by T. GormanPosted on Posted in SECActions

Crypto currency continues to be debated – some believe in it; others do not. The decision by the founder of Tesla to exit the market recently seems to have added a new element, however. Now the question is if crypto is energy efficient. Crypto mining does in fact require a great deal of energy. One solution recently offered is to do the mining at the foot of a damn in China that apparently generates a great deal of environmentally friendly energy since it comes from hydro power, according to a news report. Absent that option, the environmental question may be a challenge.

The staff of the Commission’s Investment Management Division recently addressed a more pressing crypto issue that is closer to home. In a recently released statement the Division discussed key questions regarding funds registered under the Investment Company Act and investing in the Bitcoin futures market (here).

Initial concerns of the Division, reflected in a release issued in 2018, focused on liquidity. Since that time the markets in this area have significantly evolved. The Division has also benefitted from information obtained from funds and investors. Now, for example, there are a number of registered funds that have focused on cash-settled Bitcoin futures that are traded on an exchange regulated by the CFTC. Those instruments represent a potential method of giving the fund and its investors crypto currency exposure while addressing the liquidity questions that have been raised since the initial letter was issued shortly after Bitcoin began trading.

Now some mutual funds are “investing or seek to invest in Bitcoin futures . . . [and] believe they can do so consistent with the substantive requirements of the Investment Company Act . ..” In view of these events the Division plans to closely monitor and assess compliance in conjunction with the Division of Exams. There will be six areas of focus:

1) Liquidity and depth represent key areas of focus; the question is whether the “Bitcoin futures market . . . is appropriately supporting mutual fund investment in Bitcoin Futures; . . .”

2) Ability to liquidate Bitcoin futures positions as required is a critical point of concern to be monitored;

3) Valuations are also key; the funds’ valuations of Bitcoin futures will be monitored as well as the overall impact of participating in the Bitcoin futures markets;

4) Compliance with the open-end fund liquidity rule and mutual funds’ liquidity classification of any position in the Bitcoin futures market will be assessed; the fund’s liquidity risk management program will also be evaluated;

5) Fraud and the impact for it or manipulation in the underlying Bitcoin markets and the impact on the fund will be assessed;

6) ETFs present a key question to be evaluated; a question is if, based on the experience of the mutual fund investing, the Bitcoin futures markets could accommodate ETFs

Finally, for open ended funds the Division staff “believes at this time that investment in the Bitcoin futures market should be pursued only by mutual funds with appropriate strategies that support this type of investment . . .” coupled with full disclosure. Closed end funds do not present these types of issues.

Comment

The statement by the Division is consistent with the careful, considered approach of the agency to crypto from the beginning. Liquidity is a key issue for an open-ended fund in view of its redemption obligations. Bitcoin futures that settle for cash may present an opportunity to begin solving that question. Yet the historic volatility in crypto markets may present a difficulty despite the fact that Bitcoin may be more mature than other forms of crypto.

In the end, as crypto continues to evolve along with all of tech, it is clear that the Commission will ultimately have little choice except to move forward with it within the framework of its statutory mandate.

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by T. GormanPosted on Posted in SECActions

Chair Gary Gensler delivered remarks at the annual Financial Market Regulation conference as last week drew to a close. Mr. Gensler identified climate risk as one of the key agenda items for the agency in coming months. This should not come as a surprise to anyone who has followed the weeks of comments by various Commissioners on the topic.

Be careful, be safe this week

SEC

Whistleblowers: The Commission made three awards last week. One was for about $3.6 million; a second award was for $18 million; and the final award of the week was in the amount of about $4 million.

SEC Enforcement – Filed and Settled Actions

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

Misrepresentations: SEC v. Knight Nguyen Investments, Civil Action No. 4:21-cv-01586 (S.D. Tx. Filed May 13, 2021) is an action which names as defendants the firm, a registered investment adviser, its majority owner, Christopher Lopez, Forrest Jones and Jayson Lopez. The complaint alleges that over a two-year period, beginning in March 2016, the firm, Chris Lopez and Forrest Jones raised about $3.7 million from largely unsophisticated invertors through five offerings. Investors were told that the advisory would invest the capital conservatively, that good returns would result and that those at the advisory had expertise. Chris Lopez misapplied the funds received from investors and created false documents. Mr. Lopez assisted Defendant Lopez in those acts and also misused client funds. In addition, the firm assisted Mr. Lopez in an effort to register as an investment adviser. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4), 204, 203A, Exchange Act Sections 10(b) and 15(a) and Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 25089 (May 13, 2021).

AML: In the Matter of GWFS Equities, Inc., Adm. Proc. File No 3-20298 (May 12, 2021) is a proceeding which names as a respondent, the registered broker-dealer. The firm provides services to employee sponsored retirement plans. Over a three-year period, beginning in 2015, Respondent repeatedly detected efforts by bad actors to gain access to its processes through the use of improperly obtained personal identifying information. During the period the broker-dealer failed to file SARs in 130 instances where it had detected bad actors attempting to gain access. The firm also omitted information it had obtained about such efforts in 279 other instances where a SAR was filed but information was omitted. During the period the firm failed to consistently implement its AML program. The Order alleges violations of Exchange Act Section 17(a) and Rule 17a-8. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rule cited in the Order. Respondent also agreed to pay a penalty in the amount of $1.5 million.

Manipulation: SEC v. Osegueda, Civil Action No. 2:19-cv-04348 (C.D. CA.) is a previously filed action which named as defendants four individuals in a complaint centered on a pump-and-dump market manipulation scheme. Two defendants – Jessica Snyder and Calvin Ross – settled and judgements were entered as to them by consent this week. The judgements permanently enjoin each of the settling defendants from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Defendants Ross and Snyder will pay, respectively, disgorgement and prejudgment interest in the amount of $781, 868 and $184,293. In addition, each will pay a civil penalty of, respectively, $400,000 and $100,000. The other defendants in the action settled previously. See Lit. Rel. No. 25087 (May 7, 2021).

Conflicts: In the Matter of Peter J. DeCaprio, Adm. Proc. File No. 3-20286 (May 10, 2021) is a proceeding which names as a respondent Mr. DeCaprio, the co-founder, president and CEO of Crow Point Partners, LLC a registered investment adviser until 2020. Over a period of about one year, beginning in April 2015, the advisory and Mr. DeCaprio invested client funds in a series of transactions into an unregistered fund through an investment adviser sponsored investment platform. Crow Point had several business arrangements with the fund and platform that constituted undisclosed conflicts of interest. The Order alleges violations of Advisers Act Section 206(2). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he agreed to pay a penalty in the amount of $75,000.

Criminal cases

Misrepresentations: U.S. v. Lisser, No. 21-cr-210 (E.D.N.Y. guilty plea May 12, 2021) is an action which named as a defendant Mark Lisser, formerly of Knightsbridge Private Partners, LLC. The firm operated several websites to solicit investors for pre-IPO shares. Defendant repeatedly told interested investors that the firm was selling pre-IPO shares, that it was on the capitalization table, that the firm actually owned the shares it was selling and that there were no commissions on the sales until after investors made money. The claims were false. About $700,000 in investor money was raised. Mr. Lisser pleaded guilty to securities fraud conspiracy. The date for sentencing has not been set.

Hong Kong

Remarks: Ashley Alder, CEO of the Securities and Futures Commission of Hong Kong, delivered the Keynote address at the ISDA Annual General Meeting 2021 on May 10, 2021. His remarks focused on key issues in the derivative markets (here).

Singapore

Remarks: Lim Tuang Lee, Assistant Managing Director (Capital Markets), Monetary Authority of Singapore, delivered the opening remarks at the ASEAN Corporate Governance Scorecard Briefing 2021 for SGX-Listed Companies (May 11, 2021(here). His remarks focused on evaluating corporate governance.

UK

Business plan: The U.K. Serious Fraud Office published its Annual Business Plant 2021/22 on May 13, 2021(here). The plan details the manner in which the SFO expects to fight complex economic crime and protect the reputation of the country as a safe place for business.

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