SEC Issues Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

The Securities and Exchange Commission today announced that it has voted to issue a statement setting forth the Commission’s position, for a limited time period, that certain actions with respect to specific provisions of its Business Conduct Standards for Security-Based Swap (SBS) Dealers and Major Security-Based Swap Participants will not provide a basis for a Commission enforcement action. The statement also addresses the Commission’s position on the ability of parties to security-based swaps to rely on written representations previously provided in relation to swaps, also for a limited time period.     

The Commission’s statement is intended to minimize potential market disruptions to existing counterparty relationships resulting solely from documentation implementation issues that may arise when security-based swap dealers and major security-based swap participants are required to register with the Commission. Upon registration with the Commission, entities that are also registered with the Commodity Futures Trading Commission (CFTC) will be required to comply with both the Commission’s Business Conduct Standards as well as analogous rules adopted by the Commodity Futures Trading Commission in 2012 applicable to swap dealers and major swap participants.  

“Today’s statement reflects the culmination of outreach by Commission staff, and their counterparts at the Commodity Futures Trading Commission, consistent with the agencies’ shared commitment to achieving greater harmonization of Title VII rules,” said Chairman Jay Clayton. “Market participants have raised concerns about documentation implementation issues that may arise when SBS Entities are registered with both the Commission and the CFTC, and today’s statement is intended to provide those market participants appropriate time to assess and update their documentation.”

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FACT SHEET

Commission Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants 

Oct. 31, 2018
 

Action

The Commission is issuing a statement setting forth the Commission’s position, for a limited time period, that certain actions with respect to specific provisions of the SEC’s business conduct standards for security-based swap dealers and major security-based swap participants will not provide a basis for a Commission enforcement action.  

Background

In 2012 the U.S. Commodity Futures Trading Commission (CFTC) adopted business conduct rules for swap dealers and major swap participants (CFTC’s Business Conduct Rules).[1]To assist the swaps industry in implementing and complying with the CFTC’s Business Conduct Rules, industry participants developed standardized counterparty relationship documentation that has been in force since 2012, and is currently used by over 22,000 counterparties.[2]  

In 2016, pursuant to Section 15F of the Securities Exchange Act of 1934 (Exchange Act), the Commission adopted final rules imposing business conduct standards (the SEC’s Business Conduct Rules) for security-based swap dealers (SBS Dealers) and major security-based swap participants (Major SBS Participants and, together with SBS Dealers, SBS Entities).[3]As noted in the Commission’s Adopting Release, the Commission endeavored to harmonize its rules with analogous CFTC requirements where possible to create efficiencies for entities that have already established infrastructure for compliance with analogous CFTC requirements.[4]In certain instances, however, the Commission’s requirements, and the associated representations that would be required under standardized counterparty relationship documentation, diverge from those of the analogous CFTC requirements, which are reflected in existing standardized counterparty relationship documentation. Market participants have expressed concerns about practical compliance difficulties presented by certain of these differences.    

The Commission is mindful of the time and costs that may be associated with a documentation initiative that would be undertaken solely to address the SEC’s Business Conduct Rules. Therefore, to minimize potential market disruptions to existing counterparty relationships resulting solely from documentation implementation issues (upon their compliance date when compliance will first be required), for a limited time period, the statement provides that certain actions with respect to specific provisions of the SEC’s Business Conduct Rules will not provide a basis for a Commission enforcement action.

To the extent there are additional differences between the CFTC’s Business Conduct Rules and the SEC’s Business Conduct Rules that otherwise present documentation implementation difficulties that could result in potential for market disruption, the Commission encourages market participants to provide that information to the Commission.

Highlights

Time limitation. The Statement applies only until five years after the compliance date for SBS Entity Registration rules.

Affected Rule Provisions. The Statement addresses certain requirements in the SEC’s Business Conduct Rules. These requirements fall into three broad categories, two regarding “special entities,” and one applying to written representations generally:

• The mechanism by which non-ERISA employee benefit plans may elect to be treated as a “special entity” by SBS Entities, a status that entitles the entity to heightened protections
• Certain written representations that are required to be exchanged by and among SBS Entities, counterparties, and, as applicable, qualified independent representatives of some special entities  
• Written representations from a counterparty or representative that were previously provided to an SBS Dealer in relation to swaps if the SBS Dealer is not aware of information that would cause a reasonable person to question the accuracy of the representation if the representation were given in relation to security-based swaps

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[1]           Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012).

[2]           See International Swaps and Derivatives Association, Inc. (“ISDA”) DF Protocol, List of Adhering Parties, available athttps://www.isda.org/protocol/isda-august-2012-df-protocol/adhering-parties.

[3]           Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May 13, 2016) (“Adopting Release”). Although the rules are now effective, the Commission determined not to require compliance with them until entities are required to register as SBS Dealers or Major SBS Participants. See id. at 30081.

[4]           Id. at 29964.  

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SEC Adopts Rules to Modernize Property Disclosures Required for Mining Registrants

The Securities and Exchange Commission today announced that it has voted to adopt amendments to modernize the property disclosure requirements for mining registrants, and related guidance, under the Securities Act of 1933 and the Securities Exchange Act of 1934.  The amendments will provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions.  The amendments also will more closely align the Commission’s disclosure requirements and policies for mining properties with current industry and global regulatory practices and standards. 

Under the final rules, a registrant with material mining operations must disclose specified information in its Securities Act and Exchange Act filings concerning its mineral resources, in addition to its mineral reserves.  Current Commission rules and guidance permit the disclosure of non-reserve estimates only in limited circumstances.  Requiring the disclosure of mineral resources in addition to mineral reserves will provide investors with important information concerning the registrant’s operations and prospects.

“The final rules will modernize the Commission’s mining property disclosure regime by improving the quality and reliability of information provided to investors and by harmonizing disclosures with international standards, including removing the restriction on disclosure of mineral resource estimates that may have placed U.S. registrants and investors at a disadvantage,” said SEC Chairman Jay Clayton.  “We appreciate the valuable input that we have received from a diverse group of interested parties that helped inform the Commission and shape the final rules.”

The final rules include several other requirements designed to further the protection and understanding of investors.  The final rules also reflect a number of changes to the rules proposed in June 2016 in response to commenters.

The final rules provide a two-year transition period so that a registrant will not be required to begin to comply with the new rules until its first fiscal year beginning on or after Jan. 1, 2021.

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FACT SHEET

Modernization of Property Disclosures for Mining Registrants

Action

The Commission has adopted amendments to modernize the property disclosure requirements for mining registrants, and related guidance, under the Securities Act of 1933 and the Securities Exchange Act of 1934.  The amendments more closely align the Commission’s disclosure requirements and policies for mining properties with current industry and global regulatory practices and standards.  In addition, the amendments rescind Industry Guide 7 and consolidate the disclosure requirements for registrants with material mining operations in a new subpart of Regulation S-K. 

These amendments are intended to provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions.

Highlights of the Final Rules

Under the final rule amendments, as proposed and consistent with global standards as embodied by the Committee for Reserves International Reporting Standards (“CRIRSCO”), a registrant with material mining operations must disclose specified information in its Securities Act and Exchange Act filings concerning mineral resources that have been determined on one or more of its properties.  Current Commission rules and guidance permit the disclosure of non-reserve estimates, such as mineral resources, only in limited circumstances.  Requiring the disclosure of mineral resources in addition to mineral reserves will provide investors with important information concerning the registrant’s operations and prospects.  

Also as proposed, and consistent with the CRIRSCO standards, the final rule amendments require a registrant’s disclosure of exploration results, mineral resources, or mineral reserves in Commission filings to be based on and accurately reflect information and supporting documentation prepared by a mining expert--the “qualified person.”  This requirement will further the protection of investors by helping to foster proper risk assessment and disclosure, which is key to an investor’s understanding of each stage of a mining project.

As proposed, the final rule amendments require a registrant to obtain a dated and signed technical report summary from the qualified person or persons, which identifies and summarizes the information reviewed and conclusions reached by each qualified person about the registrant’s mineral resources or mineral reserves determined to be on each material property.  A registrant must file the technical report summary as an exhibit to the relevant Commission filing when disclosing mineral reserves or mineral resources for the first time or when there is a material change in the mineral reserves or mineral resources from the last technical report summary filed for the property.  The technical report summary filing requirement will not only help ensure that the registrant’s disclosure in the Commission filing is accurate and reliable, but also will enhance investor understanding of a registrant’s material mining properties.

Principal Changes from the Proposed Rules 

The final rule amendments include a number of changes to the proposed rules in response to commenters.  These changes would more closely align the Commission’s mining property disclosure requirements with the CRIRSCO standards and thereby help decrease, relative to the proposed rules, the compliance burden and costs for the many registrants that are subject to one or more of the CRIRSCO-based codes, while preserving important investor protections.  For example, among the changes, the final rules:

• Require a qualified person to use a price for each commodity that provides a reasonable basis for establishing estimates of mineral resources or mineral reserves, which may be a historical or forward-looking price, as long as the qualified person discloses and explains his or her reasons for using the selected price, including the material assumptions underlying the selection
• Provide that a qualified person will not be subject to expert liability under Section 11 of the Securities Act for certain aspects of specified modifying factors outside the expertise of the qualified person that are based on information provided by the registrant and are discussed in the technical report summary or other parts of the registration statement
• Eliminate the proposed quantitative presumptions regarding when a registrant’s mining operations, and when a change in previously reported estimates of mineral resources or mineral reserves, are deemed to be material
• Eliminate the proposed summary disclosure provision requiring specific items of information in tabular format about a registrant’s top 20 properties and, instead, adopt a more principles-based approach by requiring the registrant to provide investors with an overview of its properties and mining operations
• Reduce the number of summary and individual property disclosure provisions requiring tables from seven, as proposed, to two, and permit other required disclosure to be in either narrative or tabular format
• Permit, but not require, a registrant to file a technical report summary to support its disclosure of exploration results
• Permit the disclosure of exploration targets in Commission filings if accompanied by certain specified cautionary and explanatory statements
• Permit a qualified person to determine mineral resources and reserves at any specific point of reference, which must be disclosed in the technical report summary, rather than at three points of reference
• Permit a qualified person to include inferred resources in an economic analysis that the qualified person opts to include in an initial assessment as long as certain conditions are met
• Define “mineral reserve” to include diluting materials and allowances for losses that may occur when the material is mined or extracted
• Permit a qualified person to conduct either a pre-feasibility or final feasibility study to support a determination of mineral reserves even in high risk situations
• Permit the use of historical estimates of mineral resources or reserves in Commission filings pertaining to mergers, acquisitions, or business combinations if the registrant is unable to update the estimate prior to the completion of the relevant transaction, provided that the registrant discloses the source and date of the estimate, and does not treat the estimate as a current estimate
• Permit a registrant holding a royalty or similar interest to omit any information required under the summary and individual property disclosure provisions to which it lacks access and which it cannot obtain without incurring an unreasonable burden or expense

The final rules also clarify that a third-party firm, which employs a qualified person, may sign the technical report summary and provide the written consent required for an expert under the Securities Act.

Compliance Date

The Commission adopted a two-year transition period so that a registrant will not begin to comply with the new rules until its first fiscal year beginning on or after Jan. 1, 2021.  A registrant may voluntarily comply with the new rules prior to the compliance date, subject to the Commission’s completion of necessary EDGAR reprogramming changes.  Guide 7 would remain effective until all registrants are required to comply with the final rules, at which time Guide 7 would be rescinded.

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SEC Updates List of Firms Using Inaccurate Information to Solicit Investors

The Securities and Exchange Commission today announced that it has updated its list of unregistered entities that use misleading information to solicit primarily non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and eight bogus regulators. The SEC also made technical updates to its database to make it easier for retail investors to search and obtain information about unregistered entities.  The update to the database consolidates the active and archived lists.

The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud. The latest additions are firms that SEC staff found were providing inaccurate information about their affiliation, location, or registration. Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and recordkeeping requirements. 

“Today’s updates to the PAUSE list are part of the agency’s continuing effort to help investors protect themselves and be better informed when making investment decisions,” said Jennifer Diamantis, Chief of the SEC’s Office of Market Intelligence.

In addition to alerting investors to firms falsely claiming to be registered, the PAUSE list flags those impersonating registered securities firms and bogus “regulators” who falsely claim to be government agencies or affiliates.  Inclusion on the PAUSE list does not mean the SEC has found violations of U.S. federal securities laws or made a judgment about the merits of any securities being offered.

The PAUSE list is periodically updated by the SEC’s Office of Market Intelligence in coordination with the Office of Investor Education and Advocacy and the Office of International Affairs.

How to protect yourself:

Check the background of anyone selling you an investment.

Learn more about scams targeting Main Street investors, including:

• High Yield Investment Programs
• Advance Fee Fraud
• Microcap Fraud

Watch out for false claims about SEC and CFTC endorsements

Visit Investor.gov for tips on investing wisely and avoiding fraud.

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SEC Proposes Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts

The Securities and Exchange Commission today announced that it has voted to propose rule changes designed to improve disclosure for investors about variable annuities and variable life insurance contracts.  The proposal is intended to help investors better understand these contracts' features, fees, and risks, and to more easily find the information that they need to make an informed investment decision.

"This proposal is another important step in the Commission's efforts to provide Main Street investors with better information to make informed investment decisions.  I have participated in many roundtables with retail investors over the last several months, and investors have emphasized their preference for clear and concise disclosure," said SEC Chairman Jay Clayton.  "Providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long‑term nature of these contracts and their potential complexity."

The proposal would newly permit these contracts to use a summary prospectus to provide disclosures to investors.  This document would be a concise, reader‑friendly summary of key facts about the contract.  More‑detailed information about the contract would be available online, and an investor also could choose to have that information delivered in paper or electronic format at no charge.  

Mutual funds have been permitted to use a similar layered approach to disclosure—with investors receiving a summary prospectus, and more-detailed information available on request—since 2009.  

The Commission has requested public comment on the proposed rule changes, as well as on hypothetical summary prospectus samples that it has published.  The Commission has also published a Feedback Flier that it will use to seek investor input about what improvements would make the summary prospectus easier to read and understand, and what information investors would like to see included.  

The public comment period will remain open through February 15, 2019.

FACT SHEET

Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

Oct. 30, 2018

Action

The Commission proposed a new rule, and rule and form amendments, that are intended to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts.   The proposed rule would permit a person to satisfy its prospectus delivery obligations under the Securities Act for a variable contract by sending or giving a summary prospectus to investors and making the statutory prospectus available online.  The proposal leverages both technology and a layered disclosure approach to improve the ability of investors to understand and evaluate variable contracts.

Proposal's Highlights

New Option to Use a Summary Prospectus for Variable Contracts 

Proposed new rule 498A under the Securities Act would permit the use of two distinct types of contract summary prospectuses:

• initial summary prospectuses covering variable contracts currently offered to new investors; and
• updating summary prospectuses for existing investors.

The initial summary prospectus would include: an overview of the contract; a table summarizing certain key information about the contract's fees, risks, and other important considerations; and more detailed disclosures relating to fees, purchases, withdrawals, and other contract benefits.  The updating summary prospectus would include a brief description of certain changes to the contract that occurred during the previous year, as well as the key information table from the initial summary prospectus.

In certain types of variable contracts, investors allocate their investment to one or more underlying investment options (typically, mutual funds).  Certain key information about these funds would be provided in both the initial summary prospectus and updating summary prospectus.

Availability of Variable Contract Statutory Prospectus and Other Materials

The proposed rule would require the variable contract's statutory prospectus, as well as the contract's Statement of Additional Information (SAI), to be publicly accessible, free of charge, at a website address specified on, or hyperlinked in, the cover of the summary prospectus.  An investor who receives a contract summary prospectus would be able to request the contract's statutory prospectus and SAI to be sent in paper or electronically, at no cost to the investor.

Optional Method to Satisfy Prospectus Delivery Requirements for Underlying Mutual Funds

The proposed rule would permit variable contracts to make prospectuses for underlying mutual fund investment options, and other documents relating to these funds, available online.  The variable contract's summary prospectus would provide certain key information about these funds.  Investors would be able to request and receive these funds' prospectuses (and the other related documents that are available online) in paper or electronically at no cost.

Updates to Variable Contract Registration Forms

The amendments to Forms N-3, N-4, and N-6—the registration forms for variable contracts—that the Commission proposed are designed to update and enhance the disclosure regime for these investment products.  These amendments are intended to improve the content, format, and presentation of information to investors, including by updating the required disclosures to reflect industry developments (e.g., the prevalence of optional insurance benefits in today's variable contracts).  In addition, the Commission proposed amendments to require the use of the Inline eXtensible Business Reporting Language (Inline XBRL) format for the submission of certain required disclosures in the variable contract statutory prospectus.  This would provide a mechanism for allowing investors, their investment professionals, data aggregators, and other data users to efficiently analyze and compare the available information about variable contracts.

Other Amendments

Finally, the Commission proposed certain technical and conforming amendments to its rules that would reflect the new regime for variable contract summary prospectuses.  The Commission also proposed other amendments and the rescission of certain rules and forms that were rendered moot by legislative actions or are otherwise no longer necessary.

What’s Next?

The comment period for the proposal will close on February 15, 2019.  This comment period will permit investors and other interested parties the opportunity to review the proposal materials, and to submit comments, data, and other information to the comment file.

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SEC Investor Advisory Committee to Hold Nov. 7 Telephone Meeting

The Securities and Exchange Commission’s Investor Advisory Committee will meet telephonically on Nov. 7 at 2 p.m. Eastern Time. The public is invited to listen to the meeting live using the dial-in details provided below. A recording of the meeting will be archived on the committee’s webpage for later listening.

The committee will discuss the SEC’s Proposed Regulation Best Interest and Form CRS Relationship Summary (which may include a Recommendation of the Investor as Purchaser Subcommittee). The agenda for the meeting is available here.

Members of the committee 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 committee members, see the committee’s webpage.

The Investor Advisory Committee was established 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 committee is authorized to submit findings and recommendations to the Commission.

Conference Call Details:  The public may dial in to the meeting toll-free by calling (800) 260-0702 in the United States or (651) 291-1170 outside the United States. Access Code: 455778.

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SEC Issues Agenda for October 29 Meeting of the Fixed Income Market Structure Advisory Committee

The Securities and Exchange Commission today released the agenda for the Oct. 29 meeting of the Fixed Income Market Structure Advisory Committee meeting.  The Commission established the advisory committee to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.

The meeting will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  The meeting will be webcast live on the SEC’s website, www.sec.gov, and will be archived on the website for later viewing.

Members of the public who wish to provide their views on the matters to be considered by the Fixed Income Market Structure Advisory Committee may submit comments either electronically or on paper, as described below.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

Send paper submissions in triplicate to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-30, and the file number should be included on the subject line if e-mail is used.

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Agenda

October 29, 2018

9:30 a.m.       Welcome and Opening Remarks 

10 a.m.          Draft Recommendations on ETF Classification and Education and Data

11:15 a.m.     Break  

11:30 a.m.     Draft Recommendation on Collection and Dissemination of Reference Data

• Fred Demesy, Refinitiv
• Spencer Gallagher, ICE Data Services
• Bob LoBue, JP Morgan
• Ola Persson, FINRA
• Alex Sedgwick, T. Rowe Price

12:45 p.m.     Lunch Break

1:30 p.m.       Corporate Bond Transparency Subcommittee Update

1:45 p.m.       Municipal Securities Transparency Subcommittee Update and Presentation of Pre-Trade Transparency Analysis

• Simon Wu, MSRB

2:15 p.m.       Corporate Credit Markets: The Role of Credit Ratings in a Higher Leverage World

• Eric Beinstein, JP Morgan
• John Bender, Legal and General Investment Management America
• Daniel Gates, Moody’s Investors Service
• Brian Kennedy, Loomis Sayles
• Jim Nadler, Kroll Bond Rating Agency
• Tom Murphy, Columbia Threadneedle Investments
• Craig Parmelee, S&P Global
• Adam Richmond, Morgan Stanley

3:45 p.m.         Future Topics for Committee Consideration

4:15 p.m.         Adjournment

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SEC Announces $23.8 Million Settlement with the Self-Proclaimed “Frack Master”

The Securities and Exchange Commission today announced it has agreed to a settlement with Christopher A. Faulkner—the self-proclaimed “Frack Master”—in connection with his wide-ranging securities-fraud scheme that raised over $80 million from hundreds of investors nationwide. Faulkner has simultaneously entered into a plea agreement relating to the same misconduct under which he will serve 12 years in federal prison for securities fraud, money laundering, and tax evasion.

According to the SEC’s June 2016 complaint, Faulkner systemically deceived investors across the country by disseminating false and misleading offering materials, misappropriating millions of dollars of investor funds, and manipulating the stock of Breitling Energy Corporation (BECC), a publicly traded company Faulkner controlled.  Faulkner started the scheme in 2011 through privately held Breitling Oil and Gas Corporation (BOG), which offered and sold “turnkey” oil-and-gas working interests to investors using a team of commissioned cold-callers. As part of these offerings, Faulkner lied to investors about his experience, the drilling-cost estimates for the prospects, and the use of their invested funds. Over time, the scheme evolved to include BOG’s successor, BECC and two affiliated entities that he secretly controlled, Crude Energy LLC and Patriot Energy Inc. Faulkner, with the assistance of others, used these entities to raise more than $80 million and then he misappropriated approximately $23.8 million to fund his lavish personal lifestyle. The SEC also charged 11 other individuals and entities for their roles in the misconduct, reaching settlements with a majority of them.

In August 2017, on an emergency motion filed by the SEC, the court froze Faulkner's assets and placed them, as well as BECC and BOG, under the control of a court-appointed receiver due in part to Faulkner’s continued misappropriation of investor funds. The court also preliminarily enjoined Faulkner and the two companies from violating antifraud provisions of the federal securities laws. A month later, the Commission obtained emergency relief against Faulkner and others for a separate offering fraud in California involving real estate. 

“Faulkner first proclaimed himself the ‘Frack Master’ in order to deceive investors about his expertise and steal millions of dollars to fund his lifestyle, and the SEC put an early end to his second effort to defraud investors in a real estate scheme,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “Today’s serious civil and criminal sanctions serve as a warning to anyone who intends to target retail investors.” 

Under the agreed final judgment, which is subject to court approval, Faulkner would be ordered to disgorge $23.8 million; permanently enjoined from violating various provisions of the federal securities laws and from participating in any unregistered securities transactions; and barred from serving as an officer or director of any SEC-reporting company and from participating in any offering of a penny stock.

The SEC’s litigation has been handled by B. David Fraser, Scott F. Mascianica and Timothy S. McCole, and supervised by Eric R. Werner. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Texas.

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SEC Suspends Trading in Company for Making False Cryptocurrency-Related Claims about SEC Regulation and Registration

The Securities and Exchange Commission today suspended trading in the securities of a company amid questions surrounding its statements about partnering with a claimed SEC-qualified custodian for use with cryptocurrency transactions and a purportedly registered public offering of preferred stock.

The SEC’s trading suspension order says that two August 2018 press releases issued by Nevada-based American Retail Group, Inc. (OTC: ARGB) aka Simex, Inc. claimed that the company had partnered with an SEC qualified custodian for use with cryptocurrency transactions that would be “under SEC Regulations,” and that the company was conducting a token offering that was “officially registered in accordance [with] SEC requirements.”

Earlier this month, the SEC issued an investor alert that warned investors to be vigilant for false claims about SEC endorsements used to promote digital asset investments.

“The SEC does not endorse or qualify custodians for cryptocurrency, and investors should use vigilance when considering an investment in an initial coin offering,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Bulletin on initial coin offerings and a mock ICO website to educate investors.  Additional information about ICOs is available on Investor.gov and SEC.gov/ICO.

The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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SEC Charges Lawyer and Her Husband in EB-5 Fraud

The Securities and Exchange Commission today charged a California-based immigration attorney and her husband in a fraudulent scheme that generated millions of dollars of undisclosed compensation from foreign investors seeking permanent U.S. residency through the EB-5 Immigrant Investor Program.  

The SEC’s complaint alleges that Jean Danhong Chen, Tony Jianyun Ye, and Law Offices of Jean D. Chen, with the assistance of a personal friend, Kuansheng Chen, secured over $10 million in undisclosed commissions by selling EB-5 securities to hundreds of Chen’s legal clients. The complaint also alleges that Jean Chen and Ye secretly acquired and operated an EB-5 regional center, Golden State Regional Center LLC, and later advised clients to invest in the center’s projects without disclosing their ownership interest. According to the complaint, Kai Hao Robinson assisted in the scheme by posing as the sole manager in control of Golden State when she was in fact merely a figurehead controlled by Jean Chen and Ye.  

After learning of the SEC’s investigation, Jean Chen and Ye allegedly backdated documents and scrubbed other business records to conceal their role in the alleged scheme.   

“Ms. Chen’s alleged self-dealing breached her clients’ trust and violated the federal securities laws,” said Melissa R. Hodgman, Associate Director of the Division of Enforcement. “Where conduct harms investors in our markets, attempts to stymie our investigation by fabricating evidence and withholding documents will not deter our efforts.” The SEC’s Office of Investor Education and Advocacy has issued an investor alert describing steps that can be taken to research EB-5 offerings.

The SEC’s complaint, filed in federal district court in the Northern District of California, alleges that the defendants violated or aided and abetted violations of antifraud provisions of the federal securities laws, and that certain of the defendants violated or aided and abetted violations of registration provisions. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, civil penalties, and the appointment of a receiver.

The SEC’s investigation was conducted by D. Ashley Dolan, Sarah M. Hall, and Heather A. Powell and supervised by Melissa A. Robertson of the SEC’s Washington, D.C. office. The litigation will be led by Kenneth W. Donnelly. The SEC would like to thank the U.S. Citizenship and Immigration Services for its assistance in connection with this investigation.

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SEC Launches New Strategic Hub for Innovation and Financial Technology

The U.S. Securities and Exchange Commission today announced the launch of the agency's Strategic Hub for Innovation and Financial Technology (FinHub).

The FinHub will serve as a resource for public engagement on the SEC's FinTech-related issues and initiatives, such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning. The FinHub also replaces and builds on the work of several internal working groups at the SEC that have focused on similar issues. 

The FinHub will: 

• Provide a portal for industry and the public to engage directly with SEC staff on innovative ideas and technological developments; 
• Publicize information regarding the SEC's activities and initiatives involving FinTech on the FinHub page; 
• Engage with the public through publications and events, including a FinTech Forum focusing on distributed ledger technology and digital assets planned for 2019;
• Act as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge within the agency; and
• Serve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems. 

The SEC's FinHub will be led by Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC's Division of Corporation Finance, and staffed by representatives from the SEC's divisions and offices who have expertise and involvement in FinTech-related issues. 

"The SEC is committed to working with investors and market participants on new approaches to capital formation, market structure, and financial services, with an eye toward enhancing, and in no way reducing, investor protection," said SEC Chairman Jay Clayton. "The FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission."    

"SEC staff across the agency have been engaged for some time in efforts to understand emerging technologies, communicate the agency's stance on new issues, and facilitate beneficial innovations in the securities industry," said Ms. Szczepanik. "By launching FinHub, we hope to provide a clear path for entrepreneurs, developers, and their advisers to engage with SEC staff, seek input, and test ideas."

For more information, visit the new FinHub page, which replaces the FinTech@sec.gov address that was established in connection with the issuance of DAO Report on July 25, 2017. To contact FinHub staff, use the form available at the FinHub page.

SEC Press Release

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SEC Announces 2018 Government-Business Forum to Be Held at The Ohio State University

The Securities and Exchange Commission today announced it is partnering with the National Center for the Middle Market at The Ohio State University Max M. Fisher College of Business to host the SEC’s annual Government-Business Forum on Small Business Capital Formation on Dec. 12. This annual forum provides a platform to highlight additional measures to improve small business capital formation.

“We have made it a priority to reach out to small businesses across the country,” said Chairman Jay Clayton. “Holding this event in Columbus, one of the top five best cities for entrepreneurs and startups, will give us the opportunity to hear directly from small businesses and their investors on ways to improve our regulatory system.” 

The morning session will feature a panel discussion exploring how capital formation options are working for small businesses, such as those in the Midwest.  Participants will then work in groups to formulate specific policy recommendations. Information on the panel participants and the full agenda will be announced in the coming weeks and will be available on the forum webpage.

The forum will begin at 9 a.m. Eastern Time and will be open to the public.  It will be held in the Fawcett Center on the campus of The Ohio State University in Columbus, Ohio. The opening remarks and panel discussion will be webcast live.  The breakout group sessions will not be webcast but will be accessible by teleconference for those not attending in person. Anyone wishing to participate in a breakout group either in person or by teleconference must register online by Dec. 7.

Members of the public are invited to suggest recommendations or topics to be discussed at the forum by calling the SEC’s Office of Small Business Policy at (202) 551-3460.

Information on ways small businesses can raise capital is available at https://www.sec.gov/smallbusiness.

SEC Press Release

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SEC Charges Investment Adviser With Stealing From Friends, Community Members

The Securities and Exchange Commission today announced charges against an investment adviser with a history of violating the securities laws for defrauding his close friends and community members.  

According to the SEC’s complaint filed Tuesday, from at least 2014 through at least 2017, Bruce J. Fixelle solicited investments from close friends he met through a local community organization, telling them that he was going to invest their money in initial and secondary offerings, which he would then sell before the end of the trading day. Fixelle described his trading strategy as safe and successful. In reality, rather than investing these funds, he allegedly used investor money to pay mounting personal debt and personal expenses.  

In 2014, Fixelle and a company he controlled, Genesis Advisory Services Corp., were charged by the Commission with violations of Rule 105 of Regulation M. Among other sanctions, they agreed to pay disgorgement, prejudgment interest, and civil penalties of over $1.5 million.  

“Fraud often occurs where investors least expect it – with close friends, family members, and in trust-based communities,”said Marc P. Berger, Regional Director of the SEC’s New York Office. “Investors are encouraged to use publicly available tools to gather information about individuals who are attempting to sell them securities.”

The SEC’s Retail Strategy Task Force and Office of Investor Education and Advocacy (OIEA) encourage investors to check the background of anyone selling or offering them an investment using the free and simple search tool on Investor.gov. Investors can also use the SALI feature to find information about certain people who have had judgments or orders issued against them in SEC court actions or administrative proceedings. 

The SEC’s complaint, filed in federal district court in New Jersey, charges Fixelle, Genesis, and another company he controlled, Aurora Capital Management LLC, with violating the antifraud provisions of the federal securities laws.  

The SEC’s continuing investigation is being conducted by Janna Berke, Andrew Dean, Kerri Palen, Richard G. Primoff, and Sandeep Satwalekar and supervised by Lara Shalov Mehraban. The SEC’s litigation will be led by Ms. Berke, Mr. Dean, and Mr. Primoff.  The SEC appreciates the assistance of the Bergen County Prosecutor’s Office.

SEC Press Release

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SEC Provides Regulatory Relief and Assistance for Hurricane Victims

The Securities and Exchange Commission today announced that it is providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, municipal advisors, and others affected by Hurricane Michael.  The loss of property, power, transportation, and mail delivery due to the hurricane poses challenges for some individuals and entities that are required to provide information to the SEC and shareholders.  

To address compliance issues caused by Hurricane Michael, the Commission issued an order that conditionally exempts affected persons from certain requirements of the federal securities laws for periods following the weather event. 

The Commission also adopted interim final temporary rules that extend the filing deadlines for specified reports and forms that companies must file pursuant to Regulation Crowdfunding and Regulation A. 

* * *

ADDITIONAL INFORMATION

In connection with the Commission relief, issued in the order and interim final temporary rules, the Commission staff will take the following no-action positions with respect to affected parties’ obligations under the Exchange Act, the Securities Act, and the Investment Advisers Act:

• For purposes of eligibility to use Form S-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 eligibility), a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements during the relief period if it was current and timely as of the first day of the relief period. After the relief period, a company will continue to be considered current and timely if it files any required report on or before Nov. 23, 2018
• For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive order will be considered current in its Exchange Act filing requirements during the relief period if it was current as of the first day of the relief period.  After the relief period, a company will continue to be considered current if it files any required report on or before Nov. 23, 2018
• Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date of Nov. 23, 2018.  As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the due date.
• During the period from Oct. 10, 2018 to Nov. 21, 2018, a registered open-end investment company and a registered unit investment trust will be considered to have satisfied the requirements of Section 5(b)(2) of the Securities Act to deliver a summary or a statutory prospectus, as applicable, to an investor, provided that: (1) the sale of shares to the investor was not an initial purchase by the investor of shares of the company or unit investment trust; (2) the investor’s mailing address for delivery, as listed in the records of the company or unit investment trust, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Michael, of the type or class customarily used by the company or unit investment trust, to deliver summary or statutory prospectuses; and (3) the company, or unit investment trust, or other person promptly delivers the summary or statutory prospectus, as applicable either (a) if requested by the investor, or (b) by the earlier (i) of Nov. 23, 2018 or (ii) the resumption of the applicable mail service.
• A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if:  (1) the registrant’s Form ADV filing deadline falls within the period from Oct. 10, 2018 to Nov. 21, 2018; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Michael; and (3) the registrant makes the required Form ADV filing by Nov. 23, 2018.  
• During the period from Oct. 10, 2018 to Nov. 21, 2018, a registered investment adviser will be considered to have satisfied the requirements of Section 204 of the Advisers Act and Rule 204-3(b) thereunder to deliver the written disclosure statements required thereunder to its advisory client, provided that:  (1) the client’s mailing address for delivery, as listed in the records of the investment adviser, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Michael, of the type or class customarily used by the adviser to deliver written disclosure statements; and (2) the investment adviser or other person promptly delivers the written disclosure statement either (a) if requested by the client, or (b) at the earlier of (i) Nov. 23, 2018 or (ii) the resumption of the applicable mail service.

Some companies and other affected persons may require additional or different assistance in their efforts to comply with the requirements of the federal securities laws and therefore are encouraged to contact Commission staff.  The Commission staff will address these and any disclosure-related issues on a case-by-case basis in light of their fact-specific nature.  

SEC Press Release

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SEC Investigative Report: Public Companies Should Consider Cyber Threats When Implementing Internal Accounting Controls

The Securities and Exchange Commission today issued an investigative report cautioning that public companies should consider cyber threats when implementing internal accounting controls. The report is based on the SEC Enforcement Division's investigations of nine public companies that fell victim to cyber fraud, losing millions of dollars in the process.

The SEC's investigations focused on "business email compromises" (BECs) in which perpetrators posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. The frauds in some instances lasted months and often were detected only after intervention by law enforcement or other third parties. Each of the companies lost at least $1 million, two lost more than $30 million, and one lost more than $45 million. In total, the nine companies wired nearly $100 million as a result of the frauds, most of which was unrecoverable. No charges were brought against the companies or their personnel.

The companies, which each had securities listed on a national stock exchange, covered a range of sectors including technology, machinery, real estate, energy, financial, and consumer goods. Public issuers subject to the internal accounting controls requirements of Section 13(b)(2)(B) of the Securities Exchange Act of 1934 must calibrate their internal accounting controls to the current risk environment and assess and adjust policies and procedures accordingly. The FBI estimates fraud involving BECs has cost companies more than $5 billion since 2013.

"Cyber frauds are a pervasive, significant, and growing threat to all companies, including our public companies," said SEC Chairman Jay Clayton. "Investors rely on our public issuers to put in place, monitor, and update internal accounting controls that appropriately address these threats."

Stephanie Avakian, Co-Director of the SEC Enforcement Division, said, "In light of the facts and circumstances, we did not charge the nine companies we investigated, but our report emphasizes that all public companies have obligations to maintain sufficient internal accounting controls and should consider cyber threats when fulfilling those obligations."

The issuance of the SEC's report coincides with National Cybersecurity Awareness Month.

In consultation with the Division of Corporation Finance and the Office of the Chief Accountant, the SEC's investigations were conducted by Brent Wilner, Creighton Papier, and Maria Rodriguez, and supervised by Diana Tani, John Berry, and Michele Layne of the Los Angeles Regional Office.

SEC Press Release

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SEC Suspends Former BDO Accountants for Improperly “Predating” Audit Work Papers

The Securities and Exchange Commission today suspended three former BDO USA LLP accountants for their improper professional conduct during an audit of an exchange-listed insurance company.

According to the SEC’s order, BDO fell behind schedule while conducting its 2013 integrated audit of AmTrust Financial Services Inc. and ultimately failed to complete necessary audit procedures before AmTrust’s deadline to file its annual report with the SEC. To create the appearance that BDO’s audit was in fact complete, the senior manager on the audit engagement, Lev Nagdimov, instructed BDO’s audit team to sign off on all work papers and audit programs regardless of whether its work was finished. Nagdimov further instructed BDO’s audit team to load and sign blank or placeholder work papers in BDO’s electronic files.  Consistent with Nagdimov’s instructions, the audit team improperly “predated” audit documentation by signing blank or incomplete work papers and audit programs. After AmTrust filed its 2013 annual report, the audit team finished its necessary audit procedures and preserved the predated sign-offs in BDO’s electronic files by overwriting existing documentation in the placeholder work papers. BDO was required to produce an earlier snapshot of its work papers from the period when the “predated” documents were in place, pursuant to an SEC request. The SEC identified the audit deficiencies and predated work papers by comparing BDO’s final, archived work papers to the snapshot of the work papers as they existed at the time that BDO released its audit report.

The SEC’s order also found that if BDO’s engagement partner Richard J. Bertuglia and engagement quality review partner John W. Green had properly exercised due professional care, they would have identified these audit deficiencies before they released BDO’s audit report, which provided unqualified opinions on AmTrust’s 2013 financial statements and internal control over financial reporting.  

“Auditors are entrusted with significant responsibility when auditing public companies,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “Public accountants who manipulate their files to conceal audit deficiencies represent a serious breach of those professional obligations, and the Commission will impose suspensions to protect investors.”

The SEC’s order finds that Nagdimov, Bertuglia, and Green violated auditing standards established by the Public Company Accounting Oversight Board, and engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice.  Without admitting or denying the findings in the SEC’s order, Nagdimov, Bertuglia, and Green each agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Nagdimov to apply for reinstatement after five years, Bertuglia to apply for reinstatement after three years, and Green to apply for reinstatement after one year.

The SEC’s investigation was conducted by Christopher W. Ahart, Michelle Lama, Keith J. Hunter, and David R. King and supervised by Eric R. Werner and Jim Etri of the Fort Worth Regional Office. 

SEC Press Release

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SEC’s New Strategic Plan Puts Investors, Innovation, and Performance at Top

The Securities and Exchange Commission today announced a new strategic plan to guide the agency’s work over the next four years with a primary focus on investors, innovation, and performance. The plan’s goals reflect the agency’s commitment to its longstanding mission while leveraging the opportunities and addressing the challenges that come from fast-evolving markets, products and services.

Our new strategic plan is a concise, straight-forward explanation of the goals that will guide us as our markets evolve. It is based on the core values that have motivated the women and men of the SEC for over 80 years, including, most importantly, serving the interests of our long term Main Street investors.

–SEC Chairman Jay Clayton

The SEC’s new strategic plan was published 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.

Strategic Plan Summary

GOAL 1. Focus on the long-term interests of our Main Street investors.

The SEC will strive to better understand how a wider range of investors participate in the capital markets and how to reach them while tailoring policy initiatives with retail investors in mind. Initiatives under this goal will include modernizing disclosure and expanding investor choice.

GOAL 2. Recognize significant developments and trends in our evolving capital markets and adjust our efforts to ensure we are effectively allocating our resources.

Under this goal, the SEC will embrace innovation by analyzing market developments, evaluating existing rules and procedures, understanding the continually changing cyber-landscape and ensuring the appropriate resources are dedicated to each area.

GOAL 3. Elevate the SEC’s performance by enhancing our analytical capabilities and human capital development.

The SEC will invest in data and technology to leverage “the experience, knowledge, creativity, leadership and teamwork of the SEC’s staff and its leaders.” The agency is also committed to recruiting and retaining a diverse workforce with a wide range of skills and expertise.

SEC Press Release

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SEC Reopens Comment Period for Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants

The Securities and Exchange Commission today voted to reopen the comment period and request additional comment (including potential modifications to proposed rule language) on the proposed rules and amendments for capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants and capital requirements for broker-dealers. 

“Reopening the comment period is an important step forward in standing up the security-based swap regime,” said Chairman Jay Clayton. “We strongly encourage interested persons to submit comments and data for the Commission to consider as the rulemaking process moves forward.”

Reopening the comment period will provide interested parties with an opportunity to submit comments that take into account regulatory and market developments since publication of the proposals. This also will provide interested parties with the opportunity to provide comments on the potential economic effects of the proposals in light of these developments.

The public comment period will remain open for 30 days following publication of the release in the Federal Register.

*  *  *

FACT SHEET

SEC Open Meeting

Oct. 11, 2018
 

Action

The Commission is reopening the comment period and requesting additional comment (including potential modifications to proposed rule language) on the proposed rules and amendments for capital, margin, and segregation requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) and capital requirements for broker-dealers.  

Background

In October 2012, the Commission proposed amendments and new rules to: 

1. establish capital and margin requirements for SBSDs and MSBSPs that do not have a prudential regulator (nonbank SBSDs and MSBSPs); 
2. establish segregation requirements for SBSDs; 
3. establish notification requirements for SBSDs and MSBSPs relating to segregation; and 
4. raise minimum net capital requirements and establish liquidity requirements for broker-dealers permitted to use internal models when computing net capital. 

In addition, in May 2013, the Commission proposed provisions to establish the cross-border treatment of security-based swap capital, margin, and segregation requirements. Finally, in April 2014, the Commission proposed an additional nonbank SBSD capital requirement.

The Commission has received numerous comment letters on the proposals and believes it is prudent to reopen the comment period for the proposals in light of these comments. In addition, the Commission believes the public should have the opportunity to provide comment on the potential economic effects of the proposals in light of regulatory and market developments since they were published.  

Highlights

The Commission is seeking comment on all aspects of the proposals. The Commission is also seeking specific comment on certain aspects of the proposals where further information would be particularly helpful to the Commission in the following areas: capital, margin, segregation, substituted compliance, compliance dates, as well as the economic implications of the proposals.  In addition, the Commission is seeking comment on potential modifications to the proposed rule text.  

Examples of some of the areas where the Commission is seeking additional comment include: 

• the potential use by a nonbank SBSD of a credit risk charge for uncollected margin under the proposed capital rules for counterparties other than commercial end users, and whether a threshold should apply;
• the treatment of collateral held at a third-party custodian under the proposed capital rules;
• the potential use of a uniform margin model, including anindustry-developed model, to compute initial margin for non-cleared security-based swaps;
• the potential use of a risk-based margin threshold under which a nonbank SBSD need not collect initial margin;
• potential alternatives relating to exceptions for dealers under the proposed margin rule;
• the potential portfolio margining of swaps and security-based swaps;
• clarifications regarding the application of the proposed omnibus segregation requirements, as well as the cross-border application of the proposed segregation requirements;
• additional guidance regarding the criteria the Commission would consider when making substituted compliance determinations for capital and margin;
• the amount of time it would take for registrants to take the necessary steps to come into compliance with applicable requirements; and
• the economic implications of the proposed rules, including solicitation of comment and supporting data on the current risk management practices that support trading activity in security-based swaps, as well as on how the baseline of the economic analyses has changed since the publication of the proposals.  

What’s Next

The comment period will be open for 30 days after the release is published in the Federal Register.

SEC Press Release

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SEC Stops Fraudulent ICO That Falsely Claimed SEC Approval

The Securities and Exchange Commission today announced that it has obtained an emergency court order halting a planned initial coin offering (ICO), which backers falsely claimed was approved by the SEC. The order also halts ongoing pre-ICO sales by the company, Blockvest LLC and its founder, Reginald Buddy Ringgold, III. 

An SEC complaint unsealed yesterday alleges that Blockvest falsely claimed its ICO and its affiliates received regulatory approval from various agencies, including the SEC. According to the SEC's complaint, Blockvest and Ringgold, who also goes by the name Rasool Abdul Rahim El, were using the SEC seal without permission, a violation of federal law, and falsely claiming their crypto fund was "licensed and regulated." The complaint also alleges Ringgold promoted the ICO with a fake agency he created called the "Blockchain Exchange Commission," using a graphic similar to the SEC's seal and the same address as SEC headquarters.

Blockvest and Ringgold also allegedly misrepresented Blockvest's connections to a well-known accounting firm, and continued their fraudulent conduct even after the National Futures Association (NFA) sent them a cease-and-desist letter to stop them from using the NFA's seal and from making false claims about their status with that organization.

The Honorable Gonzalo P. Curiel, Judge of the U.S. District Court for the Southern District of California, issued an order freezing defendants' assets and other emergency relief. The order also temporarily prohibits Blockvest and Ringgold from violating the antifraud provisions and securities registration provisions. A hearing is scheduled for Oct. 18, 2018, to consider continuing the asset freeze and issuance of a preliminary injunction.

"We allege that this ICO is using both the SEC seal and a made-up crypto regulatory authority to trick investors into believing the ICO was approved by regulators," said Robert A. Cohen, Chief of the SEC Enforcement Division's Cyber Unit. "The SEC does not endorse investment products and investors should be highly skeptical of any claims suggesting otherwise."

The SEC's Office of Investor Education and Advocacy and the U.S. Commodity Futures Trading Commission's (CFTC) Office of Customer Education and Outreach have jointly issued an investor alert on the use of false claims regarding SEC and CFTC endorsements. Additional information about ICOs is available on Investor.gov and SEC.gov/ICO.

The SEC's complaint charges Blockvest and Ringgold with violating the antifraud and securities registration provisions of the federal securities laws. The complaint seeks injunctions, return of ill-gotten gains plus interest and penalties, and a bar against Ringgold to prohibit him from participating in offering any securities, including digital securities, in the future or making misrepresentations about regulatory approval.

The SEC's investigation, which is continuing, is being conducted by David S. Brown and Brent W. Wilner and is being supervised by Diana K. Tani and Joseph G. Sansone of the Market Abuse Unit, John W. Berry of the Los Angeles Regional Office, and Mr. Cohen. Assisting the investigation is Robert Grasso of the Los Angeles Regional Office. The litigation is being conducted by Amy J. Longo of the Los Angeles Regional Office. The SEC appreciates the assistance of the CFTC and the NFA.

SEC Press Release

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Gary Goldsholle, Former Deputy Director, Current Senior Policy Adviser in the Division of Trading and Markets, to Leave the SEC

The Securities and Exchange Commission today announced that Gary Goldsholle, a senior policy adviser in the Division of Trading and Markets, will leave the agency on Oct. 12. 

Mr. Goldsholle joined the SEC staff in 2015 as a deputy director in the Division of Trading and Markets with responsibility for its Offices of Market Supervision, Chief Counsel, and Clearance and Settlement. In that role, he was substantially involved in many market structure initiatives, including the SEC’s approval of new national securities exchanges, approval of the plan to establish the Consolidated Audit Trail, and rulemakings to enhance operational transparency for alternative trading systems and expand order handling disclosures. Mr. Goldsholle also worked on rules to support a new regulatory regime for security-based swaps (SBS), including SBS dealer registration, SBS data repositories, and business conduct standards. In addition, he oversaw SEC rulemakings to strengthen the regulatory framework for clearing agencies, and to reduce the standard settlement cycle from three days (T+3) to two days (T+2), as well as the agency’s issuance of a concept release and notice of potential rulemaking for transfer agents.

More recently, Mr. Goldsholle served as a key member of the SEC’s Fintech Working Group, where he worked closely with other SEC divisions on cryptocurrency and digital asset security issues, including registration, custody, trading practices, and compliance for market participants seeking to conduct initial coin offerings and trade in digital asset securities.

“Gary’s leadership in the Division of Trading and Markets and his commitment to the SEC’s mission have served the interests of our markets and investors,” said SEC Chairman Jay Clayton. “I am grateful for Gary’s thoughtful, cooperative, and practical approach toward addressing market issues with fellow colleagues.”

“It has been an honor and a privilege to contribute to the work of the SEC,” said Mr. Goldsholle. “I have been fortunate to work with an incredible group of talented and dedicated professionals who share a deep commitment to the Commission’s mission, and collaboratively work on some of the most important policy issues we face as our markets continuously evolve.”

Previously, Mr. Goldsholle was the general counsel of the Municipal Securities Rulemaking Board. Before that, Mr. Goldsholle spent 15 years at the Financial Industry Regulatory Authority, serving as vice president and associate general counsel. Earlier in his career he was an attorney at the Commodity Futures Trading Commission and in private practice. Mr. Goldsholle graduated with degrees in computer science and economics from Duke University in 1988, and received his law degree from the University of Chicago Law School in 1991.

SEC Press Release

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SEC Monitoring Impact of Hurricane Michael on Capital Markets

The Securities and Exchange Commission is closely monitoring the impact of Hurricane Michael on investors and capital markets. 

“The dedicated staff of the SEC is preparing to provide support for market participants as Hurricane Michael approaches the Gulf,” said SEC Chairman Jay Clayton. “While we assess the need to extend deadlines for filings and other regulatory requirements, work to help ensure access to securities accounts, and monitor for storm-related fraud, we encourage all of those in its path to pay close attention to directions from local officials before, during, and after the storm.”

The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storm. Entities and investment professionals affected by Hurricane Michael are encouraged to contact Commission staff with questions and concerns:

• Office of Compliance Inspections and Examinations staff in the Commission's Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov

• Office of Compliance Inspections and Examinations staff in the Commission's Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov

• Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
• Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
• Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
• Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov

Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricane are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.

Investors should be vigilant for Hurricane Michael-related securities scams and check the background of anyone offering them an investment by using the free and simple search tool on Investor.gov. The Division of Enforcement will vigorously prosecute those who attempt to defraud victims of the storm. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.

SEC Press Release

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SEC Charges Real Estate Developer With Fraud in Project Tied to New Commuter Rail Station

The Securities and Exchange Commission today charged a Virginia real estate developer with skimming investor funds that were intended for use in purchasing an office building near the site of a planned commuter rail station on the Washington Metropolitan Area Transit Authority’s Silver Line.  The complaint also alleges commingling and misappropriation of investments in various real estate and other projects.

As alleged in the SEC’s complaint, over at least a four-year period, Todd Elliott Hitt used two of his companies – Kiddar Capital LLC and Kiddar Group Holdings, Inc. – to raise more than $20 million from investors for the purpose of acquiring and operating the Silver Line office building, new home construction in Northern Virginia, and a fund managed by Hitt that invested in a startup business.  The SEC alleges that Hitt made misrepresentations about his own investments in the ventures and misappropriated several million dollars of investor funds to support his extravagant lifestyle and make Ponzi-like payments to prior investors. 

As part of his settlement with the SEC, the terms of which remain subject to court approval, Hitt consented to entry of a judgment freezing his assets and imposing conduct-based injunctions that enjoin him from participating in the offer or sale of interests in real estate development companies.  Hitt also has consented to the appointment of a receiver over a number of the corporate defendants and relief defendants.  Under the terms of the proposed settlement, the receiver would protect investors, prevent asset dissipation and loss, and attend to the businesses.  Penalties and disgorgement would be determined by the court at a later date.    

“We moved quickly to preserve the value of investors’ stake in a number of commercial and residential properties in Northern Virginia,” said Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement.  “The total package of relief obtained in the settlement ensures that Hitt’s assets will be used to compensate harmed investors and will limit his ability to harm investors in the future.”

The SEC’s complaint, filed in U.S. District Court for the Eastern District of Virginia, charges Hitt, Kiddar Capital, and Kiddar Group with violating the antifraud provisions of the federal securities laws.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Virginia today announced criminal charges.

The SEC investigation was conducted by Daniel H. Rubenstein, Michael T. Grimes, Keith A. O'Donnell, Michael S. Fuchs, Shipra G. Wells, and Paul Harley, and supervised by C. Joshua Felker. The SEC’s litigation will be led by Patrick Costello and Nicholas Margida under the supervision of Fred Block.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Eastern District of Virginia. 

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Halts Microcap Fraud Scheme Orchestrated Through International Accounts

The Securities and Exchange Commission has filed an emergency action and obtained an asset freeze against two individuals and their companies in a scheme that generated more than $165 million of illegal sales of stock in at least 50 microcap companies.  SEC investigators unraveled the multi-year scheme with the assistance of more than a dozen international regulators and sophisticated analysis of nearly 400 bank and brokerage accounts.

According to the SEC’s complaint unsealed today, U.K. citizen Roger Knox and his Swiss-based company Wintercap SA helped microcap securities holders evade federal securities laws that restrict sales by large shareholders.  The complaint charges that Knox and Wintercap, formerly Silverton SA, helped sellers conceal their stock ownership and provided anonymous access to brokerage accounts to sell the shares in the U.S. market.  For three specific issuers detailed in the complaint, Knox sold the stocks when their price and trading volume were inflated by promotional campaigns.  Michael T. Gastauer allegedly aided and abetted the fraud by establishing several U.S. corporations and allowing Knox to use their bank accounts to disburse the proceeds of his illegal stock sales.

“Investors can help protect themselves from microcap fraud by using the tools and resources on Investor.gov,” said Paul Levenson, Director of the SEC’s Boston Regional Office.  “The allegations here should put investors on guard that spikes in trading volume may be a mirage produced by insiders secretly dumping their shares.”

“Fraudsters must not be allowed to profit at the expense of retail investors by concealing the true nature of their interests and activities and trading through foreign countries,” added Raquel Fox, Director of the SEC’s Office of International Affairs.  “With the timely and robust assistance of our foreign counterparts, we acted quickly to secure illegal profits abroad with the goal of returning assets to investors.”

The SEC’s complaint, filed in federal district court in Boston, charges Knox and Wintercap with violating the antifraud and registration provisions of the federal securities laws and with acting as unregistered broker-dealers, and charges Gastauer and his entities with aiding and abetting Knox’s violations of the antifraud and registration provisions.  The complaint also names as relief defendants two family members of Gastauer and a U.K. entity Gastauer controlled.  In addition to the asset freeze and other temporary relief obtained yesterday, the SEC seeks permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, penalties, and penny stock bars.

In a parallel criminal case, the U.S. Attorney’s Office for the District of Massachusetts today announced criminal charges against Knox.

The SEC’s investigation was handled by Trevor Donelan, Jonathan Allen, Eric Forni, J. Lauchlan Wash, Rebecca Israel, David Scheffler, and Amy Gwiazda in the Boston Regional Office with assistance from Paul Hopker in the Miami Regional Office, Alex Lefferts in the Office of Market Intelligence, and staff in the Office of International Affairs and the Microcap Fraud Task Force.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, Federal Bureau of Investigation, Financial Industry Regulatory Authority, Argentinian Comisión Nacional de Valores, Alberta Securities Commission, British Columbia Securities Commission, Ontario Securities Commission, Royal Canadian Mounted Police, Cyprus Securities and Exchange Commission, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Hong Kong Securities and Futures Commission, Latvian Financial and Capital Market Commission, Malta Financial Services Authority, Mauritius Financial Services Commission, Mexican Comisión Nacional Bancaria y de Valores, New Zealand Financial Markets Authority, Panamanian Superintendencia del Mercado de Valores, Monetary Authority of Singapore, Dubai Financial Services Authority, UAE Securities and Commodities Authority, and Liechtenstein Financial Market Authority.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC to Focus on Empowering Main Street Investors for 2018 World Investor Week

The Securities and Exchange Commission today announced that empowering Main Street investors will be the SEC’s focus during World Investor Week, which takes place Oct. 1-7, 2018.  SEC staff will emphasize both the basics of investing and savings as well as important emerging issues like the rise of initial coin offerings and digital assets, distributed ledger technology, and other innovations.

World Investor Week is a global effort promoted by the International Organization of Securities Commissions (IOSCO), with regulators on six continents joining together for the second year to educate investors on how to be smart and avoid fraud.  The SEC, along with the U.S. Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA), is leading U.S. efforts.  

As part of the week, the SEC’s Office of Investor Education and Advocacy (OIEA) issued a joint Investor Bulletin with the CFTC, FINRA, and the North American Securities Administrators Association, to promote the key messages.  Also, for the first time, OIEA created a guide for teachers that provides K-12 educators with information about the basics of saving and investing, planning for retirement, and ways to protect themselves from fraud.

“Virtually every investor I’ve spoken with wishes they had been educated earlier and better about investing and our markets,” said SEC Chairman Jay Clayton. “World Investor Week provides us the opportunity to highlight the valuable tools and information made available by the SEC to help everyday Americans save, invest, and take better control of their financial future.”

During World Investor Week, SEC staff will stress the importance of investor education, particularly in light of the rapidly changing world of investing and technology. SEC staff will also participate in events around the country to promote investing basics, such as going to Investor.gov and doing a background check on an investment professional, setting investment goals, researching investment products, recognizing the power of compound interest, and learning how to avoid fraud. Check here to sign-up for events near you.

“I have four simple words for investors – before you invest, Investor.gov,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “That’s the first step to being a smarter investor. We look forward to bringing Investor.gov and the rest of our informative tools to Americans across the country.”

SEC staff outreach events include: 

• a joint Twitter chat with the U.S. Army to provide valuable saving and investing tips to military services members; 
• participating in a national teachers conference providing guidance to K-12 educators; 
• a Thrift Savings Plan (TSP) program for federal employees covering TSP distribution options, withdrawals and fees; and
• numerous saving and investing presentations and webinars for seniors, students, women’s organizations and military service members.

For a list of other SEC outreach activities or to learn more about this global effort to promote investor education and protection and how investors can get involved, visit Investor.gov.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.