Perspective - SDDco Group

October 2, 2018  |  Vol 1. Edition 1

Dear SDDco Clients and Colleagues: Our SDDco Perspective includes industry news, guidance, regulatory rule updates, deadlines, and other timely matters impacting brokers, advisors, fintech firms, taxpayers, investors, and their service professionals. The SDDco Perspective is made available on our website monthly at http://sddco.com/resources-newsletter.

Technology continues to challenge regulators to keep up with the pace of change. The most recent wave of technological disruption hitting the securities industry is the rise of digital assets and the sale of digital tokens by issuers and market participants unaware of how these financial instruments are subject to financial industry regulation. Since the SEC’s Report of Investigation, The DAO (Exchange Act Rel. No. 34-81207) (July 25, 2017), U.S. regulators have built the case through outreach and enforcement that digital assets are securities (regardless of the “technology, smart contracts, or computer code employed”) when these “virtual organizations or capital raising entities use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities.”

On September 11, 2018, the SEC filed its first-ever enforcement action against an unregistered investment manager of digital assets. The investment manager and its principal owner, Crypto Asset Management LP (“CAM”) and Timothy Enneking (“Enneking”), generally solicited via the Internet their digital assets fund to public customers without registering under the Securities Exchange Act as a broker dealer; they didn’t file a registration statement for the fund, or operate under an appropriate exemption; and, they didn’t register as an investment adviser. Accordingly, the SEC has claimed multiple willful violations of the Securities Exchange Act of 1934; the Securities Act of 1933; the Investment Company Act of 1940; and the Investment Advisors Act of 1940. It also didn’t help their cause that the Respondents also made demonstrably false statements while marketing, including their claim that the Crypto Asset Fund, LLC (“CAF”) was the “first regulated crypto asset fund in the United States” and that it had filed a registration statement with the SEC. They were fined $200,000.

On the same day, September 11, 2018, the SEC filed a similar first-of-its-kind public administrative and cease-and-desist proceeding against a self-proclaimed Internet-based "ICO Superstore" for operating as an unregistered broker dealer that “advertised, solicited, and sold securities” to retail investors, in the form of various digital tokens, using the TokenLot website platform (www.tokenlot.com). TokenLot LLC and its owners, Lenny Kugel and Eli L. Lewitt, agreed to $471,000 in disgorgement plus $7,929 in interest. “Kugel and Lewitt also agreed to pay penalties of $45,000 each and agreed to industry and penny stock bars and an investment company prohibition with the right to reapply after three years.”

There is a great deal of legal wrangling underway to close the summer of 2018 in the world of digital assets. The U.S. Congress has yet to act with legislation supporting the regulation of digital assets. Regulators, including the SEC, FINRA, and the CFTC have continued to create precedent by developing through speeches, guidance, outreach, and enforcement, the regulation of digital assets. In Brooklyn, on September 11, 2018 (oddly enough), U.S. District Judge Raymond Dearie ruled that federal prosecutors could continue to pursue a cryptocurrency fraudster under the federal Securities Exchange Act, effectively confirming for the first time that cryptocurrency fraud could fall under the U.S. securities laws, since it is the judge’s understanding that the SEC considers some cryptocurrencies to be securities.

Let SDDco Group help guide you through the process of working with the various regulators to create and maintain your own broker dealer or investment adviser to manage, broker, and issue digital assets.

Read More at:

https://www.sec.gov/news/press-release/2017-131

https://www.sec.gov/news/press-release/2018-186

https://www.sec.gov/news/press-release/2018-185

FINANCIAL INDUSTRY & CRYPTOCURRENCY


Bryon Lyons
CEO, SDDco Brokerage Advisors LLC

FINRA asking for an education on their Securities Industry Continuing Education Program

FINRA is requesting comments from broker/dealer member firms and interested parties on enhancements to their Securities Industry Continuing Education Program (CE Program) that would support the program’s purpose and meet the securities industry’s needs. The enhancements would address: regulatory requirements; industry standards and trends; firm policies; and products, services, and strategies offered by the firm. Make sure your voice is heard, let FINRA hear your thoughts.  Read more >


SEC Reassessing Investment Adviser Proxy Process

On July 30, 2018, Chairman Jay Clayton of the SEC announced that a Roundtable was in the works for this Fall (tentatively, November 2018) that would address the effectiveness of the proxy process as it is currently conducted by U.S. public companies. More recently, in an Information Memo (IM – Info - 2018-02) dated September 2018, the SEC announced it was rescinding previous guidance it had developed over the years that clarified investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. Specifically, the staff of the Division of Investment Management rescinded the guidance letters to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004). The upcoming Roundtable will also reconsider the Staff Legal Bulletin No. 20 (June 30, 2014). Read more here and here

CYBERSECURITY


Erin Furtado
Head of Marketing

Cryptocurrency Scams Are the New Ransomware in Cyber Attacks 

In the new age of cryptocurrency comes scams that are replacing ransomware and cyber hackers are cryptomining at a faster pace than ever. The amount of cryptomining attacks have doubled in the first half of 2018 due to the easy money that cryptocurrency offers hackers. Lately, fileless malware programs have been the tactic of choice raising the number of fileless attacks by 94% this year.  Read more >


Equifax Security Gaps Were Known. How can we trust that our information is truly secure?

More than 145 million Americans were targeted in the 2017 Equifax breach. New evidence points to knowledge that Equifax was informed of security gaps but failed to fix the FOUR vulnerabilities which left 2 ½ months of mining time for hackers to steal sensitive personal information. According to a recent report, an expired digital certificate failed to scan for malicious network traffic leaving a huge footprint for hackers to attack.  Read more >


New York DFS Cybersecurity September 2018 Deadline

As of September 3, 2018, entities covered under the New York Department of Financial Services cybersecurity regulation 23 NYCRR 500 must be in compliance with requirements regarding Audit Trails, Application Security, Limitations on Data Retention, Training and Monitoring, and Encryption of Nonpublic Information. Make sure your firm is compliant in meeting all cybersecurity deadlines before February 15, 2019. Read More >

SDDco CYBER
COMPLIANCE & SUPPORT OFFERING

  • Become compliant with all state and federal requirements including FINRA, NYDFS, SEC, etc.
  • Infrastructure Testing including Penetration Testing
  • Customized and Tested Policies and Procedures
  • Fully Managed Incident Response Coverage
  • Data Security Training
  • Vendor Due Diligence
  • Risk Assessments

Speak with an SDDco consultant about how we can help you navigate the nuances of armoring your firm through SDDco Cyber.

COMPLIANCE & REGULATORY


Gary Fox
Director

A Long List of Questions As The Deadline Draws Near

While firms have been hearing about the Securities Industry Essentials (SIE) exam and FINRA's restructuring of the representative programs for a year now, the change is finally upon us. This is the most significant overhaul to FINRA's exam process in over a decade. Overall, FINRA Rules 1210-1250 represent a marked change in the regulator's approach to registrations and roles, not just the exams themselves. On September 7, 2018, FINRA released a FAQ to address those questions. The questions are broad and varied, touching on subtleties that firms may have overlooked.  Read more >


The Rise of RegTech: Making Sure Your Compliance Program Isn't "Set It and Forget It" 

It is no surprise that innovations in technology have practical use in a firm's compliance program. The increasing complexity of the marketplace coupled with the need to fulfill a firm's regulatory obligations demand that a firm's compliance program be augmented by the tools that enable surveillance, risk management, reporting, and general oversight. For example, there have been significant advances in the field of artificial intelligence as it relates to monitoring trade processing, execution quality review, and insider trading detection. But how does a firm, especially its compliance professionals, properly evaluate the effectiveness of a RegTech tool when they don't understand the core technology that runs it? On September 10, FINRA released a white paper addressing the rise of RegTech, which addresses the current state of the industry, and, most importantly, provides some guidance to compliance professionals facing this new challenge.  Read more > 


 


Ross Marlin
Associate Director

FINRA Charges Broker with Cryptocurrency Fraud

On September 11, 2018, FINRA filed its first disciplinary action involving cryptocurrencies, charging a Massachusetts broker with securities fraud and the unlawful distribution of HempCoin, an unregistered cryptocurrency security.  Read more >  


FINRA Publishes Regulatory Notice Regarding ATS Supervision

On August 13, 2018, FINRA issued Regulatory Notice 18-25 to remind Alternative Trading Systems (ATSs) of their obligation to evaluate their supervisory systems to ensure compliance with their supervision obligations, including with respect to business continuity, trade reporting, recordkeeping, Regulation ATS, Regulation NMS, Regulation SHO, and the SEC’s Market Access Rule. The notice states that an ATS’s supervisory system should be reasonably designed to identify “red flags,” including potentially manipulative or non-bona fide trading that occurs on or through its systems.  Read more > 

ACCOUTING & TAX


Bob Fortino
Co-Managing Partner

New IFRS and U.S. GAAP Lease Accounting Rules Impact M&A Transactions

New lease accounting rules treat operating leases as if they are financing leases. This rule change requires the net present value of lease payments to be capitalized and a liability in an equal amount to be established. The asset will be depreciated, changing the character of the deduction to depreciation, causing the target firm in an M&A deal to have an immediate increase in EBITDA. Also, the target firm will have an increase in its debt items, which may need to be adjusted to make a proper comparison.  Read more >


FAQ: Principal Financial Officer and Principal Operations Officer

FINRA has released a FAQ regarding Principal Financial Officers and Principal Operations Officers. This FAQ is designed to clarify when a Principal Financial Officer and a Principal Operations Officer can be one in the same person and when two separate individuals are required. Generally, when the member firm is an introducing broker/dealer, the Financial Operations Principal can satisfy both roles. The FAQ also clarifies that these new designations are not intended to add any additional requirements to a broker/dealer’s day-to-day operations. Read more >

LEGAL


Casey Muller
Senior Contract Administrator

EU’s GDPR causing a flurry of international, country-specific data protection regulations

The uncertainty of GDPR law interpretation has allowed certain EU countries, such as Italy, France, and the Netherlands, to create more individualized GDPR guidelines for their respective businesses and citizens. Other non-EU countries have decided to implement their own Privacy Law similar to the GDPR. On August 14, 2018, the president of Brazil signed the Brazilian General Data Protection Law (LGPD) into effect.  Read more >


Speaking of GDPR, US States such as California are following suit with Data Privacy legislation

On June 28, 2018, California’s governor signed a new data privacy law called the “California Consumer Privacy Act of 2018 (CCPA)” set to take effect on January 1, 2020, which will likely have nationwide implications. While the CCPA is expected to mirror some of the underlying principles of GDPR, businesses will need to be in compliance with both sets of rules separately. Legal experts believe this will lead to other States introducing similar, yet individualized, law, which could eventually result in wide sweeping Federal Government legislation.  Read More > 

IN THE SPOTLIGHT


John Cullinane, Senior Director, will be speaking on a panel at the 2018 NSCP National Conferences

OCTOBER 26-31, 2018 | Omni Atlanta Hotel at CNN Center | Atlanta, GA  

SDDco Booth – #14 | Session DATE: October 29, 2018 | TIME: 9:50 am - 11:05 am

BD/MA – Conflicts of Interest and Employee Reporting Requirements Lab

This lab will focus on the supervision of employee conflicts of interest with particular attention paid to enhanced reporting requirements in light of the most recent FINRA and SEC guidance. The session will review FINRA rules and attendees will share their best practices regarding: Outside Business Activities; Private Securities Transactions; Personal Account Trading; and Gifts, Entertainment and Political Contributions.

Advanced Preparation: None

Pre-requisites for participation: None

Learning Objectives:

  • Share best practice guidance regarding Outside Business Activities
  • Learn how your peers in compliance are managing Private Securities Transactions
  • Discuss FINRA’s 2017 Examinations Findings Report on Rules 3270 and 3280 and application to current rules
  • Obtain practical strategies and guidance for assessing and tracking employee gift, entertainment, personal trading, and political contributions

Register here: https://national.nscpconferences.org/fees-2/

SDDco Group makes this general information available for educational purposes only, the contents of which were not originated from SDDco. SDDco is not affiliated with any of the publishing persons or entities of the articles herein. The information provided should not be construed as legal advice. This email may constitute an advertisement under U.S. law.

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