Articles Posted in SEC

While it may be difficult to verify first-hand how secure your stockbroker keeps your personal information, a recent order from the Securities and Exchange Commission (SEC) shows that even the largest stockbrokers are prone to customer data breaches.

On September 20, 2022, the SEC fined financial services giant Morgan Stanley Smith Barney (“MSSB”) $35 million for failing to adequately protect its customer’s records and personal identifying information (“PII”). [1] The fine was entered via a settlement between the SEC and MSSB, through which MSSB has agreed to pay a civil penalty for the SEC’s charges without admitting to nor denying the violations. [2]

MSSB is a subsidiary of Morgan Stanley and focuses on wealth management services for clients ranging from individuals to large corporations. [3] More specifically, MSSB is the broker-dealer designation for the group more commonly known as Morgan Stanley Wealth Management.  [3] During the second quarter of 2022, Morgan Stanley Wealth Management recorded $5.7 billion in net revenues. [4]

Signaling the potential future of cryptocurrency regulation in the United States, Gary Gensler, the Chairman for the Securities and Exchange Commission (SEC), shared his perspective that the majority of crypto tokens are indeed securities under U.S. law while presenting at the SEC Speaks event in early September. [1]

Along with the sharing his viewpoint that the majority of crypto tokens and cryptocurrency intermediaries are subject to federal securities laws and regulations, Gensler also shared a quote from the first SEC Chairman, Joseph Kennedy: “No honest business need fear the SEC.” [1] Gensler’s repeated reference to this quote supported his overarching message that regulatory oversight of crypto tokens and intermediaries should be viewed as a positive for the market rather than a negative.

In first speaking on crypto tokens themselves, Gensler noted that the purchase and sale of these tokens are subject to federal securities laws so long as the tokens meet the statutory definition of a security. Gensler cited Congressional purpose and history as well as the Supreme Court’s “Howey Test” in support of his view. [1]

On August 1, 2022, the Securities and Exchange Commission (SEC) charged eleven individuals in connection with a cryptocurrency Ponzi and pyramid scheme. [1] The alleged scheme was perpetrated through a website called Forsage, which operates via smart contracts over the blockchain.

The eleven defendants include Forsage’s four founders as well as several “promoters” of the Forsage scheme. [2] The SEC’s complaint notes that to date, more than $300 million worth of transactions have occurred via Forsage smart contracts, despite the fact that the retail investors powering this scheme have received no good or service of value in return for their “investments.” [2]

Forsage is a classic pyramid scheme in that those at the top – namely the founders and promoters charged by the SEC – stood to gain the most wealth, especially as others joined the scheme after them. In fact, a recent scholarly report on the scheme found that more than 88% of Forsage users incurred net losses on their investments with the platform, with those at the top generating massive gains. [3]

Cryptocurrency proponents tout the technology’s potentially “transformative” nature and its position as an arguably more stable store of value when compared with fiat money. [1] Yet SEC Chairman Gary Gensler cautioned crypto investors against an overly rosy view of the technology during a speech at the Penn Law Capital Markets Association Annual Conference this week. Instead, Gensler advocated for investor caution, along with a much broader regulatory and enforcement role for the SEC in cryptocurrency markets. [2]

Before sharing his view of the SEC’s role in crypto markets, Chairman Gensler first compared the technology to that of the dotcom bubble in 2000 and subprime lenders leading up to the 2008 financial crisis. His message: the flurry of attention on crypto and related innovations does little to vouch for its long-term viability or success. Instead, as was borne out in 2000 and again in 2008, cryptocurrency could indeed be a technology destined for failure.

The SEC’s role then, in Gensler’s view, is to protect investors from the potential financial blowback of such a failure. While Gensler lauded the spirit of entrepreneurship common in the United States, he also argued that the SEC should approach crypto regulation in a “technology neutral” way. In so doing, the SEC could carry out their mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets, while still allowing crypto markets to flourish.

On Wednesday, March 30th, the Securities and Exchange Commission (SEC) announced newly proposed rules and rule amendments governing Special Purpose Acquisition Companies (SPACs), shell companies, and the projections that these companies make. The aggregate proposed rule is aimed at heightening investor protections for those who choose to invest in SPACs and shell companies, where such investor protections are currently quite slim.

Understanding the new rules necessitates a working understanding of SPACs themselves. SPACs are a form of “blank-check” company, in which capital is raised by investors through an Initial Public Offering (IPO). [2] SPAC IPOs differ greatly from traditional IPOs, however, in that at the time of a SPAC IPO, the SPAC has no physical operations of its own. [2]  Instead, post-IPO, a SPAC is granted a two year term during which it must acquire or merge with an existing company, thereby taking that company public without ever going through the traditional, and often costly, IPO process. [2]

New SPAC IPOs have been on a meteoric rise since 2020. In 2019, just 59 SPAC IPOs occurred, while 2020 saw 247 and 2021 saw a record 613 SPAC IPOs. [2] These 613 SPAC IPOs in 2021 represented over $160 billion of capital raised. [2]

The Securities and Exchange Commission’s much-anticipated rules on climate-related disclosures are finally here. [1] On Monday, March 21, 2022, the federal securities regulator announced the release of a proposed rule, broadly referred by the SEC as “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” [2] The proposed rule comes to the delight of activist investors and others concerned about climate change impacts, while industry actors may fear the increased costs of the proposed mandatory disclosures.

The SEC has proposed rules which would require those registered with the SEC to disclose specific information regarding their climate-related financial risks and climate-related financial metrics. [2] This information would be disclosed to the SEC through an entity’s typical registration statements or annual reports, which already contain many other required disclosures. [2]

Importantly, the draft rules require companies registered with the SEC to disclose both their direct and indirect greenhouse gas emissions. These emissions include three discrete categories – Scope 1, Scope 2, and Scope 3. [3] Scope 1 greenhouse gas emissions are those emitted directly by the company through its operations, while Scope 2 emissions are the “indirect” emissions stemming from a company’s energy usage, such as through electricity generation. [4]

Electric automaker, Tesla, and its CEO, Elon Musk, made headlines once again this week in connection with a 2018 Twitter post. The tweet in question, posted by Elon Musk, read simply: “Am considering taking Tesla private at $420. Funding secured.”[1]

At the time the tweet was posted in 2018, the SEC swiftly charged both Tesla and Musk with securities fraud, over which the parties eventually settled. [1] Now more than three years later, the public has learned of a new subpoena from the SEC relating to the tweet, though the subpoena’s impact and strategic aim are still to be seen.

As evidenced by this series of events, Tesla and the SEC share a turbulent, history. Following the 2018 “funding secured” tweet, the SEC alleged that Musk violated Section 10(b) of the Securities Exchange Act of 1934 along with rule 10b-5.[2] These allegations were based upon the SEC’s contention that the tweet constituted a materially false and misleading statement because despite Musk’s confident tone, he had neither discussed nor confirmed the terms of such a deal with any potential funding source. [2]

The SEC is attempting to broaden the scope of liability under federal insider trading laws, and it just secured its first incremental victory along the way.

The win comes as a newly formulated legal theory offered by the SEC survived a motion to dismiss in SEC v. Panuwat, a case proceeding in the U.S. District Court for the Northern District of California.[1] The SEC’s legal theory states that the practice of “shadow trading” constitutes a violation of federal securities law, namely Section 10(b) of the Exchange Act and Rule 10b-5.[1]

“Shadow trading” occurs when a person with a connection to one publicly held company uses material, nonpublic information (MNPI) they have gained from their connection with that company to inform their trading decisions in a separate publicly held company. Typically, this separate company is economically connected in some way to the company for which the person possesses MNPI. [2]

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While the dust settles on the recent trial of Elizabeth Holmes, former CEO of Silicon Valley startup Theranos, attention is building around the Securities and Exchange Commission’s current and future role in regulating private firms.

Under existing federal law, private firms with less than 2,000 shareholders are not required to register with the SEC nor provide routine disclosures, unlike their public counterparts. [1]

While exemption from such regulatory requirements may provide private startup companies with the freedom to develop their business unimpeded by government, thus encouraging valuable innovation, the rapid growth of the private capital market has experts questioning whether some degree of SEC oversight may be warranted.

As 2021 draws to a close, it is a fitting time to revisit some of the main enforcement actions taken by the Securities and Exchange Commission (SEC) through fiscal year (FY) 2021, which ended on September 30th, 2021.

In total, the number of new enforcement actions filed by the SEC in FY 2021 increased by 7% over the previous year, with 434 new enforcement actions. While the total number of enforcement actions – including new actions along with other “follow-on” or open proceedings  – decreased slightly year over year in FY 2021, the SEC remained committed to its role as “cop on the beat for America’s securities laws,” as described by Chair Gary Gensler. [1] The SEC maintained a sharp focus on protecting the integrity of the country’s capital markets through enforcement actions against bad actors even in the face of the persisting COVID-19 pandemic persisted.

In announcing its progress on enforcement actions during FY 2021, the SEC concentrated on several key priority areas. Some of these priority areas, per a recent SEC Press Release, included “holding individuals accountable,” “ensuring gatekeepers live up to their obligations,” “rooting out misconduct in crypto,” “policing financial fraud and issuer disclosure,” “cracking down on insider trading and market manipulation,” and “swiftly acting to protect investors.” [1]

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