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Shutdown Shuts Down Securities Regulators

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SECThe government shutdown is affecting securities regulators.

The Securities and Exchange Commission (SEC) has furloughed approximately 94% of their employees while the government has been shut down.

Newly minted House Financial Services Committee Chair Maxine Waters, a Democrat from the State of California, made note of it in a recent speech on the House floor.

“This President has all but closed the doors of the SEC, furloughing 94% of the agency and essentially providing fraudsters and schemers with a free pass to swindle investors and small businesses. With such a skeleton crew of less than 300 staff, the SEC cannot possibly oversee the activities of the over 26,000 registered entities, such as investment advisers, broker-dealers, and stock exchanges. Worse, the SEC is unable to hold bad actors accountable through most enforcement actions, preventing harmed investors from obtaining relief.

“But the importance of the SEC goes beyond ensuring the rule of law. Businesses that are looking to enter the public stock markets may have to delay their Initial Public Offerings because the SEC cannot approve their documents. Businesses seeking guidance from the SEC are left in legal limbo until the SEC can get back to work.

Maxine Waters

Maxine Waters

“The Trump shutdown is jeopardizing the integrity of our financial markets and the hard-earned savings of millions of Americans. So, let’s end this Trump shutdown and open the government so that the SEC and other agencies can get back to work on behalf of the public.”

The US government has been shut down to all but essential services since December 22, 2019, when the President, the Republicans, and Democrats could not agree on a budget moving forward.

With no more money allocated, all but the most essential government services are shut down as well.

This includes the SEC.

Waters continued in the speech: “Mr. Speaker and Members, I appreciate some of the comments that have been made about the fact that we have been able to work together on both sides of the aisle on the Financial Services Committee, working on such things as the JOBS Act but we can’t do any of that. We cannot move. We cannot get to work for the American people because this President not only has shut down the government, but he took responsibility for it.

“He wanted everybody to know that he did it, that he not only did it, but he’s going to continue to do it until he can bend us to his will and give him $5 billion dollars plus to put up a wall of some kind. We don’t even know what it is.”

The SEC is not the only trading regulator hit; according to the website, Pensions and Investments, approximately 90% of employees at the Commodities Futures Trading Commission (CFTC) will also be furloughed.

FINRA, the Financial Industry Regulatory Authority, is a self-regulatory organization, and not a part of the government- though it maintains government functions- and is not affected by the shutdown.

Regulators Warn Public of Pension Scammer Tactics as Victims Report Losing an Average of £91,000 in 2017

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FCAA new campaign to tackle pension scams launches today as the latest figures reveal that victims of pension scammers lost an average of £91,000 each in 2017. 

  • The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) launch joint TV advertising campaign to raise awareness of pension scams and the most common tactics used by fraudsters
  • New statistics show that pension scam victims lose an average of £91,000 each

The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have joined forces to urge the public to be on their guard when receiving unexpected offers about their pension and to check who they are dealing with. The two regulators have launched a new ScamSmart advertising campaign targeting pension holders aged 45-65, the group most at risk of pension scams. This comes as a new poll commissioned by the regulators reveals that almost a third (32%) of pension holders aged 45 to 65 would not know how to check whether they are speaking with a legitimate pensions adviser or provider.

Highly sophisticated scammers lure people into transferring their pensions into fraudulent schemes, stealing an average of £91,000 per victim. Victims of pension scams can lose their life savings, and be left facing retirement with limited income.

The FCA and TPR are calling the public’s attention to the tactics used by pensions scammers. One of the most common tactics is to offer a ‘free pension review’. Research reveals that one in eight 45 to 65-year-olds surveyed (12%) said they would trust an offer of a ‘free pension review’ from someone claiming to be a pension advisor.

Cold calling is currently by far the most common method used to initiate pension fraud. Other scam tactics include:

  1. Unexpected contact about your pension via phone, post or email
  2. Promises of guaranteed high returns and downplaying the risks
  3. Offering unusual or overseas investments that aren’t regulated by the FCA e.g. overseas hotels, forestry, green energy schemes
  4. Putting people under pressure to make a quick decision, for example with time-limited offers, and sending a courier round with paperwork to sign
  5. Claiming to be able to unlock money from an individual’s pension (which is normally only possible from age 55)

It is believed that only a minority of pension scams are ever reported. The FCA and TPR are urging anyone who believes they may have been targeted to come forward.

Mark Steward, Executive Director of Enforcement and Market Oversight, FCA, said: “The size of individual pension pots makes pensions savings an attractive target for fraudsters. That’s why we’re urging anyone who is thinking about transferring their pension to check who they are dealing with and only use firms authorised by the FCA. Pension scams can cause victims significant harm – both financially and mentally. If you are ever in doubt about a pension offer, visit the ScamSmart website.”

Nicola Parish, Executive Director, TPR, said: “£91,000 is a huge amount of money for someone approaching their retirement to suddenly have ripped from their savings. If someone cold calls you about your pension, it’s probably an attempt to steal your savings. Our message is clear – hang up and report it.”

Guy Opperman, Minister for Pensions and Financial Inclusion, said: “Pension scams are devastating for hardworking people and can rob them of the retirement they planned. I would urge savers to always exercise caution and seek independent guidance or advice before making important financial decisions. Anyone looking for free, impartial guidance on pensions can visit Pension Wise or The Pensions Advisory Service.”

Dimitrios Tsivrikos, consumer and business psychologist, said: “Scammers are intelligent, ambitious and deceiving. They mimic the sales patter used by salesmen, building trust, a rapport and a relationship to infiltrate our psyches and influence our behaviour. That’s why I want everyone to remember that if it sounds too good to be true, then it probably is. So, put the phone down to unsolicited calls regarding your pension and stop a scammer from stealing your retirement.”

The FCA and TPR are urging the public to be ScamSmart with their pension and always check who they’re dealing with. The regulators recommend four simple steps to protect yourself from pension scams:

  1. Reject unexpected pension offers whether made online, on social media or over the phone
  2. Check who you’re dealing with before changing your pension arrangements – check the FCA Register or call the FCA contact centre on 0800 111 6768 to see if the firm you are dealing with is authorised by the FCA
  3. Don’t be rushed or pressured into making any decision about your pension
  4. Consider getting impartial information and advice

If you think you’ve been a victim of a pension scam, report it. Visit www.fca.org.uk/scamsmart to find out more.

The joint advertising campaign shows the contrast between the impact on the victims of pension scams and the lifestyles enjoyed at their expense by the criminals. Using TV, radio and social media adverts, it urges anyone who is contacted about their pension to visit ScamSmart before they transfer any funds, so that they don’t end up becoming the victim of a scammer.

FCA and TPR are part of Project Bloom a multi-agency taskforce which is working to combat pension scams. The taskforce includes the DWP, HM Treasury, the Serious Fraud Office, City of London Police, the National Fraud Intelligence Bureau, The Pensions Advisory Service, and the National Crime Agency.

Notes to editors:

  1. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1,018 adults aged 45-65 with a pension. Fieldwork was undertaken between 20-23 July 2018. The survey was carried out online.
  2. The new ScamSmart pension scams advertising launches on 14 August 2018. The advertising will include TV, radio, online video and banner ads, and paid search.
  3. If people aged 50 or over do require free independent advice they can contact the government-backed Pension Wise service. To book a free appointment visit www.pensionwise.gov.uk/en(link is external).
  4. The Treasury intends to lay regulations to ban pension cold calling in the autumn.
  5. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority.
  6. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  7. TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

MAS Directs Financial Institutions to Tighten Customer Verification Process

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monetary authority of singaporeSingapore, 24 July 2018…The Monetary Authority of Singapore (MAS) has issued a circular to all financial institutions, directing them to tighten their customer verification process. This follows the recent cyber attack at SingHealth where personal information of 1.5 million individuals was illegally accessed and stolen.

  1. For access to online financial services, banks in Singapore are already required to put in place two-factor authentication (e.g. PIN and One-Time-Password) at login to identify their customers. Banks are also required to implement an additional layer of control to authorise high-risk transactions1.
  2. Financial institutions also have in place robust measures to verify customer identity. Personal information (name, NRIC number, address, date of birth, etc) is generally not used as the sole means of verification by financial institutions as these are often freely given out by members of the public for various purposes, such as when filling out lucky draw coupons or surveys.
  3. However, to address any risk that the information stolen from SingHealth may be used by fraudsters to impersonate customers and perform unauthorised financial transactions, MAS has directed financial institutions to tighten their customer verification processes. Specifically, with immediate effect, all financial institutions should not rely solely on the types of information stolen (name, NRIC number, address, gender, race, and date of birth) for customer verification. Additional information must be used for verification before undertaking transactions for the customer. This may include, for instance, One-Time Password, PIN, biometrics, last transaction date or amount, etc.
  4. MAS has also directed all financial institutions to conduct a risk assessment of the impact of the SingHealth incident on their existing control measures for financial services offered to customers, including transaction and inquiry functions. Financial institutions are to take immediate steps to mitigate any risks that might arise from the misuse of the compromised information.  MAS will engage financial institutions on their risk assessments and mitigation steps.
  5. Mr Tan Yeow Seng, MAS’ Chief Cyber Security Officer said, “MAS will work closely with the financial institutions to ensure that robust cyber defenses are in place so that customers can carry out online financial transactions with confidence. But customers must also play their part.  They must safeguard their passwords and practise good cyber hygiene.  If they suspect any fraudulent transactions in their accounts, they should notify their banks immediately.”
  6. Consumers can refer to the Gosafeonline web page for cyber security tips and the SingCERT webpage for alerts and advisories on cybersecurity issues.

Former HSBC Forex Trader Headed to Prison

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The former head of HSBC’s Global Foreign Exchange Cash-Trading will be spending time in the slammer.

The US Department of Justice announced that Mark Johnson, a former forex trader for the European bank, has been sentenced to twenty-four months in prison.

“Mark Johnson, 51, a United Kingdom citizen, was sentenced to serve 24 months in prison by U.S. Distict Judge Nicholas Garaufis of the Eastern District of New York.  In addition, Judge Garaufis ordered that the defendant pay a fine of $300,000.  A federal jury convicted the defendant on Oct. 23, 2017, following a four-week trial, of one count of wire fraud conspiracy and eight counts of wire fraud.” The US DOJ said in a statement.

Front-running is when traders- using insider information- place trades for their own accounts to get ahead of big trades that their clients are about to make.

The investigation involved not only the Federal Bureau of Investigation but also the Federal Deposit Insurance Corporation, which protects depositor funds at banks.

FDIC Inspector General Jay Lerner

FDIC Inspector General Jay Lerner

“Today’s sentencing holds Mr. Johnson accountable for his egregious conduct to improperly manipulate the foreign currency market, misuse his position, and breach the customers’ trust,” said FDIC Inspector General Jay Lerner.  “We are dedicated to working with our law enforcement partners in order to combat crimes that undermine the integrity of financial institutions and bring culpable bank insiders to justice.”

As was previously noted, the FBI heads federal investigation while the US Attorney’s Office prosecutes.

Nancy McNamara, who heads up the Washington D.C. Field Office headed the investigation while Richard Donoghue was the prosecutor in the case.

“Mark Johnson exploited confidential information and betrayed a client in order to generate profits for HSBC and enrich himself,” Donoghue stated.  “Johnson has been held accountable for his crimes and today’s sentence should serve as a deterrent to fraudsters seeking to cheat their victims by manipulating important benchmarks, such as the FX spot fixings.  This Office, together with our law enforcement partners, is committed to bringing to justice those who undermine public confidence in the operation of the financial markets through such schemes.”

“Leaders of financial service organizations such as HSBC are held to the utmost standard of integrity, which Mark Johnson failed to uphold,” McNamara said.  “The FBI will not falter in assuring that justice will be brought to those that use company finances for their own personal gain.

The US Attorney’s Office released a statement describing Johnson’s crimes.

“According to the evidence presented at trial, in November and December 2011, Johnson cheated an HSBC client out of millions of dollars by misusing information provided to him by that client, which had hired HSBC to execute a foreign exchange transaction related to a planned sale of one of the client’s foreign subsidiaries.  HSBC was selected to execute the foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  HSBC’s agreement with the client required the bank to keep the details of the client’s planned transaction confidential.  Instead, Johnson misused confidential information he received about the client’s transaction to cheat the client out of millions of dollars, the evidence showed.

“Shortly before the transaction, Johnson and other traders acting under his direction purchased Pounds Sterling for their own benefit in their HSBC ‘proprietary’ accounts.  Johnson then caused the $3.5 billion foreign exchange transaction to be executed in a manner that was designed to “ramp,” or drive up, the price of the Pound Sterling, benefiting their proprietary positions and HSBC at the expense of their client.  As part of the scheme, Johnson and his co-conspirators also made misrepresentations to the client about the transaction that concealed the self-serving nature of their actions.  The evidence showed that in total, Johnson and the traders he supervised generated HSBC profits of roughly $7.3 million from the execution of the transaction, including profits generated from the front-running conduct.”

US SEC Spotlights ICOs

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ICO’sThe Securities and Exchange Commission (SEC) recently featured Initial Coin Offerings (ICOs) in their “spotlight” section.

While digital currency has currently been deemed a commodity in the USA, and therefore under the jurisdiction of the Commodities Futures Trading Commission (CFTC), the SEC considers certain ICOs securities are under its purview.

In their profile, The SEC noted: “Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets. That’s why we are providing this information about the three “Rs” of ICOs: Risks, Rewards and Responsibilities.

The SEC said investors in ICOs should keep these five things in mind:

  • ICO’s can be securities
  • They may need to be registered
  • Tokens sold in ICOs can be called many things
  • ICO’s may pose substantial risks
  • Ask questions before investing

The SEC further noted that tokens can be sold internationally, recommended researching the professional who recommends them, and “if an investment sounds too good to be true, be cautious.”

In August 2017, the SEC issued an investor alert for ICOs.

The agency stated then: “The SEC’s Office of Investor Education and Advocacy is warning investors about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings (or ICOs).  Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.  These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

In January, the SEC halted an ICO for the digital currency, Arisecoin, not only deeming it a security but stating that it failed to properly register its security.

SEC Seal“AriseBank began raising money at least as early as November 2017, through a securities offering of AriseCoin—its own digital currency. AriseCoin is being offered in an initial coin offering through which Arisecoin claimed to have raised $600 million, with a goal of a $1 billion.” The order stated. “The ICO is an illegal offering because there is no registration statement filed or in effect with the SEC, nor is there an applicable exemption from registration.”

What is a Security?

The ICO question will almost certainly have ramifications for US regulations beyond digital currency, contributing further to defining-legally- what is a security.

As noted earlier, the SEC has deemed certain ICOs securities.

But the US does not operate by executive fiat, so both the judicial and legislative branches will also weigh in before it’s determined when an ICO is considered a security.

This is known as checks and balances and the separation of powers in the Constitution.

The definition of a security is a “Trading securities are investments in debt or equity that management plans to actively trade for profit in the current period. In other words, trading securities are stocks or bonds that management plans to purchase and sell in order to make money in the short term.” According to the website My Accounting Course.

By that definition, the SEC certainly appears to have broad powers but legal challenges and possibly legislation will come before this is clarified.

Congress is already taking an active role in oversight, on Wednesday March 16, 2018, the House Financial Services Committee will hold a hearing entitled: “Examining the Cryptocurrencies and ICO Markets”

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