Stephanie Avakian, one of the new Co‑Directors of the Securities and Exchange Commission’s Division of Enforcement, indicated that protecting retail investors and addressing cyber-related issues will be priorities of the Division going forward. She cautioned, however, that the Division’s “enhanced retail focus” will not diminish the Division’s activities to combat financial fraud or “policing Wall Street.”
Ms. Avakian indicated that some of the problems the Division continues to see in connection with retail customers include investment professionals directing such persons to mutual fund share classes with higher fees when lower fees are available; abuses in wrap accounts, including inadequate disclosure of possible additional costs and fees; unsuitable persons holding complex products that are not well-understood, such as inverse exchange-traded funds; and churning and excessive trading.
Among the cyber-related issues the Division has spotted include hacking to access non-public information and trading on the information in advance of some announcement or event, hacking accounts to conduct manipulative trading and spreading false information through electronic publications such as social media and EDGAR filings to manipulate prices.
Ms. Avakian indicated that the Division will also focus on “distributed ledger technology space” through its Cyber Unit. This is because, said Ms. Avakian, “…like may legitimate ways of raising capital, the popular appeal of virtual currency and Blockchain technology can be an attractive vehicle for fraudulent conduct.”
Ms. Avakian was appointed as a co-director of the SEC’s Division of Enforcement in June 2017. The other co-director appointed was Steven Peikin (click here for details).
My View and Legal Weeds: Critically, the SEC and CFTC must sooner rather than later address potential overlap in their jurisdiction to avoid inhibiting development of cryptocurrency ecosystems. Ideally, state regulators should also be part of this discussion.
A current private lawsuit in New York challenging NY’s BitLicense requirements may accelerate this discussion. In a lawsuit against the New York Department of Financial Services, Theo Chino and his company, Chino LTD, challenged the authority of DFS to promulgate and enforce rules dealing with a “virtual currency business activity,” claiming that under NY law, DFS only has the authority to regulate financial products and services. Under NY’s BitLicense requirements, all persons located in NY or conducting business with NY persons, and engaging in a virtual currency business activity are required to obtain and maintain a BitLicense. (Click here for background in the article “New York BitLicense Regulations Virtually Certain to Significantly Impact Transactions in Virtual Currencies” in a July 8, 2015 Advisory by Katten Muchin Rosenman, LLP; click here for a copy of the complaint in Mr. Chino’s litigation.)
According to the plaintiffs, cryptocurrencies are are not financial products because they are more akin to "commodity-like mediums of exchanges" and blockchain technologies can be used "to engage in a slew of non-financially related activities." The DFS has filed a motion to dismiss Mr. Chino’s lawsuit, and arguments on the motion were held on October 10. A decision is expected on the motion on January 11, 2018 (click here for a transcript of the hearing).
Since 2015, the Commodity Futures Trading Commission has stated that virtual currencies are commodities under federal law and that commodity interests in virtual currencies are subject to the CFTC’s oversight. (Click here for background in the article “CFTC Says Virtual Currencies Are a 'Commodity' Under Federal Law, Files Charges Against Coinflip for Operating an Unregistered Bitcoin Options Trading Platform” in the September 20, 2015 edition of Bridging the Week.)
Recently, the CFTC brought an enforcement action against two defendants for purportedly running a Ponzi scheme related to Bitcoin alone, not futures or swaps based on Bitcoin. The CFTC brought its current action under the provision of law enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and CFTC regulation that prohibits any person from using a manipulative or deceptive device or contrivance in connection with any “contract for sale of any commodity in interstate commerce”—not solely in connection with swaps or a commodity for future delivery on or subject to the rules of any registered entity. (Click here to access CEA Section 6(c)(1), 7 U.S.C. §9(1) and here for CFTC Rule 180.1(a); click here for further background on this CFTC enforcement action in the article “CFTC Files Charges Alleging Bitcoin Ponzi Scheme Not Involving Derivatives” in the September 23, 2017 edition of Bridging the Week.)