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This is a photo of the National Register of Historic Places listing with reference number 7000063

Friday, February 28, 2014

ATTORNEY SETTLES CLAIMS HE MADE FALSE AND MISLEADING STATEMENTS TO INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Claims Against Attorney Retained by Funds Involved in Fraudulent Investment Scheme

The United States District Court for the District of Oregon has entered final judgment against Oregon attorney Robert Custis pursuant to a settlement resolving claims brought by the Securities and Exchange Commission.  The Commission’s complaint alleged that Mr. Custis was retained to perform work for investment funds run by Yusaf Jawed and that he made false and misleading statements to the funds’ investors.

The Commission’s previously-filed complaint alleged that Mr. Jawed and two entities he controlled, Grifphon Asset Management, LLC and Grifphon Holdings, LLC, defrauded more than 100 investors in the Pacific Northwest and across the country as part of a long-running Ponzi scheme that raised more than $37 million.  The complaint alleged that Mr. Custis was retained in 2009 and began sending updates to Mr. Jawed’s investors regarding the status of a purported purchase of the funds’ assets that would allow investors to redeem their shares of the funds for a profit.  The complaint alleges that the statements regarding the asset purchase were false and that the investors were never paid.

Mr. Custis agreed to settle the Commission’s charges without admitting or denying the allegations.  The District Court entered final judgment on February 13, 2014, permanently enjoining Mr. Custis from violating Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(4) and Rule 206(4)-8 of the Investment Advisers Act of 1940.    

On February 27, 2014, pursuant to an offer of settlement submitted by Mr. Custis, the Commission issued an order prohibiting Mr. Custis from appearing or practicing before the Commission as an attorney under Rule 102(e) of the Commission’s Rules of Practice.

Thursday, February 27, 2014

SEC BRINGS CHARGES IN MISALLOCATION OF EXPENSES SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.

The SEC Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants.  CEC and Brittenham did not disclose any such payment arrangement in fund offering documents.  When the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.

“Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”

According to the SEC’s order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses.  Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself.  The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.

According to the SEC’s order, the expense misallocation scheme shrank the funds’ cash reserves.  So CEC and Brittenham made unauthorized “loans” to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets.  The loans jeopardized the funds because Brittenham had pledged fund assets as collateral.  CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money.  Brittenham also lied to a fund investor about his “skin in the game.”  Brittenham claimed that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.

The SEC’s order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.

The SEC’s investigation was conducted by Payam Danialypour and C. Dabney O’Riordan of the Asset Management Unit in the Los Angeles Regional Office and accountant Deborah Russell in Washington D.C.  The SEC’s litigation will be led by Amy Longo, Lynn Dean, and Mr. Danialypour.  The SEC examination that led to the investigation was conducted by Ryan Hinson, Ernest Tang, Daniel Jung, and Thomas Mackin of the Los Angeles office’s investment adviser/investment company examination program.

Wednesday, February 26, 2014

CLAIMS SETTLED AGAINST TWO EXECUTIVES ACCUSED OF INFLATION OF REVENUES

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Claims Against Two Former Employees of Hansen Medical, Inc. Relating to Fraudulent Sales Scheme

The United States District Court for the Northern District of California has approved settlements resolving claims by the Securities and Exchange Commission against two former sales executives of Hansen Medical, Inc., a Mountain View, California medical equipment company. The SEC's complaint alleged the former sales executives participated in fraudulent sales transactions to inflate the company's reported revenues.

The SEC's complaint alleged that Christopher Sells, Hansen Medical's former Vice President of Commercial Operations, and Timothy Murawski, a former Vice President of Sales, took steps to complete improper sales transactions in 2008 and 2009. According to the Complaint, Mr. Sells and Mr. Murawski engaged in a scheme to provide false information to Hansen Medical's finance department, resulting in publicly-disclosed financial statements that reported overstated revenue and sales numbers.

Without admitting or denying the allegations, Mr. Sells agreed to pay a civil money penalty of $85,000. The final judgment, entered by the District Court on February 21, 2014, permanently enjoins Mr. Sells from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The judgment also prohibits Mr. Sells from acting as an officer or director of a public company under the Exchange Act for five years.

Without admitting or denying the allegations, Mr. Murawski agreed to pay a civil money penalty of $35,000. The final judgment, entered by the District Court on November 6, 2013, permanently enjoins Mr. Murawski from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a), 10b-5(c), and 13b2-1 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.

Tuesday, February 25, 2014

CFTC SEEKS REVOKING OF REGISTRATION OF INTRODUCING BROKER

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Seeks to Revoke Registration of Introducing Broker iFinix Futures, Inc.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a Notice of Intent (Notice) to revoke the registration of iFinix Futures, Inc. (iFinix), a registered independent Introducing Broker based in Plainview, New York. iFinix has also done business under the name Pro-Active Futures.

The CFTC’s Notice alleges that iFinix is subject to statutory disqualification from CFTC registration based on a default judgment and permanent injunction Order entered by the U.S. District Court for the Eastern District of New York on September 16, 2013 (see CFTC News Release 6711-13). The Order found, in relevant part, that iFinix and its senior executive officer, Connecticut resident Benhope Marlon Munroe, willfully made materially false statements to the National Futures Association (NFA), the futures industry self-regulatory organization. Among other things, the Order permanently prohibits iFinix from making any false, fictitious, or fraudulent statements or representations, as charged, and from applying for registration or claiming exemption from registration with the CFTC. The Order also prohibits iFinix from trading on, or subject to the rules of, any registered entity. The Order required iFinix and Munroe to pay a $1,260,000 civil monetary penalty.

The CFTC thanks the NFA for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Lara Turcik, Douglas K. Yatter, Christopher Giglio, Lenel Hickson, Jr., and Manal M. Sultan.

Monday, February 24, 2014

SEC WILL LOOK AT INVESTMENT ADVISERS WHO WERE NEVER-BEFORE EXAMINED

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Initiative Directed at Never-Before Examined Registered Investment Advisers
  FOR IMMEDIATE RELEASE

2014-35 Washington D.C., Feb. 20, 2014 — The Securities and Exchange Commission today announced that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years.  OCIE previously announced that examining these advisers is a priority in 2014.
As part of the initiative, OCIE will conduct examinations of a significant percentage of advisers that have not been examined since they registered with the SEC.  These examinations will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets.  Additional details on the examinations are available here.

“Our examinations will focus on areas most important to protecting investors,” said Jane Jarcho, national associate director of OCIE’s Investment Adviser/Investment Company examination program. “We will also promote compliance by engaging with these advisers through outreach efforts.”

Starting later this year, OCIE will invite SEC-registered investment advisers who have yet to be examined to attend regional meetings where they can learn more about the examination process.  Advisers also can find information regarding their obligations under the Investment Advisers Act of 1940 and other useful guidance on the SEC’s website.

Sunday, February 23, 2014

CFTC REVOKES REGISTRATIONS OF CONVICTED FRAUDSTER AND COMPANY

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Revokes Registrations of Oregon Resident Joshua W. Wallace and His Company, System Capital, LLC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the revocation of the registrations of Joshua W. Wallace, a resident of Oregon, and his Oregon-based company, System Capital, LLC (System Capital). System Capital was registered with the CFTC as a Commodity Trading Advisor and Wallace was registered as an Associated Person of System Capital. Wallace is the sole principal and president of System Capital.

The CFTC filed a civil Complaint against Defendants Wallace and System Capital on November 23, 2010, charging them with solicitation fraud and making false statements to the National Futures Association (NFA) (see CFTC Press Release 5940-10). Subsequently, on March 14, 2013, the U.S. District Court for the Southern District of New York entered an Order of permanent injunction against the Defendants that imposes permanent trading and registration bans against them and prohibits them from violating the Commodity Exchange Act, as charged. The court’s Order also required Wallace and System Capital each to pay a $420,000 civil monetary penalty.

On December 23, 2013, the CFTC Judgment Officer issued a Decision against Wallace and System Capital, finding that they were statutorily disqualified from CFTC registration based on both the Order of permanent injunction and on the criminal conviction of Wallace on May 21, 2013, in which Wallace pleaded guilty to commodities fraud and was sentenced to serve 27 months in prison (U.S. v. Wallace, 11 crim 124-01 (LTS) (S.D.N.Y.)). The Judgment Officer’s Decision became a final Order of the CFTC on January 22, 2014.

The CFTC thanks the NFA, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the Southern District of New York for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, and Manal M. Sultan.

Saturday, February 22, 2014

SEC CHAIRMAN WHITE'S ADDRESS AT SEC SPEAKS 2014

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Chairman’s Address at SEC Speaks 2014
 Chair Mary Jo White
Washington, D.C.

Feb. 21, 2014

Good morning.  I am very honored to be giving the welcoming remarks and to offer a few perspectives from my first 10 months as Chair.  Looking back at remarks made by former Chairs at this event, the expectation seems to be for me to talk about the “State of the SEC.”  I will happily oblige on behalf of this great and critical agency.

In 1972, 42 years ago at the very first SEC Speaks, there were approximately 1,500 SEC employees charged with regulating the activities of 5,000 broker-dealers, 3,500 investment advisers, and 1,500 investment companies.

Today the markets have grown and changed dramatically, and the SEC has significantly expanded responsibilities.  There are now about 4,200 employees – not nearly enough to stretch across a landscape that requires us to regulate more than 25,000 market participants, including broker-dealers, investment advisers, mutual funds and exchange-traded funds, municipal advisors, clearing agents, transfer agents, and 18 exchanges.  We also oversee the important functions of self-regulatory organizations and boards such as FASB, FINRA, MSRB, PCAOB, and SIPC.  Only SIPC and FINRA’s predecessor, the NASD, even existed back in 1972.

Today the agency also faces an unprecedented rulemaking agenda.  Between the Dodd-Frank and JOBS Acts, the SEC was given nearly 100 new rulemaking mandates ranging from rules that govern the previously unregulated derivatives markets, impose proprietary trading restrictions on many financial institutions, increase transparency for hedge funds and private equity funds, give investors a say-on-executive pay, establish a new whistleblower program, lift the ban on general solicitation, reform and more intensely oversee credit rating agencies, and so many others.  These rulemakings, coupled with the implementation and oversight effort that each one brings, have added significantly to our already extensive responsibilities and challenge our limited resources.  These mandates also present the risk that they will crowd out or delay other pressing priorities.  But we must not let that happen.

All of this is upon us at a time when our funding falls significantly short of the level we need to fulfill our mission to investors, companies, and the markets.  As Chair, I owe a duty to Congress, the staff, and to the American people to use the funds we are appropriated prudently and effectively.  But it also is incumbent upon me to raise my voice when the SEC is not being provided with sufficient resources.  The SEC is deficit neutral.  Our appropriations are offset by modest transaction fees we collect from SROs.  What does that mean?  It means that if Congress provides us with increased funding, it will not increase the budget deficit or take resources from other programs or agencies, but it would go directly to protecting investors and strengthening our markets.  Given the critical role we play for investors and our expanded responsibilities, obtaining adequate funding for the SEC is and must be a top priority.

Fortunately, what has remained a constant over the years at the SEC is its magnificent and dedicated staff.  Indeed, it was the commitment, expertise, and moral, apolitical compass of the staff that led me here.  The SEC staff is a deep reservoir of extraordinary talent and expertise with a strong and enduring commitment to public service and independence.  And that is what has sustained the excellence of this agency since its founding.

Exercising my prerogative as Chair, I would now like to ask each SEC employee in the audience to stand and be recognized.  Please remain standing while I ask that everyone here today who once worked at the SEC to please also stand to be recognized.  In our most challenging moments, I urge all of us to think about the colleagues we just recognized, marvel at their public service and say thank you.

Back to the state of the SEC in 2014.

When I arrived at the SEC last April, I initially set three primary priorities: implementing the mandatory Congressional rulemakings of the Dodd-Frank and the JOBS Acts; intensifying the agency’s efforts to ensure that the U.S. equity markets are structured and operating to optimally serve the interests of all investors; and further strengthening our already robust enforcement program.  Ten months later, I am pleased with what we have accomplished.

Rulemaking
When I arrived, it was imperative to set an aggressive rulemaking agenda.  Congress had seen to that and our own core mission demanded it.  And, through the tireless work of the staff and my fellow Commissioners, we made significant progress.

On the day I was sworn in as Chair, we adopted identity theft rules requiring broker-dealers, mutual funds, investment advisers, and others regulated by us to adopt programs to detect red flags and prevent identity theft.[1]

A month later, we proposed rules to govern cross-border swap transactions in the multi-trillion dollar global over-the-counter derivatives markets.[2]

A month after that, we proposed rules to reform and strengthen the structure of money market funds. [3]

Last summer and fall, we made significant progress in implementing the reforms to the private offering market mandated by Congress in the JOBS Act.  We lifted the ban on general solicitation[4] and we proposed rules that would provide new investor protections and important data about this new market.[5]  We also proposed new rules that would permit securities-based crowdfunding and update and expand Regulation A.[6]

We adopted a Dodd-Frank Act rule disqualifying bad actors from certain private offerings.[7]

We adopted some of the most significant changes in years to the financial responsibility rules for broker-dealers.[8]

We adopted rules governing the registration and regulation of municipal advisors.[9]

We adopted rules removing references to credit agency ratings in certain broker-dealer and investment company regulations.[10]

In December, together with the banking regulators and the CFTC, we adopted regulations implementing the Volcker Rule.[11]

And, just last week we announced the selection of Rick Fleming, the deputy general counsel at the North American Securities Administrators Association, as the first Investor Advocate, a position established by Dodd-Frank.[12]

As even this partial list shows, we have made significant progress on our rulemakings, although more remains to be done.  But we must always keep the bigger picture in focus and not let the sheer number nor the sometimes controversial nature of the Congressional mandates distract us from other important rulemakings and initiatives that further our core mission as we set and carry out our priorities for the year ahead.

Other Critical Initiatives
To be more specific, in 2014, in addition to continuing to complete important rulemakings, we also will intensify our consideration of the question of the role and duties of investment advisers and broker dealers, with the goal of enhancing investor protection.  We will increase our focus on the fixed income markets and make further progress on credit rating agency reform.  We will also increase our oversight of broker-dealers with initiatives that will strengthen and enhance their capital and liquidity, as well as providing more robust protections and safeguards for customer assets.

We also will continue to engage with other domestic and international regulators to ensure that the systemic risks to our interconnected financial systems are identified and addressed – but addressed in a way that takes into account the differences between prudential risks and those that are not.  We want to avoid a rigidly uniform regulatory approach solely defined by the safety and soundness standard that may be more appropriate for banking institutions.

In 2014, we also will prioritize our review of equity market structure, focusing closely on how it impacts investors and companies of every size.  One near-term project that I will be pushing forward is the development and implementation of a tick-size pilot, along carefully defined parameters, that would widen the quoting and trading increments and test, among other things, whether a change like this improves liquidity and market quality.

In 2013, our Trading and Markets Division continued to develop the necessary empirical evidence to accurately assess our current equity market structure and to consider a range of possible changes.  Today we have better sources of data to inform our decisions.  For example, something we call MIDAS collects, nearly instantaneously, one billion trading data records every day from across the markets.  We have developed key metrics about the markets using MIDAS and placed them on our website last October so the public, academics, and all market participants could share, analyze, and react to the information that allows us to better test the various hypotheses about our markets to inform regulatory changes.[13]

The SEC, the SROs, and other market participants are also proceeding to implement the Consolidated Audit Trail Rule,[14] which when operational will further enhance the ability of regulators to monitor and analyze the equity markets on a more timely basis.  Indeed, it should result in a sea change in the data currently available, collecting in one place every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.  It is a difficult and complex undertaking, which must be accorded the highest priority by all to complete.

We also are very focused on ensuring the resilience of the systems used by the exchanges and other market participants.  It is critically important that the technology that connects market participants be deployed and used responsibly to reduce the risk of disruptions that can harm investors and undermine confidence in our markets.  A number of measures have already been taken and, in 2014, we will be focused on ensuring that more is done to address these vulnerabilities.  One significant vulnerability that must be comprehensively addressed across both the public and private sectors is the risk of cyber attacks.  To encourage a discussion and sharing of information and best practices, the SEC will be holding a cybersecurity roundtable in March.[15]

Enforcement
Let me turn to enforcement at the SEC in 2014 because vigorous and comprehensive enforcement of our securities laws must always be a very high priority at the SEC.  And it is.

When I arrived in April, I found what I expected to find – a very strong enforcement program.  Through extraordinary hard work and dedication, the Commission’s Enforcement Division achieved an unparalleled record of successful cases arising out of the financial crisis.  To date, we have charged 169 individuals or entities with wrongdoing stemming from the financial crisis – 70 of whom were CEOs, CFOs, or other senior executives.  At the same time, the Commission also brought landmark insider trading cases and created specialized units that pursued complex cases against investment advisers, broker dealers and exchanges, as well as cases involving FCPA violations, municipal bonds and state pension funds.  In 2013 alone, Enforcement’s labors yielded orders to return $3.4 billion in disgorgement and civil penalties, the highest amount in the agency’s history.  But there is always more to do.

Admissions
Last year, we modified the SEC’s longstanding no admit/no deny settlement protocol to require admissions in a broader range of cases.  As I have said before,[16] admissions are important because they achieve a greater measure of public accountability, which, in turn, can bolster the public’s confidence in the strength and credibility of law enforcement, and the safety of our markets.

When we first announced this change, we said that we would consider requiring admissions in certain types of cases, including those involving particularly egregious conduct, where a large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct undermines or obstructs our investigative processes, where an admission can send a particularly important message to the markets or where the wrongdoer poses a particular future threat to investors or the markets.  And now that we have resolved a number of cases with admissions, you have specific examples of where we think it is appropriate to require admissions as a condition of settlement.[17]  My expectation is that there will be more such cases in 2014 as the new protocol continues to evolve and be applied.

Financial Fraud Task Force
Last year, the Enforcement Division also increased its focus on accounting fraud through the creation of a new task force.[18]  The Division formed the Financial Reporting and Audit Task Force to look at trends or patterns of conduct that are risk indicators for financial fraud, including in areas like revenue recognition, asset valuations, and management estimates.  The task force draws on resources across the agency, including accountants in the Division of Corporation Finance and the Office of the Chief Accountant and our very talented economists in the Division of Economic Risk and Analysis (DERA).  The task force is focused on more quickly identifying potential material misstatements in financial statements and disclosures.  The program has already generated several significant investigations and more are expected to follow.

In addition to the new admissions protocol and the Financial Fraud Task Force, the Enforcement Division also has other exciting new initiatives including a new Microcap Task Force[19] and a renewed focus on those who serve as gatekeepers in our financial system, just to name a few.

* * *

We have talked about our rulemaking agenda, some of our ongoing market structure initiatives, and a bit about what is new and developing in Enforcement.  But what else lies ahead?

Corporation Finance: JOBS Act and Disclosure Reform
As we move to complete our rulemakings in the private offering arena, it is important for the SEC to keep focused on the public markets as well.  Our JOBS Act related-rulemaking will provide companies with a number of different alternatives to raise capital in the private markets.  Some have even suggested that if the private markets develop sufficient liquidity, there may not be any reason for a company to go public or become a public company in the way we think of it now.  That would not be the best result for all investors.

While the JOBS Act provides additional avenues for raising capital in the private markets and may allow companies to stay private longer, the public markets in the United States also continue to offer very attractive opportunities for capital.  They offer the transparency and liquidity that investors need and, at the same time, provide access to the breadth of sources of capital necessary to support significant growth and innovation.  For our part, we must consider how the SEC’s rules governing public offerings and public company reporting and disclosure may negatively impact liquidity in our markets and how they can be improved and streamlined, while maintaining strong investor protections.

Last year, I spoke about disclosure reform[20] and in December the staff issued a report that contains the staff’s preliminary conclusions and recommendations as to how to update our disclosure rules.[21]

What is next?

This year, the Corp Fin staff will focus on making specific recommendations for updating the rules that govern public company disclosure.  As part of this effort, Corp Fin will be broadly seeking input from companies and investors about how we can make our disclosure rules work better, and, specifically, investors will be asked what type of information they want, when do they want it and how companies can most meaningfully present that information.

Investment Management: Enhanced Asset Manager Risk Monitoring
The SEC of 2014 is an agency that increasingly relies on technology and specialized expertise.  This is particularly evident in the SEC’s new risk monitoring and data analytics activities.  One important example is the SEC’s new focus on risk monitoring of asset managers and funds.

Last year featured a very concrete success from these risk monitoring efforts when the SEC brought an enforcement case against a money market fund firm charging that it failed to comply with the risk limiting conditions of our rules.[22]

In the past year, the SEC has established a dedicated group of professionals to monitor large-firm asset managers.  These professionals who include former portfolio managers, investment analysts, and examiners track investment trends, review emerging market developments, and identify outlier funds.

The tools they use include analytics of data we receive, high-level engagement with asset manager executives and mutual fund boards, data-driven, risk-focused examinations, and with respect to money market funds certain stress testing results.

What is next?

I asked the IM staff for an “action plan” to enhance our asset manager risk management oversight program.  Among the initiatives under near-term consideration are expanded stress testing, more robust data reporting, and increased oversight of the largest asset management firms.  To be an effective 21st century regulator, the SEC is using 21st century tools to address the range of 21st century risks.

OCIE: Innovation in Exam Planning
We also are using powerful new data analytics and technology tools in our National Exam Program to conduct more effective and efficient risk-based examinations of our registrants.

OCIE’s Office of Risk Assessment and Surveillance aggregates and analyzes a broad band of data to identify potentially problematic behavior.  In addition to scouring the data that we collect directly from registrants, we look at data from outside the Commission, including information from public records, data collected by other regulators, SROs and exchanges, and information that our registrants provide to data vendors.  This expanded data collection and analysis not only enhances OCIE’s ability to identify risks more efficiently, but it also helps our examiners better understand the contours of a firm’s business activities prior to conducting an examination.

What is next?

The Office of Risk Assessment and Surveillance is developing exciting new technologies – text analytics, visualization, search, and predictive analytics – to cull additional red flags from internal and external data and information sources.  These tools will help our examiners be even more efficient and effective in analyzing massive amounts of data to more quickly and accurately hone in on areas that pose the greatest risks and warrant further investigation.  In an era of limited resources and expanding responsibilities, it is essential to identify and target these risks more systematically.  And we are doing that.

Conclusion
Let me stop here.  Hopefully, I have at least given you a window into the strong, busy, and proactive state of the SEC in 2014.  More importantly, throughout the next two days, you will hear directly from our staff about the many ways we are meeting the current challenges that we all face in our complex and rapidly changing markets and how we are preparing for tomorrow’s challenges.

This year as in every year, we look forward to hearing your ideas and input on our rulemakings and other initiatives.  Your views are very important to us and assist us to implement regulations that are true to our mission, effective, and workable.

Thank you and enjoy the conference.


[1] See Identity Theft Red Flags Rule Release No. 34-69359, (Apr. 10, 2013), available at http://www.sec.gov/rules/final/2013/34-69359.pdf.

[2] See Title VII of the Dodd-Frank Act and Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants Release No. 34-69490, (May 1, 2013), available at http://www.sec.gov/rules/proposed/2013/34-69490.pdf.

[3] See Money Market Fund Reform; Amendments to Form PF Release No. 33-9408, (Jun. 5, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.

[4] See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9415.pdf.

[5] See Release No. 33-9416, Amendments to Regulation D, Form D and Rule 156 (Jul. 10, 2013).

[6] See Crowdfunding, Release No. 33-9470 (Oct. 23, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf and Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, Release No. 33-9497 (Dec. 18, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9497.pdf.

[7] See Release No. 33-9414, Disqualification of Felons and Other “Bad Actors” (Jul. 10, 2013), available at http://www.sec.gov/rules/final/2013/33.9414.pdf.

[8] See Release No. 34-70072, Financial Responsibility Rules for Broker-Dealers (Jul. 30, 2013), available at http://www.sec.gov/rules/final/2013/34-70072.pdf.

[9] See Release No. 34-70462, Registration of Municipal Advisors (Sep. 20, 2013), available at http://www.sec.gov/rules/final/2013/34-70462.pdf.

[10] See Release No. 34-71194, Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934 (Dec. 27, 2013), available at http://www.sec.gov/rules/final/2013/34-71194.pdf; Release No. 33-9506, Removal of Certain References to Credit Ratings Under the Investment Company Act (Dec. 27, 2013), available at http://www.sec.gov/rules/final/2013/33-9506.pdf.

[11] See Release No. BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds Bank Holding Company Act (Dec. 10, 2013), available at http://www.sec.gov/rules/final/2013/bhca-1.pdf.

[12] See Press Release No. 2014-27, SEC Names Rick Fleming as Investor Advocate (Feb. 12, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540780377.

[13] The MIDAS web site and interactive tools are available at http://www.sec.gov/marketstructure.

[14] See Release No. 34-67457, Consolidated Audit Trail (Jul. 18, 2012), available at http://www.sec.gov/rules/final/2012/34-67457.pdf.

[15] See Press Release No. 2014-32, SEC to Hold Cybersecurity Roundtable (Feb. 14, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540793626.

[16] The Importance of Trials to the Law and Public Accountability, remarks at the 5th Annual Judge Thomas A. Flannery Lecture (Nov. 14, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540374908.

[17] See Press Release No. 2013-159, Philip Falcone and Harbinger Capital Agree to Settlement (Aug. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539780222; Press Release No. 2013-187, JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges (Sep. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965; Press Release No. 2013-266, SEC Charges ConvergEx Subsidiaries With Fraud for Deceiving Customers About Commissions (Dec. 18, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540521484; Press Release No. 2014-17, Scottrade Agrees to Pay $2.5 Million and Admits Providing Flawed ‘Blue Sheet’ Trading Data (Jan. 29, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540696906.

[18] See SEC Spotlight on the Financial Reporting and Audit Task Force, available at https://www.sec.gov/spotlight/finreporting-audittaskforce.shtml.

[19] See SEC Spotlight on Microcap Fraud, available at http://www.sec.gov/spotlight/microcap-fraud.shtml.

[20] The Path Forward on Disclosure, remarks at the National Association of Corporate Directors Leadership Conference 2013 (Oct. 15, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539878806.  See also The SEC in 2014, remarks at the 41st Annual Securities Regulation Institute (Jan. 27, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540677500.

[21] Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013), available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.

[22] In the Matter of Ambassador Capital Management, LLC, and Derek H. Oglesby, Admin. Proc. File No. 3-15625 (2013), available at http://www.sec.gov/litigation/admin/2013/ia-3725.pdf.

Friday, February 21, 2014

Addressing Known Risks to Better Protect Investors

Addressing Known Risks to Better Protect Investors

SEC CHARGES CALIFORNIA RESIDENT OF DEFRAUDING ADVISORY CLIENTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges James Y. Lee for Defrauding His Advisory Clients

On February 13, 2014, the Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC's complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee's clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws - Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee's girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.

In a related matter, on February 12, 2014, the SEC settled administrative and cease-and-desist proceedings against Ronald E. Huxtable II, of Palm Coast Florida. (Rel. 33-9547) In those proceedings the SEC found that Huxtable, one of Lee's clients, aided, abetted and caused Lee's violations by helping Lee charge certain clients fees for the month of February 2011 based on false performance and conceal the fact that they had actually incurred net realized losses for that month.

The SEC's investigation was conducted by Jennifer Peltz and Delia Helpingstine and supervised by Paul Montoya. The SEC's litigation will be led by Michael Foster.

Thursday, February 20, 2014

CFTC CHARGES TWO MEN WITH MISAPPROPRIATION OF OVER $1.6 MILLION

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges Ron Earl McCullough and David Christopher Mayhew with Fraudulent Solicitation, False Statements, and Misappropriation of More than$1.6 Million of Customer Funds

CFTC Separately Orders Travis Maurice Cox to Pay Restitution and Penalties to Settle Fraud Charges

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) filed an enforcement action in the U.S. District Court, Eastern District of North Carolina, charging Ron Earl McCullough and David Christopher Mayhew. The CFTC Complaint charges McCullough and Mayhew with fraudulently soliciting, directly and through others, approximately $2.3 million from at least 11 individuals to trade leveraged or margined off-exchange foreign currency (forex) contracts. Further, the CFTC Complaint alleges that McCullough and Mayhew misappropriated at least $1.6 million of their customers’ funds.

In a separate but related matter, the CFTC issued an administrative Order against Travis Maurice Cox that sets forth Cox’s fraudulent conduct in connection with his solicitations on behalf of his forex trading partners.

CFTC Complaint against McCullough and Mayhew

The CFTC Complaint alleges that, from approximately December 2008 until approximately January 2012, McCullough and Mayhew, directly and through others, misrepresented the risks of trading forex; falsely guaranteed the return of customers’ principal; falsely promised high returns, including double returns in short periods of time; and failed to disclose that they intended to use customer funds to pay principal and purported profits to other customers and for personal expenses. During this period, McCullough and Mayhew were residents of Raleigh, North Carolina, according to the Complaint.

The Complaint also alleges that Mayhew caused false account statements to be issued that concealed his and McCullough’s misappropriation, trading losses, and lack of trading, and that McCullough and Mayhew aided and abetted each other’s violations of the Commodity Exchange Act (Act) and a CFTC regulation, as charged.

The Complaint further charges that McCullough and Mayhew misappropriated approximately $808,000 to make purported payments of principal and profits to customers. In addition, McCullough and Mayhew misappropriated approximately $829,000, using their customers’ funds to pay for their own personal expenses, including an online forex trading course and travel expenses.

In its continuing litigation against McCullough and Mayhew, the CFTC seeks civil monetary penalties, restitution, disgorgement of ill-gotten gains, trading and registration bans, and a permanent injunction against further violations of the federal commodities laws, as charged.

CFTC Administrative Order against Travis Maurice Cox

According to the CFTC administrative Order as to Cox, a resident of North Carolina, from about August 2009 through December 2011, Cox fraudulently solicited approximately $1.3 million from at least five individuals to trade forex through Cox and his partners. The Order also finds that Cox falsely told his customers that his partners had made money for Cox through forex trading, and that they could be trusted. Cox also represented that all of his customers’ funds would be traded, but failed to transfer all such funds to his partners for trading.

Further, according to the Order, Cox misappropriated approximately $114,000 of his customers’ funds by either failing to deposit that money into forex trading accounts or transferring it to his partners for trading.

The Order requires Cox to make restitution of $1,306,010.95 to his defrauded customers and to pay a $330,000 civil monetary penalty. The Order also requires Cox to cease and desist from further violations of the Act and a CFTC regulation, as charged, and imposes permanent bans on trading, registration, and certain other commodity-related activities.

CFTC Division of Enforcement staff members responsible for this case are Glenn I. Chernigoff, James H. Holl, III, Maura Viehmeyer, Richard A. Glaser, and Gretchen L. Lowe.

Wednesday, February 19, 2014

COURT ORDERS ACCUSED EMBEZZLER TO PAY $5.2 MILLION

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Federal Court Orders North Carolina Resident Michael Anthony Jenkins and his Company, Harbor Light Asset Management, to Pay over $5.2 Million for Solicitation Fraud, Misappropriation, and Embezzlement in a Ponzi Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge James C. Fox of the U.S. District Court for the Eastern District of North Carolina entered an Order for a permanent injunction against Defendants Harbor Light Asset Management, LLC (HLAM) and its President and owner, Michael Anthony Jenkins, both of Raleigh, North Carolina. The Order requires HLAM and Jenkins jointly to pay restitution totaling $1,301,406.60 and a civil monetary penalty of $3,904,219.80. The Order also imposes permanent trading and registration bans against the Defendants and prohibits them from violating the Commodity Exchange Act and CFTC Regulations, as charged.

The Order stems from a CFTC Complaint filed on November 20, 2012 (see CFTC Press Release 6422-12, November 23, 2012), charging HLAM and Jenkins with operating a Ponzi scheme and fraudulently soliciting at least $1.79 million from approximately 377 persons, primarily in North Carolina, in connection with the scheme.

The Order finds that the Defendants made use of an HLAM Investment Agreement to falsely represent to HLAM Investors that their investment funds were used solely for investment in E-mini futures and that the funds would be wired to a specific trading account. To cover up and further the fraud, Jenkins sent spreadsheets and statements that reported false trades, profits, and inflated the value of HLAM’s investments. In addition, the Order finds that Jenkins acted within the scope of his employment by HLAM and committed embezzlement and failed to register with the CFTC as a Futures Commission Merchant.

The CFTC thanks the Securities Division of the North Carolina Department of the Secretary of State for its cooperation and assistance.

CFTC Division of Enforcement staff members responsible for this case are Xavier Romeu-Matta, Nathan Ploener, Christopher Giglio, Lenel Hickson, Jr., and Manal M. Sultan.

Tuesday, February 18, 2014

MAN TO PAY DISGORGEMENT AND PENALTY TO SETTLE INSIDER TRADING CHARGES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

On February 6, 2014, the Securities and Exchange Commission filed insider trading charges against Hao He a/k/a Jimmy He alleging He purchased short-term put option contracts in the securities of Sina Corporation ("Sina"), a foreign private issuer headquartered in Shanghai, China.

The SEC's complaint, filed in the federal district court in Atlanta, Georgia, alleges that He, between October 10, 2012 and November 13, 2012, obtained material nonpublic information concerning Sina's upcoming, negative, future earnings guidance while visiting China and/or through phone calls to China. Based on this information, He purchased approximately $162,000 in short-term put options on November 13 and November 14, 2012, which contracts expired on November 17, 2012. Given the cost and nature of those trades, Sina's stock had to decline within a short time frame in order for He's trades to be profitable.

On November 15, 2012, Sina issued an announcement noting that it had beaten analyst forecasts for third quarter earnings, but also announced unexpected negative guidance for the fourth quarter of 2012. As a result of this negative guidance, analysts downgraded the stock and, upon opening on November 16, 2012, Sina's stock price declined approximately 8.5%, opening at $48.60 compared to the previous day's close of $53.10, and ultimately closed at $45.06.

Following the announcement and decline in the stock price, He sold all of his put option contracts on November 16, 2012 for $331,530.83, generating illicit profits of $169,819.10.

The SEC's complaint alleges that He violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

He has consented, without admitting or denying the Commission's allegations, to the entry of a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and requiring him to pay $169,819.10 in disgorgement plus prejudgment interest of $6,155.36, and a penalty of $169,819.10. The settlement with He is subject to court approval.

The SEC's investigation was conducted by Grant Mogan and Peter Diskin of the Atlanta Regional Office.

Monday, February 17, 2014

DEFENDANTS TO PAY OVER $5 MILLION TO SETTLE CHARGES IN OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Federal Court in Florida Orders James Burbage, Frank Gaudino, and Their Companies to Pay over $5 Million in Restitution and Penalties to Settle Charges Related to Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that Judge Donald M. Middlebrooks of the U.S. District Court for the Southern District of Florida in Miami entered a final judgment and permanent injunction Order against Florida residents James Burbage and Frank Gaudino and their companies, Lloyds Commodities, LLC, Lloyds Commodities Credit Company, LLC, and Lloyds Services, LLC (the Lloyds Defendants), who the CFTC had sued for their role in a multi-million dollar precious metals scheme orchestrated by Hunter Wise Commodities, LLC and related companies (Hunter Wise) (see CFTC Press Release 6447-12 and the Complaint).

The Order, entered on February 5, 2014, requires the Lloyds Defendants to pay a civil monetary penalty of $2,215,000, and Burbage and Gaudino to pay civil penalties of $423,000 and $263,000, respectively. The Order also requires the Lloyds Defendants to pay restitution for the benefit of customers totaling $1,476,690, and Burbage and Gaudino to pay restitution of $423,000 and $263,000, respectively. The Order specifies that the restitution payments are to be made to Melanie Damian, a Court-appointed Special Monitor and Corporate Manager, in the name of the “Hunter Wise Settlement/Restitution Fund.” The Order also imposes permanent solicitation, trading, and registration bans on the Lloyds Defendants, Burbage, and Gaudino and prohibits them from further violating the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The Order finds that, from at least July 16, 2011 until February 25, 2013, the Lloyds Defendants, operating under the common ownership and control of Burbage and Gaudino, held themselves out as a “leading wholesaler of precious metals,” such as gold, silver, platinum, palladium, and copper. According to the Order, the Lloyds Defendants acted as an intermediary that accepted orders and funds from customers of telemarketing firms for the purchase of physical precious metals on a leveraged basis (retail commodity transactions). The Order finds that the Lloyds Defendants would then transmit the customer orders and funds to Hunter Wise. The Order further finds that the Lloyds Defendants also recruited telemarketing firms to solicit retail customers until February 25, 2013, when the Court entered a preliminary injunction Order against Hunter Wise, the Lloyds Defendants, Burbage, Gaudino, and the other Defendants named in the CFTC Complaint (see CFTC Press Release 6522-13 and Order).

The Order finds that the Lloyds Defendants, Burbage, and Gaudino confirmed the execution of, and conducted an office or business in the United States for the purpose of accepting orders for, or otherwise dealing in, retail commodity transactions, thereby violating the requirement of the CEA that such retail commodity transactions be made or conducted on, or subject to, the rules of a regulated exchange.

The CFTC’s litigation continues against Hunter Wise and its principals, as well as the firms from whom the Lloyds Defendants received customer orders and funds.

The CFTC appreciates the assistance of the Florida Office of Financial Regulation.

CFTC Division of Enforcement staff members responsible for this case are Carlin Metzger, Heather Johnson, Brigitte Weyls, Jeff Le Riche, Peter Riggs, Thaddeus Glotfelty, Joseph Konizeski, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

Sunday, February 16, 2014

CFTC O'MALIA'S STATEMENT AT TECHNOLOGY ADVISORY COMMITTEE MEETING

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Commissioner Scott D. O’Malia, 11th Meeting of the Technology Advisory Committee

February 10, 2014

I am pleased to call the 11th TAC meeting to order since we reconstituted it in July 2010. I thank all of our TAC participants for joining us here today after the January 21 meeting was snowed out. I appreciate everyone’s willingness to accommodate the change in date.

I would like to acknowledge that our new Acting Chairman Mark Wetjen is here with us today. Chairman Wetjen has shown a great interest in our technology issues and a real willingness to ensure that the data we are collecting will be used in a thorough and automated manner. I was pleased to join with Chairman Wetjen and Commissioner Chilton a few weeks ago to announce that the Commission is taking concrete steps to address the challenges we face in optimizing our data.1

Specifically, on January 21, the Commission announced the formation of a cross-divisional data team that will focus on identifying problems faced by each division and developing solutions to resolve problems with the Commission’s regulatory data. The data team will also solicit comments from market participants on recommended rule changes to the Commission’s data rules. Based on this input, the data team will make written recommendations on a corrective path forward. Until now, no one in the Commission has taken ownership to fix the problems. This has now changed.

Enhancing the Commission’s swaps reporting rules will improve data quality, minimize confusion regarding reporting workflows, and increase standardization.

In addition, the Commission staff will continue to work on the data standardization effort, led by the Office of Data and Technology. The first phase of this work has been reported to TAC,2 but much work remains to harmonize many more fields and asset classes.

Agenda

Today’s TAC agenda is packed with three very important and timely topics that are also at the top of the Commission’s policy agenda.

Panel I -- Data: Where Does the Commission Stand and How Do We Fix What’s Broken?

First, we will hear from a collection of the Commission’s division directors who have critical market oversight responsibilities, as well as our Office of Data and Technology and our new Chief Economist. They will discuss where the Commission has been successful in utilizing swap data repository data, identify areas that are not working, and explain where changes must be made.

In thinking about our goals, I reviewed the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS / IOSCO) Final Report issued in January 2012 entitled, “Report on OTC derivatives data reporting and aggregation requirements.”3 Significantly, the report identifies key reporting standards and goals for data reporting, aggregation, and sharing among regulators.

The report also establishes several high level objectives for data utilization that the Commission should be able to achieve. These objectives include:

1. Assessing systemic risk and financial stability

2. Conducting market surveillance and enforcement

3. Supervising market participants

4. Conducting resolution activities

5. Bringing greater transparency to OTC markets

While it is clear we have achieved objective 5 with a partially complete swaps data report and a real-time swaps data ticker, I believe we have a long way to go on the other fundamental data objectives.

Working hand-in-hand with the division directors, I want to better understand how we will tackle these key objectives, and further learn about the data priorities of each division and the progress being made to achieve these priorities.

Panel II -- Concept Release on Automated Trading

Our second panel will focus on a question that TAC has extensively discussed over the past three and a half years: What is the appropriate level of pre-trade functionality deployed by traders, futures commission merchants, and exchanges to protect market integrity against rouge trades which can cause market disruption?

The first TAC meeting4 addressed this topic and by the third TAC meeting,5 there were recommendations for minimum standards.6 Subsequently, we established a Subcommittee on Automated and High Frequency Trading to define high frequency trading and explore other policy questions related to automated trading.7

Today, we will discuss the Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments.8 The comment period closed on December 11, 2013,9 but my colleagues have generously agreed to reopen the comment period until February 14, 2014 to include this panel discussion and any additional comments. We have received a variety of comments and ideas regarding these standards, and I have asked four witnesses and Commission staff to participate on this panel. I also encourage our TAC members, many who submitted comments on the concept release, to share their views on this matter.

I recognize that there are very strong opinions regarding automated trading and I believe that we will have a robust discussion.

Panel III – Made Available-to-Trade Determination

Finally, the third panel will address swap execution facilities (SEFs) and the recent Made Available-to-Trade (MAT) determinations.

The Division of Market Oversight (DMO) has deemed certified several MAT submissions for standard interest rate benchmark swaps and credit default swaps. While I am supportive of the MAT determinations for the benchmark contracts, I do not believe that the appropriate research and consideration has been given to package transactions tied to benchmark contracts. I believe that we can transition many of these contracts to mandatory trading in the near future, but we must first complete some additional analysis.

As part of our research and analysis, we are focusing panel III’s discussion on package transactions and the Commission staff will hold a roundtable on February 12.

While I am pleased that the Commission staff is working to provide relief from the mandatory trading requirement for package transactions, I did raise serious concerns with the MAT process in my January 16 statement that was tied to DMO’s announcement that it deemed certified Javelin’s MAT determination.10 My concerns have nothing to do with Javelin as a company or with their offering. They just happened to be the first mover to submit an application, which exposed the flaws in the MAT process. In many respects, it is appropriate for a company called Javelin to be the first mover, or rather the “tip of the spear.”

DMO’s memo to the Commission on the MAT determinations did not include any discussion of the types of package transactions that would be impacted by the MAT determination, nor did it address the concerns regarding technical or operational readiness or the jurisdictional issues involving these transactions.

The only insight provided in the staff memo regarding commenters’ requests for temporary relief for package transactions was the following statement: “[S]uch requests are not appropriate for consideration within the scope of the Commission’s process for reviewing a MAT determination.” (emphasis added).

Thankfully, the memo went on to say, “[t]herefore, the Division is taking these comments into consideration and may provide a future response or guidance as appropriate.” However, that was the extent of the discussion.

While I am frustrated that we are conducting the analysis on package transactions after making the MAT determinations, I am pleased that this TAC meeting will initiate the process for identifying and resolving the issues associated with such transactions.

I would like to see the market continue to benefit from the efficiency of package transactions and encourage the trading of such products on exchange. So, let's begin the process to figure out how to make that happen.

1 Press Release PR6873-14, CFTC to Form an Interdivisional Working Group to Review Regulatory Reporting, January 21, 2014, available at http://www.cftc.gov/PressRoom/PressReleases/pr6837-14.

2 This report is available at http://www.cftc.gov/ucm/groups/public/documents/file/dataharmonization.pdf.

3 The final report is available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf.

4 July 14, 2010 TAC meeting.

5 March 1, 2011 TAC meeting.

6 These recommendations are available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

7 The subcommittee presentations regarding high frequency trading and automated trading from the October 30, 2012 TAC meeting are available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg1.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg2.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg3.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg4.pdf.

8 78 FR 56542 (proposed Sep. 12, 2013).

9 All comment letters on the concept release are available through the Commission’s website at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1402.

10 The statement is available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement011614

CONNECTICUT-BASED FUND MANAGER LOSES JURY TRIAL IN CASE INVOLVING PETTERS PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Wins Jury Trial Against Connecticut-Based Fund Manager Who Facilitated Petters Ponzi Scheme

The Securities and Exchange Commission today announced that a jury has found Connecticut-based fund manager Marlon M. Quan and his firms liable for securities fraud in connection with a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.

Following a two-week civil trial before the Hon. Ann D. Montgomery in federal court in Minneapolis, the jury reached a verdict that Quan and his firms Stewardship Investment Advisors LLC, Acorn Capital Group LLC and ACG II LLC violated Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).

Based on the jury verdict, the SEC is seeking an entry of a court order of permanent injunction against Quan and his firms as well as an order of disgorgement, prejudgment interest, and financial penalties.

The SEC filed its complaint against Quan and his firms in March 2011, alleging that he facilitated the Petters fraud and funneled several hundred million dollars of investor money into the scheme. The SEC further alleged that Quan and his firms invested hedge fund assets with Petters while pocketing millions in fees. Quan and his firms falsely assured investors that their money would be protected by use of a number of safeguards including a "lock box account" into which third-party retailers made payments and Quan purportedly monitored against defaults. When Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms embarked on a series of convoluted transactions to conceal Petters's defaults from investors.

The SEC's case was litigated by John E. Birkenheier, Charles J. Kerstetter, Timothy S. Leiman and Michael Mueller, assisted by Donald A. Ryba, Sara Renardo, Sally Hewitt, Mark Sabo and Estera Cardos.

Saturday, February 15, 2014

SEC.gov | Statement on Verdict in Jury Trial of Fund Manager Involved in Petters Ponzi Scheme

SEC.gov | Statement on Verdict in Jury Trial of Fund Manager Involved in Petters Ponzi Scheme

CONVICTED EMBEZZLER CHARGED IN SECURITIES FRAUD CASE

FROM: SECURITIES AND EXCHANGE COMMISSION 
SEC Charges James Y. Lee for Defrauding His Advisory Clients

On February 13, 2014, the Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC's complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee's clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws - Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee's girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.


Thursday, February 13, 2014

ARIZONA RESIDENT GETS 30 MONTHS IN PRISON IN COMMODITY POOL FRAUD CASE

FROM:   COMMODITY FUTURES TRADING COMMISSION 

CFTC Obtains Court Order against Arizona Resident Thomas L. Hampton for Issuing False Account Statements and Operating as an Unregistered Commodity Pool Operator

Hampton ordered to pay a $1.5 million penalty and permanently barred from any commodity-related activities

In a related criminal matter, Hampton sentenced to 30 months in prison and ordered to pay over $4.8 million in restitution

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge H. Russel Holland of the U.S. District Court for the District of Arizona entered an Order of final judgment by default and permanent injunction against Defendant Thomas L. Hampton of Scottsdale, Arizona. The Order requires Hampton to pay a $1.5 million civil monetary penalty, imposes permanent trading and registration bans on him, and prohibits him from violating the Commodity Exchange Act (CEA), as charged. Hampton has never been registered with the CFTC.

The Order, entered on January 23, 2014, stems from a CFTC Complaint filed on June 11, 2013, charging Hampton with acting as an unregistered Commodity Pool Operator (CPO) and issuing false account statements in violation of the CEA (see CFTC Press Release 6609-13, June 12, 2013).

The Order finds that, from approximately September 2010 through at least September 2011, Hampton, while acting as an unregistered CPO, operated Hampton Capital Markets, LLC, an Arizona limited liability company, as a commodity pool. The Order finds that Hampton solicited approximately $5.2 million from at least 72 pool participants to invest in the pool for the purpose of trading commodity futures contracts, including E-mini S&P 500 futures contracts and E-mini Dow futures contracts, as well as securities-based index products. The Order also finds that Hampton defrauded pool participants by issuing false account statements that represented that the pool was generating significant trading profits, when, in fact, Hampton’s actual trading in the HCM Pool accounts resulted in net losses virtually every month.

In a related criminal action, on April 19, 2013, Hampton pleaded guilty to one count of commodities fraud. In October 2013, Hampton was sentenced to 30 months in prison and was further ordered to pay over $4.8 million in restitution (United States v. Thomas Hampton, Case No. 13-cr-00301-RWS (United States District Court for the Southern District of New York)).

The CFTC appreciates the assistance of the Arizona Corporation Commission, Securities Division, and the U.S. Attorney’s Office for the Southern District of New York.

CFTC Division of Enforcement staff responsible for this case are Eugene Smith, Tracey Wingate, Kyong J. Koh, Peter M. Haas, Paul G. Hayeck, and Joan Manley.

Wednesday, February 12, 2014

"CFTC REVOKES REGISTRATIONS OF CHICAGO TRADING MANAGERS LLC"

FROM:  COMMODITY FUTURES 
February 3, 2014
CFTC Revokes the Registrations of Chicago Trading Managers LLC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) revoked the registrations of Chicago Trading Managers LLC (CT Managers). CT Managers had been registered with the CFTC as a Commodity Pool Operator and Commodity Trading Advisor.

On December 27, 2013, CFTC Judgment Officer Philip V. McGuire issued a Decision against CT Managers, finding that it was statutorily disqualified from CFTC registration based on a default judgment and permanent injunction Order entered by the U.S. District Court for the Southern District of New York on May 15, 2013 (see CFTC News Release 6589-13, May 16, 2013). That injunction prohibits CT Managers from, among other things, committing further fraud; entering into any regulated commodity contract transactions for any account in which it has a direct or indirect interest; controlling or directing the trading of any regulated commodity contract account; and soliciting or receiving or accepting any funds for the purpose of purchasing or selling any regulated commodity contract.

Additionally, the default judgment found that on at least 10 occasions CT Managers issued, or caused to be issued, statements to pool participants that fraudulently inflated the net asset value for pools and found that CT Managers, by engaging in that conduct, committed fraud in violation of the Commodity Exchange Act.

Additionally, the default judgment ordered CT Managers to pay a civil monetary penalty of $1.4 million jointly and severally with another Defendant.

The CFTC thanks the National Futures Association for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Lenel Hickson and Manal M. Sultan.

Tuesday, February 11, 2014

SEC COMMISSIONER STEIN'S REMARKS AT TRADER FORUM 2014 EQUITY TRADING SUMMIT

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Remarks before Trader Forum 2014 Equity Trading Summit
 Commissioner Kara M. Stein
Grand Hyatt, New York City

Feb. 6, 2014

I am joining you today to speak about something we all care deeply about: our capital markets.  Just a few miles south of here, over two hundred years ago, a collection of traders and financiers came together to lay the foundation for what became the crown jewel of American capitalism.  The Buttonwood Agreement, which led to the formation of the New York Stock Exchange, helped forge a new era of economic growth for a young country, and gave birth to New York City as the world’s financial center.

Since then, the markets have grown quite a bit, and have come to cover nearly every corner of the planet.  Today, global market capitalization is about 64 trillion dollars.[1]  Yet, the capital markets today serve the same purpose they did then: matching businesses in need of capital with investors in need of returns.  That might be the only thing that hasn’t changed since 1792.

As technology has transformed the way people socialize, it has also transformed the way people do business—including trade.  The sounds of equities trading are no longer the frantic cries and gestures of traders on the floor of the New York Stock Exchange, but rather the whir of servers stacked in windowless storage data rooms of non-descript buildings miles outside of the city.  Orders are placed and executed in millionths of a second, taking away direct human interaction, and some argue, human control.

But this evolution was not just driven by advances in technology.  It was driven by competition.  Many of you buy and sell stocks for some of the largest asset managers in the world.  You have to participate in the market on a daily basis.  You are acutely aware of the simple fact that it has always been an advantage to know when a large trader may need to buy or sell a large position before that order is filled.  You have to guard against brokers, and other market participants, from learning of your intentions before your trades are done.  Your execution quality, and your jobs, depend upon it.

The nature of the markets requires that those in the middle, like the old specialists, hold a special position of trust and confidence.  This role requires them to know who wanted to trade and how much.  Unfortunately, too often, they abused their positions.

Over the years, pleas for fairer competition and safer trading spaces for institutional and other investors ultimately led the Commission to adopt Regulation NMS.  The results have been dramatic.  Just a few years ago, the NYSE and Nasdaq dominated the US marketplace.

Today, counting the options markets, there are 16 registered securities exchanges, dozens of so-called “dark pools,” and hundreds of broker-dealer internalizers.[2]

While the birth, and growth, of crossing networks and internalizers had started years earlier, the Commission’s implementation of Regulation NMS seems to have provided the single largest impetus for change.  In 2005, the year Regulation NMS was adopted, nearly 80 percent of all trading volume in NYSE-listed stocks was done on the exchange.[3]  Four years later, that number had fallen to 25 percent.[4]  At the same time, trades executed in dark venues may now comprise over a third of a day’s trading volume.[5]

Clearly, market participants like you wanted competition, and you responded to the brave new world by sending your orders to a multitude of rapidly proliferating trading venues.  Each of these pools of liquidity, whether lit or dark, has come to play a role in the new national market system.  These execution venues compete in a variety of ways.  Of course, exchanges compete for listings.  But execution venues also compete on:

quantity and speed of information they provide about their order book;
fees;
the amount of information they make available;
the ways that traders can submit orders; and
any number of other variables.
At the same time, traders and trading strategies have evolved.  For over a decade, computers have scanned public information and placed orders based on pre-programed criteria.  While front-running used to occur over periods of minutes, hours, or even days, a well-positioned computer may now be able to process information and place orders in just milliseconds.

What isn’t entirely clear is the impact of all these different variables on the equities market as a whole.  While our capital markets have dramatically changed, we need to make sure that we do not lose sight of perhaps our most important and critical objectives:  robust, fair, and efficient capital markets.

With these objectives in mind, I want to focus you on a few questions that I think we should all be thinking about.

How do we make our equities markets more robust?  Today, we have more stocks available for trading at more venues at tighter spreads than ever before.  That said, volumes have remained largely off their pre-crisis highs, and have also fluctuated dramatically.

Our markets also face significant challenges.   They experience disruptions, including what some have called “mini flash crashes.”  Individual stocks at times gyrate wildly within fractions of a second, only to reset moments later.  One might mistakenly think that these shocks would occur in just thinly traded stocks.  The truth is far from it.  Last October, Walmart’s stock fell 5 percent in one second, with trades being executed in at least a dozen venues, before rebounding.  That followed Google’s mini-crash in April.[6]  These are some of the most heavily traded stocks in the world.  While these sharp movements may wreak havoc on the few unlucky investors with outstanding stop-loss orders, so far, they seem to be generally dismissed as inconvenient computer glitches or unwise traders.

We should not be so easily assuaged.  Rather, we should look at these mini crashes as pieces of a puzzle; symptoms of something larger.  What happens if, instead of a single issuer, the equity that is subject to a crash is a broad index?  On May 6, 2010, we all found out.  The Flash Crash was a seminal event for many of us.  It was a wake-up call to investors, regulators, and policy makers.  In just a few minutes, the markets demonstrated to the world how interconnected, complex, fragile, and fast they may be.  On a day already filled with fears of a European debt crisis, one relatively small, simple event triggered a cascade of steep price declines in interrelated products, traded at multiple venues, overseen by multiple regulators.[7]

One trader’s algorithm combined with selling pressures by high frequency traders and others pushed E-mini futures prices sharply down, which ultimately brought down the SPY, which in turn ultimately brought down individual stocks and ETFs, even as the E-mini futures and SPY were beginning to recover.[8]  When all was said and done, over the course of 20 minutes, 2 billion shares were traded for over 56 billion dollars.[9]  During that same time, 20,000 trades were executed at prices that were more than 60 percent away from their prices at the start of the twenty minutes.[10]  And then, almost as quickly as it started, it was over.  The futures markets reset and then the equities and options markets eventually followed suit.[11]

In the aftermath, we’ve learned quite a bit.  We learned that even the most heavily traded futures and equities products in the world were susceptible to computer-driven crashes.  We learned that the connections between the futures and equities markets were direct enough so that safety features in one market should be coordinated with those in the others.

There can be no doubt now that the markets, and their regulators, need to coordinate.  We learned that the Commission did not have easy access to the data it needed to quickly and effectively analyze and understand the event.  And we learned just how much investors’ confidence may be shaken by dramatic price swings, even if they are quickly corrected.

Clearly, we need to make sure that our markets can withstand computerized trading glitches, whether they arise from a Kansas City-based institutional investor seeking to sell E-mini futures, a wholesale market maker that had a problematic software installation, or a Wall Street bank with a malfunctioning options program.  One trader’s computer system should not be able to bring our capital markets to their knees.  By the same token, if one execution venue’s data system sends out bad data, another venue shouldn’t crash.

There has always been an emphasis on system reliability.  Some have focused on the fact that our trading venues may operate smoothly over 99 percent of the time.  That is obviously important.  But resiliency should also be important.  How do these systems respond when impacted by something that has never happened before.  Our market participants –  traders, venues, clearing firms and others – need to anticipate, and plan reactions to, the unexpected.

Firms with direct access to the markets and execution venues should be required to have detailed procedures for testing their systems to ensure that they don’t cause market failures.  Systems should be reliable, so that anticipated failures are rare.  Testing should be thorough.  Data should be verified.  But systems must also be resilient, so that they can adapt and respond to challenges.  Seamless backup systems should be established.  Firewalls and trading limits should be clearly defined and coordinated across markets.

A comprehensive review of critical market infrastructure, with a focus on points of failure, like the securities information processor, is essential.  The Commission must work with traders, brokers, exchanges, off-exchange execution venues, our fellow regulators, and others to better identify and address areas of risk.  The greatest capital markets in the world should be more than capable of protecting against and minimizing the damage inflicted by a bad trading algorithm, an unexpected stream of data, a hardware failure, or a determined hacker.

How do we make our markets fairer?  The answer often depends on whom you ask.  For retail customers, they receive confirmations that their orders have been filled within seconds.  What most of them don’t know is that their orders likely never went to a stock exchange.  Rather, the orders were probably sold by their broker to a sophisticated trader who paid for the privilege of taking the other side.

These retail customers are ostensibly better off because they got a fraction of a penny in price improvement from the National Best Bid and Offer (“NBBO”) price.  But, is a fraction of a penny per share enough of a price improvement to be meaningful?  Does it matter if the price improvement is measured against a NBBO, which might be stale by the time the trade is executed?  Would retail investors actually be better off if their trades were routed to the public execution venues?  Would that improve the quality of their executions or the value of the NBBO for the entire marketplace?  Some individual transaction costs may be cheaper, but what about others?  What about implied transaction costs?

For institutional traders, the questions get even more complex.  Institutional traders seeking to keep their trading costs low now have to scan dozens of execution venues in search of liquidity, and are increasingly at the mercy of broker-provided, smart order routers to slice, dice, and feed out their orders into the marketplace.  Do these routers send orders to the venues that are most likely to get them filled?  Or do they send the orders to the venues that have the lowest cost for the broker, even if it might not get the order filled, or get the best price?[12]  When will an institutional broker commit capital to take the other side of an order?  Will an institutional investor’s order be seen by third parties, who may trade ahead of it, or otherwise take advantage of that information?  How should a trader measure execution quality?

Unfortunately, these questions are difficult to answer, in large part, due to a lack of available comprehensive data.  The Consolidated Audit Trail (or “CAT”) is intended to help fill that void.  In the meantime, the Commission last fall unveiled the Market Information Data Analytics System (fondly known as “MIDAS”), which is intended to help answer some of these questions.  The MIDAS system captures vast amounts of market data from the consolidated tapes and proprietary data feeds, and has already been used to help study how odd lot trading transparency may impact their use.[13]  MIDAS collects over one billion records a day, and can help the Commission and the public better understand trends and market events.[14]

But we need the deeper information that only the CAT will provide.  And we also need help in getting it up and running as soon as possible.  All market participants should be involved in helping to develop the CAT—it is not, nor should it be, the exclusive province of the Commission and the SROs.  And we must also move quickly.  Until regulators, buy-side traders, brokers, consultants, and the academic community can pore over the data, we simply don’t know what we’re missing.

Another important question we should continuously ask ourselves is how can we make our markets more efficient.  As trading has become more automated, overall execution costs and nominal spreads have narrowed.  However, a growing body of research on datasets, both here and abroad, suggests that some of these potential efficiency gains may be overstated, plateauing, or even reversing.  For example, one study recently found that, when controlling for information asymmetry, increases in market share for dark pools’ non-block trading corresponds with increased market-wide transaction costs.[15]  On the flip side, other studies suggest that dark pool activity may be associated with narrower spreads, greater market depth, and lower volatility.[16]

From a trader’s perspective, is it efficient to have to check dozens of pools of liquidity in order to execute a trade?  What are the costs and benefits of monitoring and accessing these multiple pools?  Does an institutional trader risk tipping off other market participants by just seeking to access these venues?  Finally, does the complexity unnecessarily increase traders’ reliance on brokerage firms or consultants?

Again, good data and careful analysis is critical to answering these questions, which brings me back to the CAT.  We need to get it up and running as soon as possible.

As you may have guessed, I believe we should develop policy from the facts.  We should be gathering as much data as we can, and if we think an alternative approach should be considered, we should test and evaluate it.

For example, we should explore how the maker-taker pricing model impacts liquidity and execution quality.  Does the current rebate system incentivize or penalize investors?  I have heard from many investors, and even exchanges, who are worried about the incentives embedded in the current system, and if there are proposals to explore alternative approaches, we should consider them.  We should try to understand the various order types. Why would one exchange need 80-plus order types?  What is the purpose for each?  How do these order types interact with others, and how do they impact market liquidity and functioning?  We should be willing to re-examine the roles of these order types in the market.

We also need to gather data to better understand the impacts of different types of trading strategies on the markets.  Do high frequency traders add meaningful liquidity to the markets, or not?  Do high frequency trading strategies impact volatility?  If so, how?  We need to look at market maker privileges and burdens.

In each of these areas, we should be driven by the relentless pursuit of more robust, fair, and efficient markets.  And if we can make modest reforms that improve the markets now, we should consider them.

One example might be a tick size pilot.  Some have argued that, for micro and small cap stocks, often penny-wide spreads may be reducing trading profits for brokers so significantly that they are unwilling to provide research coverage and market making services in those stocks.  Supporters argue that widening displayed spreads may restore trading profits for firms, which would incentivize them to enhance research coverage and market making in stocks of micro and small cap issuers.  Others argue that there is likely to be no appreciable connection between the tick size and the amount of research coverage or market making in these issuers.  The Commission would benefit from hearing your thoughts on whether and how a tick pilot program might be helpful in answering a number of questions.  A carefully-constructed tick size pilot program might help inform this debate.  But a poorly-constructed one could easily harm investors and the markets.  

I will be working with my fellow Commissioners in considering the merits of proceeding with such a program, and ensuring that if we do proceed, we maximize its utility while minimizing its costs and risks to investors.

I also want to take a moment to assess the role of the self-regulatory organizations.  In a world where trading occurred predominantly on one or two venues, it made sense for those venues to have primary regulatory oversight over trading.  But, in a world where trading occurs in hundreds of places, which are for-profit enterprises, the exchange-based SRO model warrants significant reconsideration.

Does it make sense for firms registered with the SEC as exchanges to bear the bulk of the costs to oversee a market that is much larger than their respective portions?  Who should be determining and enforcing listing standards?  How should we rationalize the discrepancies in regulatory treatment between a dark pool and an exchange, given that they are expected to perform the same generalized function: serving as a place to match buyers and sellers?

And we must better understand and clarify the role of the FINRA, which has taken on more and more regulatory functions.  In recent years, through private contracts, FINRA has come to run many critical market surveillance functions, from monitoring for insider trading, to looking for cross-market manipulations.  While this may be one way to deal with increasing market complexity, it arguably has also created new challenges: including how to effectively oversee a very important, but private regulator.  We need to be thinking about the interactions between FINRA and its customers, other market participants, the Commission, and regulators and participants in related markets.

We at the Commission clearly have a lot of work to do.  Technology and competitive pressures have already moved our markets well past our relatively new regulatory regime.  A short time ago, an executive from a foreign exchange told me that he turns over his entire technology operation every two years.  In a world where a few millionths of a second can mean the difference between a good execution and a bad one, we need to make sure our rule structure and our surveillance apparatus can keep up.  In order for the US to remain the home of the premier capital markets in the world, we must relentlessly strive to keep them the most robust, fair, and efficient in the world.

That will require constant evaluation by both market participants and regulators, working together, in the midst of constant change.  I think we have a Commission that is eager to take on this task.

I know I am, and I hope you will help me.

***


[1] World Federation of Exchanges, 2013 WFE Market Highlights, 5 (2014).

[2] Concept Release on Equity Market Structure, Exchange Act Rel. No. 34-61358, 75 Fed. Reg. 3594 (Jan. 21, 2010).

[3] Id.

[4] Id.

[5] Id.

[6] Steven Russolillo, Google Suffers ‘Mini Flash Crash,’ Then Recovers, Wall St. J. (Apr. 22, 2013).

[7] Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and the SEC to the Joint Advisory Committee on Emerging Regulatory Issues (Sept. 30, 2010).

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] See, e.g., Robert Battalio, Shane Corwin, and Robert Jennings, Can Brokers Have it all? On the Relation between Make Take Fees and Limit Order Execution Quality (2013)  (finding that “routing limit orders in a manner that maximizes make rebates reduces fill rates and produces less profitable limit order execution.”).

[13] Staff of the Securities and Exch. Comm’n, Data Highlight 2014-01: Odd-Lot Rates in a Post-Transparency World (2014).

[14] Sec. and Exch. Comm’n, Market Information Data Analytics System, What is MIDAS?, available at http://www.sec.gov/marketstructure/midas.html.

[15] Frank Hatheway, Amy Kwan, and Hui Zheng, An Emprical Analysis of Market Segmentation on U.S. Equities Markets (2013).

[16] See, e.g., Sabrina Buti, Barbara Rindi, and Ingrid M. Werner, Diving Into Dark Pools (2011).
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