by T. GormanPosted on Posted in SECActions

The future of Fintech is a continuing saga. As technology continues to rapidly evolve it impacts not just finance but much of the surrounding environment. For regulators like the Commission the rapid evolution of tech presents the continuing challenge of how to administer and implement statutes that were created in a different age — the 1930’s when radio and phones tied to a wire were tech — to crypto, DeFi, and artificial intelligence, Fintech today.

Chair Gary Gensler addressed this question in remarks delivered at the recent DC Fintech Week on October 21, 2021. Prepared Remarks at DC Fintech Week (here). Mr. Gensler began by creating a bit of context: “Finance and technology have coexisted in a symbiotic relationship since antiquity. Think about it. Money, accounting and ledgers, which we take for granted in some ways now, were technologies that changed the face of finance long ago.” Thus, the Financial Stability Board recently focused on Fintech as “technologies that may have a material effect on how finance is delivered.”

If Fintech is the delivery vehicle of finance, then the central question is how regulators such as the SEC continue to achieve their core public policy goals as it evolves today. Mr. Gensler addressed this question by considering two innovations. First, he addressed artificial intelligence. Presently, the Chair stated that in his view artificial intelligence is challenging decision-making more than crypto: “Predictive data analytics, including machine learning are increasingly being adopted in finance from trading, to asset management, to risk management. Though we’re still in the early stages of these developments, I think the transformation we’re living through now could be every bit as big as the internet was in the 1990,” according to Mr. Gensler.

The new technologies can and are transforming. Yet they also present traditional issues such as conflicts of interest, bias and systemic risks. New tech also holds the potential to reinforce societal inequities. Dealing with these and other, similar issues, presents significant challenges for the future.

Another innovation is crypto and, within that space, decentralized finance or DeFi. This development is challenging “current business models in trading, lending and lending,” according to the Chair. Again new issues are being raised based on many traditional notions.

While Chair Gensler describes himself as “technology-neutral” he is not public policy neutral. As these new technologies continue to develop and evolve a key question is how to protect investors. Another centers on maintaining fair, orderly and efficient markets and facilities for capital formation. At the same time it is essential to guard against improper activity and promote financial stability. Questions about how to achieve these goals are “timeless” despite the fact that the technology is new, Mr. Gensler stated in concluding his remarks.

Comment

The statutes administered by the agency may be decades old, but as Chair Gensler stated, the questions are not. The challenge of protecting investors, maintain orderly markets and fostering capital formation is as difficult today as it was at the time the statutes were initially drafted in the 1930s. While the tech is new, and the terms are different, the central questions being addressed are essentially similar. Indeed, the challenge of bringing a new ethics to the market-place is as important and difficult today as it was in 1930.

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by T. GormanPosted on Posted in SECActions

Chair Gensler raised two key points regarding environmental disclosures in remarks before the Financial Stability Oversight Counsel on October 21, 2021. First, with respect to issuers, the Chair noted that the “SEC has a role to play in cases like this to facilitate consistent, comparable, and decision-useful disclosures . . .” Second, concerning funds, he noted that it is time to update rules in this area “so that investors can see what data, methodologies, and criteria stand behind these names and claims” used.

SEC

Report: The Staff issued a Report on Equity and Options Market Structure Conditions in Early 2021. The report essentially focuses on the trading around GameStock earlier this year. At the conclusion it provides a list of items for reflection. The Report was issued on October 18, 2021 (here).

Whistleblowers: Two whistleblowers were awarded $40 million on October 18, 2021. The CFTC, however, issued a record $200 million to one whistleblower last week.

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 1 civil injunctive actions and 1 administrative proceeding, exclusive of tag-along and other similar proceedings, excluding one FCPA case where the author has conflicts.

Offering fraud: SEC v. Bernardi, Civil Action No. 1:21-cv-08598 (S.D.N.Y. Filed October 20, 2021) is an action which names as defendants: Robert Bernardi, the founder of GigaMedia Access Corporation, a private encryption software firm and its CEO for a time; Nihat Cardak, Gia’s CFO for a period; and Sunil Chandra, an employee of the firm. Over a period of several months, beginning in early 2018, Defendants raised over $37 million from sophisticated investors in Giga. The plan was implemented through the use of fabricated bank statements, falsified audited financial statements and with the aid of an employee who impersonated a customer on an investor due diligence call. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was brought by the U.S. Attorney’s Office for the Southern District of New York. See Lit. Rel. No. 25244 (October 20, 2021).

Offering fraud: SEC v. Trikantzopoulos, Civil Action No. 25243 (D. Mass.) is a previously filed action which named as defendants Vassillios Trikantzopoulos and Navis Ventures LLC. The complaint alleged an international real estate investment scheme. Following the solicitation of investors, their funds were misappropriated and used for the personal expenses of Mr. Trikantzopoulos. The Court granted the Commission’s motion for summary judgment, concluding that Defendants had defrauded investors. The Court entered judgements as to each Defendant on October 15, 2021, enjoining them from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the Court directed that Mr. Trikantzopoulos pay $109,139 in disgorgement, $17,841 in prejudgment interest and a penalty of $195,046. Nevis was directed to pay a penalty of $250,000. See Lit. Rel. No. 25243 (October 15, 2021).

Controls: In the Matter of Amyris, Inc., Adm. Proc. File No. 3-20624 (October 15, 2021) is a proceeding which names the developer of chemical products as a respondent. During the first two quarters of 2018 the firm improperly recognized certain royalty revenues. As a result, the firm’s financial statements were materially inaccurate. This resulted because the company did not devise internal accounting controls to provide reasonable assurance that relevant information was communicated to the accounting staff. The company took remedial actions. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings the company consented to the entry of a cease-and-desist order based on the Sections cited in the Order. The company will also pay a penalty of $300,000.

DOJ

Report: The Department issued its annual report on DOJ’s efforts to combat and prevent elder fraud and abuse, dated October 19, 2021 (here).

FinCEN

Exceptive relief: The regulator issued exceptive relief for casinos from certain identity verification requirements. Specifically, a casino may use suitable non-documentary methods to verify the identity of online customers. The method selected should be evaluated based on risk, according to the October 19, 2021 release (here).

Australia

Remarks: Cathie Armour, Commissioner, Australian Securities and Futures Commission, delivered the keynote address at the ISDA Annual Asia Pacific Commission, titled Regulating FICCA in today’s Age of Uncertainty on October 19, 2021 (here). Her remarks focused on the impact of the current pandemic.

ESMA

Report: Three European Supervisory Authorities delivered to the Commission their final report regarding financial products that make sustainable investments contributing to environmental objectives, according to an October 22, 2021 release (here).

Germany

Requirements: BaFin qualified its requirements for BAIT, that is, the supervisory requirements for banks, according to an October 14, 2021 release (here).

U.K.

Rules: The Financial Conduct Authority issued final rules under the Markets in Financial Instruments Directive which is part of the investment firm’s Prudential Regime. These Directive will streamline and simplify prudential requirements by refocusing on requirements and expectations away from certain risks. The focus is to consider and look to manage the potential harm firms can pose to consumers and markets (here).

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