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Financial Services Law Insights and Observations

SEC Chairman Discusses Corporate Governance, States Enhanced Transparency Can Help Prevent Fraud, and Reveals First-Ever National Database of Barred Brokers and Advisors

Securities Initial Coin Offerings SEC Fraud

Securities

On November 8, the Chairman of the SEC, Jay Clayton, spoke before the Practising Law Institute’s annual institute on securities regulation to discuss the role of corporate governance and how enhanced transparency can help prevent fraud. Clayton stated that the SEC would be streamlining and shortening its near-term agenda in an effort to increase transparency and accountability, and that the SEC also would apply this approach to its longer-term strategic plans as well.

Clayton also commented on approaches to mitigate “misconduct” before an enforcement action would be required. Specifically, Clayton noted, “[l]ooking back at enforcement actions, a common theme emerges – where opacity exists, bad behavior tends to follow.” Clayton highlighted the following areas in which opacity may exist: (i) disclosures involving “hidden or inappropriate fees”; (ii) poor recordkeeping and lack of reliable information related to penny stocks; (iii) transaction processing related to unregistered securities; (iv) online platforms that manage initial coin offerings (ICOs); and (v) investor education.

Concerning ICOs, Clayton commented that because “[t]here is a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in . . . ICOs . . ., [t]rading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.” The SEC proposed enhanced clarity when listing tokens on these types of platforms, assigning value to tokens, and examining measures designed to protect investors and market integrity.

Clayton further revealed that the SEC was creating a website that would publish, among other things, a searchable database of those individuals who have been barred or suspended as a result of federal securities law violations.  Clayton noted that this database would be “intended to make the prior actions of repeat offenders and fraudsters more visible to investors” and could be “particularly valuable when bad actors have shifted from the registered space for investment advisers and broker-dealers to the unregistered space.”

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