s distinguished group of speakers, panelists, and attendees.

This afternoon, I would like to address a practical topic that I hope will be useful for many in this audience: techniques for productive and effective communication with SEC staff during Wells meetings.

I have spent nearly 20 years focused on the criminal and civil enforcement of the federal securities laws, first as an Assistant U.S. Attorney, then in private practice, and now as Co-Director of the SEC’s Division of Enforcement. Those of us who work on securities and white collar matters often take for granted how fortunate we are to be able to practice in a bar that is populated by some of the best lawyers in the country. The opportunity to be part of such a bar is one of the things that attracted me to work on securities matters in the first place, and I know that I am a much better lawyer for having had the chance to do so.

Over the course of my career, I have had many opportunities to interact with opposing counsel – both on behalf of the government and while representing private clients. Experience has taught me that open, effective, and productive dialogue between the government and defense counsel is critical for both sides in handling a complex securities matter. As a prosecutor, I found that frank communication with opposing counsel helped me understand complicated facts, focus an investigation, and – ultimately – reach the right result. In private practice, I think my clients were best served when the government was open to frank dialogue.

My time at the Commission has reinforced these conclusions.

At the SEC, we frequently confront issues that are novel, complex, or both. For the staff, productive communication with defense counsel can often provide a better understanding of complicated businesses, markets, and financial products. Effective communication allows us to tailor our theories, focus our inquiries and get to the end of our investigations efficiently.

I believe that the benefits of this communication flow in both directions. That is, effective dialogue can also yield significant benefits for defense counsel and their clients. In some instances, defense counsel will persuade us that we have gotten something wrong, leading us to abandon a charge, recommend different relief, or decline to pursue a matter entirely. Even where that isn’t the case, effective communication often helps defense counsel to better understand our thinking, which in turn allows them to provide better advice to their clients.

An SEC investigation provides many opportunities for dialogue – from the time of the first contact with the staff through discussions about possible settlement or litigation. As many of you know, one of the most significant opportunities for communication is the Wells process.

The Wells process takes its name from an advisory committee, headed by the distinguished corporate lawyer John A. Wells, which was convened in 1972 to review and evaluate the Commission’s enforcement policies and practices. As the Commission noted in responding to the recommendations of the committee, the purpose of the Wells process is to ensure that the Commission “not only [is] informed of the findings made by its staff but also, where practicable and appropriate, [has] before it the position of persons under investigation[.]”[1] The Commission declined to adopt a formal rule or procedure requiring a prospective defendant or respondent to be given notice of the staff’s charges and proposed enforcement recommendation and an opportunity to respond, deeming such a requirement to be impractical given that the Commission is frequently required to act with exigency. Nevertheless, the Wells process is one that the Commission staff has followed in most cases where doing so would not compromise other law enforcement interests.

The Wells process has significant benefits for the Enforcement staff. It provides us with a chance to learn – and understand – the “position of persons under investigation.”[2] This, in turn, allows us to ensure that we make appropriate recommendations to the Commission, and that the Commission has a full and accurate picture of the positions of both sides when it reviews our recommendations.

While some may consider Enforcement staff and defense counsel to be adversaries in the Wells process, I think our interests are often aligned. A Wells notice is an invitation for defense counsel to respond to the Enforcement staff’s preliminary conclusions and try to persuade us we are mistaken. We are focused on getting it right, not bringing cases for the sake of bringing cases. So if we are on the wrong track, we want to know that before we proceed further. That benefits everyone.

For these reasons, my Co-Director, Stephanie Avakian, and I place great importance on the Wells process – and Wells meetings in particular. I believe all of our Regional Directors and other Senior Officers are on the same page. We view these meetings as among the most important parts of our jobs, and we devote substantial time and care to preparing for them. I know they are viewed as milestone events by defense counsel and their clients, and they too devote substantial resources to preparing and making these presentations.

As I approach one year on the job, overall I have been extremely impressed by the quality, sophistication, and effectiveness of the advocacy in the Wells process. Nevertheless, I’ve found that some Wells meetings have been more productive than others. Drawing on that experience, I’d like to share some observations about what I have found makes for effective Wells meetings.

Before I do that, however, let me pause to make clear that I am not telling defense counsel how to do their jobs. At the SEC, we expect that counsel will zealously represent their clients. And nothing I say should dissuade counsel from doing what they think is in their client’s best interest. The arguments presented in a Wells meeting are – ultimately – up to the lawyer and the client. So I hope you will take the following in the spirit in which it is offered – which is an attempt to share my personal observations about what I have found does – and does not – tend to foster the most constructive, effective, and productive dialogue between Enforcement staff and defense counsel during a Wells meeting.

Observations

My first observation is an obvious one: Wells meetings tend to be the most productive when defense counsel focuses on the most important arguments and issues in the case, as opposed to taking a blunderbuss approach that attempts to address every possible argument, fact, element, and issue.

In most of our mature investigations, the true issues in dispute have been distilled, and there is typically one or a small number of live issues. In a fraud case, for example, perhaps it is a question of whether a statement was false or misleading? Or whether an omission was material? Or whether a person acted with scienter? Rarely, it seems to me, are all possible issues in serious dispute.

We view Wells meetings as counsel’s opportunity to educate us on their positions on the key facts and issues before we make a decision about a charging recommendation. The time is yours, and you should use it how you see fit. But meetings can only last so long – typically about an hour. When counsel attempt to make every argument and address every issue, it distracts. And in certain circumstances, contesting facts and issues that are not subject to reasonable dispute adversely impacts credibility.

In my experience, the most effective advocates pick their battles and focus on the central issues and arguments. This may mean foregoing discussion of every argument made in a written Wells submission. In my view, that is fine. We read Wells submissions carefully, and we take them into account when preparing our charging recommendations.

I have also found that the best advocates listen carefully to us during a Wells meeting and adapt accordingly. If the discussion makes clear that we are not receptive to a particular argument, they move on. And if we suggest that counsel address a particular issue, they pivot to address it. Simply marching though prepared talking points is seldom the best approach.

My second observation is that while defense counsel should not try to cover all of the possible issues during a Wells meeting, the meetings tend to be most productive when the staff is aware of what defense counsel will contend are key facts before we meet.

By the time we reach a Wells meeting, the staff has concluded that the investigation is complete and that it has a sufficient record upon which to recommend charges. But the reality is that defense counsel and their client may know things that we don’t. We want to know as much as we can before we make a recommendation to the Commission. Educating the staff on what you believe are the key facts – and explaining why, in your view, those facts don’t support an enforcement action, or a particular charge or form of relief – can be effective.

But for the discussion in a Wells meeting to be productive, all of what you believe to be the operative facts need to be on the table before the meeting so that we can consider and analyze them and discuss them meaningfully at the meeting. In my experience, the parties are unlikely to make much progress during a Wells meeting if staff are surprised with new facts at the beginning of the discussion – especially if defense counsel takes the position that those facts are central to the case.

This is an issue that arises with some frequency where defense counsel has claimed privilege over supposedly key information during the investigation. I have found that it is not helpful for counsel to disclose supposedly key privileged information for the first time in a Wells meeting, and then spend the rest of the meeting arguing that the information is a defense to the proposed charges.

Likewise, it is not useful when parties submit lengthy supplemental submissions on the eve of a long-scheduled Wells meeting. Those who do this must perceive a strategic advantage in dropping in a new submission at the eleventh hour, providing staff with little time to digest it. But I think otherwise. This can make the meeting a waste of time. To be in a position to make progress at the meeting, we must know about – and have an opportunity to consider and test – information and arguments in advance.

Now, the reverse is also true. It makes no sense for defense counsel to go through the Wells process blind to key pieces of evidence that the staff has developed in its investigation. And so we have encouraged the staff to share with defense counsel key documents and information upon which our proposed case will rest. There will, of course, sometimes be reasons why we are unable to share some things. But our dialogue will be most robust, and the process most effective, when we are all talking about the same factual record.

That point is related to my third observation, which is that it is not effective to allude to an advice-of-counsel defense without disclosing the key underlying facts, including the privileged communications themselves.

Sometimes, defense counsel will claim at a Wells meeting that privileged information they are unwilling or unable to share is central to the case. For example, during a meeting, they may allude to – but not formally raise – an “advice-of-counsel” defense by noting that they have privileged information that gives them comfort about the legality of the actions taken by a particular employee, or her lack of scienter.

In my experience, alluding to privileged information in Wells meeting – but not sharing it with the staff – is not effective. To be clear, I am not encouraging anyone to waive privilege in these circumstances. The decision whether to share privileged information is one that must be made by defense counsel and the privilege holder. I simply note that we cannot ground our decision-making on documents we cannot see or testimony we cannot hear.

Fourth, I have found that it can be very effective when defense counsel grounds their arguments in case law and prior Commission actions.

It is ultimately the Commission – not the staff – that decides whether to bring an action, or to accept a settlement. We take very seriously the recommendations we make to the Commission. In every case, we think hard about what we are recommending, why we are recommending it, and – critically – how it compares to what the Commission has done in past cases. This ensures that we are both fair to the parties in the case at hand and that we are sending clear, consistent messages to the public.

When you are asking us to make a particular recommendation to the Commission, it can be very helpful to show us how and why that recommendation compares with what happened in prior cases. This is particularly true when you are asking the staff to recommend that the Commission bring certain charges and not others, or only seek or impose certain types of relief. In these circumstances, pointing to what has been done before can be helpful.

Likewise, if an analogous case has been litigated and resulted in a decision that is at odds with what the Staff has proposed, point us to those precedents as well. Showing us that we are proposing something that is inconsistent with what we would likely obtain if we were to prevail in litigation can be powerful as well.

While pointing to what the Commission or courts have done in the past can be very effective, I will offer a few caveats.

The first is that in most cases, the more recent the court decision or Commission action, the more persuasive it is likely to be. With some exceptions, cases that are superannuated do not speak as clearly about what approach the Commission should or will take today.

Second, while prior Commission actions are very important, there are certainly some matters in which – for case-specific reasons – the Commission has taken an approach that is at odds with what it tends to do in a particular type of case. Where a case appears to be an outlier, you should take that into account before relying on it too heavily at a Wells meeting.

The third caveat is that we are fully aware that we, like you, are subject to the vagaries and vicitudes of litigation. The fact that the Commission suffered an adverse result in a particular litigation may be a relevant data point, but more often will not carry significant weight.

Fourth, while prior Commission actions are important, my experience has been that it is not particularly persuasive when defense counsel argues at a Wells meeting that we won’t have the votes for a particular case, or that a particular Commissioner will not support what we propose recommending.

Stephanie and I are well attuned to the Commission as a whole, and the views of individual Commissioners. We meet regularly with each of them, and we study carefully how they approach various issues. If you don’t succeed in persuading us not to bring charges, you are of course free to take your arguments directly to the Commissioners. But, in my experience, telling us that you know the Commissioners’ views better than we do is unlikely to meet with much success.

My next observation is that the most effective advocates think carefully about whether to use visual aids at a Wells meeting. And if they do, they are judicious about the materials they use.

We spend a great deal of time preparing for Wells meetings, and we are typically well-versed in the key facts and issues. For that reason, it is often not necessary for defense counsel to march through handouts or PowerPoint slides that cover background or elementary issues, facts, and legal standards, or which summarize the Wells submission.

So what is helpful? Consider not using anything at all. Although handouts and presentations have their place, they can sometimes inhibit natural and open dialogue.

If you do decide to use some sort of handout or visual aid, I have found that succinct presentations that cover the key evidence and central issues often have the most impact. Of course, what that looks like will depend on the case. If a particular issue turns on a handful of key documents, a short PowerPoint that highlights those materials can be helpful. Or, if a specific witness is particularly important, it can be helpful to focus on key excerpts from her testimony. In short, I have found that presentations that are focused on the key evidence often have a greater impact.

My next observation is that I have found that it is rarely productive when defense counsel uses a Wells meeting to threaten to take us to trial. For me, saber-rattling is a rhetorical dead-end.

The SEC staff includes experienced and talented trial attorneys. We regularly solicit their views during the investigative process. Defense counsel can safely assume that if a case has gotten to the Wells stage, we are serious about the case and we have come to the preliminary conclusion that we can prevail if the case is litigated. Simply telling us that the client will litigate achieves nothing.

That doesn’t mean you should shy away from providing your views on the risks we will face in litigation and trying to explain to us why we are unlikely to prevail. I have found that it can be very effective if defense counsel summarizes how they might try a case. That could mean previewing anticipated trial themes, or summarizing how you plan to use or diffuse key evidence or witnesses.

I have also found that Wells meetings are least productive when defense counsel raise what I call “non-starters.” By “non-starters,” I mean issues of programmatic importance on which counsel knows that the Commission and the Division have taken clear and consistent positions, and on which we simply don’t have any ability to compromise.

For example, defense counsel will not make much progress if they ask us during a Wells meeting to forego an injunction in a settled district court action due to possible Kokesh statute of limitations issues.[3] Our district court settlements uniformly include injunctive relief, and the Commission has consistently taken the position that the Supreme Court’s Kokesh decision does not apply to injunctive relief.[4] You are welcome to try to persuade a court to extend Kokesh in a litigated case, but that is not something we are likely able to agree to in a settled context or to forgo based on litigation risks.

My next-to-last recommendation relates to cooperation credit. The SEC has a robust program that is intended to encourage cooperation in SEC investigations and enforcement actions. The program provides incentives to those who come forward and provide valuable information to SEC staff.

As many of you know, we use a framework to evaluate whether, how much, and in what manner to credit cooperation by individuals and entities. The factors we consider are well known and have been set out in a number of public documents, including the Seaboard Report[5] and other Commission policy statements.[6]

When arguing in a Wells meeting that a client should receive cooperation credit, I have seen defense counsel take a number of approaches. Some are more effective than others.

Some, for example, simply run down a laundry list of actions their client has taken during the course of an investigation – such as producing a certain number of documents, or making a certain number of witnesses available for a certain number of days of testimony – and claim that they should receive cooperation credit. In my view, this is not effective.

For one, doing something that your client is already required to do – such as producing documents in response to a subpoena – is not what we consider “cooperation.”

Second, simply listing out what actions your client has taken, without more, does not explain the significance of the cooperation. In my view, the more effective approach is to carefully and specifically explain at a Wells meeting how each action your client took aided the staff’s investigation in a material way. How did you help the staff to tailor its investigation, discover new witnesses, or uncover material facts they otherwise would not have known about? In short, explain to the staff – with specificity – how each action your client took materially aided our investigation. Doing so will assist us in explaining to the Commission why your client should receive credit for its cooperation.

My final observation is simple and straightforward: a Wells meeting is not the place to re-hash battles fought with the staff during the investigation.

Long-running SEC investigations – like any high-stakes litigation – can be contentious and hard fought. We strive to keep the scope of our work reasonable and proportionate, but our investigations can take time, and they can often require your clients to expend considerable resources.

While I understand the temptation, a Wells meeting is simply not the place to air grievances about the length of the investigation or shifting theories of the case, or positions the staff took on things like subpoenas, search terms, privilege logs, production deadlines, or testimony schedules.

Stephanie and I expect the Staff to conduct themselves professionally at all times. But just as your clients expect you to be aggressive in representing them, we also expect our staff to be appropriately aggressive as they work to support the Commission’s mission of policing the markets and protecting investors.

Ultimately, the Wells meeting is your client’s opportunity to educate us on your positions about the key issues. I have found that it is rarely a productive for defense counsel to rehash old disagreements with the staff about the way the investigation was conducted. Those disagreements won’t have a bearing on what we decide to recommend to the Commission. We will make more progress when everyone sticks to the facts and the law.

Conclusion

In conclusion, I’ll say that, as I mentioned at the outset, my thoughts today are not grounded in some presumption that we can or should tell you how to do your jobs. How you represent your clients is up to you. But I do hope that you will find my observations about what we find to be effective helpful as you prepare for your next Wells meeting.

Thank you again to the City Bar for giving me the chance to spend time with you this afternoon, and I hope you enjoy the rest of the conference.

[1] Securities Act of 1933 Release No. 5310, “Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigations.”

[2] Id.

[3] See Kokesh v. SEC, 137 S. Ct. 1635 (2017).

[4] See SEC Enforcement Manual § 3.1.2 (2017) (“[C]ertain claims are not subject to the five-year statute of limitations under Section 2462, including claims for injunctive relief.”)

[5] See Report of Investigation Pursuant to § 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, SEC Rel. No. 34-44969 (Oct. 23, 2001), available at https://www.sec.gov/litigation/investreport/34-44969.htm#P54_10936.

[6] Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions, SEC Rel. No. 34-61340 (Jan. 19, 2010), available at https://www.sec.gov/rules/policy/2010/34-61340.pdf.

 

Press Release

SEC Names Jessica Kane Director of Office of Credit Ratings

https://www.sec.gov/news/press-release/2018-80

FOR IMMEDIATE RELEASE
2018-80

Washington D.C., May 7, 2018 —

The Securities and Exchange Commission today announced that Jessica Kane has been named the Director of the agency’s Office of Credit Ratings, where she has served as Acting Director since September 2017.

The Office of Credit Ratings is responsible for oversight of nationally recognized statistical rating organizations (NRSROs).  The office conducts annual examinations of NRSROs and works to ensure that credit ratings are not unduly influenced by conflicts of interest and that NRSROs provide greater transparency and disclosure to investors.

“Jessica’s strong leadership, dedication, and diverse experience at the SEC will serve her well in this role,” said Chairman Jay Clayton.  “The Office of Credit Ratings is integral to the SEC’s mission and plays an important role in ensuring that NRSROs meet their obligations, investors are well informed, and our markets function effectively.”

“I am honored to continue leading the Office of Credit Ratings and working with the talented and dedicated staff in this office and across the agency,” said Ms. Kane.  “I look forward to continuing to work with Chairman Clayton, the Commissioners, and the staff to ensure effective oversight of NRSROs.”

Before joining the Office of Credit Ratings, Ms. Kane was Director of the SEC’s Office of Municipal Securities, which administers SEC rules on participants in the municipal securities market and coordinates with the Municipal Securities Rulemaking Board (MSRB) on rulemaking and enforcement.  Key initiatives advanced under Ms. Kane’s leadership include the implementation of SEC municipal advisor registration rules and a new regulatory regime for municipal advisors; Commission approval of MSRB rules on best execution and mark-up disclosure; and a Commission proposal to improve municipal securities disclosure regarding certain financial obligations incurred by issuers and obligated persons.

Ms. Kane joined the SEC in 2007 and spent five years in the Division of Corporation Finance before moving to the Office of Legislative and Intergovernmental Affairs.  She later served as Deputy Director and Senior Special Counsel to the Director of the Office of Municipal Securities.

Ms. Kane graduated with honors from Georgetown University, where she received her B.A. degree in English, with a minor in Economics.

She holds a J.D. degree from George Mason University School of Law, where she was Executive Editor of the Civil Rights Law Journal.

##

 

Public Statement

Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

Divisions of Enforcement and Trading and Markets

https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading

March 7, 2018

Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”).  The platforms often claim to give investors the ability to quickly buy and sell digital assets.  Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.

A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.  The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.

Considerations for Investors Using Online Trading Platforms

To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer.

The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not.  Many platforms refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.  Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.  Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.  Again, investors should not assume the trading protocols meet the standards of an SEC-registered national securities exchange.  Lastly, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.

In light of the foregoing, here are some questions investors should ask before they decide to trade digital assets on an online trading platform:

  • Do you trade securities on this platform?  If so, is the platform registered as a national securities exchange (see our link to the list below)?
  • Does the platform operate as an ATS?  If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC (see our link to the list below)?
  • Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?
  • How does the platform select digital assets for trading?
  • Who can trade on the platform?
  • What are the trading protocols?
  • How are prices set on the platform?
  • Are platform users treated equally?
  • What are the platform’s fees?
  • How does the platform safeguard users’ trading and personally identifying information?
  • What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
  • What other services does the platform provide?  Is the platform registered with the SEC for these services?
  • Does the platform hold users’ assets?  If so, how are these assets safeguarded?

Resources for Investors

Investor.gov Spotlight on Initial Coin Offerings and Digital Assets

Chairman Jay Clayton Statement on Cryptocurrencies and Initial Coin Offerings

Chairman Jay Clayton’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC

Report of Investigation Pursuant to Section 21(a) of the Securities and Exchange Act of 1934:  The DAO

Investors can find a list of SEC-registered national securities exchanges here:  List of Active National Securities Exchanges

Investors can find a list of ATSs that have filed a Form ATS with the SEC here:  List of Active Alternative Trading Systems

Considerations for Market Participants Operating Online Trading Platforms

A platform that trades securities and operates as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for ATSs under SEC Regulation ATS.  An SEC-registered national securities exchange must, among other things, have rules designed to prevent fraudulent and manipulative acts and practices.  Additionally, as a self-regulatory organization (“SRO”), an SEC-registered national securities exchange must have rules and procedures governing the discipline of its members and persons associated with its members, and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange.  Further, a national securities exchange must itself comply with the federal securities laws and must file its rules with the Commission.

An entity seeking to operate as an ATS is also subject to regulatory requirements, including registering with the SEC as a broker-dealer and becoming a member of an SRO.  Registration as a broker-dealer subjects the ATS to a host of regulatory requirements, such as the requirement to have reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules, including, as applicable, requirements concerning the safeguarding and custody of customer funds and securities.  The overlay of SRO membership imposes further regulatory requirements and oversight.  An ATS must comply with the federal securities laws and its SRO’s rules, and file a Form ATS with the SEC.

Some online trading platforms may not meet the definition of an exchange under the federal securities laws, but directly or indirectly offer trading or other services related to digital assets that are securities.  For example, some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities.  These and other services offered by platforms may trigger other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things.  In addition, a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.

In advancing the SEC’s mission to protect investors, the SEC staff will continue to focus on platforms that offer trading of digital assets and their compliance with the federal securities laws.

Consultation with Securities Counsel and the SEC Staff

We encourage market participants who are employing new technologies to develop trading platforms to consult with legal counsel to aid in their analysis of federal securities law issues and to contact SEC staff, as needed, for assistance in analyzing the application of the federal securities laws. In particular, staff providing assistance on these matters can be reached at FinTech@sec.gov.

Resources for Market Participants

Regulation of Exchanges and Alternative Trading Systems

Select Commission Enforcement Actions

SEC v. Jon E. Montroll and Bitfunder

In re BTC Trading, Corp. and Ethan Burnside.

SEC v. REcoin Group Foundation, LLC et al.

SEC v. PlexCorps et al.

 

SEC Charges Attorney for Role in Fraudulent IPO Scheme

https://www.sec.gov/litigation/litreleases/2018/lr24132.htm

Litigation Release No. 24132 / May 2, 2018

Securities and Exchange Commission v. Adam Tracy and Securities Compliance Group, Ltd., Case No. 1:18-cv-01891-TCB (N.D.Ga.)

The Securities and Exchange Commission today announced charges against a Wheaton, Illinois-based securities lawyer and his law firm for their roles in a fraudulent scheme to conceal the identity of a company’s principal control person, a convicted felon who had been previously incarcerated for securities fraud.

According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, Adam Tracy and his law firm, Securities Compliance Group, Ltd., were retained by a convicted felon and his company, Sonant Communications Corp., to file a registration statement with the SEC for an initial public offering of 10 million shares of common stock. The SEC alleges, however, that the felon asked Tracy to conceal his role with the company such that his involvement would be hidden from the SEC and the investing public. As alleged in the complaint, Tracy agreed to participate in the ruse by drafting and filing with the SEC two registration statements that omitted the felon’s name, and, instead, named others, without their knowledge or consent, as being the principal officers and control persons of Sonant.

The SEC’s complaint charges Tracy and Securities Compliance with aiding and abetting violations of Sections 17(a)(1) and (3) of the Securities Act of 1933. To settle the SEC’s charges, the defendants agreed, without admitting or denying the allegations, to the entry of permanent injunctions, disgorgement of all legal fees received in connection with the scheme with prejudgment interest in the amount of $2,655.71, a civil monetary penalty of $25,000, and a penny stock bar against Tracy. Subject to court approval of the settlements, Tracy also has consented to the entry of an order suspending him from appearing or practicing before the SEC as an attorney.

The investigation was conducted in the SEC’s Atlanta Regional Office by Edward H. Saunders and supervised by Justin C. Jeffries.

 

SEC Obtains Preliminary Injunction Continuing Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin

https://www.sec.gov/litigation/litreleases/2018/lr24130.htm

Litigation Release No. 24130 / May 2, 2018

Securities and Exchange Commission v. Longfin Corp., et al., Case No. 18-cv-2977 (DLC) (S.D.N.Y., filed April 4, 2018)

On May 1, 2018, a federal district court in Manhattan granted the Securities and Exchange Commission’s motion for a preliminary injunction, extending until the conclusion of the case the emergency order previously entered by the court freezing more than $27 million in trading proceeds from allegedly illegal distributions and sales of restricted shares of Longfin Corp. stock involving the company, its Chief Executive Officer, Venkata S. Meenavalli, and three affiliated individuals, Andy Altahawi, Dorababu Penumarthi, and Suresh Tammineedi.

The Court’s order enjoins Defendants Altahawi, Penumarthi, and Tammineedi from dissipating assets pending final disposition of the case, and states, “[t]he SEC has carried its burden of showing a likelihood of success of proving at trial that the three defendants violated Section 5 in selling their shares.”

The SEC’s litigation against Longfin, Meenavalli, Altahawi, Penumarthi, and Tammineedi is ongoing.  The complaint charges the Defendants with violating Section 5 of the Securities Act of 1933 and seeks injunctive relief, disgorgement of ill-gotten gains, and penalties, among other relief.  According to the complaint, Longfin’s CEO and controlling shareholder, Meenavalli, caused the company to issue more than two million unregistered, restricted shares to Altahawi, who was the corporate secretary and a director of Longfin, and tens of thousands of restricted shares to two other affiliated individuals, Penumarthi and Tammineedi.  Shortly after Longfin began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, Altahawi, Penumarthi, and Tammineedi illegally sold large blocks of restricted Longfin shares to the public while the stock price was highly elevated, for profits in excess of $27 million.

The litigation is being led by Kevin Lombardi and Sarah Heaton Concannon and supervised by Stephan Schlegelmilch.  The SEC’s continuing investigation is being conducted by Ernesto Amparo, Robert Nesbitt, and Adam B. Gottlieb and supervised by Anita B. Bandy and Robert A. Cohen, Chief of the SEC’s Cyber Unit.

For further information, see Press Release No. 2018-61, Apr. 6, 2018; Litigation Release No. 24106, Apr. 9, 2018; and Complaint, Apr. 4, 2018.  Anyone with information about potential securities law violations involving Longfin may contact us by emailing longfin-info@sec.gov.

 

SEC Charges Two Pennsylvania Residents with Insider Trading

https://www.sec.gov/litigation/litreleases/2018/lr24134.htm

Litigation Release No. 24134/ May 4, 2018

Securities and Exchange Commission v. David A. Zimliki and Russel P. Schiefer, No. 18-civ-1:18-cv-00947-SHR (M.D. Pa. filed May 4, 2018)

The Securities and Exchange Commission today charged two York, Pennsylvania residents with insider trading on confidential information about the impending merger of two potato chip manufacturers.

The SEC alleges that David A. Zimliki learned from a close personal friend that potato chip manufacturer Golden Enterprises Inc. was going to merge with privately-held Utz Quality Foods, LLC. The SEC further alleges that before the merger was announced Zimliki bought shares of Golden Enterprises and tipped his friend, Russell P. Schiefer, who also bought shares. Shortly after the merger was announced, Zimliki and Schiefer each sold their Golden Enterprises shares, realizing profits of $9,319 and $5,877 respectively.

The SEC’s complaint, filed in the U.S. District Court for the Middle District of Pennsylvania, charges Zimliki and Schiefer with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Zimliki and Schiefer agreed to settle the charges by consenting to permanent injunctions, disgorgement of ill-gotten gains plus interest, and penalties equal to the amount of their respective profits.

The SEC acknowledges the significant assistance of the Financial Industry Regulatory Authority in this matter.

 

Press Release

SEC Enforcement Division Issues FAQs for Share Class Selection Disclosure Initiative

https://www.sec.gov/news/press-release/2018-75

FOR IMMEDIATE RELEASE
2018-75

Washington D.C., May 1, 2018 —

The Securities and Exchange Commission’s Division of Enforcement today issued answers to frequently asked questions (FAQs) on the Share Class Selection Disclosure Initiative, providing additional information about adviser eligibility, disgorgement, and the distribution of funds to clients.

The Share Class Selection Disclosure (SCSD) Initiative, announced on February 12, seeks to protect advisory clients from and return money to those affected by undisclosed conflicts of interest.

“It appears that many investment advisers are working diligently to evaluate whether they can take advantage of the initiative and we believe that providing these FAQs will help them make that determination,” said C. Dabney O’Riordan, Co-Chief of the Division of Enforcement’s Asset Management Unit.  “The initiative provides a framework to quickly and efficiently resolve these issues with self-reporting advisers and return money to their clients.”

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisers who self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available for the advisory clients.  In such cases the Enforcement Division will recommend settlements that do not impose a civil monetary penalty while requiring participating advisers to return ill-gotten gains to harmed advisory clients.

The cut-off date for self-reporting under the initiative is June 12.

Please direct questions regarding the initiative to SCSDInitiative@sec.gov .

 

Press Release

SEC Launches Additional Investor Protection Search Tool

The SEC’s “SALI” Tool Will Allow Investors to Identify Individuals Subject to Judgments or Orders in Enforcement Actions

https://www.sec.gov/news/press-release/2018-78

FOR IMMEDIATE RELEASE
2018-78

Washington D.C., May 2, 2018 —

The Securities and Exchange Commission today announced the launch of an additional online search feature that enables investors to research whether the person trying to sell them investments has a judgment or order entered against them in an enforcement action. The new tool is intended to assist the public in making informed investment decisions and avoiding financial fraud.

The SEC Action Lookup for Individuals – or SALI– will help identify registered and unregistered individuals who have been parties to past SEC enforcement actions and against whom federal courts have entered judgments or the SEC has issued orders.

“Our Main Street Investors themselves are a key line of defense in detecting and preventing fraud. One of the SEC’s most important tasks is to arm our investors with the tools necessary to identify potential fraudsters. An important risk factor is whether the person you are dealing with has a disciplinary history with the SEC or other regulators,” said SEC Chairman Jay Clayton. “SALI provides Main Street investors with an additional tool they can use to protect themselves from being victims of fraud and other misconduct.”

The new tool’s results are not limited to registered investment professionals, as with many existing online search functions. Instead, SALI allows the public to identify individuals who have settled, defaulted, or contested an enforcement action brought by the SEC, provided that a final judgment or order was entered against them in a federal court or an administrative proceeding.

SALI supplements existing SEC-provided investor education resources available on Investor.gov, including a free investment professional search tool, that provides access to information on investment adviser representatives as well as individuals listed in FINRA’s BrokerCheck system. Investors are encouraged to take advantage of the considerable resources, such as Investor Alerts and Bulletins, planning tools and answers to frequently asked questions, provided by the Office of Investor Education and Advocacy on Investor.gov.

Currently, SALI search results include parties from SEC actions filed between October 1, 2014 and March 31, 2018. The SEC will update the search feature periodically to add parties from newly-filed actions and actions filed prior to October 1, 2014.

***

Additional information about SALI can be found on sec.gov. For more information about SEC federal court actions and administrative proceedings, select the Enforcement tab on sec.gov. There, you can search for documents related to SEC actions by using the “Search Litigation Materials” feature located at the bottom of that page. For other resources and tools, see information for the individual investor or visit Investor.gov.

###

 

RELEASE Number

https://www.cftc.gov/PressRoom/PressReleases/7723-18

7723-18

May 2, 2018

CFTC Staff Issues Interpretive Guidance Regarding Exemption from Aggregation

Washington, DC — The Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight today issued interpretive guidance regarding CFTC Regulation 150.4(b)(1), which is an exemption from position aggregation requirements for certain commodity pool investors.

In response to a request for interpretation, the staff letter confirms that, for purposes of applying the position limits set forth in CFTC Regulation 150.2, when an institutional investor qualifies for the Regulation 150.4(b)(1) exemption from position aggregation with respect to their investment in a fund, the institutional investor is not required to look through its investment in a fund to aggregate commodity interest positions of an underlying portfolio company in which the institutional investor may hold a 10 percent or greater indirect interest (via its investment in the fund).

 

SPEECHES & TESTIMONY

https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam5?utm_source=govdelivery

Keynote of Commissioner Rostin Behnam at the FIA 40th Annual Law & Compliance Division Conference on the Regulation of Futures, Derivatives and OTC Products, Washington, DC

Our Charming Ways

May 3, 2018

Introduction

 

Good morning.  It’s great to be with you today.  Before I begin, I want to extend my thanks to Walt Lukken and the entire FIA team for inviting me to share my thoughts.  Also, let me say that the views I express are my own and do not represent the views of the Commission.  As many of you know I worked on Capitol Hill between 2011 and 2017.  As far as I can remember, FIA usually held its annual Law & Compliance (L&C) meeting in Baltimore.  Despite the relatively short distance between Washington, D.C. and Baltimore, I sadly never attended the conference.  My job rarely afforded an opportunity to stray far from the congressional campus — even for a few hours, particularly when the Senate was in session.

 

Now a CFTC Commissioner, and more importantly, a proud, and relatively new resident of Baltimore, having left the District with my wife and newborn in November, 2016, Law & Compliance has conveniently settled, I think, in D.C.; and Walt— also conveniently — offered me the 8:15 a.m. speaking slot.  I could not have planned my L&C debut any worse.

 

Honestly, though, I love early mornings, and I am thrilled to be here to share my thoughts on policy and current events at the CFTC.  But, not before I make a pitch for Charm City.  Baltimore is a scrappy city, and has for over 100 years been one of our nation’s great hubs for the financial services industry, and would welcome Law and Compliance back with open arms.

 

The FIA L&C conference has a strong reputation as the premier legal conference for the derivatives industry.  While it may not offer the sweet salty air of Boca, the views of Dana Point, or the historic charm of the Brewery on Chiswell Street, every year since 1978, regardless of its location, L&C has served as a hive of activity for legal and compliance professionals to share, learn, and explore the legal and regulatory issues of the day.

 

This year marks L&C’s 40th anniversary, having grown from a gathering of few dozen in the early years to nearly 900 attendees annually.  As I learned from the FIA website, in the beginning, industry professionals were “grappling with a new regulator, a new regulatory environment and understanding how newly adopted and proposed regulations would affect commodities futures contracts.”[1]  In many respects, the same could be said for where we are today.  We just need to use that trick where we add “and swaps” to the end clause of the statement.  If only regulatory reform were that simple.  Joking aside, while the CFTC isn’t a new regulator per se, it is a new regulator for many (new) industry practitioners and participants, and it is becoming a relevant regulator in some newer, emerging areas.  And, as I will touch upon in a little bit, we are eight years into implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[2] and we are still evaluating and refining the “new” regulatory environment.  I also suppose “grappling” still fairly describes where we are, at least with respect to some of the more challenging issues of our time.

 

Chairman Giancarlo graciously swore me in as a Commissioner nearly eight months ago to the day.  Pretty remarkable to think it has already been eight months.  If these first eight months are an indication of how quickly my term will come and go, then I’ve got to keep moving if we are going to meet the Chairman’s agenda.  I might need to learn to love my mornings even earlier.

 

As I thought about my remarks, and reflected on the first eight months of my time at the CFTC, a few events came to mind: (i) my maiden speech at Georgetown University; (ii) the listing of bitcoin futures and the increasingly rapid proliferation of financial technology; (iii) participating in the FIA/SIFMA AMG Annual Asset Management Derivatives Forum; (iv) convening the Market Risk Advisory Committee (MRAC); and (v) the first Project KISS and Reg Reform 2.0 initiatives.  As I continue to refine my approach as a Commissioner and formulate strategies in support of goals and priorities, these first events will serve as both developmental milestones and guideposts for tackling our agenda in the months and years to come.  The derivatives industry is vast and diverse, and yet through its ecosystem of industry groups, trade associations, self-regulatory organizations (SROs), and the National Futures Association (NFA), it provides meaningful collaboration, education, and feedback as we continually grow and re-evaluate efforts towards ensuring the safety and integrity of our markets, customer protections, and the professionalism of our market participants.

 

It’s this last point that segues into my actual remarks.  To be blunt, there is a lot going on right now.  It’s important that we continue to collaborate, focus on transparency, and act responsibly.   The Commission and industry must move in tandem as we move forward on the ambitious timetable before us.  While I am optimistic and supportive of our leadership, I will continue to insist that we listen to our constituents and the broader markets and general public in determining how best to serve our purpose and achieve our mission.  We cannot eschew and ignore process and progress in a rush to indulge in initiatives that respond to the rhetoric of the moment.  Doing so could undermine sound policy, create greater uncertainty and impracticability regarding our rules, and leave us vulnerable to creating regulation by enforcement.

 

Last month, during my “Washington Outlook” at FIA Boca, I made clear that we are all in this together.[3]  We’ve been waiting for deliverables in terms of Project KISS, Reg Reform 2.0, and CFTC and SEC harmonization, and anticipating resolution of unfinished business in terms of the de Minimis exception, position limits, capital, and Regulation Automated Trading (Reg AT).  Since that time, we’ve received the Chairman’s white paper on “Swaps Regulation Version 2.0,” which purports to set the agenda for Reg Reform 2.0.[4]  While I appreciate the Chairman’s transparency in setting forth his vision and, in his words, starting a dialogue, I can’t help but note that there is already a process for dialogue with market participants regarding potential rule changes – the notice and comment process for proposed rules under the Administrative Procedure Act.  Adding another white paper just pushes back the timeline for getting to actual deliverables.  It adds another step to the process.  It also takes a lot of staff time when budgets are tight.

 

I know that the natural information asymmetries are at work and that you are all working to solidify what the path forward for the balance of 2018 may look like for you and those you represent.  I am here today to let you know that I continue to believe we must focus on reform and be wary of huge and potentially premature policy shifts; strive for accountability, and continue to have productive dialogs aimed at ensuring that the Commission serves its purpose and remains true to its mission.  With that in mind, I will use the remainder of my remarks to elaborate using my milestone markers.

 

The Maiden Speech

 

Admittedly, I tend to share my views directly with market participants, end-users, and the public instead of making prepared public remarks.  However, I realize that in terms of broader messaging, I may need to provide a little more background.

 

I gave my first public remarks at Georgetown University in November, 2017.[5] Briefly, I observed that the CFTC is at an inflection point.  I suggested that the CFTC, having largely completed its rulemaking requirements under Title VII of the Dodd-Frank Act, is settling in to its new post-crisis role as a world class regulator of futures, options, and swaps (see how I did that there?).  The CFTC — despite rhetoric of regulatory rollbacks here in D.C. and economic tailwinds — should primarily focus its limited resources on moving forward and not backward.  Of course, I recognize that detours are necessary to address emerging issues and advancements in our markets.

 

I also stated that the inflection point must include careful reflection on what has been done since 2010.  Any outcome should be a careful, limited fine-tuning and adjustment to reforms that have resulted in unintended consequences or do not further congressional intent or the CFTC’s core mission.  I’ll augment those sentiments today by adding that, as we engage in these exercises, we must be mindful that our rules and policies interconnect in various places, and that each adjustment must be accompanied by sound analysis to ensure that we don’t create misalignments and new uncertainty.  I’ll also add that we must also consider the rules of our fellow domestic regulators, the Securities and Exchange Commission (SEC) and the prudential regulators, and our foreign counterparts.  Our newest registrants operate across jurisdictional lines and we ought not to assume that our rules should trump all others, or that their purposes cannot be met absent the strictest interpretation of compliance.  In adjusting our rules, we should leverage existing regulatory structures and identify synergies that support our goals and meet the highest standards of global regulatory cross-border harmonization.

 

FinTech

 

The last quarter of 2017 gave many of us a hard and fast introduction to Bitcoin and its underlying technology.  Although I had a base understanding of the technology and its potential uses, the rapid rise in crypto-asset prices, and the introduction of Bitcoin futures on two CFTC registered designated contract markets forced a much deeper understanding.  There were many lessons from those weeks and months leading up to the launch of the contracts in December, 2017, and then after when I convened a meeting of the Market Risk Advisory Committee to discuss the self-certification process and crypto-assets in January.  But, one of the most important lessons is that policymakers, including myself, need to prioritize the discussions and policy roadmap for the oversight and regulation of FinTech.

 

The experience of overseeing the introduction of the first Bitcoin futures contracts epitomized how regulators and policymakers can end up on the tail of technological advancement, scurrying to keep pace with swift innovations that capture market efficiencies, open the markets to new products and participants, and often reward those willing to take risk.  We’ve been assured by the G20 that financial stability is not yet implicated by the transformative technology underlying crypto-assets, and that any urgency to create new laws and regulations must be tempered by our lack of a full understanding of the promise and perils of this FinTech phenomenon.[6]  However, to make sure we firmly catch the tail, I’ve proposed that the U.S., through the multi-member Financial Stability Oversight Council (FSOC), lead the collaborative, interdisciplinary effort to identify and craft an appropriate path forward for ensuring that legal issues resulting from these technologies are identifiable and solvable before they cross the horizon.[7]

 

In 2010, the Dodd-Frank Act created the FSOC as a tool for identifying risks and responding to emerging threats to financial stability.[8]  Accountable to Congress and the American public, the FSOC, Chaired by the Treasury Secretary, includes in its membership representatives from each of the federal financial regulators.  FSOC must play a more direct, inclusive role in the broader FinTech economy to effectively capture its breadth and global market impact.  Critically, discussions must move beyond the role of crypto-assets as currency; FinTech presents advancement in financial commerce, including payment systems, distributed ledger, artificial intelligence, and identity verification.

 

Given its mandate, the FSOC has authority to (i) convene all key U.S. financial regulators; (ii) establish a mutually agreed lexicon for discussing crypto-assets and related FinTech; (iii) convene public hearings; and (iv) propose policy direction and guide jurisdictional responsibility based on input from regulators, stakeholders, academics, and the public.

 

The interests of regulators, the markets, and market participants should be aligned when it comes to building legal certainty.  Anything less than decisive action by policymakers in the short term will leave us all scratching heads, pointing fingers, and asking who, what, when, and how.  The task certainly will not be easy, but complacency by policymakers could lead to industry-led policies and practices that ultimately provide short-term solutions of limited application without including impacted stakeholders and appropriate consumer protections.

 

Those who support the creation of an industry-led self-regulatory organization in the crypto-asset markets clearly recognize the need to fill the regulatory vacuum, but their motives may be too focused on supporting industry growth without being stifled by the perceived bureaucratic stall that regulation may bring.  Nevertheless, their movement towards development of industry standards signals support of the concept of regulation.  Industry buy-in will be critical in achieving the engagement with policymakers needed to ensure that any recommendations and decisions reflect an understanding of FinTech and address the concerns and needs of all stakeholders.

 

FIA/SIFMA AMG Forum

 

I took a breather from FinTech and headed across the country to meet with–well, actually, first with members of the Federal Reserve Bank of San Francisco and several crypto-asset and FinTech pioneers.  But then, I continued down the coast to participate in the annual FIA/SIFMA Asset Management Derivatives Forum in Dana Point, California.  Besides the obvious pleasant memories of spending a few days near the ocean, I am continually heartened by the feedback I received from my prepared remarks at the conference.[9]  In part, I spoke about my position on the CFTC and the SEC efforts to harmonize rules.  Given the large number of dually registered market participants and overlapping policy, there is a real opportunity for the CFTC and SEC to harmonize redundant rules and leave both market participants and regulators in a stronger position.

 

My message to market participants was clear: let’s work together, have an honest conversation, and seek solutions that focus on an inclusive regulatory landscape.  This ambitious strategy can be achieved by recognizing statutory limitations and congressional intent; leveraging expertise at each of the respective agencies; and maximizing collaboration between the two agencies to ensure each are contributing without duplication.

 

I believe the audience appreciated my message, and I am hopeful that with continued dialogue, results will be delivered.  I’d like to continue to be a part of the conversation and believe a bipartisan solution will not only provide a more thoughtful outcome, but also an outcome that will stand the test of time.

 

I mentioned this particular speech because I do believe harmonization and exhaustive collaboration is critical among regulators.  I believe it is one of our most important responsibilities.  But, I also mention this speech as a proxy for my thinking on all policy issues.  Dialogue, honesty, and transparency are key elements to any relationship, including the relationship between a regulator and its regulated market participants.

 

Whatever your issue, my door is open.  Whatever your concern, my door is open.  Whatever your question, my door is open.  Let’s tackle problems together, and find solutions.  I am not suggesting this is easy.  And we will probably not agree on many things, but moving forward doesn’t necessarily mean getting everything you want in short order.  Small steps count as progress towards future solutions.

 

Market Risk Advisory Committee

 

As I mentioned earlier, as sponsor of the Market Risk Advisory Committee, I convened the Committee in January to provide a public forum for an open dialogue regarding the CFTC’s regulatory self-certification process for new products, specifically those in the crypto-asset space.  Looking forward, I am in the process of renewing the MRAC’s charter, and reconstituting its membership.  I hope to convene the Committee twice more before the year ends.  The MRAC refresh will mean new membership and new issues.  Based on much feedback, the MRAC will focus on current issues involving benchmark risk (specifically the Libor transition), clearinghouse risk, operational risk and third-party service providers, and financial technology risk that can have an impact on the financial stability of our markets.

 

I want the MRAC to be a forum for robust dialogue of wide ranging issues, including those that may not be easy to discuss.  My philosophy is based in well-grounded relationships and transparent conversation.  I believe keeping these two principles in mind provide the best chance to identify problems and provide solutions.

 

Project Kiss & Reg Reform 2.0

 

Shortly after his appointment as Acting Chairman, Chairman Giancarlo announced Project KISS, or “Keep It Simple, Stupid.”[10]  Market participants and even a few law makers have broadly supported its underlying goals of reducing regulatory burdens by making our existing regulations and practices simpler, less burdensome, and less costly.  More recently, the Chairman co-authored and released Reg Reform 2.0, a white paper outlining a future vision for swaps markets.[11]

 

In principle, I support the Chairman’s efforts to reduce regulatory burdens.  I have said as much since becoming a Commissioner, and even earlier in these remarks.  Reflection and improvement have long been woven into the fabric of the CFTC and its entire staff.  We have wide ranging responsibilities to the general public, customers, market participants, and the Congress.  In my view, always seeking to improve and be better regulators is certainly one of those responsibilities.  The Chairman’s initiatives give new names to processes and goals that have long been part of the Commission’s approach to regulation.

 

However, as with any government agency, or private sector business for that matter, the CFTC must work within its means.  The CFTC must always remain focused and vigilant to its core mission and responsibilities, and only undertake significant overhauls when resources allow, or under the most necessary circumstance.  The President recently signed an omnibus spending package for the balance of fiscal year 2018.  The funding level appropriated to the CFTC is $249 million; a decrease of one million dollars from federal year 2017’s funding level of $250 million.[12]

 

Given the President’s request of $281.5 million,[13] the CFTC is in a time of prolonged belt tightening.  We need to utilize the limited resources we have on mission critical issues not major overhauls.  The most important and valuable resource the CFTC has is its dedicated, expert professional staff.

 

I am concerned that as our jurisdiction has significantly grown since 2010, and markets have become more complex and global, we will struggle to be the vigilant cop on the beat we need to be, leaving our nation’s critically important derivatives market and the general public increasingly vulnerable to systemic (and other) risk, and susceptible to fraud and manipulation.  If staff is directed to focus on reworking the broader framework for the swaps market in lieu of fine-tuning and building on the progress we’ve made since 2008, we risk creating greater uncertainty and impracticability at increased costs to market participants.

 

The core reforms are solid, the principles are sound, and markets are functioning well.  As Federal Reserve Board Governor Lael Brainard recently suggested, we cannot afford to begin reassessments before we’ve had the opportunity to evaluate the efficacy of those we’ve already put in place. [14]

 

All this said, I want to emphasize and level set a few things: (i) I want to thank all CFTC staff for their dedication, and commitment to the agency; (ii) I have long supported and will continue to support additional funding for the CFTC; and (iii) I am fully supportive of getting better, and being a better regulator.  Let’s focus on the needs of the day: operational risk, fraud and manipulation; developments in financial technology to name a few.  Project KISS and presumably Reg Reform 2.0 have set the bar high.  Let’s focus on what’s absolutely necessary, and maximize staff resources in a manner that best serves market participants.

 

The National Futures Association

 

Before I wrap things up, I’d like to acknowledge my deepest appreciation for the NFA, our designated registered futures association and the industrywide, self-regulatory organization for the U.S. derivatives industry.  I’d also like to mention two important and timely initiatives aimed at improving our understanding of and ability to oversee participation in the virtual currency markets and further protecting customers and market integrity by raising the standards of professionalism in the swaps market.

 

First, NFA staff is focused on understanding and obtaining information about their members’ activities in underlying/spot virtual currencies and virtual currency derivatives in order to ensure appropriate regulatory oversight of this area.  Since December 2017, NFA has required futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisors (CTAs) and introducing brokers (IBs) to report information relating to their virtual currency activities.[15],[16]  The NFA recently informed me that the number of Members trading these products remains relatively flat and modest.  As of March 27th, three FCMs for which NFA is the DSRO, 63 IBs, 35 CPOs and 16 CTAs have reported that their business activities currently involve virtual currency derivatives.

 

NFA staff is working on a proposed Interpretive Notice designed to enhance disclosure requirements for Members that trade underlying/spot virtual currencies and virtual currency derivatives.  The proposed Notice would provide guidance on customer disclosures regarding the risks of trading virtual currency products that should be included in promotional materials, disclosure documents and other offering materials.  NFA’s Executive Committee recently approved the Notice and it will be submitted to NFA’s Board later this month.  NFA continues to work with its advisory committees and CFTC staff to finalize and refine the disclosures before submission to the CFTC for final approval.

 

Second, the NFA is in the initial stages of developing an online learning program with an embedded test for swaps professionals.  In his 2015 White Paper, Chairman Giancarlo cited the need to raise the standards of professionalism in the swaps market by establishing requirements for product and market knowledge, professionalism and ethical behavior for swaps market personnel.[17]  NFA’s Registration Rules require that associated persons (APs) engaged in futures and forex activities must take and pass proficiency examinations that test both their market knowledge and their knowledge of regulatory requirements.  However, currently, there are no analogous requirements applicable to swaps related activity.  I support a swaps proficiency requirements program and, along with DSIO staff, have agreed to NFA’s proposed approach to develop an examination as part of an internet-based learning program for all APs engaging in swaps activities.[18]

 

NFA is in the initial stages of developing swaps proficiency requirements, and is forming a special advisory committee composed of industry experts from NFA Member firms and other entities that would be impacted by these requirements.  NFA will continue to work with the Commission and the industry throughout this process.

 

Conclusion

 

The CFTC is a unique regulatory agency.  The subject matter is puzzling to most outsiders.  The agency’s history is rich, dating back over a century to American agriculture.  The agency is also relatively small by D.C. standards; but, I think this and its other unique attributes make it rather charming and one of the best in town.  The CFTC has gone through many dramatic changes in the past decade.  Tectonic shifts, one might say.  By in large, the changes have been successful, and the market has responded positively, adjusting to the new regime and adapting to the new rules of the road.

 

As we move forward, let’s reflect on the past, address the unintended consequences, properly calibrate the numbers, and focus on our day-to- day responsibilities of protecting customers, preserving market integrity, and keeping markets safe.  As we move forward into new areas, innovating and evolving with our markets does not mean we must cast aside our charming ways.  Like Baltimore, part of that charm is an understated scrappiness.  We are a resourceful agency that dreams big.  We have tremendous responsibilities, and sometimes must reserve those big dreams for another day.  But, I am confident that as we continue to grapple with the issues of today—and those on the horizon, we will continue to do so responsibly and with the support and buy-in of our industry.

 

[1] Futures Industry Association, FIA L&C 2018, https://lc2018.fia.org/ (last visited May 2, 2018).

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).

[3] Rostin Behnam, Accountability & Moving Forward: Remarks of Commissioner Rostin Behnam at the FIA Boca 2018 International Futures Industry 43rd Annual Conference (Mar. 15, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam4.

[4] Press Release Number: 7719-18, CFTC, CFTC Chairman Unveils Reg Reform 2.0 Agenda (Apr. 26, 2018), https://www.cftc.gov/PressRoom/PressReleases/7719-18; J. Christopher Giancarlo, Chairman & Bruce Tuckman, Chief Economist, U.S. Commodity Futures Trading Commission, Swaps Regulation Version 2.0; An Assessment of the Current Implementation of Reform and Proposals for Next Steps (2018), https://www.cftc.gov/sites/default/files/2018-04/oce_chairman_swapregversion2whitepaper_042618.pdf.

[5] Rostin Behnam, The Dodd Frank Inflection Point: Building on Derivatives Reform: Remarks of CFTC Commissioner Rostin Behnam at the Georgetown Center for Financial Markets and Policy (Nov. 14, 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam1.

[6] G20, Communiqué: 19-20 March 2018, Buenos Aires, Argentina (Mar. 19-20), available at https://g20.org/sites/default/files/media/communique_-_fmcbg_march_2018.pdf.

[7] See Behnam, supra note 3.

[8] Dodd-Frank Act, supra note 1 at § 112.

[9] Rostin Behnam, Remarks of Commissioner Rostin Behnam before the FIA/SIFMA Asset Management Group, Asset Management Derivatives Forum 2018, Dana Point, California (Feb. 8, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam2.

[10] J. Christopher Giancarlo, Transforming the CFTC: Remarks of Acting Chairman J. Christopher Giancarlo before the 11th Annual Capital Market Summit: Financing American Business, US Chamber of Commerce (Mar. 30, 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-21; see alsoPress Release Number: 7555-17, CFTC, CFTC Requests Public Input on Simplifying Rules (May 3, 2017), https://www.cftc.gov/PressRoom/PressReleases/pr7555-17.

[11] Giancarlo & Tuckman, supra note 4.

[12] Consolidated Appropriations Act, 2018, Pub. L. No. 115-141 (2018).

[13] Office of Mgmt. & Budget, Exec. Office of the President, Budget of the United States Government, Fiscal Year 2019, 1141-1143 (2018), available athttps://www.whitehouse.gov/wp-content/uploads/2018/02/oia-fy2019.pdf.

[14] Lael Brainard, Board of Governors of the Federal Reserve System, Safeguarding Financial Resilience through the Cycle (Apr. 19, 2018), https://www.federalreserve.gov/newsevents/speech/brainard20180419a.htm.

[15] National Futures Association, Notice 1-17-27, Additional reporting requirements regarding virtual currency futures products for FCMs for which NFA is the DSRO (Dec. 6, 2017), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4973; National Futures Association, Notice 1-17-28, Additional reporting requirements for CPOs and CTAs that trade virtual currency products (Dec. 14, 2017), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4974; National Futures Association, Notice 1-17-29, Additional reporting requirements for IBs that solicit or accept orders in virtual currency products (Dec. 14, 2017), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4975.

[16] On March 27th, NFA issued a Notice to Members reminding CPOs, CTAs and IBs of the ongoing obligation to update the virtual currency questions set forth in the annual questionnaire.  National Futures Association, Notice 1-18-07, Reminder to update annual questionnaire regarding virtual currencies (Mar. 27, 2018), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4999.

[17] J. Christopher Giancarlo, Commissioner, U.S. Commodity Futures Trading Commission, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank 71-74(2015), http://www.cftc.gov/idc/groups/public/@newsroom/documents/ file/sefwhitepaper012915.pdf.

[18] These individuals will include individuals designated as swaps APs at FCMs, IBs, CPOs, and CTAs; individuals who act as APs at swap dealers; and, if applicable, swap execution facility (SEF) employees that broker swaps.  The requirements will not include a grandfathering provision.

 

SEC Shuts Down $85 Million Ponzi Scheme and Obtains Asset Freeze

FOR IMMEDIATE RELEASE
2018-77

https://www.sec.gov/news/press-release/2018-77

Washington D.C., May 1, 2018 —

The Securities and Exchange Commission today announced the unsealing of fraud charges against a Mississippi company and its principal who allegedly bilked at least 150 investors in an $85 million Ponzi scheme.  The defendants agreed to permanent injunctions, an asset freeze, and expedited discovery.

The SEC’s complaint alleges that Arthur Lamar Adams lied to investors by telling them that their money would be used by his company, Madison Timber Properties, LLC, to secure and harvest timber from various land owners located in Alabama, Florida, and Mississippi, and promised annual returns of 12-15%.  But Madison Timber never obtained any harvesting rights.  Instead, Adams allegedly forged deeds and cutting agreements as well as documents purportedly reflecting the value of the timber on the land.  Adams also allegedly paid early investors with later investors’ funds and convinced investors to roll over their investments.  According to the complaint, Adams used investors’ money for personal expenses and to develop an unrelated real estate project.

“Investors should be wary anytime they are promised high or consistently positive returns,” said Richard Best, Director of the SEC’s Atlanta Regional office.  “We acted quickly in this case to protect the victims of the alleged Ponzi scheme by obtaining immediate injunctive relief and an asset freeze.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of Mississippi today announced criminal charges against Adams.

The SEC’s complaint, filed under seal in federal court in Jackson, Mississippi on April 20, 2018 and unsealed today, charges Adams and Madison Timber Properties with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for an asset freeze and permanently enjoined Madison Timber and Adams from violating the antifraud provisions of the federal securities laws and ordered Adams to surrender his passport.  Adams and Madison Timber consented to the entry of the court order.

The SEC’s continuing investigation is being conducted by Krysta Cannon and Justin Delfino in the agency’s Atlanta office and is being supervised by Peter Diskin.  The SEC’s litigation will be led by Shawn Murnahan and supervised by Graham Loomis.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Mississippi and the Federal Bureau of Investigation.

The SEC strongly encourages investors to check the backgrounds of people selling them investments by using the agency’s Investor.gov website to quickly identify whether they are registered professionals.
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PRESS RELEASES

Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association May 1

https://home.treasury.gov/news/press-releases/sm0380

MAY 2, 2018

The Committee convened in a closed session at the Hay-Adams Hotel at 9:30 a.m. All members were present. Counselor to the Secretary Craig Phillips, Deputy Assistant Secretary for Financial Markets Clay Berry, Deputy Assistant Secretary for Federal Finance Laura Lipscomb, Director of the Office of Debt Management Fred Pietrangeli, and Deputy Director of the Office of Debt Management Nick Steele welcomed the Committee, including the newest member to the Committee, Gagan Singh. Other members of Treasury staff present were Ayeh Bandeh-Ahmadi, Chris Cameron, Dave Chung, Stephen Clinton, Sarah Hirsch, Tom Katzenbach, Jerry Kelly, Amyn Moolji, Ken Phelan, Renee Tang, and Brandon Taylor. Federal Reserve Bank of New York staff members Nathaniel Wuerffel, Susan McLaughlin, and Ellen Correia Golay were also present.

Counselor Phillips began by announcing that Elizabeth Hammack and Daniel Dufresne will become the new Chair and Vice Chair of the Committee later this year. Phillips thanked Jason Cummins and Stuart Spodek for their leadership as Chair and Vice Chair over the past two years.

Next, the Committee turned to a charge on the potential benefits of 2-month bill issuance and an additional weekly settlement cycle for bills. The presenting member began by discussing projections for increased borrowing needs over the next several years, expectations for significant and sustainable future demand for bills, and concentrations of bill auction settlements on Thursdays.

The presenting member noted that Congressional Budget Office (CBO) estimates indicate considerable increased borrowing needs over the 10-year forecast window. As discussed at the November 2017 TBAC meeting, the Committee agreed that between one-quarter and one-third of cumulative future financing gaps should be met by bill issuance.

Next, the presenting member noted several characteristics of the market that indicate sustained demand for bills. Bill holdings by investor class indicate that foreign investors and money market funds own the largest proportion of the outstanding supply. MMFs, in particular, have increased bill holdings since regulatory changes were enacted in 2016. Moreover, the associated re-allocation from prime to government MMFs has remained durable despite an increase in yield premium for prime MMFs.

The presenting member noted recent portfolio allocations by government MMFs to repo and argued that if the yield spread between repo and bills were to narrow, it would likely drive additional flow from repo to bills. Furthermore, an analysis was presented showing the persistence of a bill issuance premium, which tends to be greatest at the short-end of the bill curve, thereby supporting the idea of increasing issuance in that sector. Lastly, the introduction of a 2-month bill would allow for smaller auction sizes in other tenors, allowing for greater flexibility in funding future projected financing gaps.

Finally, the presenting member detailed the concentration of funding on Thursdays and the potential benefits of an additional weekly settlement cycle. Specifically, the presenting member recommended that a new 2-month bill program settle on Tuesdays, and argued in favor of moving the existing 1-month bill to the same Tuesday cycle. Adding a 2-month bill on a new settlement day would both reduce concentration on Thursdays and allow for smaller bill auction sizes, all else equal. Moving the 1-month bill would support liquidity at the short-end and allow investors to ladder maturities in this segment of the market. Moreover, diversifying settlement volumes across days helps mitigate the intraday operational requirements for clearing and settling. Treasury also benefits from an additional bills settlement day by allowing for greater ability to manage the 5-day cash balance target.

The presenting member noted that the additional settlement day could also alleviate pressure in repo funding markets around the concentrated Thursday settlement days, and indicated that ample liquidity exists for investors to reinvest between settlement cycles.

The Committee then discussed current bill market dynamics and agreed that demand should remain strong, while potentially increasing among some types of investors. In addition, the Committee agreed that the amount of net bill issuance should increase, given the CBO’s projections for increased borrowing needs over the next several years. Furthermore, all Committee members agreed that a new 2-month bill could be introduced to fill that funding gap based on evidence for strong short-end demand. In addition, the Committee generally agreed that further study was warranted to assess a Tuesday settlement cycle as a means to reduce funding congestion and increase operational resiliency. The Committee recommended that Treasury evaluate ways to facilitate the introduction of a new 2-month bill, paired potentially with a 1-month bill, on a Tuesday settlement cycle.

The meeting then continued with a review of the TBAC charter and Committee guidelines by Treasury counsel.

Next, Director Pietrangeli provided an overview of the fiscal situation. Pietrangeli noted that for the first half of FY2018, receipts totaled $1,497 billion, an increase of two percent year-over-year, led by a $47 billion increase in withheld taxes and an $11 billion increase in non-withheld taxes. The gains were partially offset by a $14 billion decrease in corporate taxes. Outlays totaled $2,097 billion over the same timeframe, an increase of five percent. Notable increases include $32 billion for interest on the public debt as well as payments made to Government-Sponsored Enterprises related to valuation of Deferred Tax Assets as a result of the Tax Cuts and Jobs Act (TCJA), $19 billion for increased enrollment and increased average benefit payments for Social Security, $16 billion for Medicare, and $15 billion for the Department of Homeland Security including increased payments for disaster relief.

Pietrangeli also commented on issuance of State and Local Government Securities (SLGS) over the past quarter. Issuance was down, partly due to a suspension of SLGS issuance during the debt limit impasse, as well as lower demand for SLGS as rules for advanced refundings were modified in the TCJA.

Based on the near-term fiscal outlook, Treasury recently announced privately-held net marketable borrowing estimates of $75 billion for the April to June 2018 quarter, assuming an end-of-June cash balance of $360 billion, and $273 billion for the July to September quarter, assuming an end-of-September cash balance of $350 billion. The privately-held net marketable borrowing estimates take into account the Federal Reserve’s normalization of its System Open Market Account (SOMA) portfolio. Specifically, the estimates exclude SOMA rollovers (auction “add-ons”) and include private financing required due to SOMA redemptions. For FY2018, total privately-held net marketable borrowing is estimated at $1,118 billion. Pietrangeli noted that the Office of Management and Budget (OMB) and CBO do not provide a “privately-held” estimate of net marketable borrowing.

Pietrangeli then acknowledged that recent projections by OMB and CBO indicate borrowing needs will increase over the ten-year forecast window. As a result, these projections create a funding gap that Treasury will need to fill with increased issuance. Finally, Pietrangeli discussed demand for Treasury securities, citing stable bid-to-cover ratios and a rebound of foreign demand in FY2018 Q2.

Next, Deputy Assistant Secretary Lipscomb commented on bill issuance over the last several months. Following the resolution of the debt limit impasse, Treasury began to issue more bills to rebuild its cash balance to meet the stated policy target of a minimum of five days of future outflows, with a floor of $150 billion, and to address seasonal borrowing needs associated with tax refund payments. Between February 9 and the end of March, aggregate Treasury bill supply increased more than $300 billion. Lipscomb noted that bill supply generally fluctuates over the short-term in line with seasonal needs, thereby enabling Treasury to maintain its policy of regular and predictable coupon issuance. Given the circumstances, bill issuance increased at a faster than ordinary pace, which some market commentators have cited as one factor affecting broader money market rates over the period, particularly because bill issuance was easily quantifiable compared to other factors.

The Committee began a discussion of short-term rates and the effect of rapidly increasing bill issuance over the recent period. The Committee agreed that recent increases in broader money market rates are due to a confluence of factors, including but not limited to, the increase in bill issuance. The Committee also remarked that restoring the cash buffer is a prudent policy objective.

Closing the discussion on bills, Lipscomb noted that, in April, Treasury has paid down more than $100 billion in bills. Feedback from market participants indicate that expectations are for relatively stable net bill issuance moving forward until seasonal needs require an uptick in issuance later in the year. By the end of FY2018, however, the level of bills outstanding is expected to be below the peak observed in March 2018, given current fiscal forecasts.

Lipscomb also provided the Committee with feedback from primary dealers in response to the recent quarterly refunding agenda discussion topics. Primary dealers generally responded that foreign demand has remained robust, as the Treasury market is the deepest and most liquid in the world. Foreign official demand is expected to remain steady in the year ahead, while foreign private demand will continue to fluctuate with various factors, including investment mandates, cross-border funding costs, and exchange rate expectations.

Pietrangeli then provided the Committee with feedback from the primary dealers on the Treasury Inflation-Protected Securities (TIPS) program. In particular, primary dealers indicated expectations for strong demand moving forward and that an increase in current TIPS issuance sizes would be well received, particularly at the 5-year tenor. Many primary dealers were also supportive of the potential for a new 5-year TIPS issuance in the second half of the year. Pietrangeli noted that Treasury was pleased by the positive feedback on the current issuance calendar and will continue to study the potential introduction of a new 5-year TIPS, as well as other potential adjustments to the TIPS program to support liquidity and meet investor demand.

The Committee then turned to a discussion around financing for the upcoming quarter. The Committee agreed that a recommended financing plan should take into account several portfolio metrics. In particular, the TBAC’s debt optimization model suggests Treasury would benefit by focusing new issuance in the belly of the curve, defined by the model as the 2- to 5-year nominal coupon tenors.

The Committee adjourned at 12:30 p.m. for lunch.

The Committee reconvened at 1:30 p.m., with Committee members providing an update on the development of the debt issuance optimization model, indicating that TIPS may soon be incorporated into the optimization.

The Committee then proceeded to finalize its issuance recommendations for the upcoming quarter. Given current estimates for funding needs over the medium-term, as well as the benefits of issuing proportionally more in the belly of the yield curve, the Committee recommended that Treasury increase 2-, 3-, and 5-year nominal coupon auction sizes proportionally more than the 7-, 10-, and 30-year nominal coupon securities during the remainder of the May-July period.

The Committee adjourned at 2:30 p.m.

 

_____________________________

Laura Lipscomb
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
May 1, 2018

 

Certified by:

_________________________________

Jason Cummins, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 1, 2018

_________________________________

Stuart Spodek, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 1, 201

 

TREASURY BORROWING ADVISORY COMMITTEE QUARTERLY MEETING
COMMITTEE CHARGE – MAY 1, 2018

FISCAL OUTLOOK

Taking into consideration Treasury’s short, intermediate, and long-term financing requirements, as well as the variability in financing needs from-quarter to quarter, what changes to Treasury’s coupon auctions do you recommend at this time, if any?

ASSESSMENT OF POTENTIAL 2-MONTH BILL ISSUANCE AND POSSIBLE ALTERNATIVE SETTLEMENT CYCLE

We would like the Committee to comment on potential demand for a 2-month bill tenor, as well as the effect a 2-month bill would have on pricing and liquidity of other T-bill tenors.  Please also comment on the potential advantages and disadvantages to having some Treasury bill tenors settle and mature outside of the typical Thursday-to-Thursday cycle.

FINANCING THIS QUARTER

We would like the Committee’s advice on the following:

  • The composition of Treasury notes and bonds to refund approximately $39.1 billion of privately-held notes maturing on May 15, 2018.
  • The composition of Treasury marketable financing for the remainder of the April-June 2018 quarter, including cash management bills.
  • The composition of Treasury marketable financing for the July-September 2018 quarter, including cash management bills.

 

Perdue Announces Florida Citrus Hurricane Recovery Details

Release & Contact Info

Press Release

https://www.usda.gov/media/press-releases/2018/05/01/perdue-announces-florida-citrus-hurricane-recovery-details

Release No. 0092.18

Contact: USDA Press
Email: press@oc.usda.gov

(Washington, D.C., May 1, 2018) – Under the direction of President Donald J. Trump, U.S. Secretary of Agriculture Sonny Perdue today announced new details on eligibility for a new U.S. Department of Agriculture (USDA) disaster program, 2017 Wildfires and Hurricanes Indemnity Program (2017 WHIP). Additionally, USDA will provide $340 million through a block grant to the State of Florida for Hurricane Irma losses to citrus production expected during the 2018 through the 2020 crop year, reimbursement for the cost of buying and planting replacement trees – including resetting and grove rehabilitation, and for repair of damages to irrigation systems among other things.

In total, USDA’s Farm Service Agency (FSA) will deploy up to $2.36 billion that Congress appropriated through the Bipartisan Budget Act of 2018 to help producers with recovery of their agricultural operations in at least nine states with hurricane damage and other states impacted by wildfire. Following the announcement, Secretary Perdue, Florida Governor Rick Scott, and Florida Commissioner of Agriculture Adam H. Putnam issued the following statements:

“Last year our nation experienced some of the most significant disasters we have seen in decades, some back-to-back, at the most critical time in their production year. The Florida citrus industry was likely hit the hardest, and with such a high-value crop, they face a steeper financial burden and as a whole, have less coverage through our traditional insurance options. Under the direction of President Trump, my office has been working directly with Governor Scott and Commissioner Putnam in Florida to put a process in place that will ensure the Florida citrus industry maintains its infrastructure and can continue to be the signature crop for the state,” Secretary Sonny Perdue said. “Our team is working as quickly as possible to make this available to farmers in need and continues to provide excellent customer service, which began the day the storm hit through a successful recovery within local communities.”

Governor Scott said, “Since Hurricane Irma hit our state, I have been fighting for Florida’s citrus growers to get the relief they need to rebuild their livelihoods, including taking immediate steps to provide relief from the state. Our citrus growers have had many challenges over the last few years, including fighting citrus greening, which was compounded by the ravaging effects of Hurricane Irma. Florida prides itself on our incredible and iconic citrus industry and this funding will help ensure that Florida remains synonymous with citrus.”

“While no amount of relief can make the farmers who suffered damages from Hurricane Irma whole, this much-needed disaster relief will help Florida agriculture get back on its feet. I thank Secretary Perdue, Governor Scott, our federal leaders and the agriculture industry for their collaborative efforts to provide this relief. Florida’s $120 billion agriculture industry is a pillar of our economy, and we must continue to give our farmers and ranchers the support they need to thrive,” said Commissioner Putnam.

*NOTE: To view video statements from Secretary Perdue, Governor Scott, and Commissioner Putnam, you may view the Help For Florida Citrus Growers Following Hurricane Damage video or you may play the video below.

Background:

The Florida Department of Citrus is estimating the lowest citrus forecast in decades because of damage caused by Hurricane Irma last year. In October, the Florida Department of Agriculture and Consumer Services announced that Florida citrus sustained more than $760 million in damages because of the hurricane. The state is also dealing with the effects of disease, like citrus canker and citrus greening.

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USDA is an equal opportunity provider, employer and lender.

 

Press Release

Office of International Affairs Director Paul A. Leder to Leave SEC

https://www.sec.gov/news/press-release/2018-74

FOR IMMEDIATE RELEASE
2018-74

Washington D.C., April 30, 2018 —

The Securities and Exchange Commission today announced that Paul A. Leder, Director of the Office of International Affairs (OIA), will leave the agency in June. Mr. Leder rejoined the agency as OIA Director in February 2014. OIA advises the Commission on cross-border enforcement and regulatory matters and coordinates the SEC’s involvement with regulatory authorities outside the United States.

“Today’s capital markets are global and the SEC must engage on a wide range of international issues affecting U.S. markets and our investors,” said SEC Chairman Jay Clayton.  “For the past four years, Paul has led, with distinction, the SEC’s engagement with domestic and foreign regulators to address consequential cross-border challenges, always with an eye on the interests of our Main Street investors.”

“When I joined OIA just after it was created, cross-border collaboration on enforcement, supervisory and regulatory issues was the exception,” said Mr. Leder. “Today, the agency routinely addresses important international issues and the number of cross-border matters continues to grow. It has been an honor to work alongside the incredibly talented staff of OIA as we partner with other offices and divisions to tackle substantive issues of importance to U.S. investors and markets. I want to thank Chairman Clayton and the other Commissioners for their leadership and support.”

Mr. Leder’s broad portfolio has included addressing potential financial stability risks associated with the asset management industry in discussions at the Financial Stability Board and the International Organization of Securities Commissions (IOSCO); negotiating with foreign authorities to address the potential effects of legal and regulatory changes on U.S. markets and investors (e.g., with European regulators on MiFID II and MiFIR);and playing an integral role in the development of a new platform – the IOSCO ICO Network – to assist the SEC and its counterparts as they address the growth of Initial Coin Offerings (ICOs) and resulting regulatory and enforcement challenges. In the area of enforcement cooperation, Mr. Leder oversaw matters in which the SEC requested assistance from foreign counterparts on a variety of investigations, including insider trading and violations of the Foreign Corrupt Practices Act. He also participated in OECD Anti-Bribery Working Group missions to advance compliance with international anti-corruption commitments.

Prior to his return to the SEC, Mr. Leder was a partner at Richards Kibbe & Orbe LLP. Previous to that, Mr. Leder spent more than a decade at the SEC, beginning as a trial attorney in the Division of Enforcement in 1987. Soon after OIA was established in 1989, Mr. Leder joined its initial leadership team, first serving as assistant director and later as deputy director. From 1997 to 1999, he also served as senior adviser for international issues to Chairman Arthur Levitt. He began his legal career as a trial lawyer at the Public Defender Service for the District of Columbia.

Mr. Leder earned his bachelor’s degree at the University of Michigan and his law degree from the University of Michigan Law School.

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USDA Supports Specialty Crop Industry with Multi-State Initiatives

Release & Contact Info

Press Release

https://www.usda.gov/media/press-releases/2018/04/30/usda-supports-specialty-crop-industry-multi-state-initiatives

Release No. 0091.18

Contact: USDA Press
Email: 
press@oc.usda.gov

WASHINGTON, April 30, 2018 – The U.S. Department of Agriculture (USDA) today announced the funding of $7 million to support 11 projects in six states to develop solutions to challenges affecting the specialty crop industries that cross state boundaries. The awards are managed through the Specialty Crop Multi-State Program (SCMP) administered by the Agricultural Marketing Service (AMS).

“The best way to tackle many of the biggest challenges in food safety and to promote markets is to make it easier for a lot of stakeholders to work together,” said USDA Under Secretary for Marketing and Regulatory Programs Greg Ibach. “USDA’s Specialty Crop Multi-State Program provides the grease to help them leverage state and private sector resources across state lines—especially the knowledge and experience of farmers and the agricultural industry.”

SCMP strengthens food safety; seeks new ways to address plant pests, disease, and other crop-specific issues; and increases marketing opportunities for specialty crops—fruits, vegetables, tree nuts and dried fruits to horticulture and nursery crops, including floriculture. Funding is awarded competitively to state departments of agriculture that partner with stakeholder organizations in two or more states.

The 2018 SCMP projects announced today include:

California Department of Food and Agriculture will partner with:

  • The University of California’s Western Institute for Food Safety & Security and Oregon State University for a food safety project to support food safety and honey bee health through veterinary education. Awarded $483,278.
  • The University of California and Oregon State University for a pest and plant health project to optimize phasmarhabditis nematodes for mitigating invasive gastropods in the western United States. Awarded $770,356.
  • USDA’s Agricultural Research Service, Washington State University and the University of California-Davis for a pest and plant health project to better understand esca trunk disease in multiple grape-production systems. Awarded $348,991.

Indiana State Department of Agriculture and Purdue University will partner on a project to diversify sod production with sustainable turfgrasses. Awarded $495,635.

Nebraska Department of Agriculture will partner with the University of Wisconsin and the University of Nebraska on a pest and plant health project to improve aronia berry sustainability and fruit quality. Awarded $479,751.

Pennsylvania Department of Agriculture will partner with:

  • The Pennsylvania State University; collaborating with universities in Georgia, Maryland, Wisconsin, South Carolina, Mississippi, Missouri, New York, Ohio, North Carolina, Kentucky, West Virginia, Louisiana, and Florida; on a pest and plant health project to develop a regional approach to cucurbit downy mildew prevention monitoring and management. Awarded $806,739.
  • The Pennsylvania State University, University of Maryland and the University of Florida on a pest and plant health project to develop a reliable, customized bio-control for fusarium wilt of the tomato. Awarded $770,360.
  • The U.S. Sweet Potato Council, Inc., collaborating with sweet potato commissions and councils in Alabama, California, Louisiana, Mississippi and North Carolina on a project to increase the market for sweet potatoes. Awarded $250,000.

Texas Department of Agriculture will partner with Texas A&M University and the University of California on a project to improve nitrogen use efficiency and food safety in spinach production. Awarded $743,878.

Wisconsin Department of Agriculture, Trade and Consumer Protection will partner with:

  • The University of Wisconsin-Madison and the University of Minnesota on a project to expand North American hazelnut production through the hedgerow hazelnut system. Awarded: $777,203.
  • The University of Wisconsin-Madison and Michigan State University on a pest and plant health project to optimize disease management and yield in potato via microbiome-based prediction.Awarded $999,599.

This program helps industry stakeholders work together to tackle big agricultural challenges. Two examples from prior years include teams targeting Armillaria root rot and Listeria.

Armillaria root rot threatens both forest and fruit tree crops, impacting farmers in many states. In 2016, the Pennsylvania Department of Agriculture in partnership with Clemson University, Michigan State University, University of Georgia and the University of Georgia Cooperative Extension used an SCMG to launch a project to evaluate potential solutions including an Above Ground Root Collar Excavation (AGRCE) planting system. So far in this multiyear project, they have demonstrated the system to South Carolina growers, established a test site at the Cumberland Valley Nursery to assess growth rate and sizing in Armillaria resistant rootstock, and tested in vitro Prunus spp. accessions to analyze their response to Armillaria mellea infection.

Listeria is another challenge for farmers across the country. In 2016, the New York Department of Agriculture and Markets began using an SCMG to collaborate with Cornell University and Virginia Tech-Eastern Shore to develop, implement and evaluate a produce-specific Listeria monitoring and control programs to increase food safety in produce packing houses and processing facilities. Though still in its early stages, the partnership has already organized a cohort of private sector businesses and started testing to determine trends as a step toward developing more effective industry-wide best practices for controlling this disease.

More information about this program and funded projects can be found on the SCMP page on the AMS website.

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USDA is an equal opportunity provider, employer and lender.

 

PRESS RELEASES

Economy Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

https://home.treasury.gov/news/press-releases/sm0376

APRIL 30, 2018

Over the past four quarters, real GDP has grown by 2.9 percent, the most rapid pace since early 2015.  At nearly nine years old, the current expansion is set to become the second-longest stretch of continuous economic growth in the postwar period.  Although the pace of U.S. economic growth moderated to an annual rate of 2.3 percent in the first quarter, compared with 2.9 percent in the fourth quarter, a rebound is expected in coming months and overall strong growth is forecast for the year as a whole.

A slowdown in consumption affected economic performance in the first quarter, partly owing to a return of durable goods spending to more normal levels after the hurricane-related surge of last fall.  Business fixed investment made the largest contribution to real GDP growth, just ahead of consumption, while residential investment was roughly flat.  All together, private domestic final purchases (the sum of consumption, business fixed investment, and residential investment) advanced by 1.7 percent in the first quarter.  Other components added modestly to growth as well.  Total government spending made a solid contribution, although smaller than in the fourth quarter.  Net exports and inventory investment were also supportive of growth, after posing significant drags in the fourth quarter.  As labor markets have tightened and the unemployment rate has remained at a seventeen-year low of 4.1 percent, there have been signs of faster growth in wages and gains in personal income, too.  Measures of consumer sentiment remain at, or near, all-time highs, and household balance sheets remain robust.  For the current quarter, and the year as a whole, private forecasters are predicting a return to strong growth.

GDP GROWTH

According to the advance estimate of real GDP, which was released last Friday, the U.S. economy expanded at an annual rate of 2.3 percent in the first quarter, slowing from 2.9 percent in the fourth quarter.  Private domestic final purchases – the sum of personal consumption, business fixed investment, and residential investment – grew in the first quarter at an annual rate of 1.7 percent, following a 4.8 percent jump in the fourth quarter.  Over the past four quarters, private domestic final purchases have grown at an average annual rate of 3 percent, attesting to the ongoing momentum of private demand.

Growth in real personal consumption expenditures decelerated to an annual rate of 1.1 percent in the first quarter, down from 4.0 percent in the fourth quarter when post-hurricane clean-up and motor vehicle replacement elevated spending.  In the first quarter, outlays on consumer durables fell back to a more normal level, which led to a quarterly decline of 3.3 percent that weighed on overall consumption growth.  Spending on nondurables was essentially flat, after a 4.8 percent gain in the fourth quarter.  Although spending on durable and nondurable goods slowed, consumption of services held steady.  On balance, real personal consumption expenditures added 0.7 percentage point to growth in the first quarter.

Business fixed investment grew 6.1 percent at an annual rate in the first quarter, only marginally lower than the fourth’s quarter’s 6.8 percent advance, and contributed 0.8 percentage point to overall growth.  Notably, fixed investment in structures accelerated for the second consecutive quarter, nearly doubling to 12.3 percent at an annual rate from a 6.3 percent pace in the fourth quarter.  Outlays for intellectual property products in the first quarter picked up, rising to 3.6 percent at an annual rate from 0.9 percent in the fourth quarter.  On a slightly softer note, equipment investment slowed to 4.7 percent, following a surge of 11.5 percent in the previous quarter.  The cycle of inventory accumulation turned up in the first quarter, adding 0.4 percentage point to growth, after subtracting 0.5 percentage point in the fourth quarter.  This component of GDP is a volatile factor and tends to balance out over longer periods of time.

Residential construction edged up 0.1 percent at an annual rate in the first quarter, easing after a storm-related reconstruction bump of 12.8 percent in the fourth quarter.  Consequently, it made an essentially flat contribution to growth.  Nonetheless, the housing market is generally healthy, although tight supply remains a risk.  New home sales rose in February and March and are now 8.8 percent higher over the past year.  Existing home sales also increased in each of the past two months, although they were 1.2 percent lower over the year through March.  Total housing starts rose in March, as a substantial advance in the volatile multi-family component helped offset a 3.7 percent decline in the larger single-family sector.  Total building permits also rose in March, and continued to exceed starts, suggesting additional gains in housing activity in the months ahead.  In the recent months through April, homebuilder confidence has hovered just below the eighteen-year high reached last December.  Driven by low inventories and solid demand, house price appreciation has accelerated in recent months, even in the face of rising mortgage rates.

Total government spending rose 1.2 percent at an annual rate in the first quarter, following a rapid 3.0 percent pace in the previous quarter.  After making an essentially neutral contribution to growth since early 2016, government spending has added an average 0.3 percentage point over the past three quarters.  Gains at both the federal level and the state and local level continue to drive growth.  Federal outlays grew 1.7 percent in the latest quarter, after the seven-year peak rate of 3.2 percent in the fourth quarter.  State and local government spending grew 0.8 percent at an annual rate in the first quarter, roughly two-thirds the 2.9 percent pace in the previous quarter.

After widening substantially in the fourth quarter of 2017, the U.S. trade deficit narrowed in the first quarter, as export growth slowed to an annual rate of 4.8 percent while import growth slowed even more sharply to 2.6 percent.  As a result, net exports made a 0.2 percentage point contribution to growth in the first quarter, reversing from a 1.2 percentage point drag in the fourth quarter.

LABOR MARKETS AND WAGES

During the first quarter of 2018, monthly job growth averaged 202,000, up from the 182,000 average for 2017 as a whole.  In March, for the sixth consecutive month, the unemployment rate held steady at 4.1 percent, a seventeen-year low and 1.2 percentage points below the 2002-2007 average of 5.3 percent.  Headline unemployment remains at a level that is historically consistent with full employment.  At the same time, the most comprehensive measure of labor market slack, which includes those marginally attached to the labor force and those working part-time for economic reasons, has dropped to 8.0 percent, a touch above the eleven-year low reached last October but more than a full percentage point below the pre-recession average of 9.1 percent.  Initial unemployment claims have remained below 300,000 for more than three years, approaching the record stretch seen between 1967 and 1970, when total employment was less than half of current levels. Furthermore, more workers are entering the labor force, attracted by tightening labor market conditions.  In March 2018, the overall labor force participation rate stood a tick below the three-year high reached last September, while that for prime-aged workers advanced to 82.1. percent, a gain of 0.4 percentage point relative to the year-earlier level.  The April employment report will be released this coming Friday.

In the past few months, the pace of nominal wage growth has risen above year-ago levels.  Nominal average hourly earnings for private-sector production and nonsupervisory employees rose 2.4 percent over the year ending in March, accelerating from the 2.2 percent pace in March 2017.  Real average hourly earnings were flat over the same twelve months, a modest improvement over the 0.1 percent decline of a year earlier.  Other measures exhibit an even stronger pick-up in earned income growth: over the year through March 2018, the Employment Cost Index for wages, salaries, and benefits in private industry showed the fastest growth since 2008.  Private worker compensation grew 2.8 percent over the year through March 2018, the quickest pace since early 2008, and private industry wages and salaries rose 2.9 percent over the same period, marking the most rapid growth since early 2008.

PRICES

A moderate pullback in oil prices caused a deceleration in inflation starting in spring 2017, which continued for much of last year.  More recently, inflation has begun to accelerate a bit.  Over the twelve months through March 2018, the consumer price index (CPI) for all items rose 2.4 percent, matching the rate seen over the year through March 2017.  Energy price inflation has slowed relative to year-ago levels, but food price inflation continues to run well above last year’s rates.  Excluding food and energy, the CPI edged up to 2.1 percent over the year through March 2018, above the 2.0 percent rate seen in March 2017.

The headline Personal Consumption Expenditures (PCE) price index slowed after hitting a high of 2.2 percent in February 2017, bottoming out over the summer and moving gradually higher in subsequent months.  As of March 2018, headline PCE was up 2.0 percent over the past year, slightly above the 1.8 percent pace observed a year earlier, but well above the 1.4 percent pace observed in last summer. Similarly, core PCE price inflation decelerated through most of 2017 and remained in a lower range during the first two months of the year.  In the latest March data, core PCE inflation picked up to 1.9 percent, returning to the rates observed in early 2017.

CONCLUSION

Similar to the pattern seen in recent years, U.S. economic growth slowed in the first quarter for idiosyncratic reasons but remains poised to accelerate in subsequent quarters, propelled by very strong underlying private demand.  On a four-quarter basis, the economy’s growth rate has strengthened in each of the past three quarters, suggesting that the long but relatively slow recovery following the crisis has shifted into a higher gear.  Favorable economic conditions are in place, including lofty consumer optimism, healthy labor markets, faster growth in wages and household income, and positive business sentiment.  The benefits of the first major tax reform in thirty years are also poised to underpin near-term consumption and investment.  In short, the stage is set for a pick-up in growth over the near term.  Private forecasters are currently projecting a growth rate of 3.1 percent in the second quarter of 2018, and of 2.8 percent on a fourth-quarter over fourth-quarter basis for the whole year.

###

 

RELEASE Number

7720-18

https://www.cftc.gov/PressRoom/PressReleases/7720-18

April 30, 2018

CFTC Charges Charles H. McAllister of Alabama with Engaging in a Fraudulent Precious Metals Scheme

McAllister Charged with Two Counts of Wire Fraud and One Count of Money Laundering in a Related Criminal Action

Washington, DC – The Commodity Futures Trading Commission (CFTC) filed a federal civil enforcement action in the U.S. District Court for the Western District of Texas against Defendant Charles H. McAllister, of Auburn, Alabama, charging him with fraud and misappropriation in connection with contracts of sale of precious metals through his company, BullionDirect, Inc. (BDI).  McAllister has never been registered with the CFTC in any capacity.

McAllister & BDI Allegedly Defrauded Thousands of Customers throughout the United States

The CFTC Complaint alleges that from August 15, 2011 through July 20, 2015, McAllister and BDI defrauded thousands of customers throughout the United States who purchased precious metals from or through BDI.  McAllister’s and BDI’s fraud allegedly resulted in customer losses of more than $16 million.

Specifically, according to the Complaint, McAllister and BDI fraudulently solicited and induced customers, through BDI’s website, to send money to BDI for the purported purchase of gold, silver, palladium, and platinum from or through BDI.  Customers purportedly could take immediate delivery of or store the precious metals with BDI.  However, as alleged, McAllister and BDI failed to procure all the metal they were obligated to purchase for customers.  Instead, McAllister and BDI misappropriated millions of dollars from thousands of customers in the fraudulent scheme to pay back other customers (in Ponzi scheme fashion), cover BDI business expenses, and invest in other businesses.

As further alleged, McAllister and BDI made material misrepresentations and omissions to customers in the course of their fraudulent precious metals scheme, and they issued false account statements to customers.

In its continuing litigation, the CFTC seeks, among other relief, restitution to defrauded customers, disgorgement of ill-gotten gains, trading bans, a civil monetary penalty, and a permanent injunction against future violations of federal commodities laws, as charged.

Related Criminal Charges

On January 18, 2018, the U.S. Attorney’s Office for the Western District of Texas filed a related criminal action charging McAllister with two counts of wire fraud and one count of money laundering in the U.S. District Court for the Western District of Texas for conduct spanning back to 2009.  In conjunction with that action, McAllister was taken into custody on January 23, 2018 and later conditionally released.

The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office for the Western District of Texas, the Federal Bureau of Investigation, and the Internal Revenue Service, all located in Austin, Texas.

CFTC Division of Enforcement staff members responsible for this matter are Jo Mettenburg, J. Alison Auxter, Stephen Turley, Joyce Brandt, Christopher Reed, and Charles Marvine.

* * * * * * * * * * *

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

 

News Release

For Release: 

http://www.finra.org/newsroom/2018/finra-progress-report-finra360-highlights-significant-changes

Tuesday, April 24, 2018

Contact(s): 

Jessica McCormick (212) 858-5145
Donna Hemans (202) 728-6982

FINRA Progress Report on FINRA360 Highlights Significant Changes

One-year Report Lays out Changes through the Organizational Review

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today released a comprehensive progress report summarizing the significant operational and regulatory changes FINRA has made in the first year of its ongoing FINRA360 organizational review.

“The first year of FINRA360 is already resulting in significant change across the organization,” FINRA CEO Robert Cook wrote in the report. “We have placed particular emphasis on changes that benefit investors, promote compliance, address duplicate operations, enhance transparency, foster engagement, or improve our day-to-day supervisory interactions with firms.”

Major actions to date include:

  • integrating two Enforcement programs into a single unified structure;
  • releasing an Examinations Findings Reportdetailing FINRA’s observations from the prior year’s examinations;
  • publishing a summary of FINRA’s 2018 budget and financial guiding principles;
  • launching a Small Firm Helplineto address routine questions about FINRA;
  • creating an Innovation Outreach Initiativeto address the growing activity in FinTech, cryptocurrencies and related issues;
  • increasing funding for training of examiners and regulatory coordinators;
  • updating the activities of FINRA’s advisoryand governance committees and enhancing transparency regarding what they do and how interested parties can get involved; and
  • further advancing FINRA’s risk-based approach to examinations and implementing certain process improvements in how FINRA interacts with member firms in the exam context.

As part of this ongoing initiative, FINRA continues to make organizational changes that will impact FINRA’s day-to-day interactions with member firms and investors, Cook noted in the report.

“A year into what I have often emphasized is a multi-year initiative, we have accomplished a great deal, but we still have much more work ahead of us,” Cook wrote in the report. “We are turning our attention in the coming year to our Examination program and a number of other areas where we think we can achieve additional meaningful change. These may include larger organizational changes as well as smaller improvements that collectively will have significant impacts on our day-to-day interactions with the firms we regulate and the investing public we protect. Expect more to come.”

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

 

SPEECHES & TESTIMONY

Remarks of Commissioner Brian Quintenz before the Eurofi High Level Seminar 2018

https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz11?utm_source=govdelivery

April 26, 2018

Introduction

Good morning.  This is the first Eurofi Seminar that I have had the privilege to attend and I am delighted to be able to participate in this remarkable conference.  Before I begin, let me quickly say that the views I express are my own and do not represent the views of the Commission.

In addition to being my first Eurofi conference, this is also my first trip to Sofia.  I have been struck by the city’s beauty and its embodiment of living history.  Sofia has been inhabited for over 8,500 years, but perhaps its closest modern day precursor was the Thracian settlement Serdica built by the Roman Emperor Trajan in the second century BC.  Reminders of antiquity are scattered amongst modernity in this bustling city.  Indeed, I have only to look out the window of my hotel to see St. George’s Church – built in the 4th century AD – safely ensconced in the courtyard. I discovered that the very parking lot of my hotel was once rumored to sit on top of Constantine the Great’s palace.[1]  However, recent excavations of St. Nedeylya square unearthed not a palace, but the ruins of an enormous building containing various artefacts, including a ceramic vessel containing 3,000 silver Roman coins inside, with the owner’s name, Selvius Calistus, scratched on the outside.[2]

Sofia is a city where the ancient past and present converge. In many ways, we are living through that same convergence now with respect to technology and innovation. Once novel inventions – like the home phone, film cameras, VHS tapes – have become obsolete.  And yet, the underlying functions and needs they addressed remain with us, persisting into the future to be solved by new, once unthinkable, but quickly taken for granted, innovations. Although our world would certainly be unrecognizable to Selvius Calistus if he were here with us – we do know there would be some shared understanding – the need for money as a medium of exchange, the desire for shared society and recreation.  The question emerges, how do we harness creativity and technological innovation so that they work to better meet the needs and desires of all of us today, so that they have a lasting positive impact in our daily lives, on our cultures, and, in light of the focus of this conference, on our financial markets.

Supporting Responsible Financial Innovation

In the midst of the technological renaissance we are living through, what then is the proper role of the regulator?  I believe it starts with leadership, clarity, cooperation, and open-mindedness.  I think it is incumbent upon regulators to create a workable and appropriate regulatory framework that facilitates market-enhancing innovation.  This means adopting regulation that is fair, technology-neutral, and does not stifle positive innovations.  It means actively engaging with the financial technology (FinTech) community and other regulators to provide the regulatory certainty necessary to support innovation that promotes competition, vibrancy, and growth in our financial markets.  It also means developing thoughtful, balanced regulation that allows nascent markets to develop while also protecting investors and preserving market integrity.

In order to further these objectives, the CFTC is engaging with industry to learn more about FinTech, through the LabCFTC initiative and the Technology Advisory Committee (TAC).  Chairman Giancarlo and the agency launched LabCFTC in the spring of 2017.  Through early engagement during the development process, LabCFTC hopes to offer clarity and guidance about the CFTC’s regulatory framework.  Since its launch less than a year ago, LabCFTC has met with over 150 market participants.

LabCFTC also assists staff in identifying where potential changes to the existing regulatory framework may be beneficial.  For example, if an innovation achieves the desired outcome of a regulation, but does not fit within the letter of the rule, LabCFTC advises on whether regulatory relief should be provided or if it may be appropriate to consider rule revisions.  LabCFTC’s knowledge and expertise also promote technology-neutral regulations—ones which mandate a particular result but not the means by which the result is achieved.

LabCFTC also coordinates with other U.S. and international regulatory authorities.  Through formal and informal relationships, LabCFTC seeks to collaborate with, and learn from, the experience of fellow regulators to develop best practices and recognize emerging trends.  Most recently, the CFTC entered into an arrangement to collaborate on financial innovation with the United Kingdom’s Financial Conduct Authority (FCA).  LabCFTC and Project Innovate, the FCA’s FinTech initiative, will share information regarding market trends and developments, as well as insights derived from innovation competitions, sandboxes, or other similar endeavors.

In addition to LabCFTC, the agency also has five advisory committees which solicit the input of outside experts on different topics to advise on developments, risks, and regulatory issues.  I have the privilege of sponsoring the TAC, which explores the potential application of new technologies to the derivatives markets.  For example, at our inaugural meeting this past February, the TAC discussed several areas where rapid technological innovation was creating both challenges and opportunities in our markets, including blockchain and distributed ledger technology, cryptocurrencies, machine learning and artificial intelligence, automated trading technologies, and cybersecurity best practices.  Over the course of the next year, the TAC will explore each of these issues in greater detail, with the ultimate goal of providing the CFTC with actionable, practicable advice.

 Cryptocurrencies

One area of technological innovation that has captured the world’s attention is the cryptocurrency space.  Since Satoshi Nakamoto first published his groundbreaking paper on a cryptocurrency called Bitcoin almost a decade ago, we have witnessed the proliferation of many new cryptocurrency concepts and tokenized products.[3]

In fact, I believe it is important to separate the idea of cryptocurrencies, whose main purpose is only to serve as a medium of exchange or a store of value, from the proliferation of “tokens” generally.  As I postulated two days ago at the City Week conference in London, I see three main motivations for the broader tokenization revolution. One motivation for a company or entity to tokenize a product is purely as a marketing ploy – to take advantage of the popular and speculative mania surrounding all things “token.”  However, just because a product is tokenized does not change its underlying qualities.  For example, if Disney World were to tokenize the admissions to its theme parks, those tokens would still be tickets. Tokenizing the tickets does not make them currencies and it does not make them securities. It makes them tickets.  Similarly, tokenizing a security does not change the fact that it is a security.

A second motivation to create a token is to enable and realize the efficiency of the blockchain construct in assigning and tracking ownership. This is having, and will continue to have, an impact on title transfer and settlement processes.  Think of this as the back office tokenization revolution.

Lastly, a third motivation is to utilize the transferability of tokens to create a secondary market for any and all non-tangible things – the eBay of Intangibles so to speak – for rights, services, permissions, etc., that the seller allows to be transferred between parties.  Empowering a secondary market’s price discovery and valuation functions for products that were previously untransferable – such as extra storage space on a home computer – is a fascinating development.

Certainly, not all tokens are cryptocurrencies – in fact, very few are.  And even those best representing a currency-focused concept have yet to truly attain that functionality.  Yet it would be a mistake, in my view, to dismiss those products because of that fact.  Sure, some of these cryptocurrencies have not yet, and may never, achieve the acceptance and stability of a true reserve currency, like the dollar or the euro.  But, there may also be instances where an established cryptocurrency’s volatility and transferability could compare favorably against a sovereign currency.

In fact, it is quite possible, that just as the cryptocurrency trading market evolved from the bottom-up, starting at the retail level and slowly reaching the institutional level, so may the global driver of cryptocurrency acceptance come not from places like Washington, London, Frankfurt, or Tokyo, but rather through a bottom-up process as well.  That may ultimately prove wrong, but it is worth pondering.

Indeed, the intense, ongoing debate about cryptocurrency’s intrinsic value has caused regulators around the globe to grapple with how best to respond.  Some nations have banned cryptocurrency mining and trading.[4]  Others permit cryptocurrency trading, but restrict anonymous trading or require spot platforms to register with regulators.[5]  Many others are vigilantly monitoring developments to determine if additional regulatory oversight is necessary and, if so, what form it should take.[6]  Most recently the G20 called for the Financial Stability Board, in consultation with other standard-setting bodies, including the Committee on Payments and Market Infrastructure (CPMI) and International Organization of Securities Commissions (IOSCO), to report in July 2018 on their work to develop global standards for what they label as crypto-assets.[7]

Given that there are many participants on those boards and groups who are here today, I would like to take a few minutes now to discuss the regulatory framework for cryptocurrencies in the United States as it stands today.

Regulatory Framework in the United States

At the outset, I would note that the regulatory landscape for cryptocurrencies, including so-called tokens, within the United States is an evolving one.  Regulators in the United States, including the CFTC, are monitoring cryptocurrencies and working collaboratively to develop effective regulatory approaches for this new asset class.  The Treasury Department has established a crypto-asset working group which includes the CFTC, Securities and Exchange Commission, and banking regulators.  Ongoing communication among regulators is critical because oversight jurisdiction over cryptocurrencies is shared across multiple agencies in the United States.

For example, state regulators and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) regulate cryptocurrency platforms as money service businesses, thereby subjecting those “exchanges” to anti-money laundering and know-your-customer requirements.[8]  The Internal Revenue Service views cryptocurrencies as property and subjects sales to capital gains tax without a de minimis threshold.[9]

The CFTC and SEC also have jurisdiction over cryptocurrencies depending on their status as a commodity or as a security.  From our own perspective, the CFTC has both oversight and enforcement authority over derivatives on commodity cryptocurrencies, but only enforcement authority over the spot transactions of commodity cryptocurrencies.  This means that the CFTC’s role is broad and far reaching with respect to derivatives trading on cryptocurrencies – such as futures contracts on Bitcoin – including setting requirements for registration of trading platforms or firms, trade execution, orderly trading, data reporting, and recordkeeping.  However, in the spot markets, or the platforms where cryptocurrencies themselves are actually bought and sold, the CFTC has onlyenforcement authority – the CFTC can only police fraud and manipulation in the actual trading of cryptocurrencies, but has no ability to make platforms register with the Commission or set any customer protection policies.

On the other hand, if the cryptocurrency or digital asset is a security, it must be traded on a platform that is registered with the SEC or is specifically exempt from registration.[10]  In addition, the SEC has stated that many initial coin offerings (ICOs) used to raise capital for business projects may be securities, thereby triggering the fully panoply of registration and investment protection requirements under American securities laws.[11]

From my perspective as a CFTC Commissioner, I think the area with the greatest need for enhanced regulatory certainty and oversight is the spot market.  In that regard, the CFTC has undertaken an educational campaign to provide customers with information about cryptocurrencies and to warn about potential fraud in these markets.  The CFTC’s Division of Enforcement has aggressively targeted deception and manipulation to ensure that innocent customers are not exploited by fraudsters.  And with respect to jurisdictional considerations, the CFTC has been, and continues to be, in close communication with the SEC.

In light of the patchwork of state and federal regulation that currently exists in the United States, and until such time as Congress might choose to add spot commodity markets to a regulator’s jurisdiction, I have also encouraged cryptocurrency spot platforms to come together and form an SRO-like entity that could develop and enforce customer protection rules to strengthen the integrity of these growing markets. I think an independent, self-regulating body for spot platforms in the United States could significantly contribute to ongoing efforts to rationalize and formalize cryptocurrency regulation.  I am not now suggesting, nor have I ever suggested, that this potential body should be a substitute for federal oversight in this area; rather, I believe this potential organization’s efforts can fill a current void and could eventually complement federal oversight efforts.

I think it is the role of the CFTC, along with other regulators, to support the integrity of these developing markets so that individuals have the information and transparency they need to make informed choices.  Indeed, when Congress amended the CFTC’s governing statute to give exchanges the ability to list new contracts through a self-certification process, as opposed to requesting the CFTC’s approval, I believe Congress did so intentionally to limit the CFTC’s power to make value judgements on new contracts.  I also think that is appropriate – the markets, investors, and consumers need to decide for themselves which new products and innovations are worthwhile and which are not, and what value truly is.

Conclusion

I am optimistic about the future of financial technology and its potential to improve all of our lives.  Gatherings like this help us to build the partnerships and trust, and attain the expertise and wisdom, to recognize and support those innovations that are genuinely innovative, that have the power to enhance our societies.  I look forward to working with all of you to develop thoughtful regulatory frameworks that allow our markets to flourish and our innovators to innovate.  Thank you.

[1]       Ivan Dikov, Archaeologists Start Search For Roman Forum of Ancient Serdica in Bulgaria’s Capital Sofia, Archaeology in Bulgaria (April 22, 2018), http://archaeologyinbulgaria.com/2015/07/06/archaeologists-start-search-for-roman-forum-of-ancient-serdica-in-bulgarias-capital-sofia/.

[2]       Leon de Leeuw, Serdica (April 22, 2018), https://www.leondeleeuw.net/travel-bulgaria-sofia-serdica.

[3]       Cryptocurrency Market Capitalizations, CoinMarketCap, https://coinmarketcap.com/all/views/all/.

[4]       Chao Deng, China Quietly Orders Closing of Bitcoin Mining Operations, Wall St. J., Jan. 11, 2018, https://www.wsj.com/articles/china-quietly-orders-closing-of-bitcoin-mining-operations-1515594021.

[5]       Eun-Young Jeong and Steven Russolillo, Got ID? South Korea Tightens Noose on Anonymous Cryptocurrency Trading, Wall St. J., Jan. 24, 2018, https://www.wsj.com/articles/noose-tightens-on-anonymous-cryptocurrency-trading-in-south-korea-1516699321; Garrett Keirns, Japan’s Bitcoin Law Goes Into Effect Tomorrow, Coindesk, April 2017, https://www.coindesk.com/japan-bitcoin-law-effect-tomorrow/.

[6]       Communique, G20, Finance Ministers and Central Bank Governors (March 19-20, 2018), https://g20.org/sites/default/files/media/communique_-_fmcbg_march_2018.pdf.

[7]       Id.  The IMF has also recently urged international standard-setters to work together to develop a consensus on the definition of crypto-assets and their potential role in the financial system.  IMF, 2018 Global Financial Stability Report 24-26 (April 18, 2018), http://www.imf.org/~/media/Files/Publications/GFSR/2018/April/ch1/doc/text.ashx?la=en.

[8]       See, e.g. FinCEN Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013), https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering; “Virtual Currency” licenses issued by the State of Washington Dept. of Financial Services and the “BitLicenses” issued by the New York State Dept. of Financial Services, https://dfi.wa.gov/bitcoin; http://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm.

[9]       Internal Revenue Service, Notice 2014-21 (March 25, 2014), https://www.irs.gov/newsroom/irs-virtual-currency-guidance.

[10]     Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, Divisions of Enforcement and Trading and Markets, Securities and Exchange Commission (March 7, 2018), https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading.

[11]     Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, Divisions of Enforcement and Trading and Markets, Securities and Exchange Commission (March 7, 2018), https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading; Statement on Cryptocurrencies and Initial Coin Offerings, SEC Chairman Jay  Clayton (Dec. 11, 2017).

 

RELEASE Number

7719-18

https://www.cftc.gov/PressRoom/PressReleases/7719-18?utm_source=govdelivery

April 26, 2018

CFTC Chairman Unveils Reg Reform 2.0 Agenda

Washington, DC — The Commodity Futures Trade Commission (CFTC) Chairman J. Christopher Giancarlo today released a white paper, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps, co-authored with CFTC Chief Economist Bruce Tuckman.

Giancarlo unveiled the white paper at the International Swaps and Derivatives Association (ISDA) annual meeting, in an interview with ISDA CEO Scott O’Malia.

“This white paper is economy-focused,” said Giancarlo. “And our role at the CFTC is to bring a market-focused approach. Our focus is what’s in the best interest of the markets. Our mission is market integrity and market health.”

In response questions about the timeline of implementation of the ideas in the paper, Giancarlo said, “I’m committed to a process in rule writing which is ‘ready, aim, fire.’ I think sometimes, regulators can use the ‘ready, fire, aim’ approach. I’m committed to a deliberative process and getting back to regular order at the agency. We’re not in the wake of a crisis right now – we need to take the time to get this right. We have an ambitious timetable, and we will get this done, but we will do this right. We will move forward in regular order and in good order – we will get this done.”

The white paper utilizes a range of academic research, market activity and the agency’s regulatory experience with implementing current swaps reform, to assess the agency’s implementation of swaps reform, determine its strengths and deficiencies and recommend improvements to the current swaps market reform framework.

In this paper, Giancarlo and Tuckman seek to optimize the CFTC’s implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) so as to strike a balance between systemic safety and stability and market vibrancy and economic growth. Giancarlo and Tuckman explain that financial regulators have a duty to apply the policy prescriptions in ways that enhance markets and their underlying vibrancy, diversity and resiliency. That duty also includes the responsibility to review past policy applications continuously to confirm they remain improved for the purposes intended. It further includes anticipating changing market dynamics and the impact of technological innovation.

The paper takes a comprehensive look at five key areas:

Swaps Central Counterparties (CCPs)

  • Swaps clearing is probably the most far-reaching and consequential of the swaps reforms adopted under Title VII of Dodd-Frank.
  • CFTC implementation of Dodd-Frank’s clearing mandate has been highly successful, significantly increasing the volume of swaps cleared by CCPs.
  • CCPs and the CFTC have made substantial progress to ensure that CCPs are safe and sound under extreme but plausible scenarios and have credible recovery plans to remain viable without government assistance.
  • Continued vigilance and improvement are essential with respect to ensuring the liquidity of prefunded resources; understanding network effects; estimating the liquidation costs of defaulted positions; and enhancing the transparency and predictability of recovery plans.
  • The FDIC and CFTC have much to do in formulating resolution plans, which would guide government intervention in the most dire of eventualities.

Swaps Reporting Rules

  • Swaps data reporting was an important mandate to assist regulators in measuring the counterparty credit risk of swaps by large financial institutions.
  • Yet, ten years after the crisis, the reporting structure is still incomplete.
  • The initial implementation was flawed and ineffective, providing insufficient technical specificity.
  • Since then, CFTC has laid out a more detailed and clear path forward under its July 2017 “Roadmap to Achieve High Quality Swaps Data.”
  • Meanwhile, the CFTC continues global leadership in swaps reporting by co-chairing CPMI-IOSCO Harmonization Group that issued final guidance regarding unique transaction identifiers (UTIs) and unique product identifiers (UPIs)
  • Real-time reporting requirements should be tailored to the liquidity profiles of the associated swaps products in order to yield value of transparency to market (e.g. price discovery, confidence) without introducing trading risk
  • The CFTC should look to collaborate with other authorities to cultivate the development of “regulator nodes” on distributed ledgers

Swaps Execution Rules

  • Congress enacted the G-20 swaps execution reforms by requiring that swaps transactions be traded on regulated platforms called swap execution facilities (SEFs) and executed by “any means of interstate commerce.”
  • The CFTC incorrectly implemented the execution mandate by arbitrarily confining swaps execution to two methodologies and adopting trading rules from highly liquid futures markets, the wrong model for swaps that trade in more episodically liquid markets.
  • The adverse consequences of restrictive execution methods has been global fragmentation of swaps markets and pushing swaps liquidity formation and price discovery away from the SEF platforms, contrary to Congressional intent.
  • The CFTC could encourage a greater amount of swaps trades to take place on regulated SEFs by making the “Made Available to Trade” requirement synonymous with the clearing requirement.
  • Instead of trying to determine SEFs’ swaps execution business model, the CFTC should focus on raising standards of conduct for swaps trading.

Swap Dealer Capital

  • Several components of today’s bank capital regime overestimate the risks of swaps.
  • The conceptual problems are relying on swap notional amount to measure risk; failing to sufficiently recognize offsetting swap positions; and failing to sufficiently acknowledge the risk mitigation of posted margin.
  • These problems can be addressed by iterating, and likely complicating, prescriptive models. Alternatively, regulators might focus on how to rely more heavily but confidently on the internal risk models used by banks and their swap affiliates.

End User Exception

  • Dodd-Frank intended a robust end user exception from clearing and margin requirements and did not intend margin rules to favor cleared products.
  • To reduce the burdens on end users that are not sources of systemic risk, and, in some cases, to reduce their liquidity risk, material swaps exposure thresholds should be established, below which entities would be excepted from clearing and margin requirements.
  • Rules governing uncleared initial margin should be reworked to be less prescriptive and to be unbiased with respect to cleared and uncleared products.

 

RELEASE Number

7718-18

April 25, 2018

https://www.cftc.gov/PressRoom/PressReleases/7718-18?utm_source=govdelivery

CFTC Charges Pennsylvania Resident Michael Salerno and his Entities with Solicitation Fraud and Misappropriation in Connection with Retail Forex Transactions in Violation of the Commodity Exchange Act

Federal Court Order Freezes Assets and Protects Books and Records of Defendants and Relief Defendants

Washington DC – The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action charging Defendants Michael Salerno of Chadds Ford, Pennsylvania, and his companies Black Diamond Forex LP and BDF Trading LP, both Pennsylvania limited partnerships, and Advanta FX, a Pennsylvania corporation, with fraudulently soliciting members of the public to become foreign currency (forex) proprietary traders and with misappropriating the traders’ funds for purposes other than forex trading.

Relief Defendants

The Complaint, filed on April 17, 2018, in the U.S. District Court for the Eastern District of Pennsylvania, also charges Black Diamond Investment Group, a Pennsylvania limited liability corporation, and Advanta Capital Markets Ltd., a Saint Vincent and the Grenadines company, as Relief Defendants for holding funds belonging to proprietary traders.  As alleged, the Relief Defendants were funneled funds that Defendants had received from proprietary traders and used the funds for purposes for other than forex trading.

On April 17, 2018, U.S. District Court Judge Cynthia M. Rufe signed a Statutory Restraining Order freezing the assets of all the Defendants and Relief Defendants, and prohibiting the destruction of their books and records.  The court has scheduled a hearing for May 1, 2018, on the CFTC’s motion seeking a preliminary injunction against the Defendants and Relief Defendants.

The Scheme’s Fraudulent Hiring Process

The CFTC’s Complaint alleges that beginning in at least January 2017 and continuing through at least March 2018, Salerno and his companies fraudulently solicited individuals to become forex traders by making false statements on online websites such as LinkedIn and Indeed.com and their own websites, in violation of the Commodity Exchange Act.  As alleged, the Defendants required prospective traders to pay a “risk deposit” or “risk capital deposit” of varying amounts, usually ranging from $1,200 to $1,900, with a promise that Defendants would match these risk deposits with some multiple of company funds in proprietary trading accounts, and then share a portion of the profits from trading with the traders and to pay bonuses tied to certain performance milestones.  Defendants’ job postings and solicitations enticed at least 150 prospective traders to deposit at least $310,000 in risk deposits, the Complaint alleges.

Fraudulent Misrepresentations and Misuse of Trader Funds

In soliciting prospective traders, the Complaint alleges that Salerno and his companies falsely represented that Salerno had amassed a comfortable income in the forex market, possessed an overseas bank account holding $9.5 million, and that Salerno had sold off $10 million in real estate in 2015.  According to the Complaint, Salerno claimed that he was using these funds to start up his proprietary trading companies, from which Salerno promised to establish live trading accounts for traders at an overseas trading company and to split the profits from those trading accounts 70/30 in favor of the trader.  However, Salerno allegedly has not traded successfully in the forex markets for at least five years.

In addition, the Complaint states that in 2015, the same year he claimed to have made $10 million in real estate sales, Salerno actually filed for bankruptcy and was discharged from debts totally over $250,000.  He failed to tell prospective traders that he had been convicted of a felony and sentenced to 21 months in prison in 2005.  Moreover, the Complaint alleges Defendants never established live trading accounts for anyone, but used risk deposits for purposes other than trading and have refused to return traders’ funds.  For instance, on one occasion, Salerno told another employee that the “payroll needs to be covered by the deposits …,” according to the Complaint.

In its continuing civil litigation, the CFTC seeks restitution to defrauded investors, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against further violations of the CEA, as charged.

The CFTC appreciates the assistance of the Cyprus Securities and Exchange Commission and the St. Vincent and the Grenadines Financial Services Authority.

CFTC Division of Enforcement staff members responsible for this action are Elizabeth M. Streit, Barry Blankfield, Joy McCormack, Scott Williamson, and Rosemary Hollinger.

* * * *

CFTC’s Foreign Currency (Forex) Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Foreign Currency Trading (Forex) Fraud Advisory, which states that the CFTC has witnessed a sharp rise in Forex trading scams in recent years and helps customers identify this potential fraud.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Complaint: Michael J. Salerno, et al.

Statutory Restraining Order: Michael J. Salerno, et al.

 

News Release

For Release: 

http://www.finra.org/newsroom/2018/finra-progress-report-finra360-highlights-significant-changes

Tuesday, April 24, 2018

Contact(s): 

Jessica McCormick (212) 858-5145
Donna Hemans (202) 728-6982

FINRA Progress Report on FINRA360 Highlights Significant Changes

One-year Report Lays out Changes through the Organizational Review

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today released a comprehensive progress report summarizing the significant operational and regulatory changes FINRA has made in the first year of its ongoing FINRA360 organizational review.

“The first year of FINRA360 is already resulting in significant change across the organization,” FINRA CEO Robert Cook wrote in the report. “We have placed particular emphasis on changes that benefit investors, promote compliance, address duplicate operations, enhance transparency, foster engagement, or improve our day-to-day supervisory interactions with firms.”

Major actions to date include:

  • integrating two Enforcement programs into a single unified structure;
  • releasing an Examinations Findings Reportdetailing FINRA’s observations from the prior year’s examinations;
  • publishing a summary of FINRA’s 2018 budget and financial guiding principles;
  • launching a Small Firm Helplineto address routine questions about FINRA;
  • creating an Innovation Outreach Initiativeto address the growing activity in FinTech, cryptocurrencies and related issues;
  • increasing funding for training of examiners and regulatory coordinators;
  • updating the activities of FINRA’s advisoryand governance committees and enhancing transparency regarding what they do and how interested parties can get involved; and
  • further advancing FINRA’s risk-based approach to examinations and implementing certain process improvements in how FINRA interacts with member firms in the exam context.

As part of this ongoing initiative, FINRA continues to make organizational changes that will impact FINRA’s day-to-day interactions with member firms and investors, Cook noted in the report.

“A year into what I have often emphasized is a multi-year initiative, we have accomplished a great deal, but we still have much more work ahead of us,” Cook wrote in the report. “We are turning our attention in the coming year to our Examination program and a number of other areas where we think we can achieve additional meaningful change. These may include larger organizational changes as well as smaller improvements that collectively will have significant impacts on our day-to-day interactions with the firms we regulate and the investing public we protect. Expect more to come.”

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

 

SPEECHES & TESTIMONY

Statement on Manufactured Credit Events by CFTC Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight

https://www.cftc.gov/PressRoom/SpeechesTestimony/divisionsstatement042418

April 24, 2018

Washington, DC — The Commodity Futures Trading Commission (CFTC) Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight today issued the following statement regarding manufactured credit events in connection with credit default swaps (CDS):

“The CDS market functions based on the premise that firms referenced in CDS contracts seek to avoid defaults, and as a result, the instruments are priced based on the financial health of the reference entity.  However, recent arrangements appear to involve intentional, or ‘manufactured,’ credit events that could call that premise into question. In a public statement dated April 11, 2018, the International Swaps and Derivatives Association’s (ISDA) board of directors criticized manufactured credit events, writing that they ‘could negatively impact the efficiency, reliability, and fairness of the overall CDS market,’ and ISDA’s board indicated that it advised its staff ‘to consult with market participants and advise the Board on whether…amendments to the ISDA Credit Derivatives Definitions should be considered’ to address manufactured credit events.

“Manufactured credit events may constitute market manipulation and may severely damage the integrity of the CDS markets, including markets for CDS index products, and the financial industry’s use of CDS valuations to assess the health of CDS reference entities.  This would affect entities that the  CFTC is responsible for overseeing, including dealers, traders, trading platforms, clearing houses, and market participants who rely on CDS to hedge risk. Market participants and their advisors are advised that in instances of manufactured credit events, the Divisions will carefully consider all available actions to help ensure market integrity and combat manipulation or fraud involving CDS, in coordination with our regulatory counterparts, when appropriate.”

 

Three-year Anniversary of FINRA Securities Helpline for Seniors Marked by Investor Success

http://www.finra.org/industry/three-year-anniversary-finra-securities-helpline-seniors-marked-investor-success

On April 20, 2015, FINRA launched the Securities Helpline for Seniors to provide senior investors a source of trustworthy information and assistance. Since its inception, Helpline staff has taken more than 13,000 calls and brokerage firms have voluntarily returned more than $5.3 million to brokerage customers because of information and help provided by the Helpline.

Many callers are simply seeking information, while others need additional help navigating more complex investment problems. One of those stories came to FINRA’s attention following a call to the Helpline in the fall of 2017 by Meggie. We went out to Seattle to learn more about her story.

Securities Helpline for Seniors
Toll free Call 844-57-HELPS (844-574-3577)
Monday – Friday
9 a.m. – 5 p.m. Eastern Time

 

RELEASE Number

7717-18

https://www.cftc.gov/PressRoom/PressReleases/7717-18?utm_source=govdelivery

April 24, 2018

CFTC Asks Innovators for Competition Ideas to Advance FinTech Solutions

LabCFTC looking to “crowdsource” ideas for using the Science Prize Competition Act

Washington, DC — LabCFTC, the Commodity Futures Trading Commission’s (CFTC) FinTech initiative, announced today that it is requesting public input to gather ideas and topics for innovation competitions to advance the agency’s FinTech goals. All comments must be received within 90 days of publication of the request in the Federal Register.

“We launched the LabCFTC initiative to stimulate and promote market-enhancing FinTech solutions,” said CFTC Chairman J. Christopher Giancarlo. “By soliciting feedback from innovators on how the CFTC can best encourage innovation and leverage FinTech and RegTech solutions for the marketplace, we are not only fulfilling the mission of this initiative, we are moving the CFTC closer to my ultimate goal of making the agency a 21st Century regulator.”

“Innovation competitions and our effort to crowdsource priority RegTech topics are exciting regulatory tools that can unleash creativity, ingenuity, and new technologies that can solve challenges that benefit the American public,” said LabCFTC Director Daniel Gorfine. “Our ultimate goal is to focus the energy of America’s innovators on ways to improve our agency and our markets so that we can keep pace with a rapidly digitizing world.”

The Request for Input (RFI), to be published in the Federal Register, is LabCFTC’s effort to gather feedback on how innovation competitions can stimulate innovation and make the CFTC more effective and efficient in satisfying its mission to foster open, transparent, competitive, and financially sound markets.

The CFTC is soliciting public feedback on: (1) focus areas for potential innovation competitions, as well as (2) how competitions could best be structured and administered to maximize their impact. While the RFI raises the possibility of competitions focused on data visualization tools, machine-readable regulatory rulebooks, and “smart” notice and comment systems, it seeks to crowdsource what may be the most promising topics directly from the innovator community.

Under the Science Prize Competition Act (2015), the CFTC may hold a competition and award prizes, such as including non-monetary prizes and prizes in partnership with external organizations, in order to stimulate innovation designed to advance the goals of LabCFTC, More information on innovation competitions may be found at Challenge.gov.

About LabCFTC

Launched in May 2017, LabCFTC is dedicated to facilitating market-enhancing financial technology (FinTech) innovation, fair market competition, and proactive regulatory excellence and understanding of emerging technologies. LabCFTC is designed to make the CFTC more accessible to FinTech innovators, and serves as a platform to inform the Commission’s understanding of emerging technologies. LabCFTC will enable the CFTC to be proactive and forward-thinking as FinTech applications continue to develop, and to help identify related regulatory opportunities, challenges, and, risks. More information can be found at LabCFTC.

 

Press Release

SEC Charges Additional Defendant in Fraudulent ICO Scheme

https://www.sec.gov/news/press-release/2018-70

FOR IMMEDIATE RELEASE
2018-70

Washington D.C., April 20, 2018 —

The Securities and Exchange Commission today announced additional fraud charges stemming from an investigation of Centra Tech Inc.’s $32 million initial coin offering.

In an amended complaint filed today, the SEC charged one of Centra’s co-founders, Raymond Trapani, in a fraudulent scheme related to Centra’s 2017 ICO, in which the company issued “CTR Tokens” to investors.  Earlier this month, the SEC and criminal authorities charged Centra’s two other co-founders, Sohrab “Sam” Sharma and Robert Farkas, for their roles in the scheme.

“We allege that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.  “Investors should exercise caution about investments in digital assets, especially when they are marketed with claims that seem too good to be true.”

The SEC’s amended complaint alleges that Trapani was a mastermind of Centra’s fraudulent ICO, which Centra marketed with claims about nonexistent business relationships with major credit card companies, fictional executive bios, and misrepresentations about the viability of the company’s core financial services products.  The amended complaint further alleges that Trapani and Sharma manipulated trading in the CTR Tokens to generate interest in the company and prop up the price of the tokens.

Text messages among the defendants reveal their fraudulent intent.  After receiving a cease-and-desist letter from a major bank directing him to remove any reference to the bank from Centra’s marketing materials, Sharma texted to Farkas and Trapani: “[w]e gotta get that s[***] removed everywhere and blame freelancers lol.”  And, while trying to get the CTR Tokens listed on an exchange using phony credentials, Trapani texted Sharma to “cook me up” a false document, prompting Sharma to reply, “Don’t text me that s[***] lol.  Delete.”

The SEC’s amended complaint, filed in federal court in Manhattan, charges Trapani with violating the anti-fraud and registration provisions of the federal securities laws.  The amended complaint seeks permanent injunctions, the return of allegedly ill-gotten gains plus interest and penalties, as well as bars against Trapani prohibiting him from serving as a public company officer or director and from participating in any offering of digital or other securities.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Trapani.

The Commission’s investigation, which is continuing, is being conducted by Jon A. Daniels, Luke M. Fitzgerald, and Alison R. Levine of the Cyber Unit and New York Regional Office. The case is being supervised by Valerie A. Szczepanik and Mr. Cohen.  The litigation is being conducted by Mr. Daniels, Mr. Fitzgerald, and Ms. Levine, and supervised by Ms. Szczepanik.

The Commission wishes to acknowledge the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Manhattan District Attorney’s Office.  The Commission also acknowledges the assistance of the Conference of State Bank Supervisors, which maintains a database of state-licensed financial companies that investors can access before deciding to invest in a company claiming to have state licenses.

 

RELEASE Number

7714-18

https://www.cftc.gov/PressRoom/PressReleases/7714-18

April 18, 2018

CFTC Charges Multiple Individuals and Companies with Operating a Fraudulent Scheme Involving Binary Options and a Virtual Currency Known as ATM Coin

U.S. District Court for the Eastern District of New York Issues Emergency Order Freezing Defendants’ Assets and Granting the CFTC Immediate Access to Defendants’ Books and Records

Washington DC – The Commodity Futures Trading Commission (CFTC) announced the filing of a Complaint in the U.S. District Court for the Eastern District of New York charging Defendants Blake Harrison Kantor, who frequently uses the alias Bill Gordon, and Nathan Mullins, both of New York, and the entities Blue Bit Banc, located in the United Kingdom, Blue Bit Analytics, Ltd.(Analytics) located in Nevis, Turks, and Caicos, and Mercury Cove, Inc. and G. Thomas Client Services (G. Thomas), both New York corporations, with operating a  fraudulent scheme involving binary options and a virtual currency known as ATM Coin.

The CFTC’s Complaint, filed on April 16, 2018, also charges Blue Wolf Sales Consultants, a New York company owned by Kantor, as a Relief Defendant for receiving customer funds.  In addition, the CFTC’s Complaint charges Kantor, Blue Bit Analytics, and G. Thomas Client Services with accepting customer funds and illegally acting as Futures Commission Merchants without being registered with the CFTC.  The Complaint also alleges that the Defendants acted as a common enterprise in carrying out their fraudulent scheme.

U.S. District Court Judge Sandra J Feuerstein on April 17, 2018, entered a Statutory Restraining Order freezing the Defendants’ and Relief Defendant’s assets, prohibiting them from destroying their books and records, and granting the CFTC immediate access to those records.  The Court has scheduled a hearing for April 26, 2018, to determine, among other things, whether to enter an order for preliminary injunction against the Defendants and continue the freeze on Defendants’ assets.  On April 16, 2018, the United States Attorney for the Eastern District of New York filed a parallel criminal action, which charges Kantor with fraudulent conduct, including conduct that is the subject of the CFTC’s action.  See United States v. Blake Kantor aka Bill Gordon, Case No. 18 CR 177 (E.D.N.Y.).

CFTC’s Director of Enforcement Comments

James McDonald, the CFTC’s Director of Enforcement, commented:  “As this action shows, the CFTC is continuing its efforts to root out fraud in our markets.  To achieve this goal, we will work closely and in parallel with our law enforcement partners, which is particularly important in cases like this one, where the Defendants allegedly sought to make their fraudulent scheme more difficult to detect by stretching it across multiple markets, including a virtual currency known as ATM Coin.”

U.S. Attorney Richard Donohue Comments

“As alleged, Kantor used a computer program to generate manipulated data to cheat hundreds of investors out of their hard-earned savings,” stated U.S. Attorney Donoghue.  “To cover-up his fraudulent scheme, Kantor then lied to the FBI and ordered the alteration of documents that would assist agents in identifying his victims.  We will continue to work closely with our law enforcement partners to vigorously prosecute individuals who defraud the investing public and obstruct law enforcement’s ability to detect and prosecute financial crimes.”

Defendants’ Fraudulent Scheme

Binary options are transactions that allow customers to make predictive trades as to whether the price of a certain commodity will rise or fall by a certain date and time.  As alleged in the CFTC’s Complaint, binary options must be traded on a registered board of trade in order to be lawfully offered in the United States.  The Complaint alleges that none of the Defendants execute transactions on a registered board of trade and none has ever been registered with the CFTC in any capacity.

The Complaint alleges that since at least April 2014 and continuing to the present, the Defendants have solicited potential customers through emails, phone calls, and a website to purchase illegal off-exchange binary options.  According to the Complaint, Defendants falsely claimed customers’ accounts would generate significant profits based upon Kantor’s purported past profitable trading.  Also according to the Complaint, Defendants misappropriated a substantial amount of the customer funds for the Defendants’ own personal use.

Defendants sought to cover up their misappropriation by inviting customers to transfer their binary options account balances into a virtual currency known as ATM Coin.  According to the Complaint, some customers agreed to transfer their funds into ATM Coin, and at least one customer sent additional money to Defendants to purchase additional ATM Coin.  Defendants then allegedly misrepresented to customers that their ATM Coin holdings were worth substantial sums of money.

In its continuing litigation, the CFTC seeks restitution to defrauded customers, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions from future violations of the Commodity Exchange Act and CFTC Regulations, as charged.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, the FBI’s New York Field Office, and IRS-Criminal Investigation.

This case is brought in connection with the CFTC Division of Enforcement Virtual Currency Task Force, and the staff members responsible for this case are Susan Padove, Joseph Patrick, David Terrell, Scott Williamson, and Rosemary Hollinger.

*  *  *  *  *  * *

CFTC’s Recent Customer Fraud Advisories

CFTC’s Customer Fraud Advisory on Virtual Currencies and Bitcoin 

The CFTC has issued a Customer Advisory on the Risks of Virtual Currency Trading to inform the public of possible risks associated with investing or speculating in virtual currencies or recently launched Bitcoin futures and options.   See additional bitcoin information, including a warning on Pump & Dump schemes.  The CFTC has also issued several other customer protection Fraud Advisories that provide the warning signs of fraud.

CFTC’s Binary Options Customer Fraud Advisory and “RED” List

The CFTC has issued a Consumer Alert to warn about fraudulent schemes involving binary options and their trading platforms. The Alert warns customers that the perpetrators of these unlawful schemes allegedly refuse to credit customer accounts, deny fund reimbursement, commit identity theft, and manipulate software to generate losing trades.  (See the CFTC’s “RED Lists” [Registration Deficient Lists] information in the following CFTC Press Releases: 7224-15 September 9, 2015; 7363-16 April 18, 2016; 7551-17 April 25, 2017; and 7663-17 December 15, 2017.)

How to Report Suspicious Activities or Information to the CFTC

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Complaint: Blue Bit Banc

Order: Blue Bit Banc

 

RELEASE Number

https://www.cftc.gov/PressRoom/PressReleases/7715-18

7715-18

April 18, 2018

New CFTC Videos Give Inside Look at Binary Options Fraud

Victims’ Stories Illustrate Why Investors Should Beware of Unregistered Exchanges

Washington, DC —The Commodity Futures Trading Commission (CFTC) today released The Truth Behind Binary Options Fraud, new videos that give viewers a first-hand look at the tactics shrewd fraudsters use to con investors out of hundreds or even thousands of dollars.

Click here to view The Truth Behind Binary Options Fraud Video Series

“Binary options can be helpful hedging tools for some traders, but there are only a few entities that can legitimately do business with individual investors in the U.S.,” said Erica Elliott Richardson, CFTC Director of Public Affairs. “These videos serve as a wake-up call to investors to check the registration of the company they are trusting with their money.”

In this two-part episode, experienced investors Nick Morrison and Lowell Enlow tell their stories of how they were swindled in a binary options scheme that ultimately stole more than $1 million from victims in the United States. Their ordeal illustrates how even seasoned investors can be fooled when fraudsters build legitimacy by promoting supposedly infallible trading platform software with convincing online advertisements and fake testimonials and reviews.

The Truth Behind Binary Options Fraud is the second installment of True Fraud Stories, a video series about real people losing their hard earned money to fraudulent financial schemes.

To watch the binary options fraud videos, visit SmartCheck.gov/Videos.

The CFTC created these videos about binary options fraud because it has a global reach – most of the fraudulent operations are based in other countries with no physical location or people in the United States. These fraudsters use the Web, social media, mobile apps, and telephone pitches from so called “brokers” to lure victims into the scams and then drain the investors’ credit card accounts.

It is common for these fraudsters to create professional looking websites that resemble legitimate trading platforms. On these fraudulent sites, investors can quickly and easily open accounts, fund the accounts with their credit cards, place trades, and manage gains and losses. However, not all binary options trading is fraudulent. Binary options can be legally traded on regulated exchanges in the United States. Registered exchanges and brokers must agree to uphold requirements put in place by the CFTC and other regulators. Although registration is no guarantee against fraud or mismanagement, it does bring a higher level of security and accountability to the public.

The CFTC launched SmartCheck.gov in 2014 to make it easy for investors to conduct background checks of financial professionals and firms to ensure they are registered. CFTC also publishes the Registration Deficient List (RED List) that identifies unregistered foreign entities that the CFTC has reason to believe are soliciting and accepting funds from U.S. residents at a retail level for, among other things, trading in binary options or foreign currency and are required to register with the CFTC, but are not registered.

“We strongly encourage investors to take the simple first step of checking the registration status of their broker on SmartCheck.gov or the RED List before trading,” said Dan Rutherford, Deputy Director of CFTC’s Office of Customer Education and Outreach. “In addition to the videos, the SmartCheck website offers resources and tools to help traders and investors spot other warning signs of fraud and a direct way to report suspicious activity.”

About CFTC SmartCheck

CFTC SmartCheck is an educational initiative of the CFTC’s Office of Customer Education and Outreach. SmartCheck.gov provides the public with tools that help them research the credentials of financial professionals, uncover past disciplinary histories, and stay ahead of scam artists with news and alerts. The campaign is central to CFTC’s commitment to help protect the public through robust fraud prevention and investor education. Learn more about CFTC SmartCheck on Facebook at facebook.com/CFTCSmartCheck or Twitter at twitter.com/CFTCSmartCheck.

 

 

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