Broker-Dealer

Subscribe to Broker-Dealer

The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.

After spending years urging industry participants to come in and register, the SEC has made clear, by going after some of the biggest players in the space, that it does not intend to tolerate exchange operators’ offering of unregistered crypto trading in the United States, at least as to retail investors where the tokens are securities. From the SEC’s perspective, most crypto tokens are securities, so, if a company wants to provide the securities-like infrastructure to trade those tokens, it must be registered with the SEC – whether as an exchange (matching buyers and sellers), a broker-dealer (trading crypto on behalf of others), or a clearing agency (facilitating trade settlement).

On June 30, 2021, the SEC posted six Notices of Covered Actions, for which individuals have 90 calendar days to apply for a whistleblower award.  As discussed in our prior post, the SEC publishes Notices for cases in which the final judgment or order, by itself or together with other prior judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million.

In this post, we briefly survey the six June 2021 Notices of Covered Actions.

In a rare reversal of its own administrative law judge in the Matter of optionsXpress, the full Securities and Exchange Commission unanimously held that the SEC’s Enforcement Division had not met its burden of proof that the customer of a broker-dealer had committed securities fraud in connection with his clearing broker-dealer’s failure to deliver stock as required by Regulation SHO.

The customer in this case implemented an option trading strategy which exploited the price difference between certain options and their underlying securities.  The trading strategy focused on “hard to borrow” securities, which were more expensive to borrow due to high short-seller demand.  As a result of the trading strategy, the customer held substantial short positions in the underlying hard to borrow securities over a sustained period of time.

Under Regulation SHO, a broker-dealer is required to deliver securities to its clearing house in connection with a sale within three days of settlement.  If it does not do so, it must close out the fail to deliver on the next settlement day by purchasing or borrowing similar securities in the market. Here, the broker-dealer repeatedly failed to deliver the securities in which the customer held short positions.

On June 1, 2016, the U.S. Securities and Exchange Commission announced a $3.12M settlement with Maryland-based registered investment adviser, Blackstreet Capital Management, LLC, and its managing  member and principal owner, Murry N. Gunty. The SEC’s finding that Blackstreet acted as an unregistered broker-dealer in portfolio company transactions highlights the regulatory…

Will a broker-dealer be liable when a financial advisor employed by the firm solicits investments as part of a fraudulent scheme, where the firm specifically prohibited the advisor from soliciting the investment, the fraudulent investment was made away from the firm, and the investors never became customers of the firm?  The Eleventh Circuit recently answered that question with a resounding “maybe,” and clarified that the employer could be liable in negligence if it knew or should have known that its employee posed a risk of defrauding others.

Last week, FINRA sought approval from the SEC for a proposed change to the FINRA arbitration rules, under which monetary awards requiring the parties to pay each other damages would be offset, so the party owing the larger award would be required to pay only the net difference.  If the arbitrators do not intend monetary awards to be offset, they must specifically say so in the award.

Today, the U.S. Department of Labor released its highly-anticipated Final Rule and Exemptions addressing when a person providing investment advice with respect to an employee benefit plan or individual retirement account is considered to be a fiduciary under the Employee Retirement Income Security Act of 1974 and the Internal Revenue…