The Shift From Regulation to Enforcement

By Carmen Lelli

Prior to the COVID-19  pandemic and the shut down in the U.S., the securities industry was mainly focused on the implementation of the Consolidated Audit Trail (CAT), its timelines and the issues with CAT reporting being debated among industry members, participants, and regulators. Then between January and February of 2020, the U.S. Securities and Exchange Commission (SEC) put forth two proposals that would impact exchanges and market data feeds, which the industry refers to as Reg NMS II, in an effort to lessen fragmentation in the U.S. markets. The lockdown due to the pandemic quickly followed in the US. Subsequent to that, the Commodity Futures Trading Commission (CFTC) made a return to the 2016 proposal of Regulation Automated Trading (Reg AT) that was to address the issues that arise in the markets due to sustained high volatility such as the Flash Crash that occurred in the markets in May of 2010. Reg AT was not well received in the financial industry because it imposed a heavy burden on algorithmic trading firms in the area of compliance and imposed a registration requirement on algorithmic traders. This time, however, the CFTC returned with something much less burdensome which requires that firms to have electronic trading risk principals in place, similar to what is required under SEC Rule 15c3-5 for pre-trade risk controls.

The Financial Industry Regulatory Authority (FINRA), also put forth some minor changes to some of its rules and also proposed a couple of changes to the Trade Reporting and Compliance Engine (TRACE), to add certain data elements on trade reports for certain Fixed Income products.

Source: thesecuritiesedge.com

There is a stark contrast between the regulatory proposals and changes discussed above and the enforcement actions that have been taken by regulators during the course of the year. As the U.S. began to fall to the pandemic and shutdown, the SEC and other regulators dramatically increased their surveillance of activities taking place in the financial industry. As a result of this increased surveillance, there have been a large number of enforcement actions taken against bad actors in the industry for a wide range of possible law and regulatory violations. There have also been a large number of whistleblowers awarded money for coming forward and reporting unlawful activities across the industry. Below this article, are links to some of the actions that have been taken.

source: wisegeek.com

This list of links are only some of the press releases that have been published since the beginning of the shutdown in the U.S., there are many more. This is a prime example of what can be accomplished when regulators become more rigorous with their surveillance of the financial industry. Are they catching every fraudster, or every violation of the laws and regulations? More than likely, they are not. However, they’ve surely stepped up to the plate this year and were very proactive. As the shutdown began the SEC warned investors about the possible increase in financial crimes and advised public investors to be very careful when dealing with brokers, financial advisors and other actors in the financial industry. The CFTC also advised public investors to be more cautious and to also check on the registration status of anyone they were speaking with about investments and anyone that may be soliciting for customers. One thing is for certain, the regulators have definitely put a dent in the crime spree that is taking place this year, and many investors are being protected and also reimbursed their losses. That’s what we call protecting the investing public.

Sources: Commodity Futures Trading Commission (CFTC), U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority, Nasdaq

SEC Halts Fraudulent Offering by Florida Investment Adviser  March 10, 2020

SEC Charges Russian National for Defrauding Older Investors of Over $26 Million in Phony Certificates of Deposit Scam  March 13, 2020

SEC Awards Over $570,000 to Two Whistleblowers  March 24, 2020

SEC Charges Unregistered Penny Stock Dealer  March 24, 2020

SEC Awards $450,000 to Whistleblower  March 30, 2020

New York Federal Court Orders Defendants to Pay More Than $595,000 for Forex Solicitation Fraud and Misappropriation  April 17, 2020

SEC Orders Three Self-Reporting Advisory Firms to Reimburse Investors  April 17, 2020

SEC Issues $5 Million Whistleblower Award  April 20, 2020

Federal Court Orders Defendants to Pay Over $1.7 Million to Settle CFTC Enforcement Action Charging Fraud and False Statements  April 23, 2020

SEC Awards Over $18 Million to Whistleblower  April 28, 2020

SEC Awards Almost $2 Million to Whistleblower  May 4, 2020

CFTC Awards More Than $2 Million to Four Whistleblowers  May 4, 2020

CFTC Orders Trader and His Firm to Pay $150,000 for Wash Sales  May 7, 2020

CFTC Files Charges in $20 Million International Binary Options and Digital Asset Fraud   May 7, 2020