The Securities and Exchange Commission on Monday requested a $1.66 billion budget for fiscal year 2019, a 3.5% increase over the agency’s 2018 request, which would allow the securities regulator to restore 100 positions lost during the 2017 hiring freeze.

The agency’s annual appropriations has remained essentially flat from 2016 to 2018, at $1.6 billion. However, during the same period, securities trading has grown by more than $3 trillion, assets under management by investment advisors has jumped more than $5 trillion, and there’s been a 17% growth in ETFs and mutual funds.

The securities regulator has not yet received its 2018 appropriations.

SEC Chairman Jay Clayton said the FY 2019 budget request “reflects our top priorities of protecting investors and making sure we continue to have the most vibrant and well-functioning capital markets in the world, With the exceptional work and commitment of dedicated staff, the SEC will continue striving to maintain and expand an environment conducive to capital formation while ensuring investor protection.”

The SEC’s FY 2019 budget request would support 4,628 positions.

The agency expects to end 2018 with 4,528 positions. To stay within the SEC budget level of $1.6 billion, the agency imposed a hiring freeze at the beginning of FY 2017 that will continue throughout FY 2018.

Because the SEC permits “few exceptions to the hiring freeze,” the overall staffing level is declining and is expected to drop to 4,528 positions by the end of FY 2018.

The FY 2019 budget request boost would support the hiring of four additional staff positions to expand the agency’s cybersecurity protections, particularly with regard to incident management and response, advanced threat intelligence monitoring, and enhanced database and system security.

The added positions would be information system security officers who can focus on the security of specific systems or programs.

In 2018, the SEC plans to set up a new chief risk officer position to oversee the agency’s enterprise risk program.

The FY 2019 request, according to the agency, would permit it to hire two additional staff positions under the chief risk officer to strengthen and advance the agency’s risk management capabilities.

The agency would also use $45 million of the FY 2019 funds for IT enhancements, and $37 million would be used for a potential relocation of the agency’s New York office.

Forty-one positions would also be restored in the agency’s enforcement division as well as its Office of Compliance Inspections and Examinations.

OCIE has requested to add 24 individuals, of which 13 would be dedicated to investment advisor and investment company exams.

The FY 2019 request would restore 17 positions to enforcement to support key enforcement priorities and provide resources to support and expand the work of two newly created groups–The Cyber Unit and the Retail Strategy Task Force.

Seven staff positions would also be restored under the FY 2019 budget request within the Division of Investment Management.

Steps by Congress or the SEC should also be considered to remedy the unpaid arb award problem, FINRA said A quarter of all Financial Industry Regulatory Authority customer arbitration cases that awarded damages went unpaid in 2016, according to a just released discussion paper by FINRA.

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, called the percentage “massive,” but applauded FINRA for “attempting to get on top” of the issue by releasing the discussion paper.

The paper — “FINRA Perspectives on Customer Recovery” — released Wednesday, details perspectives on customer recovery of judgments and awards in the financial services industry, with a particular focus on the arbitration forum operated by FINRA.

By releasing the paper, the broker-dealer self-regulator said it “hopes to encourage a continued dialogue about addressing the challenges of customer recovery across the industry.”

According to FINRA’s paper, in 2016, of the total 2,457 arbitration cases, 1,747 settled, 389 closed by award, 212 were withdrawn and 109 closed “by other means.”

FINRA also released Wednesday a Regulatory Notice seeking comment on proposed amendments to its rules designed to create further incentives for the timely payment of awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards.

FINRA states in the paper that it plans to organize discussions with other regulators and policymakers “to further address the issue of customer recovery, identify additional data or analysis that may help inform effective decision-making in this area, and consider potential courses of action.”

Steps by Congress or the SEC should also be considered to remedy the unpaid arb award problem, FINRA states. They include:

SEC could require firms to raise or maintain additional capital;

Congress could expand Securities Investor Protection Corp. (SIPC) coverage to include unpaid customer arbitration awards;

Congress or SEC or FINRA rulemaking could require firms to carry insurance to cover unpaid arbitration awards;

Legislation or SEC or FINRA rule could create a second brokerage industry fund, separate from SIPC;

Amendments could be made to the SEC’s Form BD to require disclosure regarding unpaid awards by firms;

Congress could amend the Securities Exchange Act of 1934 statutory disqualification definition to include more instances in which a firm or individual fails to pay an arbitration award; or

Congress could amend the Bankruptcy Code so that arbitration awards cannot be discharged in bankruptcy.

FINRA said that it’s also seeking to provide more transparency around the dispute resolution forum and better inform discussions regarding customer recovery by making additional data on unpaid customer arbitration awards arising in its forum for the past five years available on its website.

David Bellaire, general counsel for the Financial Services Institute, stated that FSI “supports efforts to ensure that investors receive the recovery to which they are entitled whether they receive an award through FINRA arbitration, a court decision or through some other forum.”

However, he continued, “the solution to this problem should not require those who honor their obligations to bear the burden of the bad acts of those that left the industry or are otherwise avoiding their responsibilities.”

He added that FSI looks forward “to participating in this important dialogue with regulators, policymakers and other stakeholders and appreciate FINRA’s efforts to initiate it.”

Encourages IA Self-Reporting & the Prompt Return of Funds to Investors

The SEC’s Division of Enforcement announced a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors.

Under the Share Class Selection Disclosure Initiative (SCSD Initiative), the Division will agree not to recommend financial penalties against investment advisers who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues and promptly return money to harmed clients.

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisers that self-report that they failed to disc…

FINRA Releases Paper Providing Perspectives on Customer Recovery

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today released a paper providing perspectives on customer recovery of judgments and awards in the financial services industry, with a particular focus on the arbitration forum operated by FINRA. The paper – FINRA Perspectives on Customer Recovery – is intended to encourage a continued dialogue about addressing the challenges of customer recovery across the industry while directly informing the further enhancement of recovery in FINRA’s forum. As noted in the paper, FINRA plans to organize discussions with other regulators and policymakers to further address the issue of customer recovery, identify additional data or analysis that may help inform effective decision-making in this area, and consider potential courses of action.

To provide additional transparency about the FINRA dispute resolution forum and better inform discussions regarding customer recovery, FINRA is also making additional data on unpaid customer arbitration awards arising in this forum for the past five years available on its website.

FINRA also issued today a Regulatory Notice seeking comment on proposed amendments to its rules designed to create further incentives for the timely payment of awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards.

Washington D.C., Feb. 7, 2018 —

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today announced its 2018 examination priorities. OCIE publishes its exam priorities annually to improve compliance, prevent fraud, monitor risk, and inform policy. Of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.

“I appreciate OCIE’s dedication to maximizing the effectiveness of their resources with a keen eye toward asset verification, market infrastructure, and duties owed to retail investors,” said SEC Chairman Jay Clayton.

“As the markets continually evolve and the products and services available to investors adapt, OCIE remains committed in its risk-based examination program to prioritizing the interests of retail investors and examining those aspects of securities firms posing risks to investors and the proper functioning of our capital markets,” said OCIE Director Pete Driscoll.

This year, OCIE’s examination priorities are broken down into five categories: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) cybersecurity; and (5) anti-money laundering programs.

Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. OCIE will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules.

Retail Investors, Including Seniors and Those Saving for Retirement – Protecting Main Street investors continues to be a priority in 2018. OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, and the execution of customer orders in fixed income securities. OCIE will continue to monitor the growth of cryptocurrencies and initial coin offerings and examine registrants involved in their offer and sale to ensure that investors receive adequate disclosures about the risks associated with these investments.

FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also examine MSRB to evaluate the effectiveness of select operations and internal policies, procedures, and controls.

Cybersecurity – Each of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.

Anti-Money Laundering Programs – Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.

The published priorities for 2018 are not exhaustive. Further, additional priorities may be added in light of market conditions or as OCIE identifies emerging risks and trends. The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff, who are uniquely positioned to identify the practices, products, and services that may pose significant risk to investors or the financial markets. OCIE staff also seek advice of the Chairman and Commissioners, staff from other SEC Divisions and Offices, the SEC’s Investor Advocate, and the SEC’s fellow regulators.

With governments around the globe cracking down on all aspects of the cryptocurrency market, it seems like new regulatory risks arise every day. Add U.S. sanctions to that list.

On Jan. 19, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the primary sanctions enforcer in the U.S., announced that any U.S. person dealing in Venezuela’s soon-to-be-introduced cryptocurrency, the petro, could run afoul of U.S. sanctions against the Venezuelan government.

Couple that with recent comments from U.S. Secretary of the Treasury, Steven Mnuchin, warning that the U.S. is determined not to let bitcoin wallets become a new version of the Swiss bank account, and it appears that the Treasury Department is poised to wade into cryptocurrency regulation in a major way.

Although the potential sanctions risks associated with cryptocurrencies are similar in some respects to money laundering and terrorist financing risks that have garnered attention recently, they present some unique challenges.

OFAC maintains a blacklist of persons and entities that are essentially prohibited from dealing with U.S. persons, U.S. goods and services or the U.S. financial system. Direct violations of U.S. sanctions, or assisting others in efforts to evade U.S. sanctions, can result in significant financial or, in egregious cases, criminal penalties. Companies inside and outside of the U.S. have ample incentives to guard against such violations, but the anonymity afforded by cryptocurrency transactions makes compliance with such restrictions difficult.

If OFAC turns its eye toward cryptocurrencies, however, it could be only a matter of time before it makes an example out of one or more entities in an effort to send a message to the market and create a deterrent effect.

Washington D.C., Jan. 30, 2018 —

The Securities and Exchange Commission obtained a court order halting an allegedly fraudulent initial coin offering (ICO) that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.”

According to the SEC’s complaint, filed in federal district court in Dallas on Jan. 25 and unsealed late yesterday, Dallas-based AriseBank used social media, a celebrity endorsement, and other wide dissemination tactics to raise what it claims to be $600 million of its $1 billion goal in just two months.

AriseBank and its co-founders Jared Rice Sr. and Stanley Ford allegedly offered and sold unregistered investments in their purported “AriseCoin” cryptocurrency by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of consumer-facing banking products and services using more than 700 different virtual currencies. AriseBank’s sales pitch claimed that it developed an algorithmic trading application that automatically trades in various cryptocurrencies.

The SEC alleges that AriseBank falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. AriseBank also allegedly omitted to disclose the criminal background of key executives.

“We allege that AriseBank and its principals sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services. We sought emergency relief to prevent investors from being victimized by what we allege to be an outright scam,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“This is the first time the Commission has sought the appointment of a receiver in connection with an ICO fraud. We will use all of our tools and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office, said, “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.”

The court approved an emergency asset freeze over AriseBank, Rice, and Ford and appointed a receiver over AriseBank, including over its digital assets. The SEC intervened to protect the digital assets before they could be dissipated, enabling the receiver to immediately secure various cryptocurrencies held by AriseBank including Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD. AriseCoin’s public sale began around Dec. 26, 2017, and was originally scheduled to conclude on Jan. 27, 2018, with distribution to investors on Feb. 10, 2018. The SEC seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties, and bars against Rice and Ford to prohibit them from serving as officers or directors of a public company or offering digital securities again in the future.

The SEC’s investigation was conducted by David Hirsch and supervised by Jessica Magee and Eric Werner in the Fort Worth Regional Office in coordination with the Enforcement Division’s Cyber Unit. The litigation is being conducted by Timothy Evans, Christopher Davis, and Mr. Hirsch, and supervised by B. David Fraser. The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Attorney’s Office for the Northern District of Texas, Federal Deposit Insurance Corporation, U.S. Patent and Trademark Office, and Texas Department of Banking.

Investors in the AriseBank ICO who believe they may be a victim are asked to report it to the SEC as a tip or complaint.

The SEC’s Office of Investor Education and Advocacy issued an Investor Alert in August 2017 warning investors about scams of companies claiming to be engaging in initial coin offerings.

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Wedbush Securities Inc. $1.5 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection and Net Capital Rules, and for related supervisory and books and records failures.

The SEC Customer Protection Rule creates requirements to protect customers’ funds and securities. To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the rule requires the broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location,” free of liens or any other encumbrance that could prevent customers from taking their possession. The rule also requires the broker-dealer to maintain a reserve of cash or qualified securities, in a bank account, that is at least equal in value to the net cash the broker-dealer owes its customers.

The SEC Net Capital Rule regulates the ability of broker-dealers to meet their financial obligations to customers by requiring broker-dealers to maintain a minimum amount of net capital and to compute their net capital in accordance with specified formulas.

FINRA found that, during a five-month period in 2015 and 2016, Wedbush was net capital deficient, ranging between $10.5 million and $59.4 million. The deficiencies resulted from Wedbush’s failure to take required deductions when valuing certain certificates of deposit for purposes of computing its net capital.

In addition, from 2011 to 2016, Wedbush failed to accurately calculate its customer reserve requirement on 84 occasions, causing the firm to underfund its customer reserve account 73 times, in amounts ranging from approximately $2 million to $77 million. Wedbush also included ineligible assets in its customer reserve account, causing it to underfund its reserve an additional 110 times, in amounts ranging from approximately $9 million to $375 million.

Also, from 2009 to 2016, Wedbush repeatedly violated the possession or control requirement of the Customer Protection Rule by creating and/or increasing deficits in the quantity of securities it was required to keep in its possession or control, and holding customer assets in locations that were not protected from claims by third parties.

“Firms have a fundamental responsibility to safeguard the securities of their customers,” said Susan Schroeder, FINRA’s Executive Vice President, Department of Enforcement. “The Customer Protection and Net Capital Rules are important components of investor protection, and member firms must have reasonably designed and maintained systems and supervision to ensure both that they comply with the rules’ requirements, and detect and remediate any weaknesses.”

Wedbush also failed to establish and maintain supervisory systems and procedures reasonably designed to ensure compliance with the Customer Protection and Net Capital Rules, which exposed customer funds and securities to risk and prevented the firm from detecting the deficiencies for nearly seven years. Their supervisory failures also caused the firm to maintain inaccurate books and records, and to file 37 inaccurate FOCUS reports.

In settling this matter, Wedbush neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

HomeNewsroomNews Releases

News Release

For Release: Monday, February 5, 2018 Contact(s):

Michelle Ong (202) 728-8464

Mike Rote (202) 728-6912

New FINRA Rules Take Effect to Protect Seniors and Vulnerable Adults from Financial Exploitation First Uniform, National Standards to Protect Senior Investors WASHINGTON — Two FINRA rule changes took effect today addressing the financial exploitation of seniors and vulnerable adults, putting in place the first uniform, national standards to protect senior investors. Firms are now required to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. In addition, the rule permits FINRA member firms to place a temporary hold on a disbursement of funds or securities when there is a reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold.

“These important changes, developed in collaboration with our members, provide firms with tools to respond more quickly and effectively to protect seniors and vulnerable investors from financial exploitation,” said Robert L.D. Colby, FINRA’s Chief Legal Officer. “With the aging of the U.S. population, financial exploitation is a serious and growing problem, and protecting senior investors remains a top priority for FINRA.”

The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of any vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated persons with a safe harbor from certain FINRA rules. This provision will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation. It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.

FINRA recently published Frequently Asked Questions to help firms prepare. Shortly after the February 2017 announcement of the approval of these changes, FINRA amended its New Account Application Template, a voluntary model brokerage account form that is provided as a resource to firms when they design or update their new account forms, to capture trusted contact person information.

The rule changes were approved by the SEC in February 2017. FINRA set today as the effective date to provide member firms substantial time to prepare and develop policies and procedures. In addition, FINRA staff met with firms at events throughout the year to help them prepare for the rule changes.

The need for the proposal became clear from discussions with firms and calls into FINRA’s Securities Helpline for Seniors®, which has highlighted some of the issues firms are facing when it comes to senior investors. To date, the helpline has fielded more than 12,000 calls, recovering over $5.3 million in voluntary reimbursements from firms to customers since its launch in April 2015.

A lot of broker-dealers prefer to have their CCO and FINOP in-house, where they can keep their pulses on business activity and compliance. However, it is often easy to overlook the Risks involved in taking that approach:

The Risks:

The Way It’s Always Been Done: A lot of In-House CCOs and FINOPs use their experience as their greatest tool. However, often times, what worked in 2007 doesn’t work in 2017. Regulators are sharper, and business is more complex. Do your firm’s supervisory controls align with the business that your firm conducts? How are other firms in your business segment identifying their risks and controls? If your CCO doesn’t work for any other BDs, how would he or she know? FINRA examines from a diverse knowledge base. Don’t you want the same?

Limited Dimensionality: A lot of In-House CCOs and FINOPs operate under the constraints of their one broker-dealer, with its fixed set of businesses, consistent personnel, and longstanding corporate goals. But there’s a huge market out there, filled with new ideas and strategies. Remote CCOs and FINOPs play in fluid waters, continuously exposed to varying regulatory conditions, and forced to stay literate in prevalent regulatory pronouncements. Remote Principals bring fresh perspective to business risks and opportunities.

The Fear of 2 Principals: A lot of BDs have several Compliance Principals and one FINOP. Why? Wouldn’t you want to have more than one person who can calculate net capital (which by the way, could be requested by a regulator at any time) or who can file the FOCUS reports? Smart broker-dealers have one FINOP available to review the work that the other FINOP prepares. It may be advisable to hire an Outsourced FINOP for the purposes of reviewing the financial statements and FOCUS reports.

Regulatory Exposure: It’s hard enough running a business in real-time for a BD to expect its compliance staff to precisely operate in accordance with FINRA/SEC regulations at all times. You need someone above the trees, to look at the trends, to envision the perspective that FINRA will bring. Just communicating with the regulators is an art in itself.

Enough about the Risks of Only Having an In-House CCO and FINOP.

What are the Benefits to the Remote CCO / FINOP Approach?:

The Flexibility to make changes that can enhance your business and protect it from regulatory damage.

The Multi-Dimensionality to stay updated with the regulations, and adapt your BD to its true risk environment.

The Addition of Remote Principals (both Compliance/CCO and Financial/FINOP) to bolster the knowledge base in your BD. Avoid mistakes, and identify solutions for business growth.

Reduce Regulatory Exposure with a Remote CCO who can interpret your BD’s risk profile within the context of other firms in your business sector, and with a Remote FINOP who reviews your BD’s financials under a lens sharpened by exposure to various other sets of financials in the industry.

Increase Efficiency by having an overall Compliance & Financial Risk Profile, that your employees can utilize to guide their tasks and objectives.

Reduce Overall Operating Costs by bringing on the Remote CCO and/or FINOP (on a monthly rate) versus full-time compliance and accounting staff.