The SEC Chair sets the Agency’s sights on Cryptocurrencies

 On October 5, 2021, Securities and Exchange Commission Chairman Gary Gensler addressed the House Financial Services Committee regarding the agency’s role in regulating the cryptocurrency markets. His remarks regarding Congress’ need to fill the regulatory gaps in cryptocurrency markets have been criticized as confusing considering his past statements that most cryptocurrencies are securities and therefore already fall under the SEC’s regulatory scheme. Adding to the uncertainty is his refusal to stake out a clear position as to whether the two biggest cryptocurrencies, Bitcoin and Ethereum, are securities. 

The SEC and its state counterparts presently apply the Howey[1]/Forman[2] tests set down by the U.S. Supreme Court in analyzing whether cryptocurrencies are “investment contracts” within federal and state securities laws. This fact extensive analysis that is applied on a case-by-case basis may lead to different results from one cryptocurrency to another. Consequently, if faced with an enforcement action by either the SEC or the States of Missouri, you may wish to consult with experienced securities enforcement counsel at Cosgrove Law Group.

Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC. 

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[1] S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L.Ed. 1244 (1946) and 293,

[2] United Housing Foundation, Inc. v. Forman, 421U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975) 

Gary Gensler Nominated to be the New SEC Chairman

On January 18^th, a few days before Biden was sworn in as President, he announced his nomination for the new Securities and Exchange Commission (“SEC”) chairman.  President Joseph Biden named Gary Gensler as his pick for SEC chairman[1].  While Gensler still needs to be confirmed by the senate[2], it is expected that he will be approved. Gensler’s confirmation will create a 3-2 democratic majority in the SEC commission.

Gary Gensler has an extensive resume within the financial industry.  He is a former Commodity Futures Trading Commission (“CFTC”) chairman, and is known for supporting intensive regulation. During his tenure at the CFTC, he introduced new rules concerning derivative markets, and implemented the Dodd-Frank Act of 2010.  Gensler has also worked inside the industry he regulated, as an executive at Goldman Sachs from 1979 to the late 1990s[3]. Gensler has served as Secretary of the Treasury for Domestic Finance and Assistant Secretary of the Treasury for Financial Markets[4]. Currently, he is a professor of Global Economics and Management at MIT Sloan School of Management[5].

Gary Gensler is recognized as an aggressive regulator. He is known to be direct about his policy decisions and not straying away from controversy[6]. Gensler’s transparent conduct can be beneficial for the SEC, and also beneficial to those who fall under SEC regulation. Transparency in decision making can make it easier to predict what new polices could be passed, but more importantly, how those polices will affect the securities industry. This is primarily because Gensler is unambiguous about what he wants to accomplish. Gensler is consistent. While Gensler is transparent about his policy decisions, he advocates for that same transparency within securities markets. Possible changes include an increase in ESG disclosures[7], possible new rules to “swaps” (similar to his actions as CFTC Chairman), and increased whistleblower protections[8].

Gensler may impact the cryptocurrency industry. Gensler is a supporter of Bitcoin and other cryptocurrencies, however, he has also indicated the possibility of some cryptocurrencies falling under the scope of securities definitions (such as XRP)[9]. Overall, we can expect Gensler and the SEC to become more hands-on when it comes to regulation. 

At Cosgrove Law Group, we will be keeping a close eye on potential new regulation by the SEC. If you have any questions regarding securities regulations and rules, please feel free to give us a call at 314-563-2490.

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC. 

 

[1] Politi, J. (2021, January 18). Biden names Gensler as SEC head in push towards more scrutiny. Retrieved January 21, 2021, from https://www.ft.com/content/a1ddd082-a253-4148-975a-1ec85b5e94d0

[2] Dizikes, P. (2021, January 19). MIT Sloan's Gary Gensler to be nominated for chair of Securities and Exchange Commission. Retrieved January 21, 2021, from https://news.mit.edu/2021/gary-gensler-nominated-chair-sec-0119

[3] Gary Gensler. (n.d.). Retrieved January 21, 2021, from https://ballotpedia.org/Gary_Gensler

[4] Sprunt, B. (2021, January 18). Biden Taps Veteran Financial Regulators To Lead SEC, CFPB. Retrieved January 21, 2021, from https://www.npr.org/sections/biden-transition-updates/2021/01/18/958023670/biden-taps-veteran-financial-regulators-to-lead-sec-cfpb

[5] Lundy, J. G., MacPhail, M. R., & Porteous, D. W. (2021, January 19). President Biden Announces Gary Gensler as SEC Chair Nominee. Retrieved January 21, 2021, from https://www.natlawreview.com/article/president-biden-announces-gary-gensler-sec-chair-nominee

[6] Nicodemus, A. (2021, January 19). 'A very strong and vocal regulator': Biden taps Gary Gensler to lead SEC. Retrieved January 21, 2021, from https://www.complianceweek.com/regulatory-policy/a-very-strong-and-vocal-regulator-biden-taps-gary-gensler-to-lead-sec/29931.article

[7] Glazer, E. (2021, January 18). Companies Brace Themselves for New ESG Regulations Under Biden. Retrieved January 21, 2021, from https://www.wsj.com/articles/companies-brace-themselves-for-new-esg-regulations-under-biden-11610719200

[8] Schweller, G. (2021, January 18). Biden Picks Gary Gensler to Chair SEC. Retrieved January 21, 2021, from https://whistleblowersblog.org/2021/01/articles/whistleblower-news/biden-picks-gary-gensler-to-chair-sec/

[9] Basar, S. (2021, January 21). Crypto Industry Eyes Gary Gensler at SEC. Retrieved January 21, 2021, from https://www.tradersmagazine.com/am/crypto-industry-eyes-gary-gensler-at-sec/

 

What Chairman Jay Clayton’s Resignation Could Mean for Future of Financial Regulation

On November 16^th, 2020 Securities and Exchange Commission (“SEC”) Chairman, Jay Clayton announced he will be stepping down from his position at the end of 2020[1]. The Chairman’s announcement comes as no surprise, mainly due to Joe Biden’s presidential victory. SEC chairs typically step down when there is a new president elect[2]. (Former Chair Mary Jo White stepped down in 2016 after current President Donald Trump’s election[3] and former Chair Mary Schapiro resigned in 2012 after former President Barack Obama’s election.[4]) President-Elect Joe Biden is likely to nominate a new chairman before his inauguration on January 20^th, 2021.

SEC Commissioner, Allison Lee is positioned to become the acting Chair until President Biden appoints a replacement for Jay Clayton[5]. Possible appointments include former SEC commissioner Kara Stein, Former commissioner Rob Jackson, Preet Bharara, a former United States attorney for the Sothern District of New York, Maxine Waters head of the House Financial Services Committee and, Gary Gensler who is currently leading the financial policy transition team for the future Biden administration[6].  

An appointment of a democratic chair will create a democratic majority within the commission. Historically, democratic members of the SEC rely heavier on enforcement than their republican counterparts. Gary Gensler, for example, aggressively implemented regulations such as the Dodd-Frank Act during his tenure as chairman of the Commodities Futures Trading Commission (“CFTC”)[7]. The appointment of a democratic chair within the SEC will result in increased enforcement and investigations.

The main question lies in where the priorities of enforcement will be.  Over the previous 3-years, the SEC commission focused more on deregulation and lowering business costs[8].  A democratic commission will possibly shift focus onto increased regulation, specifically on private markets. Additionally, environmental, social, and corporate governance (“ESG”) disclosures are likely to become a larger part of SEC enforcement in a democratic commission, particularly regarding environmental disclosures. Democratic Commissioner Allison Herren-Lee has advocated for standardized reporting for public companies regarding their climate risk[9] efforts which could lead to another amendment to Regulation S-K. Regulation Best Interest and Shareholder Proxy Voting are both expected to come under review with a democratic commission[10]. While these are just theories about what could potentially happen, it is still not for certain. When a new chair is nominated and confirmed, we will have a better idea of what to expect from the SEC. Here at Cosgrove Law Group, LLC we will keep an eye on future changes within the SEC and CFTC.

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[1] Sorkin, A., Karaian, J., Merced, M., Hirsch, L., & Livni, E. (2020, November 16). Trump's S.E.C. Chairman Is Stepping Down. Retrieved November 30, 2020, from https://www.nytimes.com/2020/11/16/business/dealbook/clayton-sec-stepping-down.html 

[2] Cox, J. (2020, November 16). Jay Clayton says he will step down early as head of the SEC at the end of 2020. Retrieved November 30, 2020, from https://www.cnbc.com/2020/11/16/jay-clayton-says-he-will-step-down-early-as-head-of-the-sec-at-the-end-of-2020.html 

[3] Merle, R. (2019, March 28). SEC chair to step down, clearing path for Trump to eliminate tough Wall Street regulations. Retrieved November 30, 2020, from https://www.washingtonpost.com/news/business/wp/2016/11/14/sec-chair-to-step-down-clearing-path-for-trump-to-eliminate-tough-wall-street-regulations/ 

[4] Press Release. (2012, November 26). Retrieved November 30, 2020, from https://www.sec.gov/news/press-release/2012-2012-240htm 

5 Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from https://www.reuters.com/article/us-usa-biden-wallstreet-regulators-factb/factbox-the-top-contenders-to-run-bidens-financial-agencies-idUSKBN28716L 

[6] Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from https://www.reuters.com/article/us-usa-biden-wallstreet-regulators-factb/factbox-the-top-contenders-to-run-bidens-financial-agencies-idUSKBN28716L

 [7] Miedema, D. (2014, January 03). Swaps regulator Gensler: Banker turned Wall Street scourge. Retrieved December 01, 2020, from https://www.reuters.com/article/us-financial-regulation-gensler/swaps-regulator-gensler-banker-turned-wall-street-scourge-idUSBREA020OC20140103 

[8] Zanki, T. (2020, October 20). 4 Ways A Biden Election Could Swing SEC Priorities. Retrieved December 01, 2020, from https://www.law360.com/articles/1319347 

[9] Pisani, B. (2020, November 12). What a Democrat-controlled SEC might look like and what it would mean for markets. Retrieved December 01, 2020, from https://www.cnbc.com/2020/11/11/what-a-democrat-controlled-sec-might-look-like-and-what-it-would-mean-for-markets.html 

[10] Rasmussen, P., & Tehrani, P. (2020, November 7). ANALYSIS: Four Spots Biden Is Likely to Reverse SEC Deregulation. Retrieved December 01, 2020, from https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-four-spots-biden-is-likely-to-reverse-sec-deregulation

 AUTHOR: Julianna M. Ness

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC. 

The Use of Social Media for Investment Advice. The Struggle Between Employee Privacy Laws and Investor Protection

The landscape of communication has changed drastically in the past decade.  Information has the capability of widespread reach through the use of various sources.  In particular, social media has become an important channel of communication.  As such, the SEC has recently issued new guidance that allows financial firms to disseminate market related news via social media so long as firms alert investors which social media platforms will be used to deliver such information.  Financial firms’ use of social media must be in compliance with Regulation FD which “requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively…to ensure that all investors have the ability to gain access to material information at the same time.” 

Another emerging issue in the height of social media is employee privacy.  Recently, various states have made efforts to curtail employers’ attempts to monitor employees’ personal Facebook and Twitter accounts.  California, Illinois, Maryland, and Michigan adopted social media privacy laws last year while a similar law in Utah takes effect in May.  Variations of social media privacy laws have been introduced in 35 states since the beginning of 2013.

Securities regulators, however, have requested states to carve out exceptions in such state laws so that certain financial firms can maintain a close watch of the social media accounts of its employees in order to monitor whether personal accounts are being used to give investment advice. Regulators such as FINRA worry that social media networks can create new channels for Ponzi schemes and other frauds and ultimately put investors at risk. According to a survey conducted by American Century Investments, approximately one third of financial advisers use some form of social media several times a week to interact with investors.

Before California’s employee-privacy laws took effect at the start of the year, FINRA and other related groups requested that either the law be vetoed or an exception carved out for financial firms.  California rejected this request.  California’s law prohibits employers from requiring or requesting employees’ to: (1) disclose his or her username or password for the purpose of accessing social media; (2) access personal social media in the presence of the employer; or (3) divulge any personal social media.  Employees cannot be disciplined, terminated, or retaliated against for non-compliance if an employer makes such a request.     

Some state laws provide a narrow exception for employers to conduct legitimate checks of an employee’s personal social media accounts during a formal investigation of an employee’s alleged misconduct.  Nevertheless, securities regulators and financial firms would rather get in front of the issue and monitor employee’s conduct before it rises to the level of a formal investigation or before the potential harm to investors has been done. 

Securities regulators believe current employee-privacy laws are at odds with existing rules that require financial firms to monitor any investment advice that is posted or tweeted by employees.  Financial firms have found themselves between a rock and a hard place when it comes to the issue of employee privacy and compliance with regulations and will likely be faced with deciding whether to violate state law or SEC and FINRA regulations.    

Courts have yet to decide whether FINRA rules will supersede state law on this matter.

For further guidance on how financial firms can work within the bounds of state laws while maintaining its obligations to FINRA contact the experienced attorneys at Cosgrove Law Group, LLC. 

TWEETING, POSTING, and FRIENDING: Social media’s two-edged sword for Investment Advisers

Regulators and compliance departments alike have been shaking their heads at the potential pitfalls of social media. How to support and allow Investment Adviser’s to use social media tools and still protect the investor from bad actors and misinterpreted posts or tweets is no easy task. The rapid fire tweets and the “share everything” mentality become permanent, potentially discoverable, records. But Investment Advisers are finding that social media provides valuable avenues never before available to share and gain information, to find new clients, and to better understand existing clientele.

This week, the Wall Street Journal had an article on this very subject. While little official guidance has been provided to Registered Investment Adviser firms on proper social media policies, reviewing the current guidelines for client communication can offer guidance to compliance and legal departments when they are requested to develop a road map for their firm and its social media policies. The potential pitfall in having a detailed policy is that once it is in black and white, it must be followed, and either an individual or a department must be charged with ensuring this—quite a task for a such a vast medium. However, given the free-range but permanent aspects of social media, RIA’s of all sizes should begin discussing and seeking legal counsel on how they will address this matter given the current regulations in place that govern client and potential client communications. The alternative--waiting for a post or a tweet to cause a problem--can be a dangerous course to take.

Additionally, many employees may appreciate the guidance and opportunity to hear and be heard on this matter as they try to use social media to the best use without exposing their record or license to unnecessary risk. Part of being in a highly regulated industry is staying ahead of the curve so that potential problems don’t become actual ones.

FINRA has provided Broker Dealers with specific guidelines regarding social media. Using these rules as a framework for RIA’s social media policies may be another helpful tool when the RIA firm is looking for a place to start the discussion on this topic.

Cosgrove Law, LLC offers consulting to RIA firms on a wide range of compliance matters.

Focusing Only on Dodd-Frank? Then You Might Be Missing Something

Because the Dodd-Frank financial reform bill grabs headlines every day, other regulations are entering the scene almost undetected. Broker-dealers and registered investment advisors may not be aware of new upcoming regulations, which could impact their business.

The Dodd-Frank reform bill has shaken the marketplace and the regulatory bodies. In its aftermath, there have been a flurry of mandated studies, proposals and rulemakings, but it has also spurred other agencies and organizations into action. As such, new regulations are on the horizon besides just those implemented under Dodd-Frank authority.

Last summer, in addition to passing Dodd-Frank, Congress also passed the Foreign Account Tax Compliance Act (FACTA), which imposes stricter IRS filing requirements on those having overseas assets of more $50,000 US dollars. This legislation has significant effect on institutions that hold assets for U.S. investors. FACTA will take effect in 2013.

FINRA revised its suitability rule (currently NASD Rule 2310), which is slated to go into effect on July 9, 2012. The revised rule adds five new elements that broker dealers and firms must consider: client liquidity, age, investment experience, time horizon, and risk tolerance.

FINRA also has implemented new trade-reporting requirements. In May 2011, FINRA began requiring brokerage firms to start using its Trade Reporting and Compliance Engine (TRACE) system to report trades of asset-backed securities. This coming October, broker dealers will have to begin reporting more trades and additional, previously undisclosed data into FINRA’s Order Audit Trading System.

The Department of Treasury’s Financial Crimes Enforcement Network (Fincen) has been discussing the possibility of subjecting registered investment advisory firms and hedge funds to its anti-money laundering rules. Although nothing has been implemented yet, Fincen is considering making it a requirement for these firms to file suspicious-activity reports (SARs) like banks and broker dealers.

With all of these new regulations and those yet come, it is important to have legal counsel that knows and understands the changing regulatory environment.

The Murky Waters of State Commodity Laws

State commodity laws are notoriously antiquated and hard to follow. For many precious metals dealers, it can be difficult to navigate the applicable state laws in the various states where they do business.

This difficulty arises for several reasons. First, the Model State Commodity Code (“Model Code”) was drafted in the early 1980s, and it has not been updated since its inception to account for changes in technology that affect the way legitimate precious metals dealers do business. Second, the Model Code has only been enacted as it was written by a handful of states, so there is a lack of uniformity from state to state. Third, some states, like Arizona and Montana for example, have adopted substantive provisions of the Model Code, but these provisions have been incorporated into the state securities laws, instead of a separate Chapter or Act. Finally, there are states that have chosen not to regulate commodity transactions at all or that have decided to regulate them using a different approach than that set out in the Model Code.

The Model Code originally was drafted to provide state jurisdiction over generic commodities-themed frauds because the state securities acts were inadequate to address such schemes. As a result, the Model Code devised the concept of a “commodity contract”, which is defined as “a contract for the purchase or sale of commodities, primarily for speculative or investment purposes, and not for use or consumption by the offeree or purchaser.” Therefore, this new concept was intended to provide a better means of jurisdiction over only certain commodity transactions.

Unfortunately, for precious metals dealers, the two most common schemes at the time the Model Code was drafted were centered around the sale of precious metals that were never delivered or promises to store precious metals that were subsequently never purchased. Accordingly, there are stringent provisions defining and regulating the purchase of precious metals. However, the Model Code drafters included an exemption for transactions involving the purchase of precious metals if certain very specific requirements were met. One of those requirements is that delivery must be completed within 28 days, purportedly making it easier for retailers to avoid and regulators to identify unregistered futures contracts.

Essentially, the Model Code should have streamlined the process for determining whether illegal transactions have taken place. But though the Model Code may seem straightforward on its face, the inconsistency in adoption between the states and nuances among those states that have adopted the Model Code has created a veritable trap for unwary precious metals dealers and necessitates the need for experienced counsel who are aware of the these subtle differences.

The attorneys of Cosgrove Law, LLC have a unique knowledge and understanding of state and federal commodity regulations and exemptions, with an emphasis in the area of precious metals. Our firm is a member of the Industry Council for Tangible Assets that has compiled a 500-page, nationally recognized 50 state commodities survey. Our attorneys regularly provide advice to commodity dealers about relevant state and federal regulations and assist in internal review of company procedures. As part of our firm’s compliance services, we are also available to conduct audits or assist in developing an audit program to ensure ongoing compliance.

Saving a Buck on Your Compliance Program Might Cost You in the Long Run

If you are an independent investment adviser or small broker dealer that has realized it has a need for compliance assistance, you should choose your compliance counsel carefully. First, if your compliance adviser is not an attorney, your communications with that adviser is unlikely to be protected by the attorney-client privilege in the event of a regulatory inquiry or an enforcement proceeding. If you do choose an attorney in which to place your trust, you should make sure that they have previously been through several SEC, State and FINRA audits, and that he or she is adequately insured. Getting a clear picture of your compliance status is critical, but it might backfire if it can be stolen from you through an investigatory subpoena or civil investigatory demand. Compliance is a far ranging task, and you should apply several sets of eyes to getting it done right. Our firm has helped independent investment advisers with ADV updates and a variety of other regulatory issues. It can be an unnerving task, as there are so many issues and levels that need to be addressed with analytical precision and a depth of knowledge seldom possessed by a single individual. Beyond representing aggrieved investors and brokers in industry disputes, our firm has represented a variety of industry participants that would have been well-served by a preventative compliance program. It will be far more expensive to cure a lapse in compliance than it will to hire a compliance firm or law firm with substantial regulatory as well as industry compliance experience. Members and associates of our firm have been on both sides of regulatory audits and inquiries, and we are ready to help you avoid accidentally triggering a costly customer complaint or regulatory inquiry, investigation or Order.