Articles Posted in Regulation

On Tuesday, September 14th, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against an alternative data provider, charging the company App Annie Inc. with securities fraud. App Annie and Bertrand Schmitt, its co-founder and former CEO and Chairman, have agreed to pay more than $10 million in a settlement with the SEC on these charges. [1]

While this marks the SEC’s first enforcement action against an alternative data provider, it likely will not be its last, as the use of alternative data in the financial and investment sphere continues to rise. [2] Alternative data (“alt-data”) is data which goes beyond that of traditional corporate financial statements and helps guide investment strategies. [3] Examples of alt-data include mobile device data, credit card transactions, satellite imagery data, product reviews, and even social media activity. [4]

This type of data can be instrumental in making sound investment decisions when it is paired with traditional data from corporate sources, because it provides a broader view of a company’s financial viability. [4] However, it is notoriously difficult to aggregate and analyze given its vast breadth – it’s estimated that the world produces at least 2.5 quintillion bytes of such data daily. [4] This is where companies like App Annie come in.

Should a Special Purpose Acquisition Company (“SPAC”) be classified as an investment company? This is the question currently plaguing the SPAC industry, creating a divisive split between a long list of America’s biggest law firms on one side, and two preeminent securities law professors interested in investor protection on the other.

Robert Jackson, a professor at NYU School of Law and former SEC Commissioner, and John Morley, a Yale Law School professor, recently filed three suits against high-profiles SPACs in New York federal court. The suits argue that each SPAC is operating as an unregistered investment company, and under the Investment Company Act of 1940 (the “Act”), compensation paid to the SPAC’s sponsors and directors was illegal and void under the Act. However, in the decades-long history of SPACs, these entities have never been classified as investment companies under the Act, nor has the SEC purported that they should.

At the center of this debate lie two secondary, though potentially even more important, questions: what is a SPAC, and what is a SPAC’s primary purpose? The answer to these questions determines whether SPACs should indeed be classified as investment companies under the Act, as Jackson and Morley contend, or whether SPACs may continue to operate independently of the Act, as the SPAC industry and a wide coalition of law firms believe.

Instances of fraudsters disguising themselves as investment advisers and brokers are on the rise, prompting the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA), the FBI Criminal Investigative Division, and FINRA, each to release investor alerts and warnings.

While these regulatory agencies have identified multiple concerning fraudulent schemes, each type is centered around impersonation of investment advisers – a particularly worrisome and dangerous trend. A recent example was reported by the Texas State Securities Board, which announced that a Texas fraudster created a website for Prestige Assets Mgnt LLC, a name which is almost identical to that of the registered investment adviser Prestige Asset Management LLC. [1]

The regulator alleges that while the website is phony and does not represent a licensed dealer or investment adviser, it was built to look authentic, and actually directed users to the registered firm’s office location and CRD number. [1]

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On June 30, 2021, FINRA ordered an approximately $70 Million financial penalty against Robinhood Financial LLC, the highest such penalty ever levied by the regulatory organization.[1] Through its investigation of the firm, FINRA charged Robinhood with numerous violations which had resulted in significant losses to their customers. While Robinhood neither confirmed nor denied the validity of FINRA’s charges, they ultimately agreed to settle with these massive sanctions. [1]

FINRA noted three major violations from its investigation into Robinhood’s conduct and operations as a stock-trading app, each of which merited its own penalties.

First, FINRA found that Robinhood has pervasively and negligently provided false or misleading information to its customers. [1] This false information was circulated in spite of Robinhood’s core mission to “de-mystify finance for all” and “democratize finance,” and ranged from misrepresenting customer account balances and buying power, to erroneous communication about customers facing margin calls. [2]

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