by T. GormanPosted on Posted in SECActions

SEC Chair Gary Gensler detailed an agenda that is likely to chart in part the direction of the agency over at least the next several months in his testimony last week before the House Committee on Financial Services (here). The agenda includes the following: 1) Gamification and Unser Experience; 2) Payment for Order Flow; 3) Equity Market Structure; 4) Short Selling and Market Transparency; 5) Social Media; 6) Market Plumbing: Clearance and Settlement; and 7) System Wide Risk.” These issues which will be discussed in a report to be issued later this summer.

The six issues listed reflect the rapidly changing market environment created by evolving technology as well as the events in the markets earlier this year. The critical question presented by this evolution is, according to Mr. Gensler: “When new technologies come along and change the face of finance, how do we continue to achieve our core public policy goals and ensure that markets work for everyday investors?” The answer to this question is not simple as illustrated by a brief look at each question:

1) Gamification is a term that encompasses an expansive range of ideas. It begins with the game-like features used with online devices, builds on tech that includes behavioral prompts designed to encourage users to engage with an app and links to features that employ predictive data analytics. While the prompts can be useful and enhance user experience, “following the wrong prompt on a treading app . . . could have substantial effect on a saver’s financial position,” the Chair noted. To evaluate this question the Commission plans to seek public input.

2) Payment for Order Flow, which is prohibited in some countries, comes in two forms: Payments from wholesalers and those from exchanges to market makers and brokers. Mr. Gensler is focused on those from wholesalers to brokers since they transmit information to the purchasers who are not obligated to offer fair access to it – the wholesalers can use it as they determine. This creates a competitive edge. It also presents questions that include potential conflicts of interest and best execution. These are questions that must be evaluated by the staff.

3) Equity Market Structure today presents issues regarding concentration. Currently about 53% of the orders are executed by the large public markets; 47% are executed by either off-exchange wholesalers (38%) or alternative trading systems (9%). Since concentration can result in a competitive edge the agency is going to examine the question in view of its rule making authority.

4) Short Selling was one of the key issues in the market events earlier this year. While there are reports available on the question that afford transparency into the practice, the Commission is going to examine this issue.

5) Social Media is having an impact on the markets as reflected in the events that took place earlier this year. One point to consider, Mr. Gensler notes, involves “sentiment analysis” which is being used by some sophisticated investors. It involves following public communications to assess relationships between words and prices. Since it can be used for nefarious practices such as to manipulate a market, the agency will study the process.

6) Market Plumbing is a question that focuses in part on settlement time, currently T+ 2, the gap between the order and the transfer of the cash and securities. While the time has varied over the years – in the 1920s a one day cycle was used – Mr. Gensler believes that “the standard settlement cycle could reduce costs in our markets” if shortened.

7) System-wide Risks includes there key points: a) the impact of broker liquidity when large sums of capital need to be raised quickly as occurred earlier this year; b) the potential impact of losses suffered by certain hedge funds this year; and c) the concentration among market makers or brokers at clearing houses which can also have market impact. Each of these points will be evaluated by the staff.

Evaluation of these difficult and complex issues will chart much of the Commission’s path for at least the next several months. As the assessment evolves at least one report will be issued to update Congress and the markets. In addition, there will be opportunities for the public to give input to the agency and possibly enforcement actions. By the time those occur they may well represent not the end of these projects but the beginning of assessing the ever evolving impact of tech on markets that originated decades ago – a new era for the SEC.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

SEC Chairman Gary Gensler testified before a House committee this week. During his testimony the Chairman mentioned several of the pending issues on his agenda regarding items such as gamification, payment for order flow and equity market structure, noting that a report will be forthcoming. The new Chairman also discussed crypto currencies with the Committee.

Be careful, be safe this week

SEC

Repository: The Commission approved the registration of the first security-based swap data depository, announced on May 7, 2021. The repository will accept transaction reports for security-based swap transactions in equity, credit and interest rate derivatives asset classes (here).

Testimony: Chairman Gary Gensler testified before the House Committee on Financial Services on Thursday, April 6, 2021. His testimony focused on key issues facing the agency and crypto currencies (here).

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 1 civil injunctive actions and 2 administrative proceedings, exclusive of tag-along and other similar proceedings.

Manipulation: SEC v. Osegueda, Civil Action No. 25087 (C.D. Cal.) is a previously filed action which named as defendants David Osegueda and several other individuals. This week the Court entered final judgements against Defendants Calvin Ross and Jessica Snyder by consent and Zachery Logan by default. The complaint alleged a pump-and-dump scheme involving shares of Green Cures & Botanical Distribution, Inc., a cannabis company. The final judgements entered enjoined each Defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the judgments as to Mr. Ross and Ms. Snyder enjoined them as to Securities Act Section 5. Those judgments also directed Mr. Ross and Ms. Snyder to pay disgorgement and prejudgment interest of $781,868 and $184,293, respectively, and penalties of $400,000 and $100,000. Mr. Logan was ordered to pay a penalty of $164,000. Each judgement contains a penny stock and officer and director bars. See Lit. Rel. No. 25087 (May 7, 2021).

Undisclosed fees: In the Matter of Maxwell Drever, Adm. Proc. File No. 3-20280 (May 5, 20021) is a proceeding which named as a Respondent the owner and Chairman of Drever Capital Management LLC which provided management services in relation to a redevelopment project for 1401 Elm St. Over a period of several months, beginning in April 2016, Respondent raised about $53 million for the redevelopment project. Without telling investors he diverted about $10 million to himself. While he later reinvested much of the money in the project, he also used part of it to take an equity stake in another venture. In resolving the matter Respondent agreed to implement certain undertakings. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. He also agreed to pay disgorgement of $1,214,246, prejudgment interest of $282,979.17 and a penalty of $75,000.

Disclosure: In the Matter of Under Armour, Inc., Adm. Proc. File No. 3-20278 (May 3, 2021). Beginning in the second quarter of 2010 the firm reported year-over-year revenue growth exceeding 20%. The firm repeatedly highlighted this growth pattern. Yet by the second half of September 2015 the firm had seen signs that its long running streak of exceeding analysis expectations was ending. To stem the downward tide the firm began “pulling forward” orders it had for customers that were not to be delivered until a point in the future. In some instances, the practice was discussed with customers. For six consecutive quarters the practice continued. On January 31, 2017 the company missed analyst expectations for the fourth quarter and full-year 2016 period. The stock price dropped about 23%. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a) and the related Rules. To resolve the matter the company consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Under Armour will pay a penalty of $9 million.

Offering fraud: SEC v. Randall, Civil Action No. 3:21-cv-979 (N.D. RTx. Filed April 30, 2021) is an action which names as a defendant Richard Randall. Over a period of over one year, beginning in March 2015, an offering of the shares of Wireless Power, LLC, controlled by Defendant, raised about $17.2 million. Potential investors were told that the firm had a revolutionary new technology. In fact, the funds raised were almost immediately diverted to other firms by Defendant. The complaint alleges violations of subsections (a) and (c) of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25086 (May 3, 2021).

Australia

Report: The Australian Securities & Investment Commission published a quarterly update for January to March 2021 on May 6, 2021 (here).

Singapore

Announcement: The Monetary Authority of Singapore announced the launch of a Global FinTech Hackcelerator for a Greener Financial Sector. The theme is Harnessing Technology to Power Green Finance. The goal is to unlock the potential of FinTech in accelerating the development of green fiancé in Singapore and the region.

Tagged with: , , ,