THE BAR ASSOCIATION OF SAN FRANCISCOCONTINUING LEGAL EDUCATION

TuesdayApril 2, 2019Registration: 5:00 - 5:30 p.m.

Program: 5:30 - 6:45 p.m.

Light Reception to follow.

The Criminal Law and Securities Litigation Sections present

SEC Enforcement Yesterday and Today … and Tomorrow

In this CLE program, SEC veterans Jina Choi and Marc Fagel provide an

insider’s view of where the SEC has been and where it’s going. Ms. Choi is a

former federal prosecutor who went on to a lengthy career in the SEC,

including serving as the Regional Director of the SEC’s San Francisco Regional

Office from 2013-2018. Mr. Fagel spent 15 years at the SEC, including

serving as Regional Director of the SEC’s San Francisco Regional Office from

2008-2013. The Moderator, Timothy Crudo, was an Assistant United States

Attorney in San Francisco, where he served as Chief of the Securities Fraud

Section.

Topics

• The evolution of the SEC, 1999-2019

• Recent enforcement trends and priorities

• Defense perspectives on SEC investigations

• The future of securities enforcement

• The SEC as a career

as of 3/18/19Register online: www.sfbar.org/calendar or complete form below.

MCLE: 1 HourTo receive MCLE credit, you must sign in during the designated MCLE registration period. This activity is approved for Minimum Continuing Legal Education credit by the State Bar of California. BASF is a certified provider.

Provider #103

LocationCoblentz Patch Duffy & Bass LLP120 Kearney Street Suite 300 San Francisco, CA

Cost$30 BASF Section Members, Government & Nonprofit Attorneys $40 BASF Members $55 OthersFree for BASF Student MembersAll prices increase $10 on the day of the program.

Event Code: G191501

NOTES: Refunds requests will be given up to 48 hours in advance, less a $10 handling fee. Email cle@sfbar.org.

Special Requests: People with disabilities should contact BASF regarding reasonable accommodations.

Marc Fagel Past Regional Director of the SEC’s San Francisco Regional Office, 2008-2013 Former Partner, Gibson, Dunn & Crutcher

Jina Choi Partner, Securities Litigation, Enforcement, and White–Collar Defense GroupMorrison & Foerster LLP Past Regional Director of the SEC’s San Francisco Regional Office, 2013-2018

Moderator

Timothy Crudo Partner, Coblentz Patch Duffy & Bass

Speakers

SEC Enforcement Yesterday and Today … and Tomorrow

Speakers

Marc Fagel Past Regional Director of the SEC’s

San Francisco Regional Office, 2008-2013 Former Partner, Gibson, Dunn & Crutcher

Jina Choi Partner, Securities Litigation, Enforcement,

and White–Collar Defense Group Morrison & Foerster LLP

Past Regional Director of the SEC’s San Francisco Regional Office, 2013-2018

Moderator

Timothy Crudo Partner, Coblentz Patch Duffy & Bass

Tuesday, April 2, 2019

Location: Coblentz Patch Duffy & Bass LLP 120 Kearney Street, Suite 300 • San Francisco, CA

Event Code: G191501

Jina Choi

Jina is a partner in our Securities Litigation, Enforcement, and White-Collar Defense Group — a role she is uniquely qualified for as a 16-year veteran of the Securities and Exchange Commission (SEC). Her tenure culminated in serving as the Regional Director of the San Francisco Regional Office of the SEC.

As the head of the SEC’s San Francisco office starting in 2013, Jina brought a succession of headline-making enforcement actions. Under Jina’s leadership, the agency’s San Francisco regional staff of attorneys and compliance professionals established important precedents that, according to SEC Chairman Jay Clayton, the SEC “will continue to follow in the years ahead.”

In addition to her time at the SEC, Jina’s government experience includes serving as an Assistant U.S. Attorney (AUSA) in the Northern District of Texas, as a trial attorney in the Civil Rights Division of the U.S. Department of Justice, and as a law clerk for the Honorable Robert P. Patterson, Jr., in the U.S. District Court, Southern District of New York. She also has experience in private practice at other large law firms.

Now, Jina’s clients benefit from her in-depth knowledge and experience. Having helped to enforce many of the laws that govern the public and pre-IPO companies she represents, Jina is ideally situated to help companies’ officers, directors, and employees navigate and comply with the federal securities laws and the Foreign Corrupt Practices Act (FCPA).

Timothy Crudo

Tim Crudo heads the firm’s White Collar Defense and Government Enforcement Practice Group. Tim is a trial lawyer focusing on investigations and cases brought by criminal prosecutors, government regulators, and shareholders in white collar, securities, and corporate governance matters. He defends clients in trade regulation, unfair competition, and other complex business and civil cases brought by regulators, consumers, and competitors. Tim also represents Boards of Directors, Audit Committees, and Special Litigation Committees in internal investigations.

Tim has extensive criminal and civil jury, bench, and arbitration trial experience, including several prominent white collar criminal trials, the longest civil trial (a securities fraud class action) in the history of the Northern District of California, and the then-largest arbitration award in the history of the International Chamber of Commerce.

From 2003 to 2009, Tim served as an Assistant United States Attorney in the Securities Fraud Section of the United States Attorney’s Office for the Northern District of California, where he investigated, prosecuted, and tried white collar and securities fraud crimes, including complex accounting fraud, insider trading, market manipulation, investment fraud, and bankruptcy fraud cases. During his career with the Department of Justice, Tim was the lead trial lawyer on a number of high-profile securities and corporate fraud matters, including the nation’s first two stock option backdating trials; the trials of the Board Chairman, CFO, and General Counsel of a Fortune 50 company on charges of accounting fraud; the investment fraud trial of one of the largest real estate developers in northern California; a $100 million Ponzi scheme operated by the owner of a major sports franchise; insider trading investigations arising from the acquisition of a large financial institution and conduct at a major global private investment firm; and numerous investigations of companies and individuals based in Silicon Valley and beyond. He also argued several cases before the Ninth Circuit Court of Appeals. Tim was named Chief of the Securities Fraud Section in 2007. Prior to joining Coblentz, Tim was a partner at Latham & Watkins LLP.

Tim is a member of the American Bar Association, the California Bar Association, the Federal Bar Association, and the Association of Business Trial Lawyers. He is the former Chairman and is a current member of the Executive Committee of the Securities Litigation Section of the Bar Association of San Francisco as well as a member of the Executive Committee of the BASF’s Criminal Justice Section.

work with the AIDS Legal Referral Panel, the Bar Association of San Francisco’s Volunteer Legal Services Program, and civil rights work on behalf of state prisoners. Tim regularly volunteers with the St. Anthony Foundation and the Ronald McDonald House.

Tim is a 1984 cum laude graduate of Harvard College, where he majored in History and Literature. He earned his law degree in 1989 from the University of California, Berkeley (Boalt Hall), where he was elected to the Order of the Coif.

Marc J. Fagel

From 2013 until 2019, Marc Fagel was a partner in Gibson, Dunn & Crutcher’s San Francisco and Palo Alto offices and a Co-Chair of the Firm’s Securities Enforcement practice group. Mr. Fagel’s practice focused on the representation of public companies and their officers and directors, as well as financial institutions, hedge funds and private equity firms, accounting firms, and others in investigations conducted by the Securities and Exchange Commission, Department of Justice, FINRA, and other regulatory bodies. Mr. Fagel also

represented clients in connection with internal investigations, regulatory inspections and examinations, and related civil litigation.

Prior to joining the Firm, Mr. Fagel spent over 15 years with the SEC, most recently serving as Regional Director of the SEC’s San Francisco Regional Office from 2008 to 2013. In his role as Regional Director, he was responsible for administering the SEC’s enforcement and examination programs for Northern California and the Pacific Northwest, managing a staff of more than 100 lawyers, accountants, and other professionals. Before his appointment as Regional Director, Mr. Fagel served as the office’s Associate Regional Director in charge of enforcement. While at the SEC, Mr. Fagel conducted and supervised investigations in nearly every subject area of the SEC’s enforcement program, including public company disclosure and reporting; insider trading; and matters involving major financial institutions, investment advisors, mutual funds, hedge funds and broker-dealers.

Before joining the SEC, Mr. Fagel spent six years as an associate in the San Francisco office of Morrison & Foerster, where he specialized in representing technology companies and their officers and directors in securities fraud class action litigation. Mr. Fagel received his undergraduate degree from Princeton University and graduated in 1991 with honors from the University of Chicago Law School, Order of the Coif.

17

©2018, Marc J. Fagel and Mary Kay Dunning

Marc J. Fagel is a partner in the San Fran-cisco and Palo Alto offices of Gibson, Dunn & Crutcher and a Co-Chair of the firm’s Securi-ties Enforcement Practice Group. Mr. Fagel’s practice focuses on the representation of public companies, auditors, private fund managers and financial institutions in con-nection with SEC examinations and investiga-tions. Before joining the firm, Mr. Fagel spent nearly 16 years at the SEC, most recently serving as Regional Director of the SEC’s San Francisco Regional Office from 2008-2013, where he managed the SEC’s enforcement and examination programs in Northern Cali-fornia and the Pacific Northwest.

Private Funds and the Clayton SEC: Out From Under the Microscope?

By Marc J. Fagel and Mary Kay Dunning

Nearly a decade ago, managers of hedge funds and private equity funds faced a rude awakening when, in the wake of Dodd-Frank’s 2010 passage, they found themselves governed by vastly expanded SEC oversight. Private investment funds joined the ranks of advisers to individual retail client accounts and mutual funds, subjected to periodic exams by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and targeted by the growing scrutiny of the SEC’s Division of Enforcement. After years of limited SEC attention (aside from cases of outright fraud and misappropriation), fund managers had to learn to respond to protracted, resource-intensive examinations, and in many cases investigations (and potential enforcement actions) aimed at fee and expense practices common to the industry.

The following years saw the SEC quickly ramp up its oversight of these newly-registered funds. OCIE introduced its “Presence Exam” program, designed to allow the SEC staff to quickly visit a large number of new registrants by conducting more abbreviated examinations focused on specific high-risk areas such as marketing materials, portfolio management procedures, and asset custody. The increase in the volume of private fund exams unsurprisingly resulted in a number of enforcement referrals, with the Enforcement Division filing multiple actions against hedge fund and private equity fund managers on topics such as expense allocations, conflict of interest disclosures, and asset valuation.

However, the new SEC administration under Chairman Jay Clayton has signaled that its priorities lay elsewhere. In speech after speech, Clayton and other SEC of-ficials, including the OCIE and Enforcement leadership, have emphasized their focus on “retail” investors, particularly retirees and mom-and-pop investors unlikely to be placing their retirement funds (at least directly) into riskier private funds. But does this mean that private fund managers are off the hook?

Alas, it is a little too soon for these investment advisers to kick back and relax. Dodd-Frank’s registration requirements remain intact; OCIE’s expanded infrastructure overseeing private funds is not going away any time soon; and Enforcement continues to demonstrate an interest in pursuing cases against fund managers.

Mary Kay Dunning is of counsel in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s Securities Enforcement Practice Group.

Practical Compliance & Risk Management For the Securities Industry | July–August 201818

Examinations of Hedge Funds and Private Equity FundsIn July 2017, in his first speech as Chairman, Jay Clayton declared his acute interest in “the long-term interests of the Main Street investor. Or, as I say when I walk the halls of the agency, how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)?”1 A few weeks later, the Director of OCIE echoed these com-ments, noting that, while private equity funds would still be subject to oversight, “we are going to focus more on retail investors.”2

The 2018 exam priorities shared by OCIE in a February 2018 publication confirm that the investment adviser exam program will be focused primarily on matters impacting individual retail investors.3 The bulk of the OCIE release comes un-der the header “Retail Investors, Including Seniors

and Those Saving for Retirement,” emphasizing subjects such as the disclosure of investment costs, wrap fee programs, retirement accounts, and mutual fund and ETF performance.

Yet the SEC’s repeated invocations of seniors and retail investing do not leave private funds off

the hook. OCIE’s exam priorities, while addressing various fee and expense practices, specifically note that the program will target, among others, “private fund advisers that manage funds with a high concentration of investors investing for the benefit of retail clients, including non-profit organizations and pension plans.” In other words, private funds with sophisticated, well-heeled institutional inves-tors are still retail advisers in the eyes of the SEC.

The SEC’s ongoing interest in private funds is also necessitated by legislative and practical realities. Dodd-Frank mandated registration for many private funds, and notwithstanding some post-election moves by Republicans to roll back Dodd-Frank, it seems unlikely that the House and Senate will align on repealing the fund registra-tion requirements. Until that happens, the SEC remains obligated to oversee the private funds registered with the agency (and subject to SEC examinations), and risks significant political exposure if a registered fund manager turns out to be the next Madoff or Stanford.

Moreover, the SEC has significantly built the ranks of its investment adviser exam staff, including specialists in the private fund industry. Since Dodd-Frank’s passage, OCIE went on something of a hiring binge, expanding from about 820 full-time equivalent positions in FY 2012 to 1063 in FY 2017.4 A significant portion of these hires went into the group’s invest-ment adviser program; additionally, in 2016, OCIE shifted about 100 broker-dealer examiners (whose work is often duplicative of exams performed by FINRA) into the investment adviser side of the office.5 While the federal hiring freeze imposed under the Trump administration has reduced the size of the SEC through normal attrition, the SEC’s 2019 budget request seeks to restore a number of lost positions, including investment adviser examiners.6

And beyond mere numbers, OCIE has responded to the changing nature of the post-Dodd-Frank registrant pool by building its private funds expertise, including hiring examiners with industry experience and, in 2015, establishing a specialized Private Funds Unit dedicated to examining fund advisers.7

In short, for all the attention being paid to retail investment advisers, the SEC is not about to curtail its examinations of private equity and hedge fund managers. And while the exam priori-ties do not provide significant guidance, certain key themes emerge both from OCIE publications and recent exam experience.

While the SEC’s public statements may suggest that the heightened scrutiny of private fund managers in the years following Dodd-Frank may have eased somewhat under the new administration, there is no question that these advisers will continue to be subject to probing exams by a beefed-up examination staff and the risk of enforcement actions where their disclosures and practices fail to measure up to SEC expectations.

19Private Funds and the Clayton SEC: Out From Under The Microscope?

First, as noted above, the disclosure of the costs of investing is a key element for invest-ment adviser exams. As set forth in the priorities release, the SEC is focused on “whether fees and expenses are calculated in accordance with the disclosures provided to investors.” The SEC ex-panded on its concerns in an April 2018 Risk Alert highlighting some of the most frequent advisory fee issues identified in its exams.8 The Risk Alert specifically referenced, in connection with exams of private fund advisers, misallocation of various expenses to the fund rather than the adviser, in contravention of the Limited Partnership Agree-ment or other applicable documents.

The allocation of expenses across multiple funds, the fund manager, and (in the case of private equity funds) portfolio companies invari-ably receives significant attention from examiners during fund exams. (And as discussed below, such allocations are often the subject of enforcement actions as well.) Indeed, at a recent industry conference, half of all attendees who had been examined by the SEC reported that they received comments on fee or expense allocations.9

While the remainder of the advisory fee Risk Alert addressed matters affecting investment advisers generally, some items are no less ap-plicable to private fund managers, including:

Advisory fees based on incorrect valuationsBilling fees in advance or with improper frequencyFee and expense practices inconsistent with Form ADV disclosures

Another recent OCIE Risk Alert identified recurring exam deficiencies relating to advertising.10 As with the fee-related Risk Alert, much of the OCIE publi-cation is directed at retail advisers; yet, again, some lessons shine through for fund managers. Most notable is the SEC’s admonition about mis-leading performance results, including the failure to deduct advisory fees, the use of benchmark comparisons without adequate disclosures about the limitations of such comparisons, and adver-tisements with hypothetical or backtested results without adequate explanation and disclosures. More generally, the Alert noted deficiencies in policies and procedures around the review and approval of advertising materials.

Though not detailed in the Alert, other adver-tising issues that tend to draw comments in fund exams include, among others:

Cherry-picking high-performing portfolio holdings rather than using objective, non-performance based criteriaTarget returns lacking an adequate basisInadequate records supporting performance dataInappropriate attribution of track record to current portfolio managers

Another perennial focus area for the SEC exam staff is the handling and disclosure of conflicts of interest. While OCIE’s annual exam priorities do not typically highlight conflicts, the topic is consistently explored in depth in exams of private fund managers. Examin-ers tend to seek detailed information on services provided by affiliated persons and entities, exploring any personal or business relationships which in the view of the staff may influence the manager’s decisions. Exams also focus on whether certain investors stood to receive beneficial treatment.

Even for remote conflicts, examiners will inquire into the existence and disclosure of potential conflicts and whether steps taken to disclose and mitigate such conflicts were consistent with the firm’s internal policies, LPAs and other operative agreements, and fiduciary duties generally.

Conflicts scrutinized by the SEC include:Payments to affiliated service providers by the management company or a portfolio companyAllocation of investment opportunities among fundsAllocation of co-investment opportunities to preferred investors or affiliates

While fee and expense practices, advertising, and conflicts of interest may dominate examiner interest, OCIE continues to probe other areas in most private fund exams. Cybersecurity, unsur-prisingly, remains of keen interest. As set forth in the 2018 exam priorities, exams will continue to probe advisers’ risk assessment, controls, train-ing, and incident response. (An August 2017 Risk Alert highlights findings from a targeted exam of registrant cybersecurity preparedness, providing more detailed guidance on issues identified by SEC examiners.11) Private fund manager exams also continue to review advisers’ compliance with the custody rule, implementation of compliance programs specifically tailored to the registrant’s business and risks, and maintenance of books and records. And, more recently, examiners have begun inquiring into any investments by fund managers in cryptocurrency and initial coin offerings.

Practical Compliance & Risk Management For the Securities Industry | July–August 201820

Finally, the SEC’s 2018 exam priorities, as in past years, reference OCIE’s ongoing commitment to examining registered investment advisers that have never been examined, ensuring that private fund managers who have yet to undergo an exam (or have not done so in many years) will remain on the agency’s radar screen.

Enforcement ActionsThough not receiving the same fanfare as just a few years ago, enforcement actions against private fund managers continue to be a meaningful component of the Enforcement Division docket. For example, in late 2017, the SEC brought two cases relating to private equity fund fee and expense disclosures. In September, the SEC brought a settled action against a private equity fund adviser for charging broken deal expenses to the funds it managed.12 According to the SEC, while certain co-investors participated in the profits from successful transactions, the firm (which did not admit the allegations) did not allocate expenses for uncon-summated deals to the co-investors, and failed to disclose this practice to investors in the funds.

Similarly, in December, the SEC brought a settled action against an adviser for allegedly charging accelerated monitoring fees upon exiting from portfolio company investments without adequate disclosure of the practice.13 According to the SEC, while the firm disclosed that it would charge the portfolio companies monitoring fees, and reported the actual amount of fees collected, the fund

agreements did not give investors advance notice that it would accelerate monitoring fees before they committed capital to the fund.

Interestingly, the SEC’s public announcement of these cases was relatively muted. When the SEC instituted comparable cases involving broken deal expenses and accelerated monitoring fees in 2015, the filings were accompanied by press releases trumpeting the charges and the significant penal-ties assessed by the SEC, with proclamations from the SEC’s then-Director of Enforcement admon-ishing the firms.14 In contrast, the 2017 actions received far less attention, neither accompanied by press releases with Enforcement commentary. It remains unclear whether this was intended to convey a subtle message that the SEC was less enthusiastic about such cases in the new admin-istration; or simply a recognition that the second broken deal expense case or accelerated monitor-ing fee case was less newsworthy than the first.

Conflicts of interest also remain a recurring theme for SEC enforcement actions. In an April 2018 settled action, the SEC alleged that a New York-based private equity fund manager failed to disclose conflicts of interest surrounding its receipt of compensation from a company that provided ser-vices to portfolio companies owned by the private equity funds managed by the adviser.15 According to the SEC, the service provider, which specialized in aggregating companies’ spending to obtain volume discounts from participating vendors, compensated the investment adviser based on a share of the fees it received from vendors as a result of the adviser’s portfolio companies’ purchases through it, such as office supplies and car rentals.

In a pair of back-to-back cases in May, the Divi-sion of Enforcement signaled its ongoing scrutiny of asset valuation, as well as its focus on advisers’ monitoring of insider trading and performance advertising. In the first case, a New York-based investment adviser to two private funds settled claims that two of its former portfolio managers en-gaged in an asset mismarking scheme, and its chief financial officer agreed to a one-year bar from the securities industry for allegedly failing to supervise those two individuals.16 The SEC claimed that the two portfolio managers employed by the adviser falsely inflated the value of securities held by hedge funds it advised, causing the funds to falsely inflate returns, overstate their net asset value, and pay excess fees to the adviser. Moreover, the SEC also claimed that certain portfolio managers engaged in insider trading in the securities of pharmaceutical

After years of limited SEC attention (aside from cases of outright fraud and misappropriation), fund managers had to learn to respond to protracted, resource-intensive examinations, and in many cases investigations (and potential enforcement actions) aimed at fee and expense practices common to the industry.

21Private Funds and the Clayton SEC: Out From Under The Microscope?

companies and home healthcare providers. The following day, the SEC charged a New

York-based hedge fund adviser with inflating by hundreds of millions of dollars the value of private funds it advised, in order to conceal poor fund performance and attract and retain inves-tors.17 The SEC also charged the adviser’s chief executive officer and chief investment officer, as well as three former employees (a former partner, a former portfolio manager, and a former trader, all of whom are under criminal investigation).

These recent cases reflect the SEC’s publicly-stated enforcement priorities relevant to private funds. In April, staff from the Enforcement Division’s Asset Management Unit (AMU), along with staff from other divisions, gathered to discuss issues facing compliance personnel at the SEC’s 2018 Compli-ance Outreach seminar.18 The staff outlined several of AMU’s priorities applicable to private funds, particularly the disclosure of conflicts of interest regarding fees, compensation that advisers receive from broker-dealers, and transactions that benefit advisers’ affiliates. The staff highlighted its interest in fees and expenses assessed contrary to a fund’s investor disclosures, and the allocation to funds of expenses more appropriately borne by the manage-ment company. Additionally, the staff explained that, in its charging decisions, the Enforcement Division would take into account the duration and magni-tude of problematic fees, with the likelihood of filing an enforcement action increasing if a particular undisclosed fee was lucrative for the manager and a client was charged for an extended period of time.

Staying Prepared for Ongoing SEC ScrutinyWhile the SEC’s public statements may suggest that the heightened scrutiny of private fund managers in the years following Dodd-Frank may have eased somewhat under the new administra-tion, there is no question that these advisers will continue to be subject to probing exams by a beefed-up examination staff and the risk of enforcement actions where their disclosures and practices fail to measure up to SEC expectations. Hence, it remains essential for registered advis-ers to be prepared. The following pointers should be in the toolkit of the principals and compliance professionals of registered fund advisers.

Registered advisers who have never been exam-ined, or who have to date only been subjected to a brief “presence” exam by the SEC staff after

initially registering, should assume that it is just a matter of time before they get a call from the SEC. Similarly, advisers who have more recently undergone an exam that uncovered significant deficiencies should expect a follow-up visit from the staff to ascertain whether such mat-ters have been fully remediated.Advisers who have not yet undergone a standard SEC examination should consider retaining a consultant to provide a “mock exam.” These procedures can be helpful in identifying deficiencies that the firm’s compli-ance staff and legal counsel may not pick up on their own. They can also help the firm assess potential weaknesses in the adviser’s ability to respond effectively when the real staff shows up on their doorstep—particularly the firm’s ability to expeditiously locate and collect documents typically requested by the examiner, and the comfort level of firm man-agement and personnel in responding to the sort of interview questions they may be asked during an on-site examination.Relatedly, compliance personnel should review their document retention and organi-zation practices. SEC exams are initiated with a document request that can be astounding in its breadth for advisers who have not previ-ously been through the process; and the staff typically expects documents to be provided in short order, often just a week or two. Even more focused exams targeting a particular adviser practice will include significant de-mands for documents. Firms, either with a compliance consultant or on their own, should review a sample examination document request to determine whether they would be prepared to respond on a timely basis.More broadly, fund managers should review their fee and expense disclosures. Similarly, they should review their disclosures regard-ing any services provided by affiliates (or other potential conflicts, such as allocation of investment opportunities and expenses across funds). Are the disclosures clear? Are they consistent with the firm’s actual practices? Have potential conflicts been handled in ac-cordance with any procedures set forth in the fund’s offering documents (such as review by an advisory committee)? To the extent the firm identifies fee or expense payments which ap-pear to be contrary to their disclosures to in-vestors, or detects potential conflicts that have

Practical Compliance & Risk Management For the Securities Industry | July–August 201822

not been adequately disclosed or escalated, management should consider whether some remediation might be in order. Examiners identifying expenses they believe to have been improperly allocated to investors will typically push the adviser to refund such charges to the fund; proactively remediating such charges even before the examination can mitigate the risk of an OCIE deficiency letter and, more sig-nificantly, make the matter far less attractive to the Enforcement Division. Sitting back and hoping that an SEC examiner does not discover the issue is rarely the best approach.Get your cybersecurity house in order! Data security is of paramount interest to both the exam and enforcement programs. Even beyond the risk of SEC action, a data breach comes with tremendous financial and reputa-tional costs.

Finally, while compliance personnel need to focus on the SEC priorities discussed above, they can’t ignore the little things. OCIE’s public reports on the findings arising out of its exam program don’t always align with the agency’s top priorities, and give valuable insight into what OCIE continues to look for (and find) in its investment adviser exams. For example, a February 2017 OCIE risk report identified the five most frequent compliance failures found in recent investment adviser exams, including compliance policy shortcomings, inaccurate Form ADVs, Custody Rule violations, and books and records deficiencies.19 While these types of deficiencies may be less likely to result in enforcement referrals (absent repeat offenses), they can add up and lead the exam staff to view the registrant as higher risk, drawing more frequent and more in-depth examinations.

ENDNOTES

1 Chairman Jay Clayton, Remarks at the Economic Club of New York (July 12, 2017), www.sec.gov/news/speech/remarks-eco-nomic-club-new-york.

2 See D. Michaels, “SEC Scrutiny of Private Equity May Dwindle, Offi-cial Says,” Wall Street J. (July 27, 2017), www.wsj.com/articles/sec-scrutiny-of-private-equity-may-dwindle-official-says-1501185494.

3 SEC Press Release, SEC Office of Compliance Inspections and Examinations Announces 2018 Examination Priorities (Feb. 7, 2018), www.sec.gov/news/press-release/2018-12; 2018 National Exam Program Examination Priorities, www.sec.gov/about/offices/ocie/national-examination-program-priorities-2018.pdf.

4 Compare SEC FY 2014 Congressional Budget Justification, https://www.sec.gov/about/reports/secfy14congbudgjust.pdf, at 14, with SEC FY 2019 Congressional Budget Justification, https://www.sec.gov/files/secfy19congbudgjust.pdf, at 15.

5 See M. Waddell, “SEC to Move Examiners From BDs to RIAs in 2016,” ThinkAdvisor (Feb. 19, 2016), https://www.thinkadvisor.com/2016/02/19/sec-to-move-examiners-from-bds-to-rias-in-2016-chi/.

6 See SEC FY 2019 Congressional Budget Justification, https://www.sec.gov/files/secfy19congbudgjust.pdf, at 27-28.

7 Speech, Private Equity: A Look Back and a Glimpse Ahead (May 13, 2015), www.sec.gov/news/speech/private-equity-look-back-and-glimpse-ahead.html.

8 National Exam Program Risk Alert, Overview of the Most Fre-quent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers (Apr. 12, 2018), www.sec.gov/ocie/announcement/ocie-risk-alert-advisory-fee-expense-compliance.pdf.

9 See I. Markham, “No complacency for compliance,” Priv. Eq-uity Int’l (May 10, 2018), www.privateequityinternational.com/no-complacency-compliance/.

10 National Exam Program Risk Alert, The Most Frequent Adver-tising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers (Sept. 14, 2017), www.sec.gov/ocie/Article/risk-alert-advertising.pdf.

11 National Exam Program Risk Alert, Observations from Cybersecurity Examinations (Aug. 7, 2017), www.sec.gov/files/observations-from-cybersecurity-examinations.pdf.

12 SEC Litigation Release, SEC Charges Investment Adviser for Allocating All Broken Deal Expenses to Private Equity Funds Without Disclosure (Sept. 21, 2017), www.sec.gov/litigation/admin/2017/ia-4772-s.pdf

13 In re TPG Capital Advisors, LLC, Admin. Proc. File No. 3-18317 (Dec. 21, 2017), https://www.sec.gov/litigation/admin/2017/ia-4830.pdf.

14 See SEC Press Release (June 29, 2015), www.sec.gov/news/pressrelease/2015-131.html; SEC Press Release (Oct. 7, 2015), www.sec.gov/news/pressrelease/2015-235.html.

15 SEC Press Release, SEC Charges a New York-Based Investment Adviser for Breach of Fiduciary Duty (Apr. 24, 2018), www.sec.gov/enforce/ia-4896-s.

16 SEC Press Release, Hedge Fund Firm Charged for Asset Mis-marking and Insider Trading (May 8, 2018), www.sec.gov/news/press-release/2018-81.

17 SEC Press Release, SEC Charges Hedge Fund Adviser with De-ceiving Investors by Inflating Fund Performance (May 9, 2018), www.sec.gov/news/press-release/2018-83.

18 Amanda Maine, “SEC officials outline priorities at annual compli-ance seminar,” SEC Today, Vol. 2018-73 (Apr. 16, 2018); Amanda Maine, “SEC compliance seminar features views on advisory fees, custody, and cryptocurrency,” SEC Today, Vol. 2018-74 (Apr. 17, 2018).

19 National Exam Program Risk Alert, The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Invest-ment Advisers (Feb. 7, 2017), www.sec.gov/ocie/Article/risk-alert-5-most-frequent-ia-compliance-topics.pdf.

This article is reprinted with permission from Practical Compliance and Risk Management for the Securities Industry, a professional journal published by Wolters Kluwer Financial Services, Inc. This article may not be further re-published without permission from Wolters Kluwer Financial Services, Inc. For more information on this journal or to order a subscription to Practical Compliance and Risk Management for the Securities Industry, go to pcrmj.com or call 866-220-0297

1 9 9 8Annual Report

United StatesSecurities and Exchange Commission

For sale by the U.S. Government Pnntinq OfficeSupenntendent of Documents, Mall Stop: SSOP,Washington, DC 20402-9328

ISBN 0-16-050008-7

The Honorable Albert Gore, Jr.Vice President of the United States

and President of the SenateWashington, D.C. 20510

Gentlemen:

The Honorable J. Dennis HastertSpeaker of the House of

RepresentativesWashington, D.C. 20515

I am pleased to send you the annual report of the Securities and ExchangeCommission (SEC or Commission) for fiscal year 1998. The activitiesand accomplishments identified in the annual report continue theCommission's long tradition of effective enforcement in and regulation ofour nation's capital markets. I have highlighted some of theCommission's achievements below.

Enhancing Investor Protections

The Commission remains vigilant in pursuing its law enforcementresponsibilities. This past year, in an undercover investigation in theover-the-counter market, the Commission filed enforcement actionsagainst 58 defendants. Of the 58 defendants, 14 are or have been thesubject of parallel criminal proceedings involving conduct related to thatalleged in our complaints.

The Commission sanctioned a broker-dealer and four individuals for morethan $5 million in fines for fraudulent sales practices. The Commissiondetermined that the broker-dealer's compensation, production, hiring, andtraining policies created an environment that enabled the firm's brokers toengage in abusive sales practices such as churning, unauthorized andunsuitable trading, and lying to customers. This action makes clear that

iii

brokerage firms must place the interests of their clients first, and mustavoid practices that put the firm and its brokers in conflict with theinterests of their clients.

We also kept up our focus of coordinating examinations with foreign,federal, and state regulators and self-regulatory organizations to enhancecooperation. During the year, Commission staff conducted examinationswith the Hong Kong, China Securities and Futures Commission; theUnited Kingdom's Financial Services Authority acting as the InvestmentManagement Regulatory Organization; the Australia Securities Authority;and the Bundesaufsichtsamt Fur Das Kreditwesen.

To motivate Americans to get the facts they need to save and investwisely, the Commission and a coalition of other government agencies,businesses, and consumer organizations launched a "Facts on Saving andInvesting Campaign". As part of this campaign, the Commission releaseda brochure entitled Get the Facts on Saving and Investing, which explainsthe basics of saving and investing, and conducted the first-ever nationaltown meeting on saving and investing.

Disclosure Developments

For the past several years, the Commission has been actively reevaluatingthe current securities registration system. In November 1998, wepublished proposals that would modernize the regulation of capitalformation and provide significant benefits to public investors, issuers ofsecurities, and securities professionals The proposals are based on therecognition that these benefits will be recognized only if the registrationsystem is flexible enough to adapt to changes in the capital markets oftoday and the future. The proposals also would update and simplify theregulations applicable to takeover transactions to address changes in dealstructure and advances in technology.

We also overhauled the prospectus disclosure requirements for mutualfunds in order to provide investors with clearer and more understandableinformation about funds. At the same time, we permitted a mutual fund

IV

to offer investors a new disclosure document, called the "Profile," thatsummarizes key information about the fund.

Technology

One of the most significant areas we have been focusing on is automationand the many technological challenges facing the industry. First amongthem is preparing for the year 2000. This past year, our ComplianceInspections and Examination staff conducted nationwide examinationsthat were dedicated to obtaining information on the year 2000 problem.We also announced a moratorium on the implementation of newCommission rules that would require major reprogramming of computersystems by securities industry participants. As we approach themillennium, the Commission will continue its year 2000 program, takingany actions we believe will help ensure that the securities industry isprepared for the year 2000.

In light of the important role of technology, and the increasingcompetition in today's securities markets, we adopted a new regulatoryframework for alternative trading systems. The new framework allowsalternative trading systems to choose to register as exchanges or toregister as broker-dealers and comply with additional requirementsspecifically designed to address their unique role in the market. It alsobetter integrates alternative trading systems into the regulatoryframework for markets, and is flexible enough to accommodate thebusiness objectives of, and the benefits provided by, alternative tradingsystems.

We awarded a three-year contract for the modernization of our ElectronicData Gathering, Analysis, and Retrieval (EDGAR) system. WhileEDGAR is one of the government's most successful large informationsystem initiatives, the dramatic changes in technology over the past fewyears necessitate its modernization. EDGAR modernization will improvesubstantially the presentation quality and structure of SEC filings. TheEDGAR architecture will be converted to an Internet-based system andwill support the attachment of graphical files. This modernization willgreatly benefit issuers, investors, SEC staff, and other data users.

v

International Listings

We continued our efforts to widen the range of choices available to U.S.investors by promoting the internationalization of our markets. In 1990,434 foreign companies were reporting in the U.S.; today, there are over1,100 foreign companies from 56 countries. We will continue to do allwe can to encourage more companies to list here to afford U. S. investorsthe protections of U.S. securities laws.

Accounting

An area of great concern to the Commission is inappropriate earningsmanagement. While this is not a new problem, it has risen in a marketunforgiving of companies that miss Wall Street's estimates. During theyear, our staff issued guidance on various issues relating to thepresentation of earnings per share

***The markets today are very different from the ones that existed just a fewyears ago. Over the last five years, the markets have experiencedphenomenal growth and technological advances that have made ourmarkets more accessible to more people. Change has always been thehallmark of our markets, and the SEC has succeeded by recognizing thatfact and responding to it. I have every confidence that the Commissionwill continue to perform its responsibilities with the professionalism anddedication that all of us have come to expect.

S7iAtArthur LevittChairman

VI

Commission Members and Principal Staff Officers

Biographies of Commission Members

Table of Contents

XI

XIV

41:1,1,1iJ,j

Arthur Levitt. Norman S. Johnson. Isaac C. Hunt, Jr. •Laura S. Unger. Paul R. Carey

Regional and District Offices

EnforcementKey 1998 Results

Significant Enforcement Actions

International AffairsKey 1998 Results

Regulatory Initiatives • International Organizations •Enforcement Cooperation. Technical Assistance

Investor Education and AssistanceKey 1998 Results

Investor Complaints and Inquiries • Investor Outreach

Regulation of the Securities MarketsKey 1998 Results

Securities Markets, Trading and Significant RegulatoryIssues. Broker-Dealer Issues. Oversight ofSelf-Regulatory Organizations

XIX

1

11

16

21

vii

Investment Management RegulationKey 1998 Results

Significant Investment Company Act Developments •Significant Investment Advisers Act Developments •Significant Public Utility Holding Company ActDevelopments

Compliance Inspections and ExaminationsKey 1998 Results

Investment Company and Investment Adviser Inspections •Broker-Dealer and Transfer Agent Examinations.Self-Regulatory Organization Inspections

Full Disclosure SystemKey 1998 Results

International Activities. Review of Filings •Recent Rulemaking, Interpretive, and Related Matters •Conferences

Accounting and Auditing MattersKey 1998 Results

Accounting-Related Rules and Interpretations. Oversightof Private Sector Standard Setting • InternationalAccounting and Auditing Standards

Other Litigation and Legal ActivitiesKey 1998 Results

Significant Litigation Developments • SignificantAdjudication Developments • Legal Policy •Significant Legislative Developments. CorporateReorganizations • Ethical Conduct Program

Vlll

38

52

58

69

77

Municipal Securities InitiativesKey 1998 Results

Municipal Securities Disclosure • Outreach •Technical Assistance

Economic Research and AnalysisKey 1998 Results

Economic Analysis and Technical Assistance

Program Management and Administrative SupportKey 1998 Results

Policy Management • Administrative Support

Endnotes

Appendix

95

97

102

107

116

Enforcement Cases Initiated by the Commission During Fiscal Year1998 in Various Program Areas • Fiscal 1998 Enforcement CasesListed by Program Area. Investigations of Possible Violations ofthe Acts Administered by the Commission • AdministrativeProceedings Instituted During Fiscal Year Ending September 30,1998 • Injunctive Actions • Right to Financial Privacy • Types ofProceedings. Self-Regulatory Organizations: Expenses, Pre-TaxIncome, and Balance Sheet Structure • Consolidated FinancialInformation of Self-Regulatory Organizations. Self-RegulatoryOrganizations-Clearing Corporations, 1997 Revenues andExpenses. Self-Regulatory Organizations-Depositories, 1997Revenues and Expenses • Certificate Immobilization • Section13(£)(1) Reports • Exemptions • Corporate Reorganizations •The Securities Industry: Revenues, Expenses, and SelectedBalance Sheet Items • Unconsolidated Financial Information for

ix

x

Broker-Dealers, 1993-1997 • Unconsolidated Annual Revenuesand Expenses for Broker-Dealers Doing a Public Business, 1993-1997 • Unconsolidated Balance Sheet for Broker-Dealers Doing aPublic Business Year-end, 1993-1997 • Carrying and ClearingFirms • Securities Industry Dollar in 1997 for Carrying/ClearingFirms • Unconsolidated Revenues and Expenses forCarrying/Clearing Broker-Dealers. Unconsolidated Balance Sheetfor Carrying/Clearing Broker-Dealers. Securities Traded onExchanges. Market Value of Equity/Options Sales on U.S.Exchanges. Volume of Equity/Options Sales on U.S. SecuritiesExchanges • Share Volume by Exchanges • Dollar Volume byExchanges • Securities Listed on Exchanges • Value of StocksListed on Exchanges. Appropriated Funds vs. Fees Collected.Budget Estimates and Appropriations • Securities and ExchangeCommission Organization Chart

Commission Members and Principal Staff Officers(As of November 5, 1998)

Commissioners

Arthur Levitt, ChairmanNorman S. Johnson, CommissionerIsaac C. Hunt, Jr., CommissionerLaura S. Unger, CommissionerPaul R. Carey, Commissioner

Principal Staff Officers

Jennifer Scardino, Chief of Staff

Term Expires

20031999200020012002

Brian J. Lane, Director, Division of Corporation FinanceVacant, Deputy DirectorMartin Dunn, Senior Associate DirectorWilliam E. Morley, Senior Associate DirectorRobert A. Bayless, Associate DirectorMauri OsherofT,Associate DirectorShelley E. Parratt, Associate DirectorDavid A. Sirignano, Associate DirectorVacant, Associate Director

Richard Walker, Director, Division of EnforcementVacant, Deputy DirectorWilliam Baker, Associate DirectorPaul V. Gerlach, Associate DirectorThomas C. Newkirk, Associate DirectorJoan E. McKown, Chief CounselChristian J. Mixter, Chief Litigation Counsel

xi

Stephen J. Crimmins, Deputy Chief Litigation CounselWalter Schuetze, Chief AccountantJames A. Clarkson, m, Director of Regional Office Operations

Vacant, Director, Division of Investment Management*Kenneth J. Berman, Associate DirectorBarry Miller, Associate DirectorRobert Plaze, Associate DirectorDouglas Sheidt, Associate Director

Richard Lindsey, Director, Division of Market RegulationRobert L.D. Colby, Deputy DirectorLarry E. Bergmann, Associate DirectorBelinda Blaine, Associate DirectorMichael A. Macchiaroli, Associate DirectorCatherine McGuire, Associate Director

Harvey Goldschmid, General Counsel, Office of General CounselPaul Gonson, Solicitor and Deputy General CounselDavid M. Becker, Deputy General CounselKaren Burgess, Associate General CounselAnne E. Chafer, Associate General CounselRichard M. Humes, Associate General CounselDiane Sanger, Associate General CounselJacob H. Stillman, Associate General Counsel

Lori A. Richards, Director, Office of Compliance Inspections andExaminations

Mary Ann Gadziala, Associate DirectorGene Gohlke, Associate DirectorC. Gladwyn Goins, Associate Director

*Paul Roye joined the Commission as Director of the Division ofInvestment Management on November 22, 1998.

'VII

Lynn E. Turner, Chief Accountant, Office of the Chief Accountant

Brenda Murray, Chief Administrative Law Judge, Office of theAdministrative Law Judges

Erik R. Sirri, Chief Economist, Office of Economic Analysis

Deborah Balducchi, Director, Office of Equal Employment Opportunity

James M. McConnell, Executive Director, Office of the ExecutiveDirector

Michael Bartell, Associate Executive DirectorWilson A. Butler, Jr., Associate Executive DirectorMargaret Carpenter, Associate Executive DirectorJayne Seidman, Associate Executive Director

Marisa Lago, Director, Office of International Affairs

Nancy M. Smith, Director, Office of Investor Education and Assistance

Susan Ochs, Director, Office of Legislative Affairs

Paul S. Maco, Director, Office of Municipal Securities

Christopher Ullman, Director, Office of Public Affairs, PolicyEvaluation and Research

Jonathan G. Katz, Secretary to the Commission

Xlll

Biographies of Commission Members

Chairman

Arthur Levitt is the 25th Chairman oftheUnited States Securities and ExchangeCommission. First appointed by PresidentClinton in July 1993, the President reappointedChairman Levitt to a second five-year term inMay 1998. His term expires on June 5, 2003.

As SEC Chairman, Arthur Levitt's top priorityis investor protection, which is reflected by thekey successes of his first term: reforming the debt markets; improvingbroker sales and pay practices; promoting the use of plain English ininvestment literature as well as in SEC communications with the public;preserving the independence of the private sector standard settingprocess, ensuring the independence of accountants; and encouragingforeign companies to list on U. S. markets.

Chairman Levitt created the Office of Investor Education and Assistanceand has held a series of investor town meetings to educate investors abouthow to safely and confidently participate in the securities markets. UnderChairman Levitt's leadership the Commission created a web site(www.sec.gov), which allows the public free and easy access to corporatefilings, and an 800 number that enables the public to report problems andrequest educational documents.

Chairman Levitt has also worked to sever ties between political campaigncontributions and the municipal underwriting business, as well asimproving the disclosure and transparency of the municipal bond market.Chairman Levitt has sought to raise the industry's sales practice standardsand eliminate the conflicts of interest in how brokers are compensated. In

XIV

partnership with the securities industry, Chairman Levitt developed the"Fund Profile" and other plain English guidelines for investment productsto make disclosure documents easier to understand while maintaining thevalue of the information provided to investors.

In his second term, Chairman Levitt will maintain his focus on investorprotection by: increasing cooperation with the criminal authorities tocombat securities fraud; fighting fraud in the micro cap stock market,working to ensure that the securities industry's computers are preparedfor the year 2000 (Y2K); maintaining quality accounting standards;harmonizing international accounting standards; and creating a regulatoryframework that embraces new technology.

Before joining the Commission, Mr. Levitt owned Roll Call, a newspaperthat covers Capitol Hill. From 1989 to 1993, he served as the Chairmanof the New York City Economic Development Corporation, and from1978 to 1989 he was the Chairman of the American Stock Exchange.Prior to joining the AMEX, Mr. Levitt worked for 16 years on WallStreet. He graduated Phi Beta Kappa from Williams College in 1952before serving two years in the Air Force.

Commissioner

Following his appointment by PresidentClinton, and his confirmation by the Senate,Norman S. Johnson was sworn in as a UnitedStates Commissioner on February 13, 1996 in aceremony presided over by the Chief FederalDistrict Judge in Salt Lake City, Utah.

Prior to his nomination, Commissioner Johnsonwas a senior partner in the firm Van Cott, Bagley, Cornwall & McCarthyand had a long and illustrious legal career focusing on federal and statesecurities law. Commissioner Johnson commenced his career in theprivate practice after serving as a staff member of the SEC from 1965through 1967. In addition, Commissioner Johnson served as an Assistant

xv

Attorney General in the Office of the Utah Attorney General from 1959to 1965 and also served as a law clerk to the Chief Justice of the UtahSupreme Court.

During his career, Commissioner Johnson served as President of the UtahState Bar Association, was chosen as a State Delegate, House ofDelegates, American Bar Association, and was named Chairman of TheGovernor's Advisory Board on Securities Matters, State of Utah. Inaddition, Commissioner Johnson served on the Governor's Task Force onOfficer and Director Liability, State of Utah and numerous othercommittees and groups concerned with the application of federal andstate securities laws

Commissioner Johnson has received numerous honors and awards inrecognition of the outstanding contributions he has made to the SecuritiesPractice in the Rocky Mountain area. He has authored several articlespublished in legal periodicals, one of which is much cited, "The Dynamicsof SEC Rule 2( e) A Crisis for the Bar."

Commissioner Johnson has involved himself in many community groups,including the Utah Supreme Court Committee on Gender and Justice.Married since 1956 to the former Carol Groshell, Commissioner Johnsonhas three grown daughters, Kelly, Catherine and Lisa, all whom reside inUtah.

Commissioner

Isaac C. Hunt, Jr. was nominated to theSecurities and Exchange Commission byPresident Bill Clinton in August 1995 andconfirmed by the Senate on January 26, 1996.He was sworn in as a Commissioner onFebruary 29, 1996

Prior to being nominated to the Commission,Mr. Hunt was Dean and Professor of Law at

xvi

the University of Akron School of Law, a position he held from 1987 to1995. He taught securities law for seven of the eight years he served asDean. Previously, he was Dean of the Antioch School of Law inWashington, D.C. where he also taught securities law. In addition, Mr.Hunt served during the Carter and Reagan administrations at theDepartment of the Army in the Office of the General Counsel as PrincipalDeputy General Counsel and as Acting General Counsel. As an associateat the law firm of Jones, Day, Reavis and Pogue, Mr. Hunt practiced inthe fields of corporate and securities law, government procurementlitigation, administrative law, and international trade. In addition, Mr.Hunt commenced his career at the SEC as a staff attorney from 1962 to1967.

Mr. Hunt was born on August 1, 1937 in Danville, Virginia. He earnedhis B.A from Fisk University in Nashville, Tennessee in 1957 and hisLL.B. from the University of Virginia School of Law in 1962.

Commissioner

Laura S. Unger was sworn in on November5, 1997 as a member of the Securities andExchange Commission, for a term expiringJune 2001. Before being appointed to theCommission, Ms. Unger served as Counsel tothe United States Senate Committee onBanking, Housing and Urban Affairs whereshe advised the Chairman, Senator AlfonseM. D' Amato (R-NY). As counsel, Ms. _Unger followed legislative issues relating to banking and securities.

Prior to working for the Senate Banking Committee, Ms. Unger was aCongressional Fellow for Banking and Securities matters in the office ofSenator D' Amato. Before coming to work on Capitol Hill, Ms. Ungerwas an attorney in the Enforcement Division of the Securities andExchange Commission in Washington, D.C.

xvii

Ms. Unger received a B.A. in Rhetoric from the University of Californiaat Berkeley and a J.D. from New York Law School.

Commissioner

Paul R. Carey was nominated to the Securitiesand Exchange Commission by President BillClinton and confirmed by the Senate onOctober 21, 1997 for a term which expiresJune 5,2002.

Prior to being nominated to the Commission,Mr. Carey served as Special Assistant to thePresident for Legislative Affairs at the White

House where he had been since February of 1993. Mr. Carey was theliaison to the United States Senate for the President, handling banking,financial services, housing, securities, and other related issues. Prior tojoining the Administration, Mr. Carey worked in the securities industryfocusing on equity investments for institutional clients.

Mr. Carey received his B.A. in Economics from Colgate University.

Mr. Carey was born in Brooklyn, New York on October 18, 1962.

xviii

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xix

Central Regional OfficeDaniel F. Shea, Regional Director1801 California Street, Suite 4800Denver, Colorado 80201-1648(303) 844-1000

Fort Worth District OfficeHarold F. Degenhardt, District Administrator801 Cherry Street, 19th FloorForth Worth, Texas 76102(817) 978-3821

Salt Lake District OfficeKenneth D. Israel, Jr., District Administrator50 South Main Street, Suite 500Salt Lake City, Utah 84144-0402(801) 524-5796

Midwest Regional OfficeMary Keefe, Regional DirectorCiticorp Center500 West Madison Street, Suite 1400Chicago, Illinois 60661-2511(312) 353-7390

Northeast Regional OfficeCarmen 1. Lawrence, Regional Director7 World Trade Center, Suite 1300New York, New York 10048(212) 748-8000

Boston District OfficeJuan M. Marcelino, District Administrator73 Tremont Street, 6th FloorBoston, Massachusetts 02108-3912(617) 424-5900

xx

Philadelphia District OfficeRonald C. Long, District AdministratorThe Curtis Center, Suite 1120 E.601 Walnut StreetPhiladelphia, Pennsylvania 19106-3322(215) 597-3100

Pacific Regional OfficeValerie Caproni, Regional Director5670 Wilshire Boulevard, 11th FloorLos Angeles, California 90036-3648(213) 965-3998

San Francisco District OfficeDavid B. Bayless, District Administrator44 Montgomery Street, Suite 1100San Francisco, California 94104(415) 705-2500

Southeast Regional OfficeRandall J. Fons, Regional Director1401 Brickell Avenue, Suite 200Miami, Florida 33131(305) 536-4700

Atlanta District OfficeRichard P. Wessel, District Administrator3475 Lenox Road, N.E., Suite 1000Atlanta, Georgia 30326-1232(404) 842-7600

XXI

Enforcement

The SEC's enforcement program seeks to protect investors and fosterconfidence by preserving the integrity and efficiency of the markets.

Key 1998 Results

In 1998, the SEC obtained judicial and administrative orders requiringsecurities law violators to disgorge illegal profits of approximately$426 million. Civil penalties authorized by the Enforcement Remediesand Penny Stock Reform Act of 1990, the Insider Trading SanctionsAct of 1984, and the Insider Trading and Securities Fraud EnforcementAct of 1988 totaled more than $51 million.

Enforcement Actions Initiated

1994 1995 1996 1997 1998Civil Injunctive Actions 196 171 180 189 214Administrative Proceedings 268 291 239 285 248Contempt Proceedings 23 23 32 14 15Reports of Investigation -..Q _1 -.2 _1 ---.Q

Total 487 486 453 489 477

In SEC-related cases, criminal authorities obtained 74 indictments orinformations and 61 convictions during 1998. The SEC granted access toits files to domestic and foreign prosecutorial authorities in 286 instances

Significant Enforcement Actions

Most of the SEC's enforcement actions were resolved by settlement withthe defendants or respondents, who generally consented to the entry ofjudicial or administrative orders without admitting or denying the factualallegations made against them. The following is a sampling of the year'ssignificant actions. .

Internet-Related Cases

• The Commission filed a complaint against Steven Samblis, a self-styledstock picker, and his corporation New Stock, Inc., for failing to disclosethat Samblis was paid for the companies he hyped in the magazine hepublished, "New Stock" (SEC v. Steven Samblis, et al. 1). The SECalleged that Samblis enthusiastically recommended the securities ofcertain publicly-traded companies without disclosing that he had beenpaid at least $20,000 to make these recommendations. The SEC alsoalleged that Samblis was paid to issue thousands of e-mails over theInternet regarding these same securities. In addition to a preliminaryinjunction, the SEC seeks a permanent injunction, disgorgement, and civilmoney penalties.

• The SEC filed a complaint against a radio talk show host, Jerome M.Wenger, who promoted the stock ofa company on his radio program,"The Next SuperStock," without disclosing that he was being paid by thecompany to do so (SEC v. Jerome M Wenge?). Wenger received$4,000 in cash and stock that he sold for approximately $71,000. TheSEC's complaint seeks a finaljudgment permanently enjoining Wengerand ordering him to disgorge his ill-gotten gains plus prejudgment interestand to pay civil penalties. Wenger was arrested and charged criminally bythe U.S. Attorney's Office with securities fraud.

2

Broker-Dealer Cases

• The SEC filed an action against Michael R. Milken and MC Group, afirm owned and controlled by Milken (SEC v. Michael R. Milken andMC Group']. Me Group, through Milken and others, acted as abroker in connection with two transactions in which it introducedcompanies; proposed business arrangements involving the purchase,sale, or exchange of securities; and participated in negotiationsregarding the structure of the transactions and securities to be issued.As a result of these activities, MC Group received $42 million in

transaction-based compensation. The SEC alleged that Milkenviolated the 1991 SEC order barring him from associating with abroker, and that MC Group failed to register as a broker, conduct forwhich Milken was responsible. Milken and MC Group consented tothe entry of injunctions and to orders requiring them to paydisgorgement of $42 million plus prejudgment interest of $5 million.

• The SEC charged a broker-dealer, Olde Discount Corp., with creatingan environment which encouraged its registered representatives toengage in churning, unauthorized trading, misrepresentations andomission of material facts, and unsuitable recommendations (In theMatter of Olde Discount Corp., et al.4). In an order issued byconsent, the Commission made findings against the firm and three ofits senior executives. The Commission held Olde Discount directlyliable for fraudulent sales practices flowing from the firm'scompensation, production, hiring, and training practices. TheCommission also found that the firm's founder, Ernest aide, failed tosupervise and caused the violations and that two former salesexecutives willfully induced and caused those violations and failed tosupervise. The Commission imposed remedial relief, censures, cease-and-desist orders, and a total of $5 .15 million in penalties against thefirm and four individuals.

3

Microcap Cases

• The SEC filed 5 federal civil enforcement actions against 58defendants resulting from an undercover investigation into illegalmanipulation of the over-the-counter markets for "penny stock" or"micro cap" securities (SEC v. Szur, et aI.5). Of the 58 defendants 14are, or have been, the subject of parallel criminal proceedingsinvolving conduct related to that alleged in the SEC's complaints.The fraudulent schemes alleged in the 5 actions filed include:payments of undisclosed bribes totaling approximately $3.3 million tobrokers who, in tum, induced their customers to purchase micro capsecurities; manipulation of the prices set by market makers forpurchase and sale of those microcap stocks; and materialmisrepresentations about the issuers of micro cap securities. The SECis seeking permanent injunctions, court orders prohibiting thedefendants from future participation in offerings of penny stocks, anddisgorgement and prejudgment interest. These cases were pending atthe end of the fiscal year.

• The SEC filed an emergency lawsuit in federal district court to haltthe unregistered and fraudulent sale and manipulation of the stock ofElectro-Optical Systems Corporation (EOSC ) by Thomas Cavanaghand other defendants (SEC v. Thomas Edward Cavanagh, et ai.6).The court ordered the defendants to immediately cease theirfraudulent activity and froze their assets pending further litigation.The SEC also temporarily suspended trading in the securities ofEOSC for a ten-day period because of questions regarding theaccuracy of statements and material omissions concerning thecompany. The complaint alleged, among other things, that defendantswere conducting a fraudulent scheme to create a controlled marketfor the stock ofEOSC in order to artificially inflate the price of thestock which they sold to unsuspecting investors, including numeroussmall investors purchasing over the Internet. The complaint allegedthat defendants and relief defendants had made at least $5 million onsales ofEOSC stock, and the fraud was continuing. As a result ofdefendants' actions, the complaint alleged, the price ofEOSC stockrose more than 1000% in one day and was maintained by defendants

4

at that level for several months through control of the supply of thestock and issuance of false and misleading information about thecompany and its potential product. The court entered a temporaryrestraining order prohibiting violations of the securities laws.

Investment Adviser and Investment Company Cases

• The SEC instituted administrative and cease-and-desist proceedingsagainst Monetta Financial Services, Inc. (Monetta), a registeredinvestment adviser; Robert Bacarella, Monetta's president; and WilliamValiant, Paul Henry, and Richard Russo--each of whom is a director ofone of two mutual funds advised by Monetta (In the Matter of MonettaFinancial Services, Inc., et al. \ The SEC alleged that Monettareceived profitable short-term trading opportunities in certain "hot" initialpublic offerings (IPOs) from broker-dealers underwriting those offeringsto whom Monetta had directed brokerage business generated by thefunds. At Bacarella's direction, Monetta directed the hot IPOs to thepersonal accounts of Valiant, Henry, and Russo who accepted themwithout disclosing the practice to the funds' shareholders and obtainingthe consent of disinterested representatives of the Funds. Valiant, Henry,and Russo then "flipped" or sold the hot IPO shares for profits totalingmore than $51,000. This is a process called "spinning." The SEC furtheralleged that Monetta's allocation of the shares resulted in conflicts ofinterest because the receipt of the shares by Valiant, Henry, and Russoplaced them in a position where their judgment and exercise of theirresponsibilities to the funds in general could be influenced byconsiderations of personal gain dispensed by Monetta. Monetta's IPOallocations constituted material information that was relevant to theoperation of the funds because of these serious conflicts of interest. TheSEC is seeking disgorgement and civil penalties. The case was pendingat the end of the fiscal year.

• The SEC filed an injunctive action against Sweeney Capital Management,Inc. (SCM), a registered investment adviser; Timothy Sweeney, itsowner; and Susan Gorski, a portfolio manager, for misappropriating morethan $109,000 in client-owned soft dollar credits and for failing todisclose SCM's use of soft dollar credits for a variety of defendants'

5

business and personal expenses (SEC v. Sweeney Capital ManagementInc., et al.8). The complaint alleged that during the fiscal year endedDecember 31, 1994, SCM paid approximately 70% of its operatingexpenses with soft dollars misappropriated from its advisory clients and ahedge fund whose assets SCM managed. The defendants engaged inother fraudulent soft dollar practices, including submitting false invoicesto soft dollar brokers for non-existent consulting work to pay forGorski's salary, SCM's rent, and personal loans to Sweeney andsubmitting multiple invoices for the same goods and services. The SECalso alleged that defendants filed false forms with the SEC, distributedmisleading marketing materials to the public, made false claims toinvestors about the competitiveness of SCM's advisory fees, misusedclient assets in its custody, and misappropriated an elderly client's funds.The SEC is seeking permanent injunctions, disgorgement, and civilpenalties. This case was pending at the end of the fiscal year.

Offering Violations

• The SEC obtained a temporary restraining order in its action againstInternational Heritage Incorporated (Heritage Incorporated),International Heritage, Inc. (IHI), and other individuals associatedwith these two entities for a fraudulent pyramid scheme (SEC v.International Heritage, Inc., et al.9). The SEC alleged that IHI raisedmore than $150 million from over 155,000 investors through apyramid scheme. In addition to selling interests in the pyramidscheme, the defendants sold $5 million in notes convertible into sharesof IHI common stock. The defendants knowingly misrepresentedIHI's financial condition to investors and concealed the fact that IHIwas operating a pyramid scheme. The Court also appointed areceiver for IHI. This matter was pending at the end of the fiscalyear

• The court in SEC v. American Automation, Inc., et al. 10 entered apreliminary injunction against American Automation, Inc., Kendyll R.Horton, Hazel A. Horton, and Merle B. Gross. In addition, the courtordered the continuation of an asset freeze, previously granted inconnection with a temporary restraining order against all defendants,

6

including five relief defendants. The court also appointed a receiverto take possession of the assets of American Automation. The SEC'scomplaint alleged that the defendants raised over $4.5 million throughthe fraudulent offer and sale of American Automation stock to over1,400 investors in several states. The complaint also alleged that thedefendants told investors that American Automation would developand place automated insurance vending machines in high traffic areasand that projected profits would be almost $100 million by the end ofits third year of operation; however, no automated vending machineshave been sold and American Automation's only source of revenuehas come from investors' funds. Additionally, the defendantsallegedly used investor funds to pay for their personal expenses andfor business expenses unrelated to American Automation'soperations. This matter was pending at the end of the fiscal year.

Financial Disclosure Cases

• The SEC instituted administrative proceedings in which it alleged thatKPMG Peat Marwick LLP engaged in improper professional conductand issued an unqualified report on the 1995 year-end financialstatements of a client from which it lacked independence (In TheMatter of KPMG Peat Marwick LLp11

). Peat Marwick organized andcapitalized KPMG BayMark, a firm owned by Edward R. Olson andthree others, as a vehicle for new lines of business, including the"corporate turnaround" business. As part of a turnaroundengagement, KPMG BayMark installed Olson as president and chiefoperating officer of Porta Systems Corp., a financially troubled auditclient of Peat Marwick's Long Island office. When Peat Marwickaudited Porta's 1995 year-end financial statements and prepared itsaudit report, its financial and business relationships with Porta andKPMG BayMark impaired Peat Marwick's independence. This casewas pending at the end of the fiscal year.

• The Commission issued a settled cease-and-desist order against SonyCorporation and Sumio Sano (In the Matter of Sony Corp. and SumioSano12

) and filed a related settled complaint against Sony in the U.S.District Court for the District of Columbia for violations of the federal

7

securities laws based on Sony's inadequate disclosures concerning theperformance of its subsidiary, Sony Pictures (SEC v. Sony Corp. 13).Without admitting or denying the matters set forth therein, Sonyconsented to the issuing of a cease-and-desist order in which theCommission found, among other things, that Sony, a Japanesecorporation whose securities trade on the New York Stock Exchangein the form of American Depositary Receipts, violated the periodicreporting provisions applicable to foreign private issuers. Specifically,the Commission found that during the four months preceding Sony'sNovember 1994 writedown of approximately $2.7 billion of goodwillassociated with the acquisition of its Sony Pictures subsidiary, Sonymade inadequate disclosures about the nature and extent of SonyPictures' net losses and their impact on the consolidated results Sonywas reporting. The Commission also noted that during the relevantperiod, Sony did not report the results of Sony Pictures as a separateindustry segment, but instead reported the combined results of SonyPictures and Sony's profitable music business as a single"entertainment" segment, which had the effect of obscuring the lossessustained by Sony Pictures. The Commission ordered Sony to ceaseand desist from committing or causing violations of the periodicreporting provisions of the Exchange Act and to comply with variousundertakings. Without admitting or denying the allegations in theCommission's complaint, Sony consented to the entry ofa finaljudgment imposing a $1 million civil penalty.

Insider Trading Cases

• The SEC obtained a temporary restraining order against unknownpurchasers who traded just before the September 2, 1998announcement that DST Systems, Inc. intended to acquire USCSInternational, Inc. (SEC v. One or More Unknown Purchasers of CallOptions and Common Stock of USCS International, Inc. 14). The SECalleged that the unknown persons purchased 200 out-of-the-moneyUSCS call options and 61,800 shares ofUSCS common stock formore than $1.6 million through an account in Zurich, Switzerland.The buyers sold the option contracts on September 3, obtainingprofits of nearly $70,000, and transferred the proceeds to

8

Switzerland. The SEC also alleged that on September 3 the unknownpersons sold all 61,800 shares ofUSCS common stock for profits ofas much as $500,000. This action was pending at the end of the fiscalyear.

Municipal Securities Cases

As part of the SEC's initiative to address unfair practices in the municipalsecurities industry, the SEC recently brought two "yield-burning" cases

• One was filed against Rauscher Pierce Refsnes, Inc. and its formerSenior Vice President, James R. Feltham, in connection with theissuance of$129 million of Series 1992B Refunding Certificates ofParticipation by their financial advisory client, the State of ArizonaDepartment of Administration (DOA) (SEC v. Rauscher PierceRefsnes, Inc. and James R. Fe1tham15

). The SEC alleged thatRauscher and Feltham sold certain United States Treasury securities(escrow securities) to DOA at above-market prices, which reducedthe yields on those securities. According to the SEC's complaint, thatpractice allowed Rauscher to make illegal, undisclosed profits of$707,037 at the expense of the federal government, while purportingto comply with the federal tax laws governing the certificates offeringThe complaint also alleged, among other things, that Rauscher and

Feltham charged DOA a fraudulent and excessive undisclosed markupon the escrow securities and that Rauscher's profit was unreasonablein light of the circumstances surrounding the sale. The matter waspending at the end of the fiscal year.

• The second case alleged that Meridian Capital Markets, Inc., a formermunicipal securities dealer, and two of its registered representatives,Steven T. Snyder and Martin 1. Stallone, charged school districts andother governmental authorities in Pennsylvania and West Virginiaexcessive prices on Treasury securities sold in connection with 22advance refundings and 2 other types of tax-exempt refinancings (Inthe Matter afMeridian Securities, Inc., et a1.16

). In conjunction withthe Internal Revenue Service and the Department of Justice, the SECentered into a $3.8 million settlement with all parties except Snyder.

9

10

The settlement preserved the tax-exempt status of the bonds issued,thereby protecting investors. The case against Snyder was pending atthe end of the fiscal year.

International Affairs

The SEC operates in a global marketplace. Our international affairsstaffpromotes international cooperation among regulators andencourages the adoption of high regulatory standards by negotiatinginformation-sharing arrangements for enforcement and regulatorymatters, conducting technical assistance programs, and furthering theSEC's interests In international organizations

Key 1998 Results

The SEC develops global regulatory initiatives to better protect U Sinvestors. This year, the Asian financial crisis highlighted the importanceof high regulatory standards and the need for disclosure and transparency.We devoted substantial resources to respond to the Asia crisis, in additionto implementing international enforcement and technical assistanceprograms.

Regulatory Initiatives

In 1998, the importance of cross-border and cross-sector regulatorycooperation in promoting financial stability was noted by the Group ofSeven (G-7) countries (Canada, France, Germany, Italy, Japan, the UK,and the U. S) The SEC worked closely with the U S TreasuryDepartment on initiatives of the G-7 and the Group of Twenty- TwoFinance Ministers and Central Bank Governors (G-22).

11

Work on Financial Stability

G-7 Summit

Our staff helped shape the G-7 Finance Ministers Summit Report, whichcalled for improved international cooperation among regulators and lawenforcement authorities, and compliance with Ten Key Principles ofInformation Sharing.

G-22

In response to the Asian financial crisis, the G-22 issued reports ontransparency and accountability, and strengthening the internationalfinancial architecture. We played an active role in the development ofthese reports.

Core Principles of Securities Regulation

In 1998, the International Organization of Securities Commissions(IOSCO) adopted the "Objectives and Principles of SecuritiesRegulation" (the Core Principles), which represent consensus on soundpractices for regulating securities markets. Our staff worked withinIOSCO to develop the Core Principles. The principles will guidesecurities regulators and assist international organizations in assessingsecurities regulation in emerging markets.

International Disclosure Standards

In 1998, IOSCO adopted non-financial statement disclosure standardsthat will allow issuers to prepare a single disclosure document for capitalraising and listing in multiple jurisdictions.

International Accounting Standards

The SEC chairs IOSCO's working party on multinational disclosure andaccounting. In early 1999, the International Accounting StandardsCommittee expects to finalize a core set of standards. The SEC and other

12

IOSCO members will then consider whether to allow foreign issuers touse these standards for cross-border securities offerings.

Responses to Changes in Technology

Our staff contributed to IOSCO's development ofa complementaryinternational regulatory approach to the Internet, including the issuance ofa 1998 report entitled "Securities Activity on the Internet."

Year 2000 Prepardness

Through its work with IOSCO and other international organizations, theSEC is promoting Y2K preparedness internationally, including testing andcontingency planning.

International Organizations

The SEC promotes its views on the U.S. securities markets and developsinternational consensus on regulatory and market oversight issues invarious international forums.

International Organization of Securities Commissions

IOSCO is the predominant international forum for collaboration in thesecurities regulatory community. Its membership includes 90 countries,covering most of the world's securities regulators.

Council of Securities Regulators of the Americas (COSRA)

COSRA is a regional organization whose membership includes the SECas well as securities regulators from 25 nations in North, Central andSouth America, and the Caribbean. In 1998, COSRA's key initiativesincluded (1) launching an innovative, hemisphere-wide "Facts on Savingand Investing Campaign," including town meetings, radio and televisionshows, and seminars, and (2) producing a report on collective investment

13

schemes that provides information about the mechanisms used to overseea variety of investment vehicles.

Organization for Economic Cooperation and Development (DECD)

Our staff's expertise on disclosure resulted in the inclusion of strictaccounting and auditing guidelines for companies in the DECD's treatycriminalizing foreign bribery. The treaty will go into effect in early 1999.

Enforcement Cooperation

The SEC needs assistance from foreign authorities to protect U.S.investors from cross-border fraud. We have entered into over 30 formalinformation-sharing arrangements with foreign counterparts.

eration Results27515% increase from 1997

41213% increase from 1997

1998 Enforcement CooRequests to Foreign Authorities forEnforcement AssistanceRequests for Enforcement Assistance fromForei n Authorities

The following cases illustrate the effectiveness and importance of theSEC's international enforcement program.

• SEC v. Euro Security Fund, et al. In this insider trading matter, theSEC identified substantial purchases in the United States, throughEuropean banks, of Elsag Bailey's options and equities immediatelyprior to an announcement of a tender offer for Elsag Bailey by aSwiss-Swedish company The SEC simultaneously obtained a U.S.court order freezing $6.6 million in potential profits and requestedinformation about the identity of traders from European securitiesauthorities With this assistance, the SEC identified one of the foreigntraders as a company insider and obtained information to support apreliminary injunction

14

• SEC v. Cavanaugh, et at In this micro cap fraud case, severalSpanish entities controlled accounts involved in a manipulative tradingscheme. The SEC's counterpart in Spain was instrumental in helpingthe SEC locate $5 million in proceeds at a bank in Spain The moneywas then frozen to permit its return to defrauded U.S. investors.

Technical Assistance

The SEC's technical assistance program helps emerging securitiesmarkets develop regulatory structures that promote investor confidenceThe program is multifaceted and includes training, reviewing foreignsecurities laws, and responding to detailed requests

1998 Technical Assistance ResultsRequests for Technical Assistance 216from Foreign Authorities (35% increase from 1997)U.S. Training Provided 374 Officials from 94 CountriesOverseas Training Provided Over 200 Officials

The cornerstone of the SEC's technical assistance program is theInternational Institute for Securities Market Development, a two-week,management-level training program covering the development andoversight of securities markets. In addition, the SEC conducts a week-long International Institute for Securities Enforcement and MarketOversight.

Our staff participated in a range of training initiatives in conjunction withthe China Securities Regulatory Commission, including a program onaccessing the U.S. capital markets, and commented on Chinese draftsecurities legislation.

15

Investor Education and Assistance

Our Investor Education and Assistance staff serves investors whocomplain to the SEC about investment fraud or the mishandling of theirinvestments by securities professionals. The staff responds to a broadrange of investor inquiries, produces and distributes educationalmaterials, and organizes town meetings and seminars.

Key 1998 Results

During the year, the investor assistance specialists analyzed andresponded to 51,3 11 complaints and inquiries from the public. Ouractions helped investors recover approximately $1.2 million. Welaunched the Facts on Saving and Investing Campaign, an unprecedentedcampaign to help Americans become financially fit. As part of thecampaign, we conducted the first-ever National Town Meeting on Savingand Investing.

The SEC participated in 6 investors' town meetings and organized 32educational seminars on investing wisely. In addition, we released threenew publications, A Plain English Handbook: How to Create Clear SECDisclosure Documents, Get the Facts on Saving and Investing, andInvestment Clubs. We also compiled the Financial Facts Tool Kit, acollection of educational brochures from the campaign's partners.

Investor Complaints and Inquiries

Rising Volume of Investor Requests for Assistance

In 1998, our investor assistance specialists analyzed and responded to51,311 complaints and inquiries, an increase of more than 7% over 1997.The volume of investor contacts agencywide has increased more than

16

45% since 1993. About 30% of the investor complaints and inquiries arereceived through our Investor Education and Assistance electronicmailbox (help@sec.gov).

SEC Complaint & InquiryTotals by Fiscal Year

+6% ~51311

+10%+7% 70/ 48169

~453+ 12%

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o Complaints 0 lnquiries II Other Contacts" • Totals

% = percentage increase/decrease over previous year

"other contacts Includes repeat contacts, contacts WIth InsuffICient Informatron to process,and contacts not within our Jurisdiction.

Complaint Trends

The most common investor inquiries we received in 1998 involved (1)questions about the laws governing the securities industry, (2) questionsconcerning the filing status of companies, and (3) requests for SECpublications.

17

The most common complaints received were

• misrepresentation in selling a product,• unauthorized transactions;• delays in transfers of accounts or transfer problems,• failure to follow an investor's instructions;• about the way a corporation conducts its ordinary business;• failure to process or delays in handling orders;• failure to distribute money to investors;• problems concerning 401K plans or pension plans;• failure to send stock certificates to investors, and• harassing cold calls from broker-dealers.

Referrals

When a complaint contains allegations of serious misconduct or suggestsa pattern of widespread abuses, the investor assistance staff refers thecomplaint to the Division of Enforcement or the Office of ComplianceInspections and Examinations. In 1998, investor assistance specialistsreferred over 1,700 complaints to SEC divisions and offices or to otherregulatory agencies

Investor Outreach

Because a well educated investor provides one of the most importantdefenses against securities fraud, we have a number of programs toeducate investors

The Facts on Saving and Investing Campaign.

The Facts on Saving and Investing Campaign is an ongoing educationaleffort to motivate individuals throughout the Western Hemisphere to getthe facts about saving and investing. During the kick-off week of March29 to April 4, 1998, 21 countries throughout the Americas participated inthe campaign. In the United States, campaign partners-Including federal

18

agencies, 46 states, consumer organizations, and financial industryassociations--held educational events and distributed information. Keycampaign events during the year included:

• National Town Meeting on Saving and Investing. The National TownMeeting was held in Washington, D.C. and transmitted by satellite to34 cities throughout the United States. The audio portion wassimulcast over the Internet through the Alliance for InvestorEducation's Web site.

• Widespread Distribution of the "Ballpark Estimate." The "BallparkEstimate" is a single-page worksheet created to help individualscalculate how much they will need to save each year for retirement.

Investors' Town Meetings and Seminars

We participated in town meetings in Bangor, Maine, Des Moines, Iowa;Los Angeles, California; Minneapolis, Minnesota; Palo Alto, California;and Washington, D.C. In coordination with the securities industry, weheld 32 educational seminars as part of the town meeting program.

New Publications

Our investor assistance staff has prepared and distributes over a dozenbrochures that explain in plain English how the securities industry works,how to invest wisely, and what to do if something goes wrong. This yearwe published:

• Get the Facts on Saving and Investing-an introduction to the basicsof saving and investing.

• A Plain English Handbook: How to Create Clear SEC DisclosureDocuments-a guide for writing in plain English.

19

• Financial Facts ToolKit-a collection of educational brochures fromcampaign partners to help individuals save and invest wisely.In August 1998, we unveiled an on-line version of the tool kit atwww.sec.gov/consumer/toolkit.htm. Within two weeks of itsrelease, the on-line toolkit received more than 16,000 hits.

• Investment Clubs-a new brochure on investment clubs, which havebeen popular with individual investors.

Toll-Free Information Service

Our toll-free information service (800-SEC-0330) provides investorprotection information and allows investors to order educationalmaterials. During the year, we received over 65,000 calls to this service.

Internet Site

Investors who access the SEC's Web site can read and download theagency's educational publications and see our latest investor alerts.During 1998, the investor assistance and complaints section was viewedby over 250,000 users from around the world.

20

J!

jt

Regulation of Securities Markets

The Division of Market Regulation oversees the operations of thenation's securities markets and market participants. In 1998, the SECsupervised approximately 8,300 registered broker-dealers with over70,000 branch offices and over 591,000 registered representatives. Inaddition, the SEC oversaw 8 active registered securities exchanges, theNational Association of Securities Dealers and the over-the-countersecurities market, 16 registered clearing agencies, 1,210 transfer agents,the Municipal Securities Rulemaking Board, and the Securities InvestorProtection Corporation.

Broker-dealers filing FOCUS reports with the Commission hadapproximately $2.4 trillion in total assets and $145 billion in totalcapital for fiscal year 1998. Average daily trading volume reach 666million shares on the New York Stock Exchange and 786 million shareson the Nasdaq Stock Market in calendar year 1998.

Key 1998 Results

The Commission proposed and adopted important rules to revise theregulation of exchanges and give alternative trading systems the option ofregistering as an exchange or a broker-dealer subject to enhancedregulation relating to transparency, fair access, and systems capacity.These rules are part of our efforts to ensure that the SEC's regulatoryframework responds to change in the U.S. securities markets due totechnological advances.

We adopted an alternative regulatory structure for over-the-counter(GTC) derivatives dealers. These dealers, which must be affiliated withfully regulated securities firms, will operate subject to exemptions thatpermit them to compete more effectively in the global market place.

21

We also approved the rule filing implementing the merger of theAmerican Stock Exchange (AMEX) and the National Association ofSecurities Dealers, Inc (NASD) on October 30, 1998.

Our staff conducted an extensive review of the debt securities markets inthe United States, with particular emphasis on price transparency. As aresult of the staff's efforts, the NASD has agreed to pursue measures thatshould improve price transparency in the corporate bond market.

The Commission continues to monitor industry progress in preparing forthe year 2000. The Commission adopted rules requiring certain broker-dealers and non-bank transfer agents to report on the status of their year2000 preparations, including a report prepared by an independent publicaccountant regarding their processes for preparing for year 2000.

Securities Markets, Trading, and Significant Regulatory Issues

Corporate Debt Transparency

During 1998, the staff reviewed the debt securities market in the UnitedStates, with particular emphasis on price transparency. This review foundthat, as a whole, the market for government securities is characterized byreasonably good quality pricing information for investors. It also foundthat GovPX, a private information vendor formed by a consortium ofinterdealer brokers and primary dealers in the U.S. Treasury market,currently distributes quotation and transaction information provided byfive ofthe six interdealer brokers in Treasury bills, bonds, and notes. I?

The staff found improvement in price transparency in the municipalsecurities market, but determined that price transparency is deficient inthe corporate bond market. Accordingly, Chairman Levitt announced onSeptember 9, 1998 that the Commission had requested that the NASD acton certain recommendations of the staff to improve price transparency inthe corporate bond market. 18

22

1,e,

The NASD specifically agreed to:

• adopt rules requiring dealers to report transactions in U S. corporatebonds and preferred stocks to the NASD and to develop systems toreceive and redistribute transaction prices,

• create a database of transactions in corporate bonds and preferredstocks, and

• create a surveillance program to better detect fraud in these markets

Alternative Trading Systems

In April 1998, the Commission published two releases to address changesin the securities markets due to technological developments. First, weproposed a new regulatory framework for alternative trading systems,which was adopted--Iargely as proposed--in December 1998. The newframework allows alternative trading systems to choose to register asexchanges or broker-dealers and comply with additional requirementsspecifically designed to address their unique role in the market. Most ofthe rule amendments and new rules composing this framework becomeeffective on April 21, 1999, with the remainder becoming effective onAugust 30, 1999.

Second, we proposed allowing registered exchanges to be for-profit andproposed certain deregulatory measures to provide registered exchanges,and other markets operated by self-regulatory organizations (SROs),opportunities to better compete. These measures were adopted inDecember 1998. Specifically, we adopted a streamlined procedure toallow SROs to quickly begin trading new derivative securities products.In addition, SROs may operate pilot trading systems for up to two yearswithout filing for approval of the system by the Commission During thistrial two-year period, the pilot trading system is subject to strict volumelimitations. Finally, we made clear that we will work to accommodate,within the existing requirements for exchange registration, exchangeswishing to operate under a proprietary structure.

23

Automation Initiatives

Rule 17a-23 under the Exchange Act establishes recordkeeping andreporting requirements for registered broker-dealers that operate broker-dealer trading systems. In 1998, our staff reviewed 34 initial operationreports, 25 notices of proposed material change, 155 quarterly activityreports, and 7 reports of cessation of operations.

Order Handling Rules

The staff issued several no-action letters to electronic communicationsnetworks (ECNs) regarding their compliance with the provisions in theorder handling rules applicable to the ECN Display Alternative. In 1998,letters were issued for the Instinet Real-Time Trading Service, the IslandSystem, the Bloomberg Tradebook System, the TONTO System, theRouting and Execution DOT Interface Electronic CommunicationsNetwork, the ATTAIN System, BRUT, the Strike System, and the PIMGlobal Equities Trading System. 19

Matching Services

The Commission issued an interpretive release concluding that entitiesthat provide trade matching services for transactions in institutionalsecurities are clearing agencies and must be registered with the SEC. Therelease requested comment on ways to encourage entities to providematching services through modified regulation as clearing agencies orconditional exemption from registration. 20

Merger of Depository Trust Company and Participants Trust Company

The Commission approved proposals relating to a merger between TheDepository Trust Company (DTC) and Participants Trust Company(PTC)?1 In addition, we approved a proposed rule change filed by DTCthat incorporated the rules and procedures of PTC, with certainmodifications, into DTC's rules and procedures and increased the size ofDTC's Board of Directors. 22

24

IIReduction of Clearing Services

The Commission approved a series of proposals relating to thePhiladelphia Stock Exchange's (PID..X) withdrawal from the securitiesdepository business that was offered through its wholly-owned subsidiary,Philadelphia Depository Trust Company (Philadep) and to itsrestructuring and limiting its clearance and settlement business offeredthough its wholly-owned subsidiary, Stock Clearing Corporation ofPhiladelphia (SCCP).23

Trading Reconstruction

Trading Analysis a/October 27 and 28, 1997

On September 14, 1998, the staff issued a report entitled TradingAnalysis a/October 27 and 28, 1997. The report analyzes the impact ofthe cross-market trading halt circuit breaker procedures that weretriggered for the first time on October 27, 1997 when the Dow JonesIndustrial Average declined 554 points (7%). The report's findings werereflected in the SRO revisions of circuit breaker procedures that becameeffective on April 15, 1998?4

Staff Legal Bulletin-Circuit Breakers

The staff's trading analysis of October 27 and 28, 1997 also resulted inthe publication of a staff legal bulletin on September 9, 1998.25 Thebulletin provides guidance to broker-dealers on handling customer ordersand notifying customers when marketwide circuit breakers halt trading. Italso reminds broker-dealers about their responsibility to maintainadequate internal systems capacity.

The Year 2000

The Commission continues to monitor industry progress in preparing forthe year 2000 and work with the SROs and industry groups on a range ofyear 2000 issues, including testing and contingency planning. Thepurpose of these coordinated actions is to promote remediation of

25

industry systems, so that the consequences of any year 2000-relatedfailures can be minimized

Surveys of SROs

Since 1996, our staff has conducted five surveys of the exchanges,clearing agencies, and NASD regarding their year 2000 efforts. As partof these surveys, they ask the SROs to report the progress made inmoving their mission critical systems through the various phases towardsachieving year 2000 compliance. They also request that the SROs reporton any problems meeting time schedules and their contingency planningefforts.

Moratorium on Rules

As part of its efforts to support market participants' efforts to remediateand test systems that are critical to the operation of the nation's capitalmarkets, the Commission announced a moratorium on the implementationof new Commission rules that require major reprogramming of computersystems by SEC-regulated entities between June 1, 1999 and March 31,2000.26 This moratorium further facilitates participants' efforts toallocate significant time and resources to addressing potential problemscaused by the year 2000 problem.

Broker-Dealer and Transfer Agents Reporting Requirements

In July 1998, we amended rule 17a-5 under the Exchange Act to requirecertain broker-dealers to file new Form BD- Y2K with the Commissionand with their designated examining authority. We also adopted new rule17Ad-18 under the Exchange Act to require non-bank transfer agents tofile new Form TA-Y2K with the Commission.V The first forms werefiled on August 31, 1998, reflecting broker-dealer and transfer agents'year 2000 efforts as of July 15, 1998. The second and final forms arerequired to be filed no later than April 30, 1999, reflecting the broker-dealers' and the transfer agents' efforts to prepare for the year 2000 as ofMarch 15, 1999. In addition, in October 1998, we amended rule 17a-5and rule 17Ad-18 to require certain broker-dealers and certain non-bank

26

transfer agents to file with their second Y2K form a report prepared by anindependent public accountant regarding their processes for preparing forthe year 2000.28 By the end of 1998, over 6,700 reports had beenreceived.

AMEX/NASD Merger

On April 8, 1998, the AMEX and the NASD Boards unanimouslyapproved the terms of a Transaction Agreement that would result inAMEX becoming a subsidiary of the NASD At a Special Meeting ofMembers on June 25, 1998, the AMEX Membership ratified theTransaction Agreement. Our staff discussed the proposed mergerextensively with the NASD and AMEX and reviewed the TransactionAgreement and the overall terms of the merger The NASD submittedtwo rule filings and AMEX submitted one rule filing relating to themerger, which the Commission published for notice and comment andapproved on October 30, 1998.29

International Securities Exchange

On November 10, 1998, the International Securities Exchange (ISE)announced its intention to register with the SEC as a for-profit allelectronic options exchange." Our staff held extensive discussions withthe ISE regarding its structure during the preceding months. To fund theformation of this new exchange, memberships have been sold to aconsortium of broker-dealers.

Intermarket Trading Systems

The Commission published on July 24, 1998 a proposal to amend theIntermarket Trading System (ITS) Plan to expand the inter-marketlinkage to include all listed securities and to change the requirement forapproving Plan amendments from a unanimous vote to a two-thirdsmajority vote." We also published a proposal on July 15, 1998 to amendthe ITS Plan to link Pacific Stock Exchange's (PCX) OptiMark System toITS.32

27

Derivatives

The Commission also approved several SRO proposals that strengthenedmarket stability and integrity while facilitating the use of exchange-tradedderivatives for risk management purposes

Foreign Debt Obligations

On June 8, 1998, the Commission proposed an amendment to rule 3a12-8under the Exchange Act to add Belgium to the list of countries whosedebt obligations are exempted by the rule, thereby permitting the sale offutures on those debt obligations in the United States.33

Hedge Funds

On September 23, 1998, 14 commercial and investment banks announceda private-sector acquisition of Long Term Capital Management (LTCM),a large hedge fund that had relied heavily on the use of leverage toimplement its investment strategies. Our staff testified before aCongressional subcommittee on the issues arising from the financialturmoil surrounding LTCM.34 We are also working with other membersof the President's Working Group on Financial Markets on a study ofhedge funds.

Trading Practice Developments

Rule 15c2-11

The Commission proposed amendments to rule 15c2-1l that, amongother things, would require all broker-dealers to: (1) review informationabout the issuer when they first publish or resume publishing a quotationfor a security subject to the rule, (2) document that review, (3) annuallyupdate the information if they publish priced quotations, and (4) make theinformation available to other persons upon request. 35

An exemption was issued to Nasdaq and NASD Regulation (NASDR) topermit broker-dealers that had been publishing quotations for unregistered

28

foreign equity securities and American Depositary Receipts (ADRs) in theover-the-counter Bulletin Board (OTCBB) to initiate quotations for thosesecurities in the Pink Sheets." The exemption related to an NASD rulechange prohibiting the quotation in the OTCBB of unregistered foreignequity securities and ADRs after March 30, 1998.37

Rule JOb-J3

Our staff granted exemption letters from rule 10b-13 to United Kingdom(UK.) market makers and principal traders to continue their UK. marketactivities during cross-border tender and exchange offers subject to theCity Code.38

Regulation M

Our staff granted an exemption from rule 101 of Regulation M thatpermits broker-dealers effecting block transactions through the facilitiesofthe NYSE and AMEX to make bids or purchases required by NYSE orAMEX rules in conjunction with the block transactions."

Broker-Dealer Issues

OTC Derivatives Dealers

On October 23, 1998, the Commission approved an alternative regulatorystructure for a class of registered dealers that are active in the OTCderivatives markets. This structure permits a US. securities firm toestablish a separately capitalized entity, called an OTC derivatives dealer.Among the rules amended was the net capital rule that will allow OTCderivatives dealers to use Value-at-Risk models to calculate market riskcapital. The rule changes will permit these dealers to compete moreeffectively against banks and foreign dealers in global OTC derivativesmarkets. The rules become effective on January 4, 1999.40

29

Internet Issues

The staff issued two no-action letters dealing with Internet dividendreinvestment plans The first letter conditionally grants relief from thesection 15(a) broker-dealer registration requirements to StockPower, Inc.Among other things, StockPower represented that it would pass throughto participating bank transfer agents certain charges imposed by thirdparties, but would not otherwise receive transaction-related

• 41compensation.

The second letter conditionally grants relief from the section 15(a)broker-dealer registration requirements to issuers and their directors,officers, and employees. Under this letter, an issuer may (1) useStockPower software to offer issuer dividend reinvestment and stockpurchase plans (DRSPP) related materials on the Internet, (2) allowinvestors to communicate directly with bank transfer agents operatingthose DRSPPs, and (3) place "tombstone" ads on the Web site withoutthose ads being considered seIling efforts or methods.?

Extension of Credit

In 1998, the Commission began to issue orders exempting broker-dealersfrom Exchange Act section II(d). We issued these orders using ourgeneral exemptive authority under section 36 of the Exchange Act. In allcases, the relief is based on specified representations.

We granted relief from section 11(d) for the installment sale of a largeglobal offering 43 In addition, we permitted for the first time theinstallment sale of securities in a non-privatization offering to the U Spublic at large 44

We also permitted the acceptance of payment by credit card for thepurchase of shares in a venture capital fund. The credit cards had to beissued by financial institutions unaffiliated with the broker-dealer sellingthe shares." Finally, we permitted the margining of mutual fund sharesoffered through a wrap fee mutual fund asset allocation program. Themutual fund shares were acquired in exchange for shares that were also

30

acquired through the program and sold to a customer more than 30 daysprior to the extension of credit. Some of the exchanged shares offeredthrough the program were in mutual funds managed and advised by anunaffiliated broker-dealer. 46

Transaction Confirmations

Our staff confirmed that in transactions effected as agent, the yield tomaturity (YTM) required to be disclosed by rule IOb-I0 under theExchange Act must take into account sales commissions charged bybroker-dealers. They also clarified that, under rule 1Ob-I0, YTMcalculations in agency transactions do not have to include incidentaltransaction fees and miscellaneous charges. In addition, they grantedtemporary no-action relief, for six months, to permit broker-dealers notcurrently in compliance with that requirement to make the systemschanges necessary to comply with the rule."

Floor Trading

On August 21, 1998, in response to a request from the IntermarketSurveillance Group, staff clarified that any compensation arrangementthat results in an exchange member sharing in the trading profits ortrading losses of a customer account, however structured, wouldconstitute an interest in the account for purposes of section I 1(a)(1) ofthe Exchange Act and rule 11a-I. Because some compensationarrangements may give rise to violations of section 11(a)(1) or othersecurities laws, the staff stated that a SRO cannot fulfill its obligationunder section I9(g) of the Exchange Act to determine if violations existunless it surveils and investigates its members' compensationarrangements. They also clarified that an SRO is not fixing commissionrates by prohibiting a compensation arrangement that results in a violationof applicable securities laws 48

Net Capital

In a no-action letter to the NYSE and the NASD Regulation, staff statedthat an introducing broker may include its proprietary assets held at a

31

clearing firm (PAIB Assets) as allowable assets in its net capitalcomputation so long as the introducing and clearing brokers follow theguidance described in the letter. Because introducing and clearingbrokers must make operational changes to comply with the terms of theletter, introducing firms may continue their current practice of treatingPAlB Assets as allowable until June 1, 1999.49

Additionally, our staff issued a no-action letter to the GovernmentSecurities Clearing Corporation (GSCC) regarding deficit charges forrepurchase transactions. When computing net capital, GSCC nettingmembers may exclude certain outstanding repurchase deficits from theircalculations when they meet the conditions discussed in the letter. 50

Books and Records

In October 1998, the Commission reproposed for comment amendmentsto the Commission's books and records rules for broker-dealers 51 Thereproposed amendments incorporate comments received in response tothe original proposal and are designed to clarify and expand broker-dealerrecordkeeping requirements with respect to purchase and sale documents,customer records, associated person records, customer complaints, andcertain other matters. In addition, the reproposed amendments specifythe books and records that broker-dealers would have to make availableat their local offices. The reproposed amendments are specificallydesigned to assist securities regulators in conducting sales practiceexaminations.

Arbitration

The Commission approved several significant rule proposals that affectthe way securities industry disputes are resolved. On June 22, 1998, weapproved an NASD rule change that ended the NASD's requirement forsecurities industry employees to arbitrate their statutory discriminationclaims Securities firms and employees, however, may still voluntarilyenter into agreements to arbitrate these clairns.f We also published forpublic comment a proposal by the NYSE that would make its arbitrationforum unavailable for the arbitration of statutory employment

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discrimination claims unless the agreement to arbitrate the claims wasentered into after the dispute arose. 53 In addition, on October 15, 1998,we approved two NASD rule proposals that provide for the list selectionof arbitrators by parties for both investor and intra-industry arbitrationcases, giving parties a greater role in choosing who will decide theircases. 54

Lost and Stolen Securities

As of December 31, 1997, 25,436 institutions were registered in theprogram, a 1% increase of 1996. The number of securities certificatesreported as lost, stolen, missing or counterfeit decreased 4% from2,093,233 in 1996 to 2,007,611 in 1997. The aggregate dollar value ofthese reported certificates decreased 78% from $56,177,860,398 in 1996to $11,809,945,634 in 1997. The total number oflost and stolenrecovery reports received increased 16% from 162,076 in 1996 to192,586 in 1997. The dollar value of recovery reports received increased178% from $7,000,530,298 in 1996 to $19,468,888,875 in 1997. Thetotal number of certificates inquired about by institutions participating inthe program increased .03% from 8,538,192 in 1996 to 8,565,639 in1997. In 1997, the dollar value of certificate inquires that matchedprevious reports of lost, stolen, missing, or counterfeit securitiescertificates decreased 4% from $5,164,280,780 to $4,961,362,068.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1998, there were eight active securities exchangesregistered with the SEC as national securities exchanges: AMEX, BostonStock Exchange (BSE), Chicago Board Options Exchange (CBOE),Cincinnati Stock Exchange (CSE), Chicago Stock Exchange (CHX),New York Stock Exchange (NYSE), Philadelphia Stock Exchange(PHLX), and Pcx. We granted exchange applications to delist 123 debtand equity issues, and granted applications by issuers requestingwithdrawal from listing and registration for 55 issues. The exchanges

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submitted 313 proposed rule changes during 1998. We approved 243pending and new filings, and 26 were withdrawn. Approved rule filingsincluded:

• amendments to revise the circuit breaker rules to increase the tradinghalt levels from declines of 350 and 550 points to declines of 10%,20%, and 30% of the Dow Jones Industrial Average," and

• a proposal by the NYSE to modify its margin requirements toaccommodate changes to the federal margin requirements. 56

National Association of Securities Dealers, Inc.

The NASD is the only national securities association registered with theSEC and includes more than 5,500 member firms. The NASD owns andoperates The Nasdaq Stock Market as a wholly-owned subsidiary TheNASD submitted 98 proposed rule changes to the SEC during the year.We approved 83 proposed rule changes, including some pending from theprevious year, and the NASD withdrew 7. Among the significant changeswe approved or that were effective upon filing were:

• rules adopting the Order Audit Trail System to track orders in Nasdaqequity securities from the point of origination or receipt throughexecution.V

• an NASD proposal requiring each registered representative whoengages in proprietary or agency trades in equities, preferredsecurities, or convertible debt securities, or who directly supervisessuch activities, to register as a limited representative-equity trader;"

• amendments to NASD rule 3010 to require tape recording ofconversations when a certain percentage, varying from 40% of a smallfirm to 20% of a larger firm, of a member firm's sales force iscomprised of registered persons who were employed within the lastthree years by a firm that has been expelled from membership in asecurities industry SRO that has had its registration as a broker-dealerrevoked by the SEC;59 and

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• amendments to the NASD rules on continuing education to establish asupervisors' program, separate from the registered representatives'continuing education program."

At Congressman Dingell' s request, the staff also prepared a reportdiscussing changes made by the NASD in response to the Commission's1996 21(a) report. They noted that, although the changes are ongoing,the NASD has made significant improvements to its policies andprocedures.

Letters to the Commodity Futures Trading Commission

Our staff responded to requests from the Commodity Futures TradingCommission (CFTC) for our views regarding various proposals to tradefinancial products. In addition, they issued a letter to the CFTC onDecember 4, 1997 objecting to the designation of the Chicago Board ofTrade (CBOT) as a contract market for futures and futures options on theCBOT Dow Jones Utilities Average Index (DJUA) and the Dow JonesTransportation Average (DJTA).61 On July 16, 1998, the Commissionissued an order upholding the staff's position.f concluding that neitherthe DJUA or the DJT A satisfies the substantial segment requirement ofthe law." The CBOT appealed the Commission's decision to the SeventhCircuit Court of Appeals, where it is pending.

Self-Regulatory Organization Corporate Governance

The Commission approved several SRO proposals in 1998 enhancingpublic and non-industry participation in the SRO governing processesSpecifically, we approved proposals ensuring that the public and non-industry members of the NASD, PHLX, and CHX governing boardsequal or exceed the number of industry members. 64 The public governorsinclude senators, representatives, professors, and distinguished individualswho have no connection with the securities industry. The non-industrygovernors include representatives from both large and small companies

. who are not directly involved in the securities business. Similar changesto the membership of many important SRO committees, including those

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that involve SRO oversight responsibilities and policymaking, have beend . . d 65propose or Institute .

Municipal Securities Rulemaking Board

The Municipal Securities Rulemaking Board (MSRB) is the primaryrulemaking authority for municipal securities dealers. In 1998, wereceived 23 new proposed rule changes from the MSRB. A total of 19new and pending proposed rule changes were approved, and one waswithdrawn. Approved proposals included interpretations of rulesconcerning consultants, transaction reporting procedures, continuingeducation requirements for registered persons, and politicalcontributions." The MSRB also focused on strengthening theunderwriting process by addressing syndicate practices and disclosurerequirements In this regard, we approved an amendment to rule G-32that strengthened the provisions relating to dissemination of officialstatements among dealers and incorporated a long-standing interpretationrelating to disclosures required to be made to customers in connectionwith negotiated sales of new issue municipal securities. 67

We also approved an amendment to rule G-38 concerning consultantsthat clarified the definition of payment and whether bank affiliates andtheir employees may be deemed consultants under the rule." In addition,we approved the MSRB' s commencement of a service to provide dailyreports from the MSRB Transaction Reporting Program." This servicewill summarize information about customer and interdealer transactions inmunicipal securities that are reported to the MSRB.

Tradepoint

On November 20, 1997, Tradepoint filed an application for exemptionfrom registration as a national securities exchange under section 6 of theExchange Act. Tradepoint, a Recognised Investment Exchange under theU'K. Financial Services Act of 1986, is a screen-based electronic marketfor the trading of securities listed on the London Stock Exchange.Tradepoint wishes to make its system available in the United States,

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primarily to institutional investors. We solicited comments on the filingon July 2, 1998.70

Clearing Agencies

Sixteen clearing agencies were registered with the Commission at the endof 1998. On February 13, 1998, we registered the Emerging MarketsClearing Corporation (EMCC) as a clearing agency to clear and settleBrady bonds." We also exempted Euroclear from registration as aclearing agency Registered clearing agencies submitted 98 proposed rulechanges to us, and we processed 96 new and pending proposed rulechanges.

Applications for Re-entry

Rule 19h-l under the Exchange Act prescribes how the Commissionreviews proposals submitted by SROs to allow persons subject to astatutory disqualification to become or remain associated with memberfirms. In 1998, we received 22 filings or notices from SROsrecommending that certain persons be permitted to become or remainassociated with member firms notwithstanding a statutorydisqualification: 15 from the NASD, 5 from the NYSE, 1 from theAMEX, and 1 from the CBOE. One filing was withdrawn.

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Investment Management Regulation

The Division of Investment Management regulates tnvestment compantes(which include mutual funds) and investment advisers under twocompanion statutes, the Investment Company Act of 1940 and theInvestment Advisers Act of 1940. The Division also administers thePublic Utility Holding Company Act of 1935.

Key 1998 Results

During 1998, the Commission adopted major changes to the primarydisclosure form used by mutual funds We also adopted a rule permittingthe use of a "profile," which is a new disclosure document intended toprovide investors with a summary of key information about a mutualfund. These initiatives are part of the SEC's continuing efforts toincrease the effectiveness of disclosure provided to investors. In addition,we continued implementing provisions of the National Securities MarketsImprovement Act of 1996 (NSMIA) and issued no-action and interpretiveletters addressing numerous changes in the investment company andinvestment advisory industries.

Significant Investment Company Act Developments

Rulemaking

Mutual Fund Disclosure Initiatives

• Amendments to Mutual Fund Registration Form. The Commissionadopted amendments to Form N-IA, the mutual fund registrationform, to improve prospectus disclosure 72 The amendments. (1)minimize prospectus disclosure about organizational and legal mattersthat do not help investors evaluate mutual funds and (2) focus

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disclosure on essential information about a fund that investors need toknow before investing. In recognition of the importance of riskdisclosure to investors, the amendments require a new risk/returnsummary at the beginning of a mutual fund prospectus (and the newprofile). This risk/return summary includes a concise narrativedescription of a mutual fund's overall risks, a bar chart of a fund'sannual returns for 10 years that illustrates performance fluctuationsfrom year to year, and a table that compares a fund's performance tothat of a broad-based securities market index.

• Fund Profiles. The Commission adopted rule 498, which permitsfunds to use a short-form disclosure document called a "profile.?"The profile summarizes key information about a mutual fund in astandardized format designed to facilitate comparison among fundsIf a fund uses a profile, an investor can purchase the fund's sharesbased on the profile, or request and review the fund's prospectus andother information before making an investment decision All investorswould receive a prospectus no later than confirmation of purchase.

Money Market Funds

The Commission adopted technical amendments to rule 2a-7, the rule thatregulates money market funds." The amendments revise the rule'sterminology and its treatment of certain instruments to reflect marketusage. The amendments also resolve certain interpretive issues, includingthe application of other amendments adopted in 1996 concerning tax-exempt money market funds and investments in asset-backed securities.We also amended our advertising rules to clarify the formula used tocalculate yield for money market funds and reduce the potential forinvestors to be misled or confused by the presentation of the moneymarket fund's short term total return.

Delivery of Disclosure Documents to Households

The Commission proposed a new rule 154 under the Securities Act thatenables issuers and broker-dealers to satisfy prospectus deliveryrequirements by sending a single prospectus to two or more investors

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sharing the same address." We also proposed similar amendments torules 30d-1 and 30d-2 under the Investment Company Act, and to rules14a-3, 14c-3 and 14c-7 under the Exchange Act, which govern thedelivery of annual or semi-annual reports to shareholders. The proposedrule and rule amendments would provide greater convenience forinvestors and cost savings for issuers by reducing the amount ofduplicative information that investors receive.

Advisory Contracts

The Commission proposed amendments to rule 15a-4, the rule thatpermits an investment adviser, in certain circumstances, to advisetemporarily an investment company under a contract that the investmentcompany's shareholders have not approved." The proposed amendmentswould (1) expand the exemption provided by the rule to includetemporary advisory contracts entered into after a merger or similarbusiness combination involving the fund's adviser or a controlling personof the adviser and (2) lengthen the period during which the adviser mayserve under a contract without shareholder approval.

Disclosure

Filings Reviewed

In 1998, the staff reviewed 80% of the 2,100 new portfolios filed with theSEC, including 96% of newly-filed open-end and closed-end portfolios.The staff also reviewed 91% of the 645 proxy statements filed, 20 % ofthe 18,715 post-effective amendments filed, and 100% of the 200insurance contract filings.

Exemptive Orders

The Commission issued 320 exemptive orders to investment companies(other than insurance company separate accounts) seeking relief fromvarious provisions of the Investment Company Act. We also issued 53exemptive orders to investment companies that are insurance companyseparate accounts. Over 13% of all exemptive orders issued in 1998

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(other than orders issued to insurance company separate accounts)concerned mergers involving investment advisory firms or funds. Thenumber of these types of orders nearly doubled from the previous year,reflecting the trend toward consolidation in the financial services industry.Some of the other significant developments with regard to exemptiveorders in 1998 are discussed below

Open-End Interval Fund

The Commission issued an order permitting a registered closed-end fundto convert into an open-end fund that would redeem its shares at monthlyintervals rather than daily. The fund invests in equity securities of issuersin developing countries, and sought relief in order to provide itsshareholders with greater liquidity while maintaining a relatively illiquidportfolio. Under the terms of the order, the fund's new investors will belimited to "qualified purchasers," as defined by section 2(a)(51) of theInvestment Company Act. 77

Mutual Insurance Company

The Commission issued an order permitting certain registered andunregistered funds to enter into insurance agreements with an affiliatedmutual insurance company. The agreements would provide limitedinsurance coverage for certain money market assets held by the funds."

Denial of a Request for a Hearing

The Commission denied a request for a hearing on an applicationconcerning the foreign custody arrangements of certain unit investmenttrusts. The Commission's order, among other things, reiterated thestandard for determining whether a person requesting a hearing is an"interested person" with respect to an application for purposes of rule0-5(c) under the Investment Company Act. The Commission denied thehearing request because the person was not an interested person andfailed to demonstrate that a hearing was necessary or appropriate in thepublic interest or for the protection of investors. 79

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Interested Director Status

The Commission issued an order finding that a director of a fundcomplex, who also is an outside director for the parent company of abroker-dealer firm that provides de minimis distribution services to thefund complex, should be deemed an independent director under theInvestment Company Act. 80

Interpretive and No-Action Letters

The Division's Office of Chief Counsel, which handles most requests forguidance directed to the Division, responded to 888 formal and informalrequests for guidance during 1998 Some of the more significantinterpretive and no-action letters are discussed below.

Termination of Investment Advtsory Contract

The Commission stated that it may consider pursuing enforcement actionagainst a closed-end fund if the fund excluded a shareholder proposalseeking termination of the fund's investment advisory contract. The fundcontended that under applicable state law only its directors couldterminate the contract. The Commission concluded, however, thatsection 15(a)(3) of the Investment Company Act provided the fund'sshareholders with independent authority to terminate the contract. Dueto the novelty of this request, the Commission and not our staffconsidered this matter. 81

Fund Supermarkets

Our staff provided interpretive guidance regarding certain legal issuesunder rule 12b-l of the Investment Company Act arising from theparticipation of mutual funds in fund supermarkets. The staff concludedthat whether a fund's payment of all or part of a supermarket fee must bemade pursuant to a rule 12b-1 plan depends on an analysis by the boardof directors of the purpose for which the payment is made.82

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Reorganization of Investment Advisers

Our staff concluded that if a reorganization does not result in a change ofactual control or management of an investment adviser, the adviser mayrely on rule 202(a){l)-1 under the Investment Advisers Act and rule 2a-6under the Investment Company Act to conclude that no assignment of theadviser's contracts will occur as a result of the reorganization. Whetherthere is a change of actual control or management, however, is a factualissue to which the staffwill not respond. 83

Our staffagreed that the acquisition by J.P. Morgan & Co. Incorporated(JPM) of 45% of the outstanding equity interest of American CenturyCompanies, Inc. (ACC), amounting to 10.83% of the voting power in ACC,along with certain minority stockholder protections, would not result in anassignment of the advisory contracts of the mutual funds advised by asubsidiary of ACC. The staff based its position on representations that,among other things, JPM would not have a controlling influence over themanagement or policies of ACe. 84

Delayed Offerings of Securities by Closed-End Funds

Our staff took the position that a closed-end fund may conduct a delayedat-the-market shelf offering of equity securities to the general public inreliance on rule 415(a){l)(x) under the Securities Act to take advantageof opportunities when its shares are trading at a premium to its net assetvalue. The fund must meet the substantive requirements of the rule(including those that do not apply to funds), file quarterly reports with theCommission, register the offering on Form N-2, and make sure that thegross proceeds to the fund less the underwriting commission equal orexceed net asset value. 85

Section I3(f) Confidential Treatment Filings

Our staff issued a letter providing general guidance to investmentmanagers with section 13(f) reporting obligations and reminding filers ofthe Commission's long-standing position that confidential treatment maybe accorded to Form 13F information only in limited circumstances."

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Deferred Compensation Plans for Investment Company Directors

Our staff clarified its position regarding the status of deferredcompensation plans for investment company directors under theInvestment Company Act. They stated that investment companies thatwish to implement deferred compensation plans are not required to seekorders from the Commission covering the plans. 87

Investment Adviser Advertisements

Our staff stated that it would not recommend enforcement action undersection 206(4) of the Investment Advisers Act or rule 206(4)-1 (a)(l)thereunder, ifDALBAR, Inc. advertises certain numerical ratings ofunaffiliated investment advisers, notwithstanding the staff's position thatthe numerical ratings, based on DALBAR's surveys of investmentadvisory clients, are testimonials by DALBAR and the advisory clients.The staffbased its position on representations that, among other things, aDALBAR rating does not emphasize the favorable client responses orignore the unfavorable responses. The staff also provided guidanceregarding some of the factors that advisers should consider whendetermining whether any advertisements containing a DALBAR ratingwould be false or misleading 88

Private Investment Companies

Our staff took the position that the securities of an investment companythat relies on the exclusion from the definition of investment companyprovided by section 3(c)(1) or section 3(c)(7) of the Investment CompanyAct (Investing Pool), which are held by the Investing Pool's"knowledgeable employees," may be excluded when determining whetherall of the beneficial owners of the Investing Pool's securities are qualifiedpurchasers for purposes of rule 2a51-3(b). They also took the positionthat those securities owned by "knowledgeable employees" may not beexcluded for purposes of rule 2a51-3(a).89

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Foreign Investment Companies

Our staff stated that a foreign fund generally would not be deemed to bemaking a public offering for purposes of section 7(d) of the InvestmentCompany Act if certain functions (known as the "ten commandments"activities) that, for US. tax purposes, previously had been performedoffshore by or on behalf of the foreign fund, are performed in the U.S 90

Our staff also confirmed that as long as a foreign fund is conducting onlya global private offering, a foreign investor who is temporarily in the U S.may meet with the fund's personnel, and purchase an interest in the fund,without causing the fund to be deemed to be making a public offering forpurposes of section 7(d) of the Investment Company Act or to have tocount or qualify the foreign investor under section 3(c)(1) of 3(c)(7) ofthe Act.91

Interpretive Releases

Offshore Internet Offers

The Commission provided interpretive guidance concerning theapplication of the registration requirements of the U.S. securities laws tooffshore offers of securities or investment services made on Internet Websites by foreign investment companies and investment advisers. Therelease indicates that offshore offers and solicitation activities would notbe considered to be made "in the US." if the Internet offer is not targetedto the U.S. The release suggests non-exclusive measures, such as the useof disclaimers that state that the offer is not being made in the U. S., orscreening mechanisms designed to ensure that offering materials or othercommunications are not sent to U.S. persons, as a means of indicatingthat offers are not targeted to the U.S 92

Principal and Agency Transactions by Investment Advisers

The Commission provided interpretive guidance concerning section206(3) of the Investment Advisers Act. This section generally prohibitsan adviser from engaging in or effecting principal or agency transactions

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with an advisory client unless the adviser discloses certain informationand obtains the client's consent prior to the completion of the transaction.This guidance (I) supersedes a prior position taken by the Commissionand permits investment advisers to make required disclosures and obtainclient consent after execution but before settlement of a principal oragency transaction and (2) clarifies that if an investment adviser receivesno compensation for effecting an agency transaction between advisoryclients, the transaction is not subject to section 206(3).93

Insurance Products

FormN-6

The Commission proposed a.new Form N-6 for insurance companyseparate accounts that are registered as unit investment trusts and thatoffer variable life insurance policies. The form would register theseseparate accounts under the Investment Company Act and register theirsecurities under the Securities Act. It would focus prospectus disclosureon essential information to assist investors in deciding whether to investin a particular variable life insurance policy. In addition, it wouldminimize prospectus disclosure about technical and legal matters, improvedisclosure of fees and charges, and streamline the registration process byreplacing two forms that were not specifically designed for variable lifeinsurance policies with a single form tailored to these products. 94

Separate Account Conversions

Our staff took the position that the conversion of a managed separateaccount into a unit investment trust with an underlying fund couldproceed, without registering interests in the separate account or theshares of the underlying fund on Form N-14 under the Securities Act,where the restructuring involved a change in legal form only that wouldnot materially change a contract holder's interest in the contract, theunderlying portfolio assets, or the separate account. This position appliesonly to reorganizations of managed separate accounts that are similar inall material respects to the reorganization described in the letter. 95

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State and Local Government Deferred Compensation Plans

Our staff took the position that an insurance company that offers and sellsgroup annuity contracts and interests in separate investment accountsfunding the group annuity contracts to state and local governmentdeferred compensation plans qualifying under section 457 of the InternalRevenue Code of 1986, as amended, is not required to register the groupannuity contracts or the separate investment accounts under the federalsecurities laws. They had previously taken the position that registrationwas not required in these cases subject to certain conditions restrictingthe ability of an employer to withdraw assets from the plan." butmodified their position in light of the amendment of section 457 by theSmall Business Job Protection Act of 1996 that extended an "exclusivebenefit" requirement to section 457 state and local government plans."

Significant Investment Advisers Act Developments

Rulemaking

Rule Amendments Under NSMIA

Under NSMIA, the Commission is primarily responsible for regulatinginvestment advisers with more than $25 million of assets undermanagement; smaller investment advisers must register with statesecurities regulators and generally are prohibited from SEC registrationDuring 1998, the Commission adopted amendments to rules governingthis jurisdictional division.

• Multi-State Advisers. The Commission amended rule 203A-2 topermit investment advisers required to register in 30 or more states,but that do not have $25 million of assets under management orotherwise meet the criteria for SEC registration, to register with theSEC.98

• Investment Adviser Representatives. The Commission amended rule203A-3(a) to revise the definition of investment adviser representative

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to permit certain supervised persons employed by or associated withSEC-registered investment advisers to provide advisory services toone or a few institutional business clients without being subject tostate qualification requirements. Under the revised rule, supervisedpersons may have the greater of 5 natural person clients or a numberof natural person clients equal to 10% of all their clients before beingsubject to state qualification requirements. 99

Performance Fees

The Commission liberalized rule 205-3 to give investment advisers andeligible clients greater flexibility in negotiating the terms of a performancefee arrangement. The amendments eliminate requirements for specificcontractual terms and disclosures when advisers charge a performancefee, and raise the financial thresholds for client eligibility They alsoexpand client eligibility to include certain qualified purchasers, such ashigh net worth individuals and "knowledgeable employees" of theinvestment adviser. 100

Year 2000

In January 1998, our staff issued a Legal Bulletin describing investmentadvisers' obligations under the Investment Advisers Act regarding theirpreparedness for the year 2000 computer problem. Advisers that areunprepared or uncertain about their year 2000 readiness must disclosethis fact to their clients if the failure to address the year 2000 issue couldhave a material effect on their clients. 101

The Commission also adopted a new rule 204-5, and accompanying FormADV -Y2K, to require most registered investment advisers to file reportswith the SEC on their readiness for year 2000. Under the rule, advisersmust report on their year 2000 preparedness with respect to all clients,and those advisers that are sponsors or administrators of a fund complexmust report on the readiness of the investment companies they advise. 102

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Significant Public Utility Holding Company Act Developments

Developments in Holding Company Regulation

As a result ofthe current trend toward consolidation, the Commissionconsidered a number of proposed utility combinations, including severalinvolving companies that owned gas properties with companies thatowned electric properties. Three of these proposals resulted in thecreation of new registered holding companies. Registered holdingcompanies also continued to demonstrate their interest in nonutilityactivities, both in the U.S and abroad. As a result, the complexity ofapplications and requests for interpretive advice continued to increase.The Commission expects these trends to continue in 1999, as therestructuring of the industry continues.

Registered Holding Companies

As of September 30, 1998, there were 19 public holding companiesregistered under the Public Utility Holding Company Act. The registeredholding companies systems' were comprised of 101 public utilitysubsidiaries, 37 exempt wholesale generators (EWGs), 114 foreign utilitycompanies (FUCOs), 498 nonutility subsidiaries, and 87 inactivesubsidiaries, for a total of 856 companies and systems with utilityoperations in 31 states. These holding company systems had aggregateassets of approximately $188 billion and operating revenues ofapproximately $73 billion for the period ended September 30, 1998.

Financing Authorizations

The Commission authorized registered holding company systems to issueapproximately $19.5 billion of securities, an increase of less than 1% fromlast year. The total financing authorizations included $3.9 billion forinvestments in EWGs and FUCOs.

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Examinations

The staff examined three service companies, three parent holdingcompanies, and nine special purpose corporations. The examinationsfocused on: (1) the methods of allocating costs of services and goodsshared by associate companies, (2) internal controls, (3) costdetermination procedures, (4) accounting and billing policies, and (5)quarterly and annual reports of the registered holding company systems.By uncovering misallocated expenses and inefficiencies through theexamination process, consumers saved approximately $9.9 million.

Applications and Interpretations

The Commission issued various orders under the Public Utility HoldingCompany Act. Some of the more significant orders included:

Sempra Energy

The Commission authorized the acquisition by Sempra Energy, acompany not previously subject to the Holding Company Act, of (1)Pacific Enterprises, a California public utility holding company exemptfrom all provisions of the Holding Company Act except section 9(a)(2),and, through this acquisition, Southern California Gas Company; and (2)Enova Corporation, a California public utility holding company exemptfrom all provisions of the Holding Company Act except section 9(a)(2),and through this acquisition, San Diego Gas & Electric Company.i'" TheCommission also granted Sempra Energy an order under section 3(a)(l)exempting it from all provisions of the Holding Company Act, exceptsection 9(a)(2), following the acquisition. In approving the transaction,the Commission determined that a holding company may acquire utilityassets that will not, when combined with the acquired company's utilityassets, make up an integrated system, provided that there is defactointegration of contiguous utility properties and that the holding companywill be exempt from registration under section 3 of the Holding CompanyAct following the acquisition.

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WPL Holdings, Inc.

The Commission authorized the acquisition by WPL Holdings, Inc.(WPL), a public utility holding company exempt from registration byorder of the Commission under section 3(a)(I) of the Holding CompanyAct, ofIES Industries, Inc., a public utility holding company exempt fromregistration by rule 2 under section 3(a)(1) of the Holding Company Act,with the surviving entity to be renamed Interstate Energy Corporation(Interstatej.l'" The Commission also authorized the acquisition by WPLAcquisition Co., a wholly-owned subsidiary ofWPL, ofInterstate Powercompany, a public utility company. As a result of these transactions,Interstate will own, directly and indirectly, four electric and gas utilitycompanies. In finding that the transactions satisfied the HoldingCompany Act's standards for having more than one integrated system,the Commission evaluated several factors, including the loss of economiesassociated with divesting existing gas and electric operations. Interstatehas registered as a holding company under section 5 of the HoldingCompany Act.

Financing Orders

The Commission authorized two regulated holding companies, AmericanElectric Power Company (AEP) and Cinergy Corporation, to usefinancing proceeds to invest in EWGs and FUCOs, and to guarantee theobligations of EWGs and FUCOs, in amounts that, together with all otherinvestments in EWGs and FUCOs, do not exceed 100% of each holdingcompany's consolidated retained earnings.l'" The orders require AEPand Cinergy to provide quarterly information to facilitate the monitoringof their respective investments in EWGs and FUCOs and their effects onthe holding company systems.

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Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations manages theSEC's examination program. Inspections and examinations areauthorized by the Securities Exchange Act of 1934, the InvestmentCompany Act of 1940, and the Investment Advisers Act of 1940. Entitiessubject to this oversight include brokers, dealers, municipal securitiesdealers, self-regulatory organizations, transfer agents, clearingagencies, investment companies, and investment advisers.

Key 1998 Results

During 1998, the staff conducted examinations concentrating on the areasof greatest compliance risk (1. e., Smart Exams). The examinationsincluded an assessment of risk factors, identification of areas to becovered, and the refinement of the appropriate inspection techniques.The areas the staff covered and the inspection techniques they used variedbecause of the diverse population of registrants, risk assessment results,market conditions, and/or other industry developments. The staffconsidered the unique characteristics of each registrant and, in particular,the presence or lack of effective internal controls and complianceprocedures.

We continued to increase cooperation among SEC examiners responsiblefor different types of regulated entities to increase effectiveness andproductivity and enhance investor protection. For example, whenappropriate, SEC examinations of firms with broker-dealer andinvestment advisory activities were conducted by multi-disciplinaryexamination teams.

Our staff also enhanced cooperation with foreign, federal, and stateregulators, as well as with self-regulatory organizations (SROs). Thestaff conducted coordinated examinations with staff from the Hong Kong

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Securities and Futures Commission, the United Kingdom's FinancialServices Authority acting as the Investment Management RegulatoryOrganization, the Australia Securities Authority, and theBundesaufsichtsamt FOr Das Kreditwesen.

We issued a report on soft dollar practices based on 355 examinations ofbroker-dealers and money managers. The report described the currentstate of soft dollar practices and made recommendations for regulatoryaction and industry compliance practices.

The staff conducted approximately 4,350 special reviews of registrants'programs for dealing with the year 2000 computer problem. The staffdiscussed the year 2000 problem with registrants and gathered selectedinformation about their remediation programs. In approximately 9% ofthese reviews, the staff brought significant deficiencies to registrants'attention The most commonly noted deficiencies were failing to plan forexternal testing and lagging significantly behind the Commission'sguidance that corrections should be completed by December 3 1, 1998.

Investment Company and Investment Adviser Inspections

Investment Companies

Our examiners inspected 259 investment company complexes, including17 fund administrators discussed below. Excluding special inspectionsand year 2000 reviews, this number resulted in an average frequency ofinspection for the 1,128 investment company complexes of once every4.7 years. The complexes inspected had total assets of $1.1 trillion in2,636 portfolios, which represented approximately 37% of the mutualfund and closed-end fund portfolios in existence at the beginning of 1998.The complexes inspected represented a mix oflarge and small complexes.Twenty of the inspections were done on a "for cause" basis, which meansthe staff had some reason to believe that a problem existed.

Serious violations found during 11 examinations warranted referrals forfurther investigation by the Division of Enforcement. The most common

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violations resulting in referrals involved fraud, the role of the fund'sBoard of Directors, registration and Commission filings, and books andrecords.

Investment Advisers

The staff completed 1,280 inspections of investment advisers, notincluding the year 2000 reviews, achieving an average inspectionfrequency of once every 5 years. The non-investment company assetsmanaged by the advisers inspected totaled $1.7 trillion. The staffinspected 78 investment advisers for cause.

Serious violations warranting enforcement referrals were uncovered in 52of the examinations. The most common violations resulting in referralsinvolved fraud, Form ADV or brochure disclosure or delivery, books andrecords, and conflicts of interest.

Mutual Fund Administrators

Many mutual fund complexes use third party administrators to performtheir accounting and administrative functions During 1998, examinersinspected 17 fund administrators. One of the examinations resulted in anenforcement referral.

Variable Insurance Products

In response to the rapid growth in variable insurance product assets andthe emergence of new channels of distribution, specialized insuranceproduct teams conducted examinations in this area. These teamsidentified and examined variable life and annuity contract separateaccounts. Special emphasis was placed on examining branch offices ofbroker/dealers selling these products to determine patterns of salespractice abuses. A total of 3 1 insurance company complexes wereexamined, representing 25% of all the insurance sponsors as of thebeginning of 1998. This maintains a five-year inspection cycle forinsurance sponsors. None of these examinations resulted in anenforcement referral.

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Broker-Dealer and Transfer Agent Examinations

Broker-Dealers

A total of338 oversight and 308 cause and surveillance examinations ofbroker-dealers, government securities broker-dealers, and municipalsecurities dealers were conducted in 1998. Of these examinations, 123took place in broker-dealers' branch offices, reflecting an emphasis onexamining the adequacy of supervision over the activities of salespersonsin branch offices. Serious violations in 139 examinations warrantedreferrals for further investigation by Enforcement staff Findings in anadditional 55 examinations were referred to SROs for appropriate action.The most common violations and deficiencies found were record keepingdeficiencies, misrepresentations and unsuitable recommendations tocustomers, and unauthorized trading in customers' accounts.

The broker-dealer examination program devoted significant attention toabuses in the underwriting, trading, and retail selling of low-priced,speculative securities, frequently referred to as "microcaps."Examinations also emphasized the supervision of registeredrepresentatives classified as independent contractors operating infranchised branch offices, the adequacy of broker-dealers' internalcontrols and risk management activities, and retail sales of variableannuities and mutual funds. The office also completed a review ofclearing firm policies and procedures.

During 1998, our staff continued initiatives to enhance cooperation withforeign, federal, and state regulators, as well as with SROs. Examinersworked with SRO and state regulators to achieve maximum coordinationwith other broker-dealer regulatory programs. They also coordinatedoverlapping examinations of broker-dealers, clearing agencies, andtransfer agents with bank regulators.

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Transfer Agents

In 1998, our staff conducted 191 examinations of registered transfer agents,including 20 federally regulated banks. This program resulted in 143deficiency letters, 68 cancellations or withdrawals of registrations, 8 referralsto the Division of Enforcement, 20 referrals to bank regulators, and 4 staffconferences with delinquent registrants. In addition, the staff conducted year2000 reviews of transfer agents, and completed 4 routine inspections ofclearing agencies

Self-Regulatory Organizations Inspections

In 1998, the staff inspected at least one program at the following SROs.American Stock Exchange, Boston Stock Exchange, Chicago BoardOptions Exchange, Chicago Stock Exchange, Cincinnati Stock Exchange,National Association of Securities Dealers, New York Stock Exchange,Pacific Stock Exchange, and Philadelphia Stock Exchange. The SROinspections focused on:

• arbitration programs;

• listing, maintenance, and unlisted trading practices programs;

• financial and operational examination programs;

• market surveillance, investigatory, and disciplinary programs;

• customer communication review programs;

• programs for detecting and sanctioning sales practice abuses; and

• ethics and conflicts of interest.

The inspections resulted in recommendations to improve the programs'effectiveness and efficiency.

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Our staff also conducted inspections of the regulatory programsadministered by the NASD's 13 district offices. These inspectionsincluded reviews of NASD district offices' broker-dealer examination,financial surveillance, and formal disciplinary programs The staff alsoreviewed the district offices' investigations of customer complaints andterminations of registered representatives for cause.

SRO Final Disciplinary Actions

Section 19(d)(1) of the Securities Exchange Act of 1934 and Rule 19d-1require all SROs to file reports with the Commission of all finaldisciplinary actions. In 1998, a total of 1,358 reports were filed with theSEC, as reflected in the following table.

SRO Reports of Final Disciplinary Action

American Stock Exchange 14Boston Stock Exchange 0Chicago Board Options Exchange 100Chicago Stock Exchange 4Cincinnati Stock Exchange 3National Association of Securities Dealers 1,026National Securities Clearing Corporation 0New York Stock Exchange 171Options Clearing Corporation 0Philadelphia Stock Exchange 23Pacific Exchange 11

Total Reports 1,358

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Full Disclosure System

Thefull disclosure system's goals are to foster investor confidence,provide investors with material information; contribute to themaintenance of fair and orderly markets; reduce the costs of capitalraising; and inhibit fraud in the public offering, trading, voting, andtendering of securities. The Division of Corporation Finance tries toachieve this goal by reviewing the financial statements and businessdisclosure in periodic reports and transactional filings by corporateissuers and undertaking rulemaking that facilitates capital formation.

Key 1998 Results

Companies filed registration statements covering a record $2.55 trillion inproposed securities offerings during the year, a 76% increase over the$1.45 trillion in 1997. An increase in overall market activity, includingmerger transactions, resulted in $1.45 trillion in common stock offeringsfiled for registration in 1998 compared to nearly $800 billion in 1997.Offerings filed by first time registrants (!POs) were a record, totalingapproximately $257 billion, 55% more than the $166 billion filed in 1997.

Registration Statements FiledDollar Value (Billions)

Security

Common StockAsset BackedDebtUnallocated Shelf"Other EquityTotal

1997$ Value

797.2271.8174.8152.4495

1,445.7

1998$ Value

1,453.7476.2291.6259.8

64.82,546.1

% Change

82%75%67%70%31%76%

*A transactional filing where the issuer registers a dollar amount of securities withoutspecifying the particular amounts of each different security to be issued.

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In November 1998, we published proposals that would modernize theregulation of capital formation. We also issued a release proposing toupdate and simplify the regulations applicable to takeover transactionsThese important releases are discussed in more detail under RecentRulemaking, Interpretive, and Related Matters.

International Activities

Foreign companies' participation in the United States public marketscontinued to show strong growth in 1998. During the year,approximately 160 foreign companies from 34 countries entered theUnited States public markets for the first time. At year-end, there wereover 1,100 foreign companies from 56 countries filing reports with usPublic offerings filed by foreign companies in 1998 totaled over $170bilIion--a new record for an amount registered in a single year.

Review of Filings

In 1998, our Division of Corporation Finance reviewed 2,828, or nearly21%, of the reporting issuers, along with 1,320 Securities Act IPOs, 338registration statements under the Securities Exchange Act and 81Regulation A exemptive filings. The following table summarizes theprincipal filings reviewed during the last five years. Because the staffreviews all new issuer filings (including IPOs), third party tender offers,contested solicitations, and going private transactions, the number ofthese filings that are reviewed reflects the increases and decreases in thenumber of filings received.

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Full Disclosure Reviews

1994 1995 1996 1997 1998

Reporting Issuer Reviews i!./ 3,400 3,930 3,210 3,513 2,828New Issuer Reviews .12/ 1,599 1,150 1,658 1,604 1,658

Major Filing ReviewsSecurities Act Filings

IPOs f./ 1,384 950 1,412 1,255 1,320Repeat Issuers 863 815 769 723 720

P/E Amdts. f;;./ !I/ 204 215 140 41 28Regulation A 100 69 77' 111 81

Exchange Act InitialRegistrations 215 200 246 349 338

Annual Report ReviewsFull f;./ 1,540 1,930 1,446 1,949 1,527Full Financial 1,405 1,585 933 1,208 997

Tender Offers(l4D-I) 82 140 165 234 259

Going PrivateSchedules 75 77 100 94 115

Contested ProxySolicitations 42 59 62 83 59

Proxy StatementsMerger/Going Private 163 225 261 233 219Others w/Financials 180 205 199 238 257

g/ Includes companies subject to Exchange Act reporting whose financialstatements were reviewed during the year ..12/ Includes reviews of Securities Act or Exchange Act registration statementsof non-Exchange Act reporting companies. Excludes reviews of RegulationA filers.f;;./ Includes Regional Office reviews of small business filings for years priorto 1996.!I/ Includes only post-effective amendments with new financial statements.f;./ Includes annual reports reviewed in connection with the review of otherfilings that incorporated financial statements by reference.

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Recent Rulemaking, Interpretive, and Related Matters

Reform of Commission Rules Under the Securities Act

For the past several years, we have been actively reevaluating theregistration system in response to the realities of the current marketplaceand changes in technology. On November 13, 1998, we publishedproposals intended to create a more flexible system and providesignificant benefits to public investors, issuers of securities, and securitiesprofessionals. 106 The proposed rules have the following objectives:

• to continue providing investors with the information they need whenthey make an investment decision;

• to better enable small businesses to meet their capital requirements ina changing market environment;

• to permit more communications to investors and the market aroundthe time of an offering;

• to give analysts more flexibility to report about foreign governmentissuers and smaller, unseasoned companies;

• to make it easier for companies to tum a public offering into a privateoffering, and vice versa; and

• to provide issuers with incentives to offer securities publicly ratherthan privately.

The proposed rules, if adopted, also would result in more timelyinformation being available to the marketplace, as companies would berequired to:

• file annual and quarterly financial results sooner;

• make and update risk factors disclosure in their periodic reports;

• accelerate the due dates for some Form 8-K current reports; and

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• expand the events that must be discussed in the current report Form8-K

Regulation of Takeover and Security Holder Communications

On November 3, 1998, we issued a release proposing to update andsimplify the regulations applicable to takeover transactions.l'" The goalis to conform the regulations with the realities of today' s environment.The proposed rules, if adopted, would'

• permit significantly more communications with security holders andthe markets before the filing of a registration statement involving atakeover transaction, a proxy solicitation, or a tender offer;

• put stock tender offers on a more equal regulatory footing with cashtender offers;

• integrate the forms and disclosure requirements for tender offers withgoing private transactions and consolidate the disclosurerequirements in one location;

• permit security holders to tender their securities during a limitedperiod after the successful completion of a tender offer;

• more closely align merger and tender offer disclosure requirements;and

• update the tender offer rules to clarify certain requirements andreduce compliance burdens where consistent with investor protection.

Plain English Initiative

During the year, we adopted the plain English rules to improve thereadability of prospectuses. 108 Our original release proposing the ruleswas issued for public comment in January 1997.109

New Rule 421(d), the plain English rule, requires public companies toprepare the cover page, summary, and risk factors section of theirprospectuses using the following basic principals:

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• short sentences;

• definite, concrete, everyday language;

• active voice;

• tabular presentation or bullet list for complex material,whenever possible;

• no legal jargon or highly technical business terms; and

• no multiple negatives.

Cross-Border Tender Offers, Business Combinations, and RightsOfferings

On November 13, 1998, we issued a release soliciting public comment ontender offer and registration exemptive rules for cross-border tenderoffers, business combinations, and rights offerings.'!" If adopted, theserules would make it easier for U.S. holders of foreign companies toparticipate in these types of transactions. Currently, offerors oftenexclude U. S. holders from these transactions because of the need tocomply with U.S. securities regulations.

Amendments to Beneficial Ownership Reporting Under Exchange ActSection 13(d)

We adopted amendments to our beneficial ownership disclosure rulesunder Section 13(d) of the Exchange Act. III The amendments allow theuse of the short-form Schedule 13G by:

• passive investors (those that do not have the purpose or effect ofchanging or influencing control of the issuer) if they do not own 20%or more of the outstanding securities; and

• more institutional investors.

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Use of Internet Web Sites to Offer Securities, Solicit SecuritiesTransactions, or Advertise Investment Services Offshore

We issued an interpretive release that provides guidance on when offersof securities or investment services made on Internet Web sites by foreignissuers, investment companies, investment advisers, broker-dealers, andexchanges would not be considered to be an offering "in the UnitedStates." 112

The release also suggests measures that foreign Web site offerors couldimplement to guard against targeting their offers to the United States.For example, a foreign offeror could post an offer on its Web site withoutregistering the offer, if:

• the offeror includes a meaningful disclaimer on the Web site thatwould specify intended offerees by identifying jurisdictions in whichthe offer is or is not being made; and

• the offeror takes steps reasonably designed to prevent sales to U.S.persons.

International Disclosure Standards

International disclosure standards are intended to facilitate cross bordercapital raising and listing by permitting companies to comply with one setof non-financial disclosure requirements for offerings in severaljurisdictions. For several years we have been working with theInternational Organization of Securities Commissions (lOSCO) todevelop a set of international standards for non-financial statementdisclosures.

In May 1998, a draft of the standards was posted on the IOSCO Web site(www.iosco.org) as a consultation document. IOSCO approved the non-financial statement disclosures standards at its annual conference in

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September 1998. In February 1999, the Commission exposed for publiccomment amendments to its regulations in order to conform with thesestandards.

Amendments to Regulation S

We adopted Regulation S in 1990 to clarify the applicability of theSecurities Act registration requirements to offshore transactions. Sinceits adoption, a number of abusive practices have developed involvingunregistered sales of equity securities by U.S. companies purportedly inreliance upon the Regulation. These transactions have resulted in indirectdistributions of those securities into the United States without theinvestor protection provided by registration. To address the continuingabuses, we adopted measures 113 designed to eliminate the abusivepractices, while preserving many of the benefits of the Regulation forcapital formation.

Small Business Proposals

Rule 701 provides an exemption from the registration requirements of theSecurities Act for offers and sales of securities made to employees ofprivate companies. The staff proposed rules that would raise the amountof securities that could be offered under the exemption. 114

Rule 504 of Regulation D exempts public sales by private companies ofup to $1 million of securities in a year from the registration requirementsof the Securities Act. 115 The staff has proposed amendments to addressconcerns that the regulation may facilitate fraudulent securitiestransactions by microcap companies.

Shareholder Proposals

We issued a release adopting amendments to Rule 14a-8, the shareholderproposal rule, and related rules. 116 The proposals represented a packageof reforms to address a range of concerns raised by both shareholder andcorporate participants in the proposal process. The revisions:

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• recast Rule 14a-8 into a plain English question and answer format;

• reverse the Cracker Barrel interpretive position so that employment-related shareholder proposals raising social policy issues are notautomatically excludable on ordinary business grounds; and

• provide shareholders and companies with clearer guidance oncompanies' exercise of discretionary voting authority.

Year 2000 Interpretive Releases

We issued an interpretive release to elicit more meaningful year 2000disclosure from public companies.l'" The release provides specificguidance on disclosure by companies with a year 2000 disclosureobligation, including:

• the company's state of readiness,

• the costs to address the company' s Year 2000 issues,

• the risks of the company's Year 2000 issues, and

• the company's contingency plans.

In addition, we published guidance in the form of frequently askedquestions to clarify some recurring issues raised by the Year 2000interpretive release. 118

Proposed Amendments to Form S-8

Form S-8 is the short-form Securities Act registration statement usedprimarily for legitimate employee benefit plans. Some companies,including micro cap companies, have used Form S-8 improperly tocompensate consultants whose primary service to the company ispromotion and public sale of the company's securities. We issued arelease proposing amendments to Form S-8 and related rules designed todeter this abuse.119 The proposals also would facilitate tax and estateplanning by permitting the form to be used to register options that wouldbe exercised by family members of employees.

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Paper Filings No Longer Accepted

We adopted a new electronic filing rule (Rule 14 of Regulation S-T) tomake it clear that we will no longer accept filings made in paper thatshould have been filed electronically. 120

Other Rulemaking Proposals

During the year, we also proposed:

• amendments to Rule 135b to provide that an options disclosuredocument prepared in accordance with Rule 9b-l under the ExchangeAct is not a prospectus and accordingly is not subject to civil liabilityunder Section 12(a)(2) of the Securities Act;121and

• technical amendments to require disclosure of a business enterprise's"operating segments," rather than its "industry segments," inconformity with the Financial Accounting Standards Board'sStatement of Financial Accounting Standards No. 13.122

Staff Legal Bulletins

The Divisions of Corporation Finance, Market Regulation, andInvestment Management published Staff Legal Bulletin No.6 on July 22,1998. The bulletin addresses disclosure obligations in connection withthe January 1, 1999 conversion by 11 member states of the EuropeanUnion to a common currency, the "euro."

On September 4, 1998, the Division of Corporation Finance publishedStaff Legal Bulletin NO.7. The bulletin provides helpful information onthe plain English rule that applies to companies filing registrationstatements under the Securities Act.

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Conferences

Small Business Town Hall Meetings

Since 1996, several informal town hall meetings between our staff andsmall businesses have been conducted through the United States. Thesetown hall meetings tell small businesses about the basic requirements forraising capital through the public sale of securities They also provide uswith information on the concerns and problems facing small businesses.During 1998, we held small business town hall meetings in Las Vegas,Nevada; Austin, Texas; and Salt Lake City, Utah.

SECINASAA Conference Under Section 19(c) of the Securities Act

The 15th annual federal/state uniformity conference was held inWashington, D.C. on May 4, 1998. Approximately 60 SEC officials metwith approximately 60 representatives of the North American SecuritiesAdministrators Association, Inc. to discuss methods of achieving greateruniformity in federal and state securities matters. After the conference, afinal report summarizing the discussions was prepared and distributed tointerested persons and participants.

SEC Government-Business Forum on Small Business Capital Formation

The 17th annual Government-Business Forum on Small Business CapitalFormation was held in Chicago, IL on September 24-25, 1998. Thisplatform for small business is the only governmentally-sponsored nationalgathering for small business, which offers annually the opportunity forsmall businesses to let government officials know how the laws, rules, andregulations are affecting their ability to raise capital. Next year'sGovernment-Business Forum will be in the Washington, D.C. area.

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Accounting and Auditing Matters

The Chief Accountant is the principal advisor to the Commission onaccounting and auditing matters arismg from the admtnistration of thefederal securities laws. Activities designed to achieve compliance withthe accounting and financial disclosure requirements of the securitieslaws include:

• rulemaking and interpretation initiatives that supplement private-sector accounting standards and implement financial disclosurerequirements;

• review and comment process for agency filings directed to improvingdisclosures in filings, identifying emerging accounting issues (whichmay result in rulemaking or private sector standard setting), andidentifying problems that may warrant enforcement actions;

• enforcement actions that impose sanctions and serve to deterimproper financial reporting by enhancing the care with whichregistrants and their accountants analyze accounting issues; and

• oversight of private sector efforts, principally by the FtnancialAccounting Standards Board (FASB), the American Institute ofCertified Public Accountants (AICPA), the Independence StandardsBoard (ISB), and various international accounting bodies, whichestablish accounting, auditing, and independence standards designedto improve financial accounting and reporting and the quality ofaudit practice, including standards applicable to multtnauonalofferings.

Key 1998 Results

We adopted revised rules and the staff issued interpretive guidance toconform with the provisions of new FASB standards on segmentreporting and earnings per share presentations. We also continued ourinvolvement in initiatives directed toward reducing the disparities that

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currently exist between different countries' accounting and auditingstandards. We issued a policy statement acknowledging theIndependence Standards Board (ISB) as the private sector body toestablish independence standards applicable to auditors of publiccompames.

Accounting-Related Rules and Interpretations

The Commission's accounting-related rules and interpretationssupplement private sector accounting standards and implement financialdisclosure requirements. Our principal accounting requirements arecontained in Regulation S-X, which governs the form and content offinancial statements filed with us.

Derivatives

During 1998, our accounting staff reviewed compliance by SECregistrants with recently adopted rules to require additional disclosuresconcerning derivatives and other financial instruments.t" The requireddisclosures are designed to help investors better assess the market riskexposures of registrants involved with these instruments and betterunderstand how those risks are managed. The rules clarify and expandexisting requirements for financial statement footnote disclosures aboutaccounting policies for derivatives and require disclosures outside thefinancial statements of qualitative and quantitative information about themarket risks inherent in derivatives and other financial instruments.

Segment Reporting

We issued revised rules for segment reporting to conform with changesmade by the FASB in its new standard on segment disclosures.i" Thenew standard was the result ofajoint undertaking of the FASB and theAccounting Standards Board of the Canadian Institute of CharteredAccountants. 125

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Earnings Per Share

During 1998, our staff issued an accounting bulletin to provide guidanceon various issues relating to the presentation of earnings per share. 126

The bulletin responded to certain revisions to the requirements forpresenting earnings per share adopted in a new FASB standard. 127

Year 2000

We issued guidance to assist registrants in complying with their disclosureobligations involving year 2000 issues.

Oversight of Private Sector Standard Setting

FASB. The SEC monitors the structure, activity, and decisions of theprivate-sector standard-setting organizations, which include the FASB.The Commission and staff work closely with the FASB in an ongoingeffort to improve the standard-setting process, including the need torespond to various regulatory, legislative, and business changes in atimely and appropriate manner. This close involvement includes staffparticipation on all FASB task forces formed to consider major FASBprojects.

A description of FASB activities in which the staff was involved isprovided below.

To further its long-term project to address financial instruments and off-balance sheet financing issues, the FASB issued a final standard onaccounting for derivative instruments and hedging activities.V" Thestandard requires that an entity recognize all derivatives as either assets orliabilities on the balance sheet and measure those instruments at fair value.Certain derivative instruments may be specifically designated as a hedge ifcertain restrictive conditions are met. Under the standard, the recognitionof gains and losses of a derivative depends on the intended use of thederivative and the resulting designation. Due to the complexitiesassociated with derivative instruments, the FASB has formed a

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Derivatives Implementation Group to (1) identify issues related to theImplementation of the new standard, and (2) develop recommendationsfor their resolution.

In a related action, the FASB published the first special report on themost frequently asked questions raised on its standard on reporting ofsecuritizations and other financial transactions in which financial assetsare transferred in exchange for cash and other assets. 129 The report isdesigned to aid understanding and implementing Statement 125 andrepresents the first of several reports on questions affecting a broad rangeof companies and financial institutions. 130

The FASB continued its deliberations on the accounting for businesscombinations presently encompassed by Accounting Principles BoardOpinion Nos. 16, Business Combinations, and 17, Intangible Assets.They are considering whether two separate and distinct methods ofaccounting for business combinations should continue. Commentatorsresponded to a FASB special report, Issues Associated with the FASBProject on Business Combinations, published to solicit comment aboutthe scope, direction, and conduct of the project.

The FASB' s discussions have focused primarily on accounting forgoodwill arising from a purchase business combination. The FASB is notlimiting its evaluation solely to accounting practices used in the UnitedStates, but also is evaluating practices in accounting for goodwillfollowed in other countries, such as the United Kingdom, which recentlyadopted a revised approach to accounting for goodwill. Comments willbe solicited on a position paper prepared by the G4+ 1 to narrowsignificant differences in the existing business combination standardswithin the members' jurisdictions. J3l

The FASB began work on a research project on business reporting. Thisproject evolved from previous recommendations made by the AlCPASpecial Committee on Financial Reporting and the Association forInvestment Management and Research through its study, FinancialReporting in the 1990s and Beyond. Its objectives are to:

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• develop recommendations for the voluntary and broad disclosure ofcertain types of nonfinancial information for all or selected industriesthat users of business reporting find helpful in making their investmentdecisions;

• develop recommendations for ways to coordinate generally acceptedaccounting principles and SEC disclosure requirements and to reduceredundancies; and

• study present systems for the electronic delivery of businessinformation and consider the implications of technology for businessreporting in the future.

The FASB's Emerging Issues Task Force (EITF), in which our ChiefAccountant participates, continued to identify and resolve accountingissues. During 1998, the EITF reached consensus on several significantissues, including questions relating to accounting for financialinstruments, consolidation policies, and deferred compensationarrangements. The objective of the process is to narrow divergentreporting practices of public companies within the context of existingauthoritative accounting standards.

AICP A. Our accounting staff oversaw various processes and activitiesconducted through the AICPA. These included (1) the AuditingStandards Board (ASB), which establishes generally accepted auditingstandards; (2) the Accounting Standards Executive Committee (AcSEC),which provides guidance through its issuance of statements of positionand practice bulletins; and (3) the SEC Practice Section (SECPS), whichseeks to improve the quality of audit practice by member accounting firmsthat audit the financial statements of public companies.

ASB. During 1998, the ASB issued a standard to provide guidance toauditors when performing an attestation engagement with respect tomanagement's discussion and analysis presentations of SEC registrants. 132

The ASB also issued guidance on agreed-upon procedures to be followedby auditors in reporting year 2000 readiness by broker-dealers and certaintransfer agents subject to SEC reporting requirements.l" The ASB

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issued a series of annual Audit Risk Alerts to provide auditors with anoverview of recent economic, professional, and regulatory developmentsthat may affect 1998 year-end audits.

AcSEC. The AcSEC issued a position statement on accounting forinternal use computer software costs, 134 reducing diversity in accountingfor such costs. A position statement also was issued on the reporting ofstart-up costs. 135 The AcSEC continued to address accounting issuesinvolving specialized industries, dedicating resources in such areas asmotion picture accounting, insurance accounting, and revenue recognitionfrom software transactions.

SEeps. Two programs administered by the SECPS are designed toensure that the financial statements of SEC registrants are audited byaccounting firms that have adequate quality control systems. A peerreview of member firms by other accountants is required every threeyears, and the Quality Control Inquiry Committee (QCIC) reviews on atimely basis the quality control implications of litigation against memberfirms that involves public company clients.

The Commission exercises oversight of the SECPS through frequentcontacts with the Public Oversight Board (POB) and members of theExecutive, SEC Regulations, Peer Review, and Quality Control InquiryCommittees of the SECPS. During the year, our accounting staffselected a random sample of peer reviews and evaluated selected workingpapers of the peer reviewers and the related POB files. The staff alsoreviewed QCIC closed case summaries and related POB oversight files.These reviews, together with discussions with the POB and QCIC staffs,provided us with information to assess the SECPS and QCIC processes.This oversight showed that the peer review and QCIC processes continueto result in member firms focusing on and achieving the important goal ofmaintaining and improving effective quality control systems. To help theprofession continue to achieve that goal, the SEC staff requested the POBto study the audit process, including an assessment of the design andeffectiveness of member firm's quality control systems. We willcooperate with and monitor the Panel on Audit Effectiveness, which wasappointed by the POB to undertake this study.

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ISB. During 1998, we worked closely with the ISB, a new private sectorbody formed to establish independence standards applicable to audits ofpublic entities. The standards are expected to promote investors'confidence in the audit process and in the securities markets. The ISBconsists of eight members. Four are public members who are notaffiliated with auditing firms, three are managing partners in auditingfirms, and one is the president of the AICPA. The Chairman of the ISB isrequired to be one of the four public members. ISB standard-settingmeetings are open to the public; draft ISB standards are published forpublic comment. We oversee the ISB process in the same manner as weoversee the FASB process.

In February 1998, we issued a policy statement acknowledging the ISB asthe private sector body responsible for establishing independencestandards for auditors of public entities.F" However, as in the areas ofaccounting and auditing, we retain the authority to supplement or modifyISB standards and to pursue enforcement and disciplinary proceedings.

The ISB issued a rule proposal that would require auditors of publiccompanies to disclose in writing to the company's audit committee allrelationships with the company that could affect auditor independence. Afinal standard, Independence Discussions with Audit Committees, wasadopted after year-end.

International Accounting and Auditing Standards

Requirements for listing or offering of securities vary from country tocountry. Issuers wishing to access capital markets in more than onecountry may have to comply with requirements that differ in manyrespects, including accounting principles to be used in the preparation offinancial statements. The differing requirements are believed to increasecompliance costs for registrants and create inefficiencies in accessingmultiple capital markets. Also, some countries' accounting principles aremore comprehensive and result in financial statements that providegreater transparency of underlying transactions and events than others.

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As a result, securities regulators around the world have been working onseveral projects to enhance the quality of reporting and disclosurerequirements around the world.

For the past several years, the International Accounting StandardsCommittee (lAS C) has been working to complete a core set ofaccounting standards for financial reporting in cross-border securitiesofferings. The International Organization of Securities Commissions(IOSCO), of which we are a member, will assess the completed set ofstandards to determine whether they should be endorsed for cross-borderlistings and offerings of securities.

Our accounting staff will assess the completed core standards in 1999, todetermine whether we should propose changing the current reconciliationrequirements for foreign issuers that file financial statements preparedusing IASC standards.

During 1998, the SEC staff began parallel efforts to identify auditing andquality control issues that could affect the effectiveness of financialstatements prepared in accordance with IASC standards. Potential issuesinclude:

• whether the accounting profession and firms have adequate auditingstandards, training, and technical resources to result in high qualityaudits of financial statements prepared using international accountingstandards; and

• what type of quality controls to monitor the application of auditingstandards are needed for audits on non-U.S. GAAP financialstatements (for example, a peer review function like that administeredby thePOB).

The SEC staff also has participated in discussions with the InternationalAuditing Practices Committee (lAPC) of the International Federation ofAccountants and has, through IOSCO, commented on some ofIAPC'srecent proposed international standards on auditing.

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Other Litigation and Legal Activities

The Office of General Counsel provides legal services to theCommission concerning its law enforcement, regulatory, legislative, andadjudicatory activities. The office represents the Commission in appealsin enforcement cases and provides technical assistance on legislativeinitiatives.

Key 1998 Results

With assistance from the General Counsel, the Commission adopted arule clarifying the "improper professional conduct" for which accountantscan be sanctioned under SEC Rule of Practice 102(e). The Commissionalso testified regarding, and the staff played a significant role in theenactment of, the Securities Litigation Uniform Standards Act of 1998,which was signed by President Clinton in November 1998.

Significant Litigation Developments

Primary Violator Liability

In SEC v. US. Environmental.T' the United States Court of Appeals forthe Second Circuit ruled that a stockbroker could be liable as a primaryviolator, and not just as an aider and abettor, for stock price manipulationif he had, at the direction of the promoter of a manipulation, executedmatched orders and wash sales transactions that he knew were part of thepromoter's manipulative scheme. The court of appeals ruled that astockbroker could be so liable even if he did not stand to benefitpersonally from the manipulative scheme (aside from receivingcommissions for executing the trades) and did not share the promoter'spurpose to manipulate the market.

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In Klein v. Boyd, 138 the Commission filed a friend of the court briefarguing that a person-sin this case a lawyer--who drafts a documentknowing that it contains material misrepresentations and omissions, andwho knows that the document will be given to investors, is liable as aprimary violator, even if his identity is not known to the investors. Theparties subsequently settled the case, and the appeal was dismissed.

Insider Trading

In SEC v. Adler, 139 the Court of Appeals for the Eleventh Circuit ruledthat the possession of material nonpublic information by an insider whotrades in his company's stock gives rise to a strong, but rebuttable,inference that the insider used the information. In so ruling, the court didnot accept the position, urged by the Commission, that an insider whotrades in his company's stock while in possession of material nonpublicinformation is liable for insider trading regardless of whether his tradingwas based on that information.

In United States v. Smith,140 a criminal case in which the Commission hadfiled a friend of the court brief, the United States Court of Appeals for theNinth Circuit stated in dictum that, in order for an insider to violate theprohibition against insider trading in his company's stock, he must notonly have traded while in possession of nonpublic information but mustalso have used the information in his trading. Because it was a criminalcase, the court declined to adopt an inference of use from the fact ofpossession, but expressly left open whether it would do so in a civil casebrought by the Commission.

The Shingle Theory and Excessive Markups

In Banca Cremi v. Alex. Brown & Sons, Inc.,141the court of appeals, asurged by the Commission in friend of the court briefs, held that a broker-dealer has a duty to disclose excessive markups by virtue of the "shingletheory," under which a broker-dealer makes an implied representation offair dealing with customers. The court also agreed with the Commissionthat whether a markup is excessive must be determined on a case-by-case

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basis, taking into account all relevant factors. The court, however,viewed debt securities as subject to the same 5% markup guidelineapplicable to equity securities, in contrast with the Commission's positionthat markups on debt securities should be significantly lower than thoseon equity securities.

In Grandon v. Merrill Lynch & Co., 142 the court of appeals took judicialnotice of the Commission's briefs in the Banca Cremi case. The SecondCircuit endorsed the shingle theory, agreed with the Commission thatexcessiveness of markups must be determined based on all relevantfactors in each case, and held that the absence of clear guidelines did notpreclude finding any percentage excessive in appropriate circumstances.The court also recognized the Commission's longstanding view thatmarkups on debt securities should be significantly lower than those onequity securities.

In the pending appeal in Press v. Chemical Investment Services Corp., 143

the lower court had dismissed the plaintiff's claim of a fraudulentundisclosed excessive markup on the ground that the markup was below3% and, in the district court's view, the Commission's decisions andreleases had established a safe harbor of3% to 3-1/2% for markups ondebt securities, below which markups as a matter of law could not beexcessive. The Commission filed a friend of the court brief in the court ofappeals, urging that there is no safe harbor percentage for excessivenessof markups.

"In Connection With" Requirement

In Jakubowski v. SEC, 144 the court of appeals ruled in favor of theCommission in a Commission action in which the defendant purchasedsavings and loan conversion stock from the savings institutions bymisrepresenting on stock order forms that the purchasers were depositaccount holders, who had nontransferable stock subscription rights asrequired by applicable banking regulations. The court rejected thedefendant's argument that the antifraud provisions of section 1O(b) of theSecurities Exchange Act of 1934 (Exchange Act) prohibit onlymisrepresentations about the stock itself or the consideration paid,

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holding that in the circumstances of this case the misrepresentations of thepurchasers' identities were "in connection with the purchase or sale" ofthe stock within the meaning of section 1O(b) because they induced theinstitutions to sell.

The Commission addressed the pleading standard under the PrivateSecurities Litigation Reform Act 1995 (Reform Act) in friend of the courtbriefs filed in the pending appeals in Hoffman v. Comshare, Inc., 145 and Inre Silicon Graphics, Inc. Sec. Litig. 146 These briefs took the position thatthe pleading standard did not eliminate recklessness as a basis for liabilityand that courts should rely upon the Second Circuit tests in interpretingthe pleading standard of the Reform Act.

Disciplinary Standards for Accountants

In Potts v. SEC, 147 the United States Court of Appeals for the EighthCircuit affirmed a Commission decision disciplining an accountant forimproper professional conduct as concurring partner in an audit Thecourt found that substantial evidence supported the Commission's findingthat the accountant had recklessly failed to comply with the applicableprofessional standards, and it rejected the accountant's assertion thatthose standards were unconstitutionally vague as applied to a concurringpartner.

The Double Jeopardy Clause

In SEC v. Palmisano.r'" the United States Court of Appeals for theSecond Circuit rejected a defendant's claim under the multiplepunishment prong of the Fifth Amendment's Double Jeopardy Clause thatthe Commission action for disgorgement and a civil penalty was barred byhis prior criminal conviction for the same misconduct. The court foundthat neither disgorgement nor the civil penalty was punishment forpurposes of the Double Jeopardy Clause.

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Significant Adjudication Developments

The staff submitted to the Commission 80 draft opinions and ordersresolving substantive motions. The Commission issued 47 opinions and35 orders, and the staff resolved by delegated authority an additional 71motions. Appeals from decisions of administrative law judges continue tomake up a high percentage of the Commission's docket.

Jurisdiction

The Commission in Morgan Stanley & Co., Inc. 149 considered whether ithas jurisdiction under the Exchange Act to consider an appeal of adecision ofthe National Association of Securities Dealers, Inc (NASD)to deny Morgan Stanley an exemption from a two-year prohibitionagainst engaging in municipal securities business in Massachusetts due toa violation of Municipal Securities Rulemaking Board (MSRB) rule G-37Section 19(d) of the Exchange Act authorizes Commission review ofNASD action generally if it:

• imposes any final disciplinary sanction,

• denies membership to any applicant,

• prohibits or limits access to services offered by such organization, or

• bars any person from becoming associated with a member.

The Commission concluded that, because the NASD's decision to denyMorgan Stanley an exemption did not fall into any of these jurisdictionalcategories, it was not reviewable by the Commission.

Sanctions

In VIctor Teicher, Victor Teicher & Co., L.P., & Ross S. Frankel, ISO theCommission reaffirmed its authority under Meyer Blinder'?' to imposecollateral bars. It found that Ross S. Frankel's misconduct satisfied thetwo-pronged test for imposing such a bar because it was both egregious

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and, by its nature, flowed across the various securities professions andposed a risk of harm to the investing public. Commissioner Isaac Hunt,dissenting in part, stated his view that the Commission and its staff maynot seek collateral sanctions in litigated matters, and should not seek themin settled matters.

Fraud/Sales Practices ViolationslFailure to Supervise

The Commission in LiC: Wegard & Co., Inc. & Leonard B. Greer'r'concluded that the respondents deliberately assisted two brokerage firmsin manipulating securities. The respondents' purchases of certainsecurities played a significant role in causing the price to nearly double in10 trading days. The Commission concluded that scienter was establishedby the firm's trading pattern, which was inconsistent with the legitimatebusiness objective of seeking a profit.

In Steven P. Sanders and Daniel M Porush, 153 the Commission upheldNASD findings that Sanders was responsible for customers being chargedexcessive and fraudulent prices, and that Porush was responsible fordeficient written supervisory procedures and a supervisory system thatfailed to prevent or detect the pricing violations at issue TheCommission found that, because Stratton Oakmont dominated andcontrolled the market for the underlying security, it was appropriate tocalculate Stratton's markups in the warrants based on itscontemporaneous wholesale cost In finding Porush liable for supervisoryfailure, the Commission rejected his defense that, although Porush heldthe title of president during the period at issue, another individual at thefirm was the actual chief executive officer. The Commission noted thatPorush executed a registration form for the firm, in which he describedhimself as president, and that the record established that Porush did havesome supervisory responsibility.

The Commission remanded an administrative proceeding against D.E.Wine Investments, Inc., W Randal Miller, Kenneth Karpf, and DuncanWinel54 because it determined that the law judge's calculation ofD.E.Wine's markups and markdowns conflicted with Commission precedent

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in several respects. Specifically, the Commission found that the lawjudge:

• improperly gave a preference to trades involving D.E. Wine overother market makers in determining the prevailing market price forthe securities at issue,

• failed to use interdealer trades occurring after the particular retailtrade in question to determine the prevailing market price, and

• erroneously based some of the markups on D.E. Wine'scontemporaneous costs.

The Commission also considered and rejected respondents' argument thatthey were entitled to base their retail prices on quotations, in view of theabundance of information in the record concerning interdealer trades.The Commission remanded the case for further factual findings and arevised analysis consistent with its opinion.

Denial of Access Claims/Market Listing Issues

In Interactive Brokers LLC, 155 the Commission set aside action of thePacific Exchange, Inc. (PCX) restricting the use of hand-held brokerageorder routing terminals in its options trading crowds. Hand-helds arecomputer devices that can receive customer orders directly. Floorbrokers carry them onto the trading floor, speeding execution of orders.A pilot program to use hand-helds was established by the PCX in 1995.Subsequently, the PCX adopted a formal policy on hand-helds thatcreated certain restrictions. The Commission held that the PCXrestriction on Interactive's use of hand-helds was an unlawful prohibitionor limitation of access to services. The Commission found that the pilotprogram, which was never submitted to the Commission for its approvalas required by the Exchange Act, was an invalid rule. Because PCX'srestriction on the use of hand-he Ids was imposed under an invalid rule,the Commission set it aside and ordered the PCX to allow the use ofhand-helds in trading crowds.

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Net Capital Violations

In First Colorado Financial Services Company, Inc. and Mark P.Augustine, 156 the Commission modified and remanded NASD disciplinaryaction against First Colorado Financial Services and its registeredfinancial and operations principal Mark P. Augustine. The Commission,unlike the NASD, determined that First Colorado, an introducing firmoperating as a $5,000 broker, did not violate the net capital rule byparticipating in the firm commitment underwriting when the firm placedfor its customer a single order for 500 shares of a company (withoutsoliciting the order from its customer or marketing the offering). TheCommission, however, agreed with the NASD that First Colorado,through Augustine, had filed an inaccurate Financial and OperationalCombined Uniform Single Report. Therefore, the proceedings wereremanded for a redetermination of sanctions because it was unclear whatsanctions the NASD would have imposed for the reporting violationalone.

Denial of Proposed Futures and Futures Options Trading on StockIndices Under the Commodity Exchange Act

Following a hearing conducted pursuant to the Commodity Exchange Act(CEA), the Commission in The Chicago Board of Trade 157 denied theapplications of the Chicago Board of Trade (CBOT) to trade futures andfutures options contracts on the Dow Jones Utilities Average Index andthe Dow Jones Transportation Average Index. These applications werethe first for non-diversified stock indices received by the Commissionsince 1984 Non-diversified stock indices reflect securities of issuers inthe same or similar industry. The CEA requires that the Commission findthat a non-diversified stock index reflects a substantial segment of themarket as a whole, or be comparable to such a measure, in order to allowthe CBOT to trade in these stock indices. The Commission found, basedon the totality of the circumstances and in light of its experience inregulating the equity markets, that the Dow Jones Utilities Average Indexand Dow Jones Transportation Average Index did not satisfy the CEA'ssubstantial segment requirement. In addition, the Commission interpretedthe "comparable to" standard to require that the proposed index must be

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comparable to the widely-published index both in measuring andreflecting the segment. Accordingly, the Commission rejected theCBOT's view that an index was comparable to a second widely-publishedindex if the first index's movement tracked the widely-published index'smovement. Because the proposed contracts' inability to satisfy thesubstantial segment requirement was alone sufficient to deny the CBOT'sapplications, the Commission did not resolve the question whether theproposed contracts met the alternative requirement that they not bereadily susceptible to manipulation.

Legal Policy

The General Counsel's responsibilities include providing legal and policyadvice on SEC enforcement and regulatory initiatives before they arepresented to the Commission for a vote. The General Counsel alsoadvises the Commission on administrative law matters, and has substantialresponsibility for carrying out the Commission's legislative program,including drafting testimony, developing the Commission's position onpending bills in Congress, and providing technical assistance to Congresson legislative matters.

On the regulatory front, the General Counsel played a significant role indrafting an SEC rule clarifying the improper professional conduct forwhich accountants can be sanctioned under SEC Rule of Practice 102( e)In the administrative area, the General Counsel took a lead role incoordinating the preparation of reports to Congress on the year 2000readiness of the securities industry, and on several matters related to theSmall Business Regulatory Enforcement Fairness Act of 1996 In thelegislative area, the General Counsel played a significant role in theenactment of the Securities Litigation Uniform Standards Act of 1998.

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Significant Legislative Developments

Litigation Reform

On November 3, 1998, President Clinton signed into law S. 1260, theSecurities Litigation Uniform Standards Act of 1998. The Act preemptsclass actions involving certain securities (generally, nationally tradedsecurities and shares of open-end mutual funds) that are brought byprivate plaintiffs in state court or under state law. The Act does notpreempt actions, such as shareholder derivative suits, that relate to certainprovisions of state corporate governance law. Notably, the UniformStandards Act does not affect the standard of liability in federal securitiesfraud actions, and its legislative history stresses the importance of liabilityfor reckless conduct in such actions.

• In addition to its testimony regarding the impact of prior securitieslitigation reform given on October 21, 1997 before the Subcommitteeon Finance and Hazardous Materials of the House CommerceCommittee, the Commission testified twice in 1998 with regard to theHouse and Senate versions of the Uniform Standards Act, H.R. 1689and S. 1260 The Commission testified regarding the Senate bill onOctober 29, 1997 before the Subcommittee on Securities of theSenate Banking Committee, and regarding the House bill on May 19,1998 before the Subcommittee on Finance and Hazardous Materialsof the House Commerce Committee. The Commission's testimonyinitially expressed concern that the bill was too broad and that theneed for further legislation to reform securities litigation was notclearly established. Eventually, however, the Commission was able tosupport the bill, based on the addition of the corporate law carve-outand other amendments, and based on reassurances in the legislativehistory that the bill was not meant to alter the intent standard forprivate securities litigation that had been established by the PrivateSecurities Litigation Reform Act of 1995, and specifically, thatliability for reckless conduct would be preserved.

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Foreign Corrupt Practices Act

On November 10, 1998, President Clinton signed into law S. 2375, theInternational Anti-Bribery Act of 1998, which amended the ForeignCorrupt Practices Act of 1977 (FCP A). This statute implements theConvention on Combating Bribery of Foreign Public Officials inInternational Business Transactions, a treaty negotiated by theOrganization for Economic Cooperation and Development. TheConvention establishes standards for prohibiting bribery of foreignofficials to obtain or retain business. The International Anti-Bribery Actadds the concept of nationality jurisdiction to the FCP A, so that theFCPA now covers acts of United States businesses and nationals infurtherance of unlawful payments that take place wholly outside theUnited States, whether or not the transactions involve interstatecommerce. The Act also changes certain provisions of the FCP A toconform them to the Convention by banning payments made to secureany improper advantage, expanding the definition of covered foreignofficial to include officials of public international organizations, andsubjecting both foreign and United States citizens to civil and criminalpenalties. The Commission testified in support of these changes at ahearing on the House version ofthe bill (H.R. 4353) on September 10,1998 before the Subcommittee on Finance and Hazardous Materials ofthe House Commerce Committee.

Securities Activities of Banks

In 1998, Congress again devoted considerable attention to Glass-Steagallreform. The leading vehicle for banking reform, H.R. 10, the FinancialServices Competitiveness Act of 1998, was the subject of extensivenegotiations between the Banking and Commerce Committees before itpassed the House by a one-vote margin in May 1998. The bill wasreferred to the Senate and, after several days of hearings, reported out ofthe Senate Banking Committee in September 1998. Although H.R. 10was never scheduled for a floor vote in the Senate, Representative Leachre-introduced the Senate Banking Committee version ofH.R. 10 (asH.R. 4870) in the House shortly before adjournment, and he expressed

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his intention to do so again when the 106th Congress convened in January1999.

On June 25, 1998, the Commission testified before the Senate BankingCommittee regarding H.R. 10 and its views regarding Glass-Steagallreform. In general, the Commission has supported Glass-Steagall reform,provided that the resulting regulatory structure is established alongfunctional lines. The concept of functional regulation would require thata bank engage in most securities activities through a registered broker-dealer, fully subject to the federal securities regulatory scheme. TheCommission has testified that this is important because banking law doesnot contain specific provisions that provide for investor protection; theCommission believes that investors who purchase securities throughbanks should receive the same investor protections as those who purchasesecurities from broker-dealers. Functional regulation would achieve thisresult. The Commission's testimony on HR. 10:

• supported the elimination of the bank exclusions from the federalsecurities laws;

• advocated the concept of a "two-way street" to allow equalcompetitive opportunities to all financial services providers; and

• criticized the application of bank-oriented safety and soundnessregulation to securities firms' activities, which would inhibit risk-taking by securities firms affiliated with banks.

SEC-Commodity Futures Trading Commission Issues

In 1998, Congress imposed a moratorium on the Commodity FuturesTrading Commission's (CFTC's) regulation of the over-the-counter(OTC) derivatives market, in response to a May 7, 1998 CFTC conceptrelease on the OTC derivatives market suggesting that the CFTC mightrevisit the existence and scope of exemptions under CFTC rules for swapsand hybrid instruments. The concept release raised concerns in the OTCderivatives market about legal uncertainty and the validity andenforceability of existing and future OTC derivatives contracts. Because

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of the size and importance of the OTC derivatives market to the UnitedStates economy, the Treasury Department, along with the Commissionand the Federal Reserve Board, sought legislative action to prevent theCFTC from dismantling the swaps and hybrid instruments exemptions orfrom imposing additional requirements on such products.

Two bills were introduced in the House to prevent the CFTC from actingfurther with respect to OTC derivatives--H.R. 4062, on June 16, 1998,and H.R. 4507, on August 6, 1998. The Commission testified in supportof the principles behind these bills at hearings on June 10, 1998 before theHouse Agriculture Committee; on July 24, 1998 before the HouseBanking Committee; and on July 30, 1998 before the Senate AgricultureCommittee. Ultimately, language inserted into H.R. 4328, the omnibusspending bill passed at the end of the 105th Congress, placed amoratorium on CFTC regulation of the OTC derivatives market untilMarch 30, 1999, or until the enactment of CFTC authorizing legislation.As a result of the CFTC's concept release and the collapse of Long-TermCapital Management, the President's Working Group on FinancialMarkets is now preparing separate studies on hedge funds and the OTCderivatives market, both of which are expected to be the subject ofcongressional hearings in fiscal 1999.

Year 2000 Computer Issue

In response to an inquiry from Congressman Dingell of the HouseCommerce Committee, the SEC staff submitted a report in June 1998 onthe readiness of the United States securities industry and publiccompanies to respond to the year 2000 computer issue, and on theirdisclosure obligations regarding year 2000 issues. The Commissiontestified four times in 1998 regarding year 2000 readiness and disclosureissues--on October 22, 1997 and June 10, 1998 before the Subcommitteeon Financial Services of the Senate Banking Committee, and on July 6,1998 and September 17, 1998 before the Senate Special Committee onthe Year 2000 Technology Problem. Congress passed S. 2392, the Year2000 Information Disclosure Act of 1998, a bill promoted by theAdministration's Year 2000 Task Force and by industry groups, and thatwas signed into law on October 19, 1998. The Act attempts to

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encourage businesses and other entities to share information about theiryear 2000 solutions by creating a safe harbor from private liability formost statements about this information. The Act's safe harbor does notapply to actions under the securities laws based on information containedin SEC filings or on disclosures accompanying a solicitation of the offeror sale of securities.

SEC Appropriations and Fees

On March 18, 1998, the Commission testified before the Subcommitteeon Commerce, Justice, and State, the Judiciary, and Related Agencies ofthe House Appropriations Committee. The testimony supported thePresident's 1999 budget request of $341.1 million for the Commission.The Commission testified again in support of the Commission's budgetrequest on March 19, 1998 before the Subcommittee on Commerce,Justice, and State, the Judiciary, and Related Agencies of the SenateAppropriations Committee.

From October 1, 1998 until final signing of an omnibus appropriations billon October 21, 1998, the Commission operated pursuant to sixcontinuing resolutions, which provided the Commission with authority tooperate at its fiscal 1998 budget level. On October 21, 1998, H.R. 4328,the Omnibus Consolidated and Emergency Supplemental AppropriationsAct of 1998, was enacted. The Act provides the SEC with $324 millionfor 1998, and its legislative history states that the SEC is expected to usean additional $6 million from its carryover funds. Separately, the SECalso received $7.4 million in funding for year 2000 preparations. Becauseof controversy over the census, which is included in the Commerce-Justice-State appropriations package with the SEC, all agencies in thatpackage, including the SEC, are funded only though June 15, 1999. Inaddition, three ultimately unsuccessful bills were introduced in 1998 tocap SEC fee collections under section 31 of the Exchange Act--H.R.4120, introduced June 23, 1998; H.R. 4213, introduced July 14, 1998;and H.R. 4269, introduced July 17, 1998.

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SEC Reauthorization

H.R. 1262, a bill reauthorizing the SEC at funding levels of $320 millionfor 1998 and $342.7 million for 1999, passed the House on November13, 1997. When the bill failed to move in the Senate, the HouseCommerce Committee attached to H.R. 1689, the House version of theSecurities Litigation Uniform Standards Act, language reauthorizing theSEC for appropriations of up to $351.3 million for 1999. This languagewas preserved in conference and ultimately signed into law as part of S1260 on November 3, 1998.

Bankruptcy

The omnibus spending bill signed into law on October 21, 1998 containedprovisions amending the Bankruptcy Code to protect the SEC's ability toobtain asset freezes and receivers despite a bankruptcy filing by adefendant. On March 18, 1998, our staff in the Division of Enforcementtestified in support of these provisions before the Subcommittee onCommercial and Administrative Law of the House Judiciary Committee.The new provisions remove any doubt that, in the context of a regulatoryproceeding, asset freezes, receiverships, and actions taken to recoverassets are unaffected by the automatic stay that follows the filing of adebtor's bankruptcy provision. They may discourage defendants fromfiling for bankruptcy as a litigation tactic.

The Public Utility Holding Company Act of 1935

In 1998, Congress continued to consider several bills to repeal the PublicUtility Holding Company Act of 1935 (PUHCA). Repeal ofPUHCA hasbeen stalled as Congress debates whether to simply repeal PUHCA or torepeal it as part of more sweeping electric utility deregulation. Two billswere introduced in 1998 to repeal PUHCA, both similar to a bill (S. 621)that had been introduced in 1997. These were H.R. 3976, the PublicUtility Holding Company Act of 1998, introduced on May 22, 1998,which was virtually identical to S. 621, and S. 2287, the ComprehensiveElectricity Competition Act, introduced on July 10, 1998, which linkedPUHCA repeal to reform of other aspects of the federal regulatory

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scheme for electricity. Although the Commission was not asked to testifyregarding either of these bills, its testimony in prior years has supportedS. 621, the model for HR. 3976, but has taken no position on the broaderissues of electric utility deregulation.

Corporate Reorganizations

The Commission, as a statutory adviser in cases under Chapter 11 of theBankruptcy Code, seeks to assure that the interests of public investors incompanies undergoing bankruptcy reorganization are protected. Duringthe past year, the Commission entered a formal appearance in 36 Chapter11 cases with significant public investor interest.

Committees

Official committees negotiate with debtors on the formulation ofreorganization plans and participate in all aspects of a Chapter 11 case.The Bankruptcy Code provides for the appointment of officialcommittees for stockholders where necessary to assure adequaterepresentation of their interests During 1998, committees wereappointed in two cases as a result of informal discussions by our staffwith U S. Trustees, who have broad administrative responsibilities inbankruptcy cases

Disclosure StatementslReorganization Plans

A disclosure statement is a combination proxy and offering statementused to solicit acceptances for a reorganization plan. During 1998, theCommission's bankruptcy staff commented on 92 of the 130 disclosurestatements it reviewed. Recurring problems with disclosure statementsincluded inadequate financial information, lack of disclosure on theissuance of unregistered securities and insider transactions, and planprovisions that contravene the Bankruptcy Code Most of the staff'scomments to debtors or plan proponents were adopted, formalCommission objections were filed in seven cases.

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The Commission made successful formal objections to five plans ofreorganization that improperly attempted to release officers, directors,and other related persons from liability. The staffwas able to obtain thedeletion of improper third party release provisions in six cases during thedisclosure statement review and comment process. This is a significantissue for investors because in many cases debtors improperly seek to usethe bankruptcy discharge to protect officers and directors from personalliability for various kinds of claims, including liability under the federalsecurities laws.

In three cases, the Commission successfully objected to attempts todischarge claims of creditors and sell the remaining assetless publiccorporate shell. The staffwas able to prevent improper attempts to usethe debtor's public shell in four cases during the disclosure statementreview and comment process. The trafficking in public companycorporate shells-which can lead to stock market manipulation-visspecifically prohibited by the Bankruptcy Code

Law Enforcement Matters

Bankruptcy issues frequently arise in Commission enforcement actions.In In re Bilzenan.r" the Eleventh Circuit concluded that the district courtwas correct to apply the legal doctrine of collateral estoppel (that is, toaccept the factual findings of another court and preclude relitigation ofthe issue) to the Commission's $33 million securities fraud disgorgementjudgment. The court found that all of the legal requirements forexcluding a debt from discharge in bankruptcy were established by theprior criminal and civil proceedings against Bilzerian, and directed thebankruptcy court to enter an order holding that the Commission's fraudclaim was not discharged by Bilzerian's bankruptcy 159

In In re Cross,160 the Commission appealed a bankruptcy court orderdismissing its $6.5 million debt against Cross, which was based upon anillegal offering of unregistered debt securities, to the BankruptcyAppellate Panel for the Ninth Circuit. The Commission argued that thisdebt could not be discharged in Cross' bankruptcy because it was basedon his fraudulent conduct. The bankruptcy court had held that the

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Commission lacked standing as a creditor because payment of theCommission's claim was to be made to a court-appointed receiver. 161

The Appellate Panel agreed with the Commission's position and reversedthe bankruptcy court's decision, holding, that "as the chief enforcer of thesecurities laws, the Commission should not have to depend upon thereceiver to enforce its judgments," and that "designating the receiver asthe depository was merely a procedural step done for administrativeconvenience.v'f'' The panel concluded that the Commission held a validclaim against the debtor and was entitled to argue that this claim couldnot be discharged in Cross' bankruptcy.

In In re Hibbard Brown, 163 a Chapter 11 case involving a penny stockbroker-dealer, the Commission objected to confirmation of a plan thatsought to implement an unfair settlement with former registeredrepresentatives and employees who defrauded investors of more than$115 million. The Commission argued that the proposed contributions bythese third parties were not enough to justify a release of all claimsarising from their fraudulent activity. The bankruptcy court confirmedthe plan notwithstanding the Commission's objection.

Ethical Conduct Program

In 1998, our ethics staff responded to 1,475 counseling inquiries andreviewed and cleared 162 speeches and articles submitted by SECemployees. The staff assisted in the renomination process of theChairman.

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Municipal Securities Initiatives

The Office of Municipal Securities provides expertise on municipalsecurities matters to the Commission and its divisions, and to municipalmarket participants.

Key 1998 Results

The Office of Municipal Securities devoted significant attention to alerting themunicipal market of the need to disclose material issues arising from the year2000. The staff also continued to coordinate the agency's efforts to end pay-to-play practices in the municipal securities markets.

Municipal Securities Disclosure

The Office of Municipal Securities worked closely with various SEC divisionsand offices and municipal market participants on a number of importantdisclosure issues. Some of those issues included'

• the need to disclose material issues arising from the year 2000;

• implementation of, and compliance with, amendments to rule 15c2-12,which requires secondary market disclosure; and

• recent SEC enforcement decisions that apply the antifraud provisions ofthe federal securities laws to municipal securities.

Outreach

Our municipal securities staff met with numerous organizations representingparticipants involved in the municipal finance industry. Among theorganizations were the Government Finance Officers Association, National

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League of Cities, National Association of Counties, The Bond MarketAssociation, National Association of Bond Lawyers, and a variety of regionaland local municipal government educational groups. The meetings focusedon methods of improving compliance with existing regulations. The Office ofMunicipal Securities acted as a point of contact for municipal bond issuersand provided them access to the Commission.

Technical Assistance

The Office of Municipal Securities provided technical assistance to variousSEC divisions and offices on various municipal securities matters. Some ofthe more significant matters included:

• enforcement cases involving municipal securities and the municipalsecurities markets (e.g., Securities and Exchange Commission v.Rauscher Pierce Refsnes, Inc. and James R FeithamJ64 and In theMatter of Meridian Securities Inc. et al. 165);

• the tax exempt aspects of municipal securities, including the taxregulations relating to situations involving potential yield burning;

• Municipal Securities Rulemaking Board rule G-37, which prohibits pay-to-play practices in the municipal securities markets;

• Municipal Securities Rulemaking Board rule G-38, which requiresdisclosure regarding consulting arrangements;

• various issues surrounding the implementation of amendments to rule15c2-12;

• issues pertaining to individual investors and municipal securities pricetransparency; and

• municipal bankruptcy and other municipal securities matters.

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Economic Research and Analysis

The SEC's economtc analysis program provides the techmcal and analyticalsupport necessary to understand and evaluate the economic effects ofCommission regulatory policy, including the costs and benefits ofrulemaking initiatives. The staff reviews all rule proposals to assess theirpotential effects on:

• small businesses as required by the Regulatory Flexibility Act andSection 502 of the Small Business Investment Incentives Act, both enactedin 1980;

• competition within the securities industry and competing securiuesmarkets as required by the 1975 amendments to the Securities ExchangeAct of 1934;

• efficiency, competition, and capital formation pursuant to Section 106 ofthe National Securities Markets Improvement Act; and

• costs, prices, investment, innovation, and the economy as required by theSmall Business Regulatory Enforcement Fairness Act.

Key 1998 Results

Our economic analysis staff analyzed the performance of the two circuitbreakers triggered by the sharp decline in stock prices on October 27,1997. The staff also provided economic advice, empirical data, andanalytical support in connection with important policy initiatives, such asthe Securities Act Reform Release, the Exchange Concept Release, andRegulation ATS. These initiatives are designed to modernize andstreamline securities regulations.

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Economic Analysis and Technical Assistance

Securities Offerings and Capital Formation

Our economic analysis staff provided substantial quantitative economicevidence on a number of rulemaking projects.

• Securities Act Reform Release. Provided economic advice andanalysis focusing on how various aspects of the proposal designed tostreamline the securities offering process could lower capital-raisingcosts and enhance the availability of information to investors.

• Shareholder Proposals. Provided extensive empirical data andanalyses in connection with proposed changes to the proxy rules,concentrating on how the rule change could affect the number ofshareholder proposals submitted and shareholder wealth.

• Regulation S. Analyzed the impact of new disclosure requirementsgoverning offshore distributions of securities, focusing on the timingand amount of sales and the cost of raising capital under the amendedregulation.

• Securities Act Rule 701. Analyzed 1,300 filings of Form 701 for afive-year period and provided data on the number of companies usingthe rule to issue securities to employees, consultants, and advisersunder compensatory plans or contracts, such as profit sharing andsavings plans.

Mutual Funds

Our staff provided advice and analytical support to the Division ofInvestment Management in connection with the development of theprofile prospectus and methods of displaying the riskiness of funds. Theadvice and technical assistance focused on ways to improve mutual funddisclosures to help investors evaluate and compare funds.

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Market Structure and Trading Practices

Our economic analysis staff provided data, analyses, and economic adviceto help craft policy initiatives.

• The Exchange Concept Release and Regulation ATS. The staffprovided data, analyses, and economic advice to help the Division ofMarket Regulation craft the Exchange Concept Release andRegulation ATS. These address the need to update the regulatoryframework for exchanges and alternative trading systems (ATSs) inresponse to rapid technological developments affecting the securitiesmarkets. The advice and analysis focused on how the new displayand access requirements of Regulation ATS could enhance markettransparency, narrow bid-ask spreads, and provide investors withopportunities for better transaction prices.

• Report to the President's Working Group on Financial Markets. Thestaff provided extensive empirical data and analytical support,including an analysis of the performance of the two circuit breakerstriggered by the sharp decline in stock prices on October 27, 1997.The analyses was incorporated into a report issued by the Division ofMarket Regulation in September of 1998.

• Nasdaq's Fixed Income Pricing System. The staff conducted the first-ever empirical analysis of this system's bond trading data. Theanalysis assessed the transparency and trading patterns ofapproximately 1,350 below-investment-grade corporate bonds.

• Regulation M. This rule, which went into effect in April 1997,replaces the Commission's trading practice rules governing potentiallymanipulative trading during a securities distribution. The staffconducted a study of the aftermarket activities of underwritingsyndicates and provided a comprehensive review and analysis ofempirical data on underwriters' use of penalty bids and short -coveringfollowing the completion of securities distributions.

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• Order Handling and Tick Size Rules. The staff analyzed the effect ofthe Commission's new order handling rules and reductions in theminimum tick size from eighths to sixteenths. The analyses examinedthe impact of these events on bid-ask spreads, quotation depth, andtransaction prices relative to contemporaneous price quotations. Theanalyses indicated these changes narrowed bid-ask spreads and thatinvestors have benefited from their ability to trade at the improvedprice quotations.

Enforcement Issues

Our economic analysis staff provided assistance in investigations andenforcement actions involving the Nasdaq market, yield burning, insidertrading, mutual fund trade allocation, market manipulation, fraudulentfinancial reporting, and other violations of securities laws. The staffapplied financial economics and statistical techniques to determinewhether the elements of fraud were present and to estimate the amount ofdisgorgement to be sought. They also assisted in evaluating thetestimony of experts hired by opposing parties.

Inspections and Examinations

Our economic analysis staff worked closely with the SEC's Office ofInspections and Examinations (OCIE) to:

• apply large sample and statistical techniques to improve the efficiencyand effectiveness of OCIE' s examinations and inspections;

• assist in developing a system to prioritize broker-dealer examinationsbased on empirical data from regulatory reports; and

• assist OCIE in a number of its inspections involving securitiesexchanges, Nasdaq market makers, electronic communicationsnetworks, and mutual fund complexes.

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Special Projects

In addition to working with the SEC divisions and offices, the economicanalysis staff:

• analyzed the extent oftrading in ATSs and the accuracy of transactionfees collected by the Commission;

• provided assistance in connection with applications by exchanges totrade options and swaps contracts and in conjunction withapplications for exemptions filed by public utilities; and

• provided several offices and divisions with assistance in understandingthe economic value of complex financial instruments and transactions,such as collateralized mortgage obligations and wrapper agreements.

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Policy Management and Administrative Support

Our policy management and administrative support staff provide theCommission and operating divisions with the necessary services toaccomplish the agency's mission. The responsibilities and activitiesinclude developing and executing management policies, formulating andcommunicating program policy, overseeing the allocation andexpenditure of agency funds, maintaining liaison with the Congress,disseminating information to the press, and facilitating Commissionmeetings. Administrative support services include informationtechnology, financial, space and facilities, and human resourcesmanagement.

Key 1998 Results

The Commission held 50 meetings in 1998, during which it considered186 matters The Commission acted on 1,051 staff recommendations byseriatim vote. The agency collected $1.78 billion in fees, of which $250million was used to directly fund the agency in 1998.

Policy Management

Commission Activities

During the 50 Commission meetings held in 1998, the Commissionconsidered 186 matters, including the proposal and adoption ofCommission rules, enforcement actions, and other items that affect thenation's capital markets and the economy. The Commission also acted on1,051 staff recommendations by seriatim vote.

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Significant Regulatory Actions

• Adoption of requirements for plain English disclosure.

• Adoption of measures intended to deter microcap fraud

• Adoption of a new mutual fund disclosure document, the profileprospectus.

• Interpretations and rules for issuers, broker-dealers, investmentadvisers, and transfer agents concerning year 2000 computerproblems.

• Proposal on regulation of exchanges and alternative trading systems.

• Adoption of reforms to address concerns about the shareholderproposal process.

Management Activities

Our staff continued to promote management controls and financialintegrity and to manage the agency's audit follow-up system. In addition,we analyzed the efficiency and effectiveness of operating divisions andsupport offices and coordinated and implemented the agency'scompliance with and response to actions under the GovernmentPerformance and Results Act of 1993, including development of theagency's strategic plan. Working closely with other senior officials, theoffice formulated the agency's budget submissions to the Office ofManagement and Budget and the Congress.

Public Affairs

Our Public Affairs, Policy Evaluation and Research staff:

• informed those interested in or affected by Commission actions ofSEC activities;

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• published the SEC News Digest, which provides information on rulechanges, enforcement actions against individuals or corporate entities,administrative actions, decisions on requests for exemptions,upcoming Commission meetings, and other events of interest;

• provided support for the Chairman's investor education initiatives, theSEC's Internet Web site, the agency's foreign visitors program, andthe SEC International Institute for Securities Market Development;and

• responded to over 50,000 requests for specific information on theSEC or its activities and coordinated programs for 878 foreignvisitors.

Equal Employment Opportunity

Our Equal Employment Opportunity (EEO) staff monitored the SEC'scompliance with EEO laws and regulations. In an effort to establish andmaintain a discrimination-free workplace, our staff counseled employees,mediated complaints of discrimination, and investigated complaints notresolved through mediation. We trained managers and supervisors onprevention of sexual harassment and upholding the EEO responsibilitiesof the Commission. The SEC sponsored minority recruitment events andprograms to promote diversity and cultural awareness within the SEC andthe industry.

Freedom ofInformation Act and Privacy Act

Our Freedom of Information Act (FOIA) and Privacy Act staff respondedto requests for access to information under FOIA, the Privacy Act, andthe Government in the Sunshine Act, and processed requests under theagency's confidential treatment rules. In 1998, we received 3,155 FOIArequests and appeals, 12 Privacy Act requests and appeals, 21Government in the Sunshine Act requests, 12 government referrals, and8,733 requests and appeals for confidential treatment.

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Administrative Support

Financial Operations

The SEC deposited $1.78 billion in fees in the U.S. Treasury in fiscal1998, of which $250 million was used to directly fund the agency in 1998.Of the $1.78 billion in total fees collected, 58% were from securitiesregistrations; 36% were from securities transactions, and 6% were fromtender offer, merger, and other filings.

Offsetting fee collections were affected by the enactment of Title IV ofthe National Securities Markets Improvement Act of 1996 (NSMIA).Specifically, NSMIA extended the collection of existing transaction feesto the over-the-counter market at the rate of 1/300 of 1% starting in1997. It also increased the frequency of transaction fee collections on theexchanges, which resulted in the collection of 20 months of transactionfees from the exchanges in 1998 as the shift to the new scheduleoccurred. Starting in 1999, all transaction fee collections will be based ona 12-month cycle

In addition, NSMIA reduced the registration fee rate from roughly $303per million (1/33 of 1%) in 1997 to $295 per million (1/34 of 1%) in1998 NSMIA further reduces the registration fee rate to $278 permillion (1/36 of 1%) in 1999

Year 2000

In 1998, preparations for year 2000 compliance of our internal systemsremained our highest management priority. We completed an assessmentof all mainframe, client/server, and PC-based applications, and developedour strategy for repairing, replacing or retiring these applications. Wecontinued assessing and upgrading the agency's infrastructure (includinghardware, software, and PC's) to achieve year 2000 compliance Testplans, including independent verification and validation, were prepared

On July 1, 1998, the SEC awarded a contract to TRW for themodernization and ongoing maintenance of the EDGAR system. The first

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release of the three-year modernization effort was implemented inNovember with major components affecting text management and thedissemination of EDGAR filing data. The text management subsystemallows SEC and public reference room users to retrieve and printEDGAR filings using a new browse-based interface and Internettechnology. The new privatized dissemination system significantlyreduced the cost for subscribers who purchase and reformat the EDGARdata.

The agency's Internet Web site provides the public with electronic accessto the EDGAR database and a wide range of other information of interestto the investing public. The site averaged 650,000 connections and over25 gigabytes of data downloaded each day.

Administrative and Personnel Management

This year, our staff:

• continued efforts to migrate our in-house personnel/payroll systemand operations to the Department of the Interior;

• met our goal of hiring 10 employees under the Welfare to WorkProgram;

• consolidated our desktop publishing, printing, publications, and mailroom operations to improve efficiency, increase automation, anddispose of outdated equipment; and

• conducted special recruitment efforts through organizations andeducational institutions involving minorities and persons with disabilities,resulting in 210./0 of new hires in 1998 being minorities or persons withdisabilities.

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ENDNOTES

1 SEC v. Steven Samblis, et al., Litigation ReI. No. 15609 (Jan. 6, 1998),M.D. Fla.2 SEC v. Jerome M Wenger, Litigation Release No. 15707 (Apr. 15,1998), S.D.N.Y.3 SEC v. Michael R. Milken and MC Group, Litigation ReI. No. 15654(Feb. 26, 1998), S.D.N.Y.4 In the Matter of Olde Discount Corp,. et al., Securities Act ReI. No.7577 (Sept. 10, 1998).5 SECv. Szur, etal., Litigation ReI. No. 15595 (Dec. 18, 1997),S.D.N.Y.6 SEC v. Thomas Edward Cavanagh, et al., Litigation ReI. No. 15669(March 13, 1998), S.D.N.Y7 In the Matter of Monetta Financial Services, Inc., et aI., Securities ActReI. No. 7510 (Feb. 26, 1998).8 SEC v. Sweeney Capital Management Inc., et al., Litigation ReI. No.15664 (March 10,1998), N.D. Cal.9 SEC v. International Heritage, Inc., et al., Litigation ReI. No. 15672(March 17, 1998), N.D Ga.10 SEC v. American Automation, Inc., et al., Litigation ReI. No. 15872(Sept. 4, 1998), N.D. Tex.11 In The Matter of KPMG Peat Marwick LLP, Exchange Act ReI. No39400 (Dec. 4, 1997).12 In the Matter of Sony Corp. and Sumio Sano, Exchange Act ReI. No.40305 (Aug. 5, 1998).13 SEC v. Sony Corp., Litigation ReI. No. 15832 (Aug 5, 1998), D D.C.14 SEC v. One or More Unknown Purchasers of Call Options andCommon Stock of USCS International, Inc.), Litigation ReI. No 15875(Sept. 9, 1998), S.D.N.Y.15 SEC v. Rauscher Pierce Refsnes, Inc. and James R. Feltham,Litigation Release No. 15613 (Jan. 8, 1998), D. Ariz.

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16 In the Matter of Meridian Securities, Inc., et al., Securities Act ReINo. 7525 (Apr. 23, 1998).17 The SEC, Department ofthe Treasury, and the Federal Reserve Boardissued a "Joint Study of the Regulatory System for GovernmentSecurities" in March 1998III The Importance 0/ Transparency in America's Debt Market, Remarksby SEC Chairman Arthur Levitt at the Media Studies Center, New York,New York (Sept. 9,1998)19 Letters regarding Instinet Real-Time Trading Service (Jan. 17, 1997),the Island System (Jan. 17, 1997), the Bloomberg Tradebook System(Jan. 17,1997), the TONTO System (Jan. 17, 1997), the Routing andExecution DOT Interface Electronic Communications Network (Oct. 6,1997), the ATTAIN System (Feb. 4, 1998), the Brass Utility System(Apr. 21, 1998), the Strike System (Nov 13,1998), and the PIM GlobalEquities Trading System (Nov. 13, 1998).20 Release No. 39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998).21 Release No. 34-40357 (Aug. 24, 1998),63 FR 46261 (Aug. 31, 1998).22 Release No. 34-40361 (Aug. 25,1998),63 FR 46262 (Aug. 31,1998).23 Release No. 34-39445 (Dec. 11, 1997), 62FR66709(Dec. 19, 1997).24 Release No. 34-39846 (Apr. 9, 1998),63 FR 18477 (Apr. 15, 1998)(regarding AMEX-98-09, BSE-98-06, CHX-98-08, NASD-98-27,NYSE-98-06, and PHLX-98-15)25 Staff Legal Bulletin NO.8 (MR) (Sept. 9, 1998).26 Release No. 34-40377 (Aug. 27,1998),63 FR47051 (Sept. 3,1998).27 Release Nos. 34-40162 (July 2, 1998),63 FR 37668 (July 13, 1998)(regarding broker-dealers); 34-40163 (July 2, 1998),63 FR 37688 (July13, 1998) (regarding transfer agents).28 Release Nos. 34-40608 (Oct. 28, 1998), 63 FR 59208 (Nov. 3, 1998)(regarding broker-dealers); 34-40587 (Oct. 22, 1998), 63 FR 58630(Nov. 2, 1998) (regarding transfer agents).29 Release No. 34-40622 (Oct. 30, 1998), 63 FR 59819 (Nov. 5, 1998)(regarding AMEX-98-32, NASD-98-56, and NASD-98-67).30 Press Conference by David Krell, President & CEO, ISE, Nov. 10,1998, New York City.31 Release No. 34-40204 ( July 15, 1998), 63 FR 39306 (July 22, 1998).

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32 Release No. 34-40260 (July 21,1998),63 FR40748 (July 30,1998).33 Release No. 34-40077 (June 8, 1998), 63 FR 32628 (June 15, 1998).34 See Testimony of Richard R. Lindsey, Director, Division of MarketRegulation, SEC, before the House Committee on Banking and FinancialServices, dated Oct. 1, 1998.35 Release No. 34-39670 (Feb. 25, 1998), 63 FR 9661 (Feb. 25, 1998)36 Letter regarding Rule 15c2-11: OTC Bulletin Board: Removal ofF oreignEquities and ADRs, dated Mar. 13, 1998.37 Release No 34-38456 (Mar. 31, 1997) 63 FR16635 (Apr. 7, 1998).38 Letter regarding Principal Trading and Market Making Activities inCertain Securities on the London Stock Exchange, dated June 29, 1998and Letter regarding Application of Rule 10b-13 During Return ofCapital Share Redemptions, dated July 22, 1998.39 Letter regarding Exchange DistributionslBlock Crossing Transactions,dated Aug. 7, 1998.40 Release No. 34-40594 (Oct 23, 1998), 63 FR 59362 (Nov. 3, 1998).41 Letter regarding StockPower Inc., dated Mar. 26, 1998.42 Letter regarding StockPower Inc., dated July 13, 199843 Letter regarding Hili Winterthur International Holdings Limited, datedJuly 8, 1998.44 Letter regarding Telecom Corporation of New Zealand Limited, datedFeb. 20, 1998.45 Letter regarding Technology Funding Securities Corporation, datedMay 20, 1998.46 Letter regarding Wrap Fee Programs of Prudential Securities, Inc. andWexford Clearing Services Corp., dated Aug. 3, 1998.47 Letter regarding Rule 1Ob-l O/Calculation of Yield to Maturity, datedAug. 24, 1998.48 Letter regarding Intermarket Surveillance Group, dated Aug. 21, 1998.49 Letter regarding Net Capital Treatment of Proprietary Accounts ofIntroducing Brokers, dated Nov. 3, 1998.50 Letter regarding Deficit Charges for Repurchase Transactions, datedApr. 1, 1998.51 Release No. 34-40518 (Oct. 2, 1998), 63 FR 54404 (Oct. 9, 1998).52 Release No 34-40109 (June 22,1998),63 FR 35299 (June 29, 1998).

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53 Release No. 34-40479 (Sept. 24, 1998),63 FR 52782 (Oct. 1, 1998).54 Release Nos. 34-40555 (Oct. 14, 1998), 63 FR 56670 (Oct. 22,1998), and 34-40556 (Oct. 14, 1998), 63 FR 56957 (Oct. 23, 1998).55 Release No. 34-39846 (Apr. 9,1998),63 FR 18477 (Apr. 15, 1998)(regarding AMEX-98-09, BSE-98-06, CHX-98-08, NASD-98-27,NYSE-98-06, and PHLX-98-15).23 Release No. 34-40529 (Oct. 7,1998) 63 FR 55667 (Oct. 16, 1998)(regarding NYSE-98-16).57 Release No. 34-39729 (Mar 6, 1998),63 FR 12559 (Mar. 13, 1998)(regarding NASD-97-56).58 Release No. 34-39516 (Jan. 2, 1998),63 FR 1520 (Jan. 9, 1998)regarding NASD-97-21).59 Release No. 34-39883 (Apr. 17, 1998), 63 FR 20232 (Apr. 23, 1998)(regarding NASD-97-69).60 Release No. 34-39712 (Mar. 3, 1998),63 FR 1193 (Mar. 11, 1998)(regarding NASD-98-03, CBOE-97-68, MSRB-98-02, and NYSE-97-33). Note that the Commission approved at the same time similaramendments to the rules ofthe CBOE, the Municipal SecuritiesRulemaking Board, and the NYSE.61 Letter from Jonathan G. Katz, Secretary, SEC, to Jean A. Webb,Secretary, CFTC, dated Dec. 4, 1997.62 Release No. 34-40216 (July 16, 1998).63 7 U.S.c. S 2a(ii)(III).64 Release Nos. 34-39326 (Nov. 14, 1997),62 FR 62385 (Nov. 21, 1997)(regarding NASD -97-71, NASD-96-20, and NASD-96-29); 34-39759(Mar. 6, 1998),63 FR 14153 (Mar. 24, 1998) (regarding CHX-97-36);34-38960 (Aug. 22, 1997), 62 FR 45904 (Aug. 29, 1997) (regardingPHLX-97-31).65Id (Discussing committee changes in context of general corporategovernance reorganization.)66 Release Nos. 34-40499 (Sept. 29, 1998), 63 FR 53739 (Oct. 6, 1998)(regarding MSRB 97-9); 34-39495 (Dec. 29, 1997), 63 FR 585 (Jan. 6,1998) (regarding MSRB 97-18); 34-40167 (July 2, 1998),63 FR 37434(July 10, 1998) (regarding MSRB 98-10); 34-39712 (Mar. 3, 1998); 63

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FR 11939 (Mar. 11, 1998) (regarding CBOE-97-68, MSRB-98-02,NASD-98-03, and NYSE-97-33).67 Release No. 34-40230 (July 17, 1998), 63 FR 40148 (July 27, 1998)(regarding MSRB 97-14).68 Release No. 34-40014 (May 20, 1998), 63 FR 29282 (May 28, 1998)(regarding MSRB 98-1).69 Release Nos. 34-40337 (Aug. 19, 1998), 63 FR 45544 (Aug. 26, 1998)(regarding MSRB-98-9); 34-40349 (Aug. 20, 1998), 63 FR 45545 (Aug.26, 1998) (regarding MSRB-98-11 ) (establishing an effective date ofAug. 24, 1998, for the MSRB to begin operation of the Service).70 Release No. 34-40161 (July 2, 1998),63 FR 37146 (July 9,1998).71 Brady bonds are named after former U.S. Treasury Secretary NicolasBrady who developed a plan that allowed certain countries to issuecollaterized debt securities in exchange for outstanding bank loans as partof an internationally supported debt restructuring. Typically, thecollateral would be U.S. Treasury securities; more recently, however,some bonds have been issued without collateral.72 Release No. IC-23064 (Mar. 13, 1998),63 FR 13916 (Mar. 23, 1998).73 Release No. IC-23065 (Mar. 13, 1998), 63 FR 13968 (Mar. 23, 1998).74 Release No IC-22921 (Dec. 2, 1997),62 FR 64968 (Dec. 9, 1997).75 Release No. IC-22884 (Nov. 13, 1997),62 FR 61933 (Nov. 20, 1997)76 Release No. IC-23325 (July 22, 1998), 63 FR 40231 (July 28, 1998).77 Emerging Markets Growth Fund, Inc., Release Nos. IC-23433 (Sept.11, 1998),63 FR 49717 (Sep. 17, 1998) (notice); and 23481 (Oct. 7,1998) (order).78 Daily Money Fund, et al., Release Nos. IC-23004 (Jan. 20, 1998), 63FR 3933 (Jan. 27, 1998) (notice); and 23030 (Feb. 18, 1998) (order).79 In the Matter of the Chase Manhattan Bank, NA. and Chemical Bank,Release No. IC-23186 (May 14, 1998).80 Europacijic Growth Fund, et al., Release Nos. IC-23307 (July 9,1998),63 FR 38219 (July 15,1998) (notice); and 23374 (Aug. 4,1998)(order).81 The New Germany Fund, Inc. (pub. avail. May 8, 1998).82 Investment Company Institute (pub. avail. Oct. 30, 1998).83 Zurich Insurance Company (pub. avail. Aug. 31, 1998).

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84 American Century Companies, Inc'!1.P. Morgan & Co. Incorporated(pub. avail. Dec. 23, 1997).85 Pilgrim America Prime Rate Trust (pub. avail. May 1, 1998).86 Letter to Confidential Treatment Filers (pub. avail. June 17, 1998).87 Investment Company Institute (pub. avail. May 14, 1998).88 DALBAR, Inc. (pub. avail. Mar. 24, 1998).89 Paragon Advisers, Inc. (pub. avail. Oct. 1, 1998).90 Goodwin Procter & Hoar (pub. avail. Oct. 5, 1998).91 Wilmer, Cutler & Pickering and Davis Polk and Wardwell (pub. avail.Oct. 5, 1998).92 Statement of the Commission Regarding the Use of Internet Web Sitesto Offer Securities, Solicit Securities Transactions or AdvertiseInvestment Services Offshore, Release Nos. IC-23071 and IA-I710 (Mar.23, 1998),63 FR 14806 (Mar. 27, 1998).93 Release No. IA-1732 (July 17, 1998), 63 FR 39505 (July 23, 1998).94 Release Nos 33-7514 and IC-23066 (Mar. 13, 1998),63 FR 13988(Mar. 23, 1998).95 Rydex Advisor Variable Annuity Account (pub. avail. Sept. 29, 1998).96 State Street Bank and Trust Company (pub. avail. Aug. I, 1996).97 Massachusetts Mutual Life Insurance Company (pub. avail. Aug. 10,1998).98 Release No. IA-1733 (July 17, 1998), 63 FR 39708 (July 24, 1998).991d.100 Release No. IA-173I (July 15, 1998), 63 FR 39022 (July 21, 1998).101 Staff Legal Bulletin NO.5 (CF/IM) (Jan. 12, 1998).102 Release No. IA-1769 (Oct. 1, 1998),63 FR 54307 (Oct. 8, 1998).103 Sempra Energy, Release Nos. 35-26711 (Apr. 25, 1997),62 FR24141 (May 2, 1997) (notice); and 35-26890 (June 26, 1998) (order).104 WPL Holdings, Inc., Release Nos. 35-26593 (Oct. 11, 1996),61 FR54687 (Oct. 21, 1996) (notice); and 35-6856 (Apr. 14, 1998) (order).105 American Electric Power Company, Release Nos. 35-26708 (Apr. 18,1997),62 FR20024 (Apr. 24,1997) (notice); and 35-26864 (Apr. 27,1998) (order). Cinergy Corporation, Release Nos. 35-26698 (Mar. 28,1997),62 FR 16206 (Apr. 4, 1997) (notice); and 35-26848 (Mar. 23,I998) (order).

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106 Release No. 33-7606A (Nov. 13, 1998), 63 FR 233 (Dec. 4, 1998).107 Release No. 33-7607 (Nov. 3, 1998), 63 FR 233 (Dec. 4, 1998).108 Release No. 33-7497 (Jan. 22, 1998), 66 SEC Docket 8.109 Release No. 33-7380 (Jan. 14, 1997),63 SEC Docket 14.110 Release No. 34-40678 (Nov. 13, 1998), 68 SEC Docket 10.III Release No. 34-39538 (Jan. 12, 1998),66 SEC Docket 6.112 Release No. 33-7516 (Mar. 23, 1998),66 SEC Docket 16.113 Release No. 33-7505 (Feb. 17, 1998), 66 SEC Docket 11.114 Release No. 33-7511 (Feb. 27, 1998), 66 SEC Docket 11.115 Release No. 33-7541 (May 1, 1998),67 SEC Docket 4.ll6 Release No. 34-40018 (May 21, 1998),67 SEC Docket 4.117 Release No. 33-7558 (July 29, 1998),67 SEC Docket 14.118 Release No. 33-7609 (Nov. 9, 1998),68 SEC Docket 9.119 Release No. 33-7506 (Feb. 17, 1998), 66 SEC Docket 11.120 Release No. 33-7472 (Oct. 24, 1997),65 SEC Docket 15.121 Release No. 33-7550 (June 25, 1998), 67 SEC Docket 9.122 Release No. 33-7549 (June 24, 1998),67 SEC Docket 9.123 Release No. 33-7386 (Jan. 31,1997),63 SEC Docket 2182.124 Financial Reporting Release No. 54 (Jan. 5, 1999), 68 SEC Docket17.125 Statement of Financial Accounting Standards No. 131, Disclosureabout Segments of an Enterprise and Related Information (June 1997).126 Staff Accounting Bulletin No. 98 (Feb. 3, 1998), 66 SEC Docket1422.127 Statement of Financial Accounting Standards No. 128, Earnings PerShare, (Feb. 1997).128 Statement of Financial Accounting Standards No. 133, AccountingforDerivative and Similar Financial Instruments andfor Hedging Activities,(June 1998).129 Special Report, A Guide to Implementation of Statement 125 onAccounting for Transfers and Servicing of Financtal Assets andExtinguishments of Liabilities, Questions and Answers (Sept. 1998).130 Invitation to Comment, Methods of Accounting for BusinessCombinations: Recommendations of the G4+ 1 for AchievingConvergence (Dec. 15, 1998). The G4+ 1 includes representatives from

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the accounting standards boards of Australia, Canada, New Zealand, theUnited Kingdom, and the U.S. Repesentatives of the InternationalAccounting Standards Committee participate as observers.131 Statement on Standards for Attestation Engagements No.8,Management's Discussion and Analysis (June 1998).132 Statement of Position 98-8, Engagements to Perform Year 2000Agreed-Upon Procedures Attestation Requirements Pursuant to [VariousSecurities Exchange Act Rules] (Sept. 30, 1998).133 Statement of Position 98-8, Engagements to Perform Year 2000Agreed-Upon Procedures Attestation Requirements Pursuant to [VariousSecurities Exchange Act Rules] (Sept. 30, 1998).134Statement of Position 98-1, Accountingfor the Costs of ComputerSoftware Developed or Obtained for Internal Use (May 4, 1998).135 Statement of Position 98-5, Reporting on the Costs of Start-upActivities (Apr. 3, 1998).136 Financial Reporting Release No. 50 (Feb. 18, 1998), 66 SEC Docket1657.137155F.3d 107 (2d Cir. 1998).13!Nos. 97-1143, 97-1261 (3d Cir.) (en bane).139137 F.3d 1325 (11th Cir. 1998).14°155F.3d 1051 (9th Cir. 1998).141132F.3d 1017 (4th Cir. 1997).142147F.3d 184 (2d Cir. 1998).143No.98-7123 (2d Cir.).144150F.3d 675 (7th Cir. 1998).14~0. 97-2098 (6th Cir.).14~0. 97-16240 (9th Cir.).147151F.3d 810 (8th Cir. 1998).148135 F.3d 860 (2d Cir. 1998).149MorganStanley & Co., Inc., Exchange Act ReI. No. 34-39459 (Dec.17, 1997),66 SEC Dcoket 351.150Victor Teicher, Victor Teicher & Co., L.P., & Ross S. Frankel,Exchange Act ReI. No. 34-40010 (May 20, 1998),67 SEC Docket 542,appealfiled, No. 98-1287 (D.C. Cir. June 24, 1998).

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151MeyerBlinder, Exchange Act ReI. No. 34-39180 (Oct. 1, 1997),65SEC Docket 1970.152L.C. Wegard & Co., Inc. & Leonard B. Greer, Exchange Act ReI.No. 34-40046 (May 29, 1998), 67 SEC Docket 814.153Steven P. Sanders and Daniel M. Porush, Exchange Act ReI. No.34-40600 (Oct. 26, 1998), 68 SEC Docket 982.154D.E. Wine Investments, Inc., W. Randal Miller, Kenneth Karpf, andDuncan Wine, Exchange Act ReI. No. 34-39517 (Jan. 6, 1998), 66SEC Docket 763.155Interactive Brokers UC, Exchange Act ReI. No. 34-39765 (Mar.17, 1998), 66 SEC Docket 2346.156FirstColorado Financial Services and Mark P. Augustine, ExchangeAct ReI. No. 34-40436 (Sept. 14, 1998), 68 SEC Docket 24.157The Chicago Board of Trade, Exchange Act ReI. No. 34-40216 (July16, 1998), 67 SEC Docket 1640, appeal filed, No. 98-2923 (7th Cir.July 31, 1998).158Inre Bilzerian, Case No. 91-10466-8P7 (Bankr. M.D. Fla.).159SECv. Bilzerian, 153 F. 3d 1278 (l1th Cir. 1998).160Inre Cross, Case No. SA-95-15228-JB (Bankr. C.D. Cal.).161SECv. Cross, 203 B.R. 456 (Bankr. C.D. Cal. 1996).162SECv. Cross, 218 B. R. 76 (Bankr. 9th Cir. 1998).163Inre Hibbard Brown & Co., Inc., Case No. 94 B 44809 (CB) (Bankr.S.D. N.Y.).164 Case No. CV-98-0027 PHX ROS (Ariz., Jan. 8, 1998) (amendedcomplaint, filed March 6, 1998); Amended Order Denying Motion toDismiss, 1998 V.S. Dist. LEXIS 13164 (Aug. 24, 1998).165 Release No. 33-7525, Admin Proc. File No. 3-9582 (Apr. 23, 1998)

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117

Table 1ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1998 IN VARIOUS PROGRAM AREAS

(Each case initiated has been included in only one category listed below, even thoughmany cases involve multiple allegations and may fall under more than one category.

The number of defendants and respondents is noted parenthetically.)

Program Area In Which a % ofCivil Action or Admlnistrabve CIVil Admlnistrabve TotalProceeding Was InrtJated Acbons Proceedings Total Cases

Secunbes Offenng Cases 82 (335) 61 (129) 143 ( 464) 30%

Broker-dealer Cases(a) Fraud Against Customer 10 ( 20) 28 ( 44) 38( 64)(b) Failure to sopervse o ( 0) 8 ( 10) 8 ( 10)(c) GovemmenVMumclpal

secumes 5 ( 11) 15 ( 27) 2O( 38)(d) Books & Records 1 ( 1) 3 ( 10) 4 ( 11)(e) Other 4 ( 28) 5 ( 7) 9 ( 35)

Total Broker-dealer Cases 20 ( 60) 59 ( 98) 79 ( 158) 17%

Issuer Financial Statementand Reporbng Cases

(a) Issuer FinancialDisclosure 29 ( 70) 46 ( 70) 75 ( 140)

(b) Issuer Repornng Other 2 ( 7) 2 ( 4) 4 ( 11)Total Issuer Rnanclal Statement

and Reporbng Cases 31 ( 77) 48 ( 74) 79 ( 151) 17%

other Regulated Errtrty Cases(a) Investment AdVisers 7 ( 21) 41 ( 75) 48 ( 96)(b) Investment Compames o ( 0) 6 ( 10) 6 ( 10)(c) Transfer Agent o ( 0) 3 ( 5) 3 ( 5)

Total Other Regulated Errtrty Cases 7 ( 21) 50 ( 90) 57 ( 111) 12%

lnsider Trading Cases 38 ( 90) 3 ( 03) 41 ( 93) 9%

Market ManipulabOn Cases 18 (138) 12 ( 17) 30 ( 155) 6%

Delinquent Filings(a) Issuer Repornng 10 ( 10) 1 ( 3) 11 ( 13)(b) Forms 3/4/5 3 ( 5) 6 ( 6) 9 ( 11)

Total Delinquent FIlings Cases 13 ( 15) 7 ( 9) 2O( 24) 4%

Contempt Proceedings 15 ( 31) o ( 0) 15 ( 31) 3%

Fraud Against Regulated Errtrty o ( 0) 2 ( 6) 2 ( 6) .5%

Related Party Transacbon Cases 1 ( 1) 1 ( 1) 2 ( 2) .5%

Miscellaneous 4 ( 8) 3 ( 5) 7 ( 13) .5%

Corporate Control Cases o ( 0) 2 ( 2) 2 ( 2) .5%

GRAND TOTAl 229 (776) 248 (434) 477 (1210) 100%

118

Table 2FISCAL 1998 ENFORCEMENT CASES

LISTED BY PROGRAM AREA

Name of Case Release No. Date Filed

Broker-Dealer: Books & Records

In the Matter of Russo Securities, Inc., et aI. 34-39312 11/7/97In the Matter of 1.W. Korth & Co., et aI. 34-40173 7/7/98SEC v. The Nikko Securities Co. International, Inc. LR-15861 8/17/98In the Matter of Nikko Securities, Co., et aI. 34-40375 8/27/98

Broker-Dealer: Failure to Supervise

In the Matter of George 1. Kolar 34-39812 3/27/98In the Matter of Anthony S. Battaglia, Jr. 34-39360 11/26/97In the Matter of 1. David Glover, Jr. 34-40508 9/30/98In the Matter of Dean Witter Reynolds, Inc., et aI. 34-40366 8/26/98In the Matter of Joseph W. Pellechia 34-40468 9/24/98In the Matter ofPFS Investments, Inc. 34-40269 7/28/98In the Matter of NYLIFE Securities 34-40459 9/23/98In the Matter of Cesar A. Montilla 34-40309 8/7/98

Broker-Dealer: Fraud Against Customer

SEC v. David Scott Heredia LR-15542 10/24/97In the Matter of John W. Gillette, Jr. 34-40484 9/25/98In the Matter of Heman Jose Perez 34-40174 7/7/98SEC v. Rita K. Savla LR-15915 9/30/98In the Matter of Timothy B. Daley 34-40486 9/28/98In the Matter of Charles Meizoso 34-40068 6/4/98In the Matter of Michael Cardascia 34-40076 6/5/98In the Matter of Craig Leibold, et aI. 34-40507 9/30/98SEC v. Robert Tommassello, et aI. LR-15655 2/26/98In the Matter of Brent Duane Green 34-39210 10/7/97SEC v. Luis Bulas, If. LR-15917 9/23/98In the Matter of Jamie Charles Spangler 34-39848 4/10/98

119

Name of Case Release No. Date Filed

In the Matter of David W. D'Andrea 34-40060 6/3/98SEC v. Chimneyvile Investments Group, et al. LR-15867 8/31/98In the Matter of Thomas Anthony Calise 34-39795 3/25/98In the Matter of Jeoffrey A. Egan 34-40322 8/13/98In the Matter of John T. Fortier 34-40460 9/23/98In the Matter of Joseph Miceh, Jr. 34-40061 6/3/98In the Matter of Robert 1. Meledandria, Jr. 34-40477 9/24/98In the Matter of Ted C. Beattie, et al. 34-40480 9/25/98In the Matter of Mark David Anderson 34-39399 12/4/97In the Matter of Dean McDermott, et al. 33-7502 1/30/98In the Matter of Thomas F. Ferris 34-39918 4/27/98SEC v. James Frith, et al. LR-15581 12/5/97In the Matter of John von der Lieth, ill, et al. 34-40471 9/24/98In the Matter of Eugene McCloskey 34-40067 6/4/98In the Matter of David Walter Connochie 34-39993 5/14/98In the Matter of Eric S. Blumen, et al. 34-39375 12/1/97In the Matter ofH.1. Meyers & Co., Inc., et aI. 34-40510 9/30/98SEC v. Edward 1. Paradis, Jr., et al. LR-15706 4/14/98In the Matter of Robert Putnam 34-39986 5/13/98In the Matter of Kerrigan Sean Weber 34-39508 12/31/97SEC v. Bing Sung LR-15916 9/30/98SEC v. Larry K. O'Dell LR-15858 8/24/98In the Matter of Olde Discount Corp., et al. 34-40423 9/10/98In the Matter of Jean M. Yawn 34-39961 5/6/98SEC v. Heman Jose Perez LR-15544 10/10/97In the Matter of Ted E. Mong 34-40093 6/15/98

Broker-Dealer: Government Securities

In the Matter of Brian M. Cohen 34-40450 9/18/98

Broker-Dealer: Municipal Securities

SEC v. Richard P. Poirier, Jr., et al. LR-15565 11/20/97In the Matter of Lazard Freres & Co. LLC 34-39388 12/3/97In the Matter of Steven T. Snyder 34-39912 4/23/98In the Matter of Wheat, First Securities, Inc. 34-40376 8/27/98SEC v. Steven Strauss LR-15569 11/21/97

120

Name of Case Release No. Date Filed

In the Matter of City of Moorehead Mississippi 34-40478 9/24/98In the Matter of James E. Eaton 34-39515 1/2/98SEC v. Dain Rauscher, Inc., et al. LR-15829 8/3/98In the Matter of Oliver Williams 34-40347 8/20/98In the Matter of Merrill Lynch PierceFenner & Smith Inc. 34-40352 8/24/98

In the Matter of County of Nevada, et al. 34-39612 2/2/98In the Matter of Armscott Securities, LTD 34-39398 12/4/97SEC v. James Pannone and Sakura Global CapitaI LR-15630 2/4/98In the Matter of Freeman B. Irby, III 34-39362 11/26/97SEC v. Rauscher Pierce Refsnes, Inc., et al LR-15613 1/8/98In the Matter of Pacific Matrix Financial Group, Inc. 34-39600 1/30/98In the Matter of Credit Suisse First BostonCorp., et al. 34-39595 1/29/98

In the Matter of Meridian Securities, Inc., et al 34-39905 4/23/98In the Matter of Howe Solomon and Hall, et aI. 34-40038 5/28/98

Broker-Dealer: Other

SEC v. The Oakford Corporation, et al LR-15653 2/25/98SEC v. Nicholas A. Zahareas, et al. LR-15638 12/19/97SEC v. Michael R. Milken, et aI. LR-15654 2/26/98SEC v. Steven Samblis, et al. LR-15609 1/6/98In the Matter of Richard G. Strauss 34-39277 10/24/97In the Matter of Allen Weinstein 34-40501 9/30/98In the Matter of Jerry G. Allison 34-39807 3/26/98In the Matter of Paul I. Comi 34-39968 5/8/98In the Matter of Nations Securities, et al. 34-39947 5/4/98

Contempt-Civil

SEC v. David A. Colvin NONE 3/30/98SEC v. Michael Carnicle, et al. NONE 2/9/98SEC v. David A. Colvin NONE 8/6/98SEC v. Club Atlanta Travel, et aI. NONE 5/14/98

121

Name of Case Release No. Date Filed

SEC v. Dimples Group, Inc. NONE 1/13/98SEC v. Jamie Edelkind NONE 9/30/98SEC v. Gilboa Peretz, et al. NONE 9/2/98SEC v. Robert D. Wyatt NONE 3/31/98SEC v. First Zurich National USA, LLC, et al. NONE 2/13/98SEC v. Maureen Schouman NONE 12/18/97SEC v. Environmental Chemicals Group, Inc., et al. LR-15643 2/18/98SEC v. Edelkind NONE 9/30/98SEC v. Sidney W. Sers LR-15582 1/16/98SEC v. John M. Toal LR-15930 8/28/98SEC v. The Barr Financial Group, Inc., et al. NONE 9/17/98

Corporate Control: Tender Offers

In the Matter of WHX Corporation 34-40130 6/25/98In the Matter of Bisco Industries, Inc. NONE 5/18/98

, ," Delinquent Filings: Forms 3/4/5:,

In the Matter of Jacqueline Badger Mars 34-40362 8/25/98In the Matter of Jayne Kathryn Rand 34-40127 6/25/98In the Matter of James D. Scott 34-40128 6/25/98SEC v. Robert Foisie LR-15642 2/17/98In the Matter of David L. Chandler 34-40346 8/20/98In the Matter of Graham F. Lacey 34-39464 12/18/97SEC v. David L. Chandler LR-15854 8/19/98In the Matter of Alan R. Mishkin 34-39463 12/18/97SEC v. Kuslima Shogen, et al. LR-15658 3/3/98

Delinquent Filings: Issuer Reporting

SEC v. Xavier Corp. LR-15575 11/28/97SEC v. Equisure, Inc. NONE 5/26/98SEC v. Chancellor Group, Inc. LR-15831 8/4/98

122

Name of Case Release No. Date Filed

SEC v. Quadratech, Inc. LR-15745 5/15/98SEC v. LRG Restaurant Group, Inc. LR-15744 5/15/98SEC v. Inamed Corp. LR-15647 2/18/98SEC v. Viking Resources LR-15584 12/9/97SEC v. Holly Holdings, Inc. LR-15593 12/17/97SEC v. Integrated Waste Services, Inc. LR-15570 11/20/97SEC v. Safetech Industries, Inc. LR-15887 9/18/98In the Matter of Kuslima Shogen, et aI. 34-39710 3/3/98

Fraud Against Regulated Entity

In the Matter of Sean P. Brennan, et aI. 34-40466 9/23/98In the Matter of Stanley Berk, et aI. 34-40444 9/16/98

Insider Trading

SEC v. Hamilton Richardson Duncan, Jr. LR-15928 9/24/98SEC v. Roger H. Licht, et aI. LR-15666 3/11/98SEC v. S. Jim Farha LR-15641 1/13/98SEC v. Changnian Liu LR-15783 6/17/98SEC v. Frank 1. Papson LR-15799 7/6/98SEC v. Terry Shilling LR-15788 5/21/98SEC v. Robert G. Scott, Jr. LR-15708 4/16/98SEC v. My Dang LR-15785 6/17/98SEC v. Greg E. Skudlarick LR-15721 4/24/98SEC v. Andrew S. Lane, et aI. LR-15549 11/4/97SEC v. Herbert Lawson LR-15756 5/26/98SEC v. William M. Fromm LR-15625 1/22/98SEC v. Arjun Sekhri, et aI. LR-15965 4/1/98SEC v. William Lockwood LR-15754 5/29/98SEC v. One or More Unkown Purchasers LR-15875 9/8/98SEC v. Craig Ryan Spradling LR-15779 6/11/98SEC v. Guoping Wu, et aI. LR-15697 4/7/98In the Matter of My Dang 34-40168 7/6/98In the Matter of Andrew Paul Tomasko 34-40425 9/10/98

123

Name of Case Release No. Date Filed

SEC v. Lloyd Myers, et aI. LR-1591O 9/28/98SEC v. James R. Beers LR-15823 7/30/98SEC v. Cosmos Anastassiou, et aI. LR-15840 8/11/98In the Matter of Mark Muenster 34-40078 6/8/98SEC v. James Bowman, et aI. LR-15914 9/30/98SEC v. HaIton Technologies, LTD LR-15893 9/18/98SEC v. Ellison C. Morgan, et aI. LR-15920 9/30/98SEC v. Alejandro C Zaffaroni, et aI. LR-15843 8/12/98SEC v. Alan M. Stricoff, et aI. LR-15551 1115/97SEC v. Daniel Lambert, et aI. LR-15924 9/29/98SEC v. Scott Evans, et aI. LR-15648 2/19/98SEC v. Bharat Koetcha, et aI. LR-15765 6/3/98SEC v. Terri R. Scott LR-15913 9/29/98SEC v. Heidi Flannery LR-15768 6/4/98SEC v. Mitchell Sher LR-15741 5/15/98SEC v. Roger D. Wyatt, et aI. LR-15676 5/27/98SEC v. Anindya N. Bakrie LR-15834 8/6/98SEC v. Benjamin Goldfield, et aI. LR-15678 3/19/98SEC v. Brad E. Hollinger LR-15736 5/12/98SEC v Miko Leung, et aI. LR-15631 1/29/98SEC v. Myles R. Wren LR-15860 8/27/98SEC v. Brent Gale, et aI. LR-15769 6/4/98

Investment Adviser

In the Matter of Pankowski Assoc., et aI. IA-1758 9/25/98In the Matter of Mark E. Gatch IA-1677 10/7/97In the Matter of Charles E. Duquette IA-1744 8/13/98In the Matter of CS First Boston

Investment Mgmt. Corp. IA-1754 9/23/98In the Matter of William 1. Ferry IA-1747 8/19/98In the Matter of Feeley & Wilcox Asset

Management Corp., et aI. IA-l711 3/27/98In the Matter of Cowan Asset Management,

Inc., et aI. IA-1724 5/28/98In the Matter ofProfitek, Inc., et al. IA-1764 9/29/98

124

Name of Case Release No. Date Filed

In the Matter of Eugene Bilotti IA-1689 12/23/97In the Matter of Robert Hardy lA-I 703 2/27/98In the Matter of Finarc, LLC, et al. lA-I 763 9/29/98In the Matter of John 1. Kenny, et al. 1A-1723 5/28/98In the Matter of Donna L. Snyder lA-I 745 8/13/98In the Matter of Rothschild Investment Corp. 1A-1714 4/13/98In the Matter of Nicholas-ApplegateCapital Management lA-I 741 8/12/98

In the Matter of Renaissance CapitalAdvisors, Inc., et al. 1A-1688 12/22/97

In the Matter of Steven L. Down 1A-17l5 4/13/98In the Matter of Terry O. Clifford 1A-1676 10/6/97SEC v. Timothy 1. Lyons LR-15842 8/12/98In the Matter of Brian D. Schrauger, et al. 1A-1695 1/20/98In the Matter of American Growth Capital Corp. IA-1743 8/13/98In the Matter of Brack Stanford, et al. IA-1734 7/17/98In the Matter of Scott S. Bell, et al. 1A-1707 3/13/98In the Matter of Reservoir CapitalManagement Inc., et al. 1A-17l7 4/24/98

In the Matter of John Gardner Black, et al. 1A-1720 5/4/98In the Matter of Paul 1. Jackson 1A-1762 9/29/98In the Matter of Emanual Lagpacan 1A-1725 6/12/98SEC v. RCS Financial Services, et al. NONE 5/5/98SEC v. John W. Gillette, Jr. LR-15812 7/10/98SEC v. Steven Schaefer, et al. LR-15886 3/27/98In the Matter of Piper Capital Mngmt., et al. 1A-1737 7/28/98In the Matter ofRupay-BarringtonServices, Inc., et al. lA-I 761 9/28/98

SEC v. Sanjay Saxena & Mumtaz Saxena LR-15889 9/18/98In the Matter of Monetta Financial Services,Inc., et al. lA-I 702 2/26/98

In the Matter of Hugh P. Gee lA-I 698 1/29/98In the Matter of A. Morgan Maree, Jr., et al. 1A-17l8 12/4/97SEC v. Barr Financial Group, Inc., et al. LR-15932 9/3/98SEC v. Sweeney Capital Managaement, Inc., et al. LR-15664 3/10/98In the Matter of Seaboard Investment Adviser,Inc., et al. 1A-1757 9/25/98

125

Name of Case Release No. Date Filed

In the Matter of Nicholas C. Bogard IA-1756 9/23/98In the Matter of Thomas O'Connell IA-1770 4/8/98In the Matter of Geoffrey Paul Adams IA-l708 3/16/98In the Matter of George E. Brooks, et al. IA-1719 4/27/98In the Matter of Bell Capital Management, et al. IA-1768 9/30/98In the Matter of ABN AMRO-NSM International

Funds Management IA-1767 9/30/98In the Matter of Rhumbline Advisers, et al. IA-1765 9/29/98In the Matter of Ellen Griggs IA-1750 9/14/98In the Matter of Bradbury Financial

Group, Inc., et al. IA-1680 10/27/97

Investment Company

In the Matter of Stephen G. Calandrella, et al. IC-23229 6/1/98In the Matter of Bryon G. Borgardt, et al. IC-23468 9/28/98In the Matter of Concord Growth Corp. IC-23470 9/28/98In the Matter of Reid Rutherford IC-23469 9/28/98In the Matter ofR. James Brower IC-23131 4/28/98In the Matter of Stephen H. Brown IC-23434 9/14/98

Issuer Financial Disclosure

In the Matter of Richard Valade AAER-I037 5/18/98In the Matter of Leslie Danish, CPA AAER-I030 4/30/98In the Matter of Frank Palumbo, CPA AAER-I067 8/19/98In the Matter of Albert Glenn Yesner, CPA AAER-I027 4/27/98In the Matter of Joy Lynn Schneider Green AAER-I018 3/25/98SEC v. Global Timber Corp. AAER-I043 6/8/98SEC v. Paul R. Safronchik, et al. AAER-I063 5/13/98SEC v. Latin American Resources, Inc., et al. LR-15802 7/8/98In the Matter of Donna Laubscher, CPA, et al. AAER-I082 9/29/98In the Matter of Paul E. Niezel, CPA AAER-I064 8/12/98In the Matter of Maria Mei Wenner, CPA AAER-I059 7/31/98SEC v. Peter T. Caserta, et al. AAER-993 12/4/97In the Matter of Charles T. Young, CPA AAER-I052 7/8/98In the Matter of Jerry Stone AAER-I015 3/10/98

126

Name of Case

In the Matter of Vena tor Group, Inc., et al.SEC v. Arthur Toll, et al.In the Matter of Jeffrey M. Steinberg and John GeronSEC v. Guy Marcel De VreeseIn the Matter of Joseph SanfellipoIn the Matter of Sensormatic Electronics Corp.In the Matter of Thomas H. PikeSEC v. James Patrick KittlerSEC v. Raymond E. SimmonsIn the Matter of Frank 1. CooneySEC v. Robert B. PeltzIn the Matter of Paul Safronchick, CPASEC v. Sol Greenbaum, et al.In the Matter of William D. Tetsworth, Jr.In the Matter ofKPMG Peat Marwick LLPIn the Matter of Robert Gossett, et al.SEC v. John LoganIn the Matter of Oliver G. Richard III, et al.SEC v. Healthtec International, Inc.SEC v. Paul JainSEC v. Ronald G. Assaf, et al.SEC v. Thomas F. CaseySEC v. Robert Howard, et al.In the Matter of Pepsi Cola Puerto Rico Bottling Co.In the Matter of Presstek, Inc.SEC v. Bond Dellapp Fletcher, et al.In the Matter of Steven M. Scarano, CPAIn the Matter of Charles Lipton, CPAIn the Matter of Sony Corp., et al.In the Matter of Thomas D. Leaper, CPA, et al.In the Matter of Barbara 1. CavalloSEC v. Charles T. Young, et al.SEC v. Ronald 1. Hottovy, et al.SEC v. Jui-Teng Lin, et al.In the Matter of Audre Recognition Systems,Inc., et al.

SEC v. Sony Corporation & Sumio SanoSEC v. James G. Hanley

Release No.

AAER-I049AAER-I033AAER-I038AAER-1045AAER-I028AAER-I017AAER-I019AAER-I0l1AAER-I016AAER-I050AAER-I013AAER-I047AAER-I013AAER-I031AAER-994AAER-992AAER-988AAER-I003AAER-990AAER-I053AAER-I020AAER-I077AAER-I00lAAER-I034AAER-997AAER-981AAER-I072AAER-I073AAER-I062AAER-I044AAER-I057AAER-I048AAER-I058AAER-I071

AAER-I076AAER-I061AAER-977

Date Filed

6/29/985/4/985/22/986/17/984/27/983/25/983/25/981/30/983/19/987/6/983/4/986/22/983/4/985/4/9812/4/9712/1/9711/17/9712/31/9711/25/977/8/983/25/989/17/9812/22/975/12/9812/22/9710/30/979/9/989/9/988/5/986/17/987/30/986/29/987/30/989/3/98

9/17/988/5/9810/6/97

127

Name of Case Release No. Date Filed

In the Matter of James Bogner AAER-978 10/10/97SEC v. Joseph Dimauro, et aI. AAER-1075 9/9/98In the Matter of Corrpro Companies, Inc., et aI. AAER-1080 9/24/98In the Matter of Erick A. Gray AAER-1050 7/6/98In the Matter of Gaston E. Oxman AAER-1050 7/6/98In the Matter of Ivor R. Ellul, et aI. AAER-1056 7/30/98In the Matter of Pinnacle Micro Inc., et aI. AAER-975 10/3/97SEC v. Eugene McCloskey, et aI. AAER-1040 6/4/98In the Matter of Kenneth O'NeaI, et aI. AAER-983 11/7/97In the Matter of Ermin Ianacone, et aI AAER-987 11/17/97In the Matter of New Jersey Resources Corp., et aI. AAER-1002 12/31/97SEC v. William P. Trainor, et aI. AAER-1065 8/21/98In the Matter of Paul Mount AAER-1010 1/30/98In the Matter of Warren 1. Christensen, et aI. AAER-1039 5/27/98In the Matter of Michael W. Crow AAER-I025 4/22/98In the Matter of Lee PharmaceuticaIs, et aI. AAER-1023 4/9/98SEC v. Steven 1. Henke, et aI. AAER-1083 9/30/98SEC v. Sanjeev "Tony" Sachdeva, et aI. AAER-996 12/18/97In the Matter of James A. Terrano, et aI. AAER-999 12/23/97SEC v. Russell C. Faust AAER-1006 1120/98In the Matter of Lawrence 1. Simmons, CPA AAER-1024 4/20/98In the Matter of Stephen P. Morrin, CPA AAER-991 12/1/97SEC v. DonaId F errarini, et aI. AAER-1008 1129/98In the Matter of Peter F. Kuebler, CPA AAER-1060 3/25/98

Issuer Reporting: Other

In the Matter of Thomas F ehn 34-40697 12/23/97SEC v. Solv-Ex Corp., et aI. LR-15817 7/20/98SEC v. Sam D. Schwartz, et aI. LR-15826 7/30/98In the Matter ofIncomnet, Inc. 34-40281 7/30/98

Market Manipulation

In the Matter of Mike Zaman 34-40494 9/29/98In the Matter of Ronald W. Driol 34-39596 1/29/98SEC v. Joseph Pignatiello, et aI., 97-9303 LR-15595 12118/97

128

Name of Case

SEC v. Douglas G. McCaskey, et aI.SEC v. Bio-Tech Industries, Inc., et aI.SEC v. Jerome M. WengerSEC v. Barclay Davis & World Syndicators, Inc.SEC v. Thomas Edward Cavanagh, et aI.In the Matter ofIan Fishman, et aI.SEC v. Sheldon KraftSEC v. Mohamed Khairy Mohamed Zayed IT, et aI.SEC v. Jeffrey Szur, et aI.SEC v. International Automated Systems, Inc., et aI.In the Matter of Texas Vanguard Oil, et aI.SEC v.Leonard Alexander Ruge, et aI.SEC v.Andrew Scudiero, et aI.In the Matter of Sheldon KraftIn the Matter of Douglas 1. ElliottIn the Matter ofIrwin FrankelSEC v. Technigen Corp., et aI.SEC v. Michelle SotnikowIn the Matter of Rosario Russell RuggieroSEC v. Waldron & Co., Inc., et aI.In the Matter of John MarsalaIn the Matter of Eugene Laff, et aI.In the Matter of Raymond R. NewbergSEC v. Rafi M. Khan, et aI.SEC v. Paul Montie, et aI.SEC v. George Badger, et aI.In the Matter of Douglas C. Selander

Miscellaneous

SEC v. New Era Technologies International, Inc.In the Matter of Spacedev, Inc., et aI.In the Matter of James W. NearenSEC v. Intercontinental Resources, et aI.SEC v. David BednarshIn the Matter of Frank Berger, et aI.SEC v. Michael Cardascia, et aI.

Release No

LR-15865LR-15900LR-15707LR-15600LR-1566934-40115LR-15617LR-15907LR-15595LR-1589834-39757LR-15595LR-1559534-3957934-4004334-40504LR-15723LR-1588834-40259LR-1589734-4050334-4025634-40464LR-15827LR-15739LR-1559534-40502

LR-1571834-4030734-40505LR-15921LR-1585934-40125LR-15674

Date Filed

9/1/989/24/984/15/9812/22/973/13/986/24/981/14/989/23/9812/18/979/23/983/16/9812/18/9712/18/971/26/985/29/989/30/984/27/989/18/987/23/989/23/989/30/987/23/989/23/987/30/985/14/9812/18/979/30/98

4/21/988/6/989/30/989/30/988/3/986/25/983/17/98

129

Name of Case

Offering Violations

Release No Date Filed

SEC v. Grady A. Sanders, et al.SEC v. Accelerated Funding Mortgage Corp., et al.In the Matter of James Ray RossSEC v. Internet Casino Sports Gaming LLC, et al.SEC v. Uniglobe Trading Company, Inc., et al.SEC v. Green Oasis Environmental, et al.In the Matter of Jon Mark StewartSEC v. Hollywood Trenz, Inc., et al.SEC v. Patrick Antrim, et al.SEC v. Mark A. Osheroff, et al.SEC v. Bruce BaumannSEC v. Scott L. Klion, et al.SEC v. Association of Individual Ministries, et al.SEC v. Austria Trust Company, Ltd., et al.SEC v. Michael D. Richmond, et al.In the Matter of Timothy 1. BrannonIn the Matter of Robert M. MarcusIn the Matter of Joseph P. Medsker, et al.SEC v. Daniel T. Todt, et akSEC v. Teddy Wayne Solomon, et al.SEC v. Golden Eagle International, et al.SEC v. George Wallace Stewart, et al.In the Matter of Michael GraberIn the Matter of Craig Curtis PetersonSEC v. American Internet Partners, Inc.In the Matter of AmeriVision Communications,

Inc., et al.In the Matter of Robert G. BettigaIn the Matter of Susan L. HenrySEC v. David Morgenstern, et al.In the Matter of Coahoma County, et al.In the Matter of Frank P. ZitkevitzSEC v. vn Visionary Investments, Inc., et al.SEC v. First Zurich National, LLC, et al.In the Matter of Betty Ann Rubin

130

NONELR-1575134-40134LR-15845LR-15568LR-1586434-40296LR-15730NONELR-15719LR-15755LR-15766LR-15805LR-15728LR-1581334-3994934-40056NONELR-15775LR-15880LR-15733LR-1570534-3942534-39427LR-15640

34-4028234-4018434-40183LR-1590234-4019434-40313LR-15904LR-1563934-40116

9/30/985/19/986/26/988/10/9811/21/97711/988/3/985/4/986/23/984/23/985/21/986/3/987/9/984/23/987/15/985/4/986/2/9812/18/976/5/981115/975/7/984/14/9812/11/9712/11/972/11/98

7/30/987/9/987/9/989/23/987/13/988/10/989/23/982/2/986/24/98

Name of Case

SEC v. Trinity Gas Corp., et al.SEC v. Michael D. Jenkins, et al.SEC v. International Capital Management, Inc., et al.SEC v. Derryl W. PedenIn the Matter of Global Casinos, Inc., et al.SEC v. Omnigene Development, Inc., et al.SEC v. Christian Schindler, et al.SEC v. Jerald F. Albin, et al.SEC v. Medco, Inc., et al.In the Matter of Anthony LollisIn the Matter of Kenneth Alan LarsonIn the Matter of Innovative Consulting Services,Inc., et al.

In the Matter of David FreitagSEC v. Scott B. Walker, et al.In the Matter ofBret L. BotelerSEC v. Larry C. Talley, SRSEC v. Paramount Capital Management, Inc.SEC v. Kellin Investment Corp., et al.SEC v. Shane T. Vaessen, et al.SEC v. City Services Corp., et al.SEC v. Appalachian Investment Corp., et al.In the Matter of Meda Belle McKinneyIn the Matter of Lawrence A. Krause, et al.SEC v. Mamie Tang, et al.In the Matter of Gilbert Mintz, et al.In the Matter of Erik W. ChanIn the Matter of City of Anaheim, et al.In the Matter of Newport-Mesa

Unified School DistrictIn the Matter of Christopher M. PedersenIn the Matter of Rudy Crosswell, et al.In the Matter ofPrirne Advisors, Inc., et al.

Release No.

LR-15588LR-15841LR-15922LR-1580734-40469LR-15899LR-15684LR-15881LR-1553934-3942834-39426

34-4045234-40462LR-1586934-39533LR-15925NONELR-15866LR-15911LR-15687LR-1587934-4045334-39226LR-1591234-4041734-4041633-7590

33-758934-4013134-4026534-40292

Date Filed

12/l 0/978/12/989/30/987/13/989/24/989/23/982/26/989/ll/9810/8/9712/1l/9712/ll/97

9/22/989/23/989/2/98l/9/989/30/9811/l8/979/l/989/24/983/l6/989/l0/989/22/9810/9/979/28/989/9/989/9/989/29/98

9/29/986/25/987/27/987/3l/98

131

Name of Case

In the Matter of Brent W. BerryIn the Matter of Ronald G. BajorekSEC v. United Energy Partners, Inc., et alIn the Matter of Paul L. NietoIn the Matter of James D. RoccoSEC v. Autocorp Equities, Inc., et al.SEC v. Marshall Neil Craig Ronald, et al.SEC v Certain United Investment Trusts, et alSEC v. Michael A. Todd, et al.SEC v. Commercial Express, et al.In the Matter of Charles O. HuttoeIn the Matter of David T. BarrSEC v. Titan Petroleum Corp., et al.SEC v. Steven M. ScaranoIn the Matter of Schneider Securities Inc., et aI.SEC v. Rynell & Assoc , Inc., et al.SEC v CaIvin Douglas Brace, et al.In the Matter of James B. BoswellSEC v. Daniel Schneider, et al.SEC v. William MadonSEC v. Terry V. Koontz, et al.SEC v. Nichi Capital, Ltd., et aI.SEC v Michael Hall, et al.In the Matter of Phillip PepeIn the Matter of Brian Patrick CorkIn the Matter of Michelle SotnikowSEC v. Clarence Wayne CookSEC v. Environmental Energy, Inc., et al.SEC v. Vladislav Zubkis, et al.In the Matter of Randy DepoisterSEC v. Calman H. Rifkin, et al.SEC v. Edward Snyder, et al.In the Matter of Donald E. WhorlSEC v. Thomas A. Nelson, et al.In the Matter of Orlando R. LandaIn the Matter of Jeffrey A. LobelSEC v. First Americans Bank, et al.

132

Release No.

34-3939634-40470LR-1571l34-3971434-39752LR-15839LR-15882LR-15850LR-15837LR-1589034-3943134-39918LR-15764LR-1587334-39929LR-15838LR-1582834-39535LR-15670LR-15598LR-15892LR-15688LR-1590134-3942934-3942434-40509LR-15853LR-15822LR-1555234-40483LR-15594LR-1583534-40415LR-15936IA-175334-39901LR-15734

Date Filed

12/3/979/24/981/30/983/4/983/13/988/10/989/16/988/11/988/10/989/17/9812/11/974/24/985/19/989/9/984/29/988/10/987/31/981/9/981/20/9812/16/979/17/983/27/989/23/9812/11/9712/11/979/30/988/6/987/28/9810/31/979/25/9812/17/975/22/989/9/989/22/989/22/984/22/985/7/98

Name of Case

SEC v. James Michael Cogley, et aI.In the Matter of James D. StoegerSEC v. David A. Colvin, et aIIn the Matter of Kuo-Chang WongIn the Matter of Cecil R. Glass, illSEC v. Lennox Investment Group, Inc., et aI.In the Matter of Daniel E. GoodmanIn the Matter of Patricia S. GaleIn the Matter of Robert Francis Bucheit, Sf.In the Matter of Roger D. ByrdSEC v. Richard C. Powelson, et aI.In the Matter of Richard E. TobinSEC v. Louis G. Karabochos, et aI.SEC v. Phebe W. ErdmanSEC v. Stephen Desimone, et aI.SEC v. Innovative Consulting Services, Inc., et aI.SEC v. Albert E. Carter, et aI.SEC v. GeraId A. Dobbins, et aI.SEC v. Millennium Software SolutionsIn the Matter of Joseph P. TufoSEC v. Nolan W. Wade, et aI.In the Matter of Kevin C. Speranzi, et aI.In the Matter of Raymond A. BasileIn the Matter of Emanuel B. NedwickIn the Matter of Jeffrey Price and Michael OstrachIn the Matter of Norman G. CorneliusSEC v. Hugh F. RollinsIn the Matter of Charles F. Kirby, et aI.SEC v. DaVId W. Laing, et aI.SEC v. Interactive Products & Services, Inc., et aI.SEC v, Vincent SetteducateIn the Matter of Nancy A. SwofferIn the Matter of Bradford A. Orosey, et aI.SEC v. Joel & Leslie SteingerSEC v. James Staples, et aI.SEC v. American Automation, Inc., et al.SEC v. Friendly Power Co. LLC, et aI.

Release No

LR-1585134-39599LR-1568334-4039434-39536LR-1578934-3970334-4048934-3993234-39715NONE34-40023LR-15908LR-15742LR-15597LR-15891LR-15787LR-15665LR-1558334-40388LR-1592334-4039634-3993034-4024834-3984434-39756LR-1585734-39971LR-15558LR-15700LR-1556134-4048834-40429LR-15729LR-15903LR-15804LR-15927

Date FIled

8/11/981/29/982/19/989/3/981/9/986/22/982/27/989/28/984/30/983/4/985/5/982/23/989/28/985/15/9812/19/979/18/986/18/983/10/9812/8/979/1/989/25/989/3/984/29/987/22/984/9/983/16/988/21/985/7/9811/13/974/8/9811/14/979/28/989/10/985/1/989/24/987/10/987/17/98

133

Name of Case Release No. Date Filed

SEC v. International Heritage, Inc., et al. LR-15672 3/16/98In the Matter of Dyke Ferrell 34-39534 1/9/98SEC v. Hurst Capital Corp., et al. LR-15656 2/18/98SEC v. Capital Acquisitions, Inc., et al. LR-15868 12/19/97

Related Party Transactions

In the Matter of DeGeorge Financial Corporation 34-39319 11/12/97SEC v. Peter R. DeGeorge LR-15556 11/12/97

Transfer Agent

In the Matter of Interstate Transfer Co., et al. 34-40389 9/1/98In the Matter of Holladay Stock Transfer, Inc., et al. 34-39797 3/25198In the Matter of Robert Bogutski 34-39559 1/20/98

134

Table 3INVESTIGATIONS OF POSSIBLE VIOLATIONS OFTHEACTS

ADMINISTERED BYTHE COMMISSION

Pending as of October 1, 1997 1,733Opened in Fiscal Year 1998 536

Total 2,269Closed in Fiscal Year 1998 430

Pending as of September 30, 1998 1,839

Formal Orders of InvestigationIssued in Fiscal Year 1998 275

Table 4ADMINISTRATIVE PROCEEDINGS INSTITUTED

DURING FISCAL YEAR ENDING SEPTEMBER 30, 1998

Broker-dealer Proceedings 126

Investment Adviser, Investment Company and Transfer Agent Proceedings 58

'Rule 102 Proceedings 25

Suspensions ofTrading in Securities in Fiscal Year 1998 11

135

Table 5INJUNCTIVE ACTIONS

Fiscal Year

1989199019911992199319941995199619971998

Actions Initiated

140186171156172197171180189214

Defendants Named

422557503487571620549588597745

Right to Financial Privacy

Section 21(h) ofthe Securities Exchange Act of 1934 [15U.S.c. 78u(h)(6)] requiresthat the Commission" compile an annual tabulation of the occasions on which theCommission used each separate subparagraph or clause of [Section 21(h)(2)] or theprovisions of the Right to Financial Privacy Act of 1978 [12 U.S.C. 3401-22 (theRFPA)] to obtain access to financial records of a customer and include itin itsannual report to the Congress." During the fiscal year, the Commission made noapplications for judicial orders pursuant to Section 21(h)(2). Set forth below arethe number of occasions on which the Commission obtained customer recordspursuant to the provisions of the RFPA:

136

Section 1104 (Customer Authorizations)

Section 1105 (Administrative Subpoenas)

Section 1107 (Judicial Subpoenas)

10

370

32

Table 6TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons SUbject to, Acts Constituting,and Basis for, Enforcement Action

Any person

Violation of the federal securities laws.

Broker-dealer, municipal securitiesdealer, government securities dealer,transfer agent, investment adviser orassociated person

Willful violation of securities laws or rules;aiding or abetting such violation; failurereasonably to supervise others; willfulmisstatement or omission in filing with theCommission; conviction of or Injunctionagainst certain crimes or conduct.

Registered securities association

Violation of or Inability to comply with theExchange Act, rules thereunder, or its ownrules; unjustified failure to enforcecompliance with the foregoing or with rules ofthe Municipal Securities Rulemaking Boardby a member or person associated with amember.

Sanction

Cease-and-desist order, which may alsorequire a person to comply or take steps toeffect compliance with federal securitieslaws; accounting and disgorgement of illegalprofits. (Securities Act, Section 8A;Exchange Act, Section 21C(a); InvestmentCompany Act, Section 9(f); InvestmentAdvisers Act, Section 203(k».

Censure or limitation on activities;revocation, suspension or denial ofregistration; bar or suspension fromassociation (Exchange Act, Sections15(b)(4)-(6), 15B(c)(2)-(5),15(C)(c)(1 )-(2),17A(c)(3)-(4); Investment Advisers Act,Section 203(e)-(f).

Civil penalty up to $110,000* for a naturalperson or $550,000* for any other person;accounting and disgorgement of illegalprofits. Penalties are subject to otherlimitations depending on the nature of theviolation. (Exchange Act, Section 21 B;Investment Company Act, Section 9;Investment Advisers Act, Section 203).

Temporary cease-and-desist order, whichmay, in appropriate cases, be issued exparte. (Exchange Act, Section 21C).

Suspension or revocation of registration;censure or limitation of activities, functions,or operations (Exchange Act, Section19(h)(1 )).

*Adjusted for inflation under Debt Collection Improvement Act.

137

Member of registered securitiesassociation, or associated person

Entry of Commission order against personpursuant to Exchange Act, Section 15(b);willful violation of securities laws or rulesthereunder or rules of Municipal SecuritiesRulemaking Board; effecting transaction forother person with reason to believe thatperson was committing violations ofsecurities laws.

National securities exchange

Violation of or inability to comply withExchange Act, rules thereunder or its ownrules; unjustified failure to enforcecompliance with the foregoing by a memberor person associated with a member.

Member of national securities exchange,or associated person

Entry of Commission order against personpursuant to Exchange Act, Section 15(b);willful violation of securities laws or rulesthereunder, effecting transaction for otherperson with reason to believe that personwas committing violation of securities laws.

Registered clearing agency

Violation of or inability to comply withExchange Act, rules thereunder, or its ownrules; failure to enforce compliance with itsown rules by participants.

Participant in registered clearing agency

Entry of Commission order againstparticipant pursuant to Exchange Act,Section 15(b)(4); willful violation of clearingagency rules; effecting transaction for otherperson with reason to believe that personwas committing violations of securities laws.

securities Information processor

Violation of or inability to comply withprovisions of Exchange Act or rulesthereunder.

138

Suspension or expulsion from theassociation; bar or suspension fromassociation with member of association(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration;censure or limitation of activities, functions,or operations (Exchange Act, Section 19(h)(1».

Suspension or expulsion from exchange; baror suspension from association with member(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration;censure or limitation of activities, functions,or operations (Exchange Act, Section19(h)(1».

Suspension or expulsion from clearingagency (Exchange Act, Section 19(h)(2».

censure or limitation of activities; suspensionor revocation of registration (Exchange Act,Section 11A(b)(6».

Any person

Willful violation of Securities Act, ExchangeAct, Investment Company Act or rulesthereunder; aiding or abetting such violation;willful misstatement in filing withCommission.

Officer or director of self-regulatoryorganization

Willful violation of Exchange Act, rulesthereunder or the organization's own rules;willful abuse of authority or unjustified failureto enforce compliance.

Principal of broker~ealer

Officer, director, general partner, ten-percentowner or controlling person of a broker-dealer for which a SIPC trustee has beenappointed.

securities Act registration statement

Statement materially inaccurate orincomplete.

Person SUbject to SectIons 12, 13, 14 or15(d) of the Exchange Act or associatedpersonFailure to comply with such provisions orhaving caused such failure by an act oromission that person knew or should haveknown would contribute thereto.

Securities registered pursuant to Section12 of the Exchange Act

Noncompliance by issuer ~ Exchange Actor rules thereunder.

Public interest requires trading suspension.

Registered Investment company

Failure to file Investment Company Actregistration statement or required report;filing materially incomplete or misleadingstatement or report.

Company has not attained $100,000 networth 90 days after Securities Act registrationstatement became effective.

Temporary or permanent prohibition againstserving in certain capacities with registeredinvestment company (Investment CompanyAct, Section 9(b».

Removal from office or censure (ExchangeAct, Section 19(h)(4».

Bar or suspension from being or becomingassociated with a broker-dealer (SIPA,Section 14(b».

Stop order refuSing to permit or suspendingeffectiveness (Securities Act, Section 8(d».

Order directing compliance or stepseffecting compliance (Exchange Act, Section15(c)(4».

Denial, suspension of effective date,suspension or revocation of registration(Exchange Act, Section 120».

Summary suspension of over-the-counter orexchange trading (Exchange Act, Section12(k».

Suspension or revocation of registration(Investment Company Act, Section 8(e».

Stop order under Securities Act; suspensionor revocation of registration (InvestmentCompany Act, Section 14(a».

139

Attorney, accountant, or otherprofessional or expert

Lack of requisite qualifications to representothers; lacking in character or integrity;unethical or improper professional conduct;willful violation of securities laws or rules, oraiding and abetting such violation.

Attorney suspended or disbarred by court;expert's license revoked or suspended;conviction of a felony or of a misdemeanorinvolVing moral turpitude.

Securities Violation in Commission-institutedaction; finding of securities violation byCommission in administrative proceedings.

Member or employee of MunicipalSecurities Rulemaking Board

Willful violation of Exchange Act, rulesthereunder, or rules of the Board; abuse ofauthority.

Permanent or temporary denial of privilege ofappearing or practicing before the Commission(17 CFR Section 201.1 02(e)(1».

Automatic suspension from appearance orpractice before the Commission (17 CFRSection 201.1 02(e)(2».

Temporary suspension from practicing beforethe Commission; censure; permanent ortemporary disqualification from practicingbefore the Commission (17 CFR Section201.102(e)(3».

Censure or removal from office (ExchangeAct, Section 15B(c)(8».

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting,and Basis for, Enforcement Action

Any person

Engaging in or about to engage in acts orpractices Violating securities laws, rules ororders thereunder Qncluding rules of aregistered self-regulatory organization).

Noncompliance with provisions of the laws,rules, or regulations under Securities Act,Exchange Act, or Holding Company Act,orders issued by Commission, rules of aregistered self-regulatory organization, orundertaking in a registration statement.

140

Sanction

Injunction against acts or practicesconstituting violations (plus other equitablerelief under court's general equity powers)(Securities Act, Section 20(b); Exchange Act,Section 21 (d); Holding Company Act, Section18(e); Investment Company Act, Section42(d); Investment Advisers Act, Section209(d); Trust Indenture Act, Section 321).

Writ of mandamus, injunction, or orderdirecting compliance (Securities Act, Section20(c); Exchange Act, Section 21 (e); HoldingCompany Act, Section 18(f».

IIIII1Ii

Violating the securities laws or a cease-and-desist order (other than through insidertrading).

Trading while in possession of material non-puolic information in a transaction on anexchange or from or through a broker-dealer(and transaction not part of a public offering);aIding and abetting or directly or indirectlycontrolling the person who engages in suchtrading.

Violating Securities Act Section 17(a)(1) orExchange Act section 1O(b). when conductdemonstrates substantial unfitness to serveas an officer or director.

Issuer subject to Section 12 or 15(d) ofthe Exchange Act; officer, director,employee or agent of Issuer; stockholderacting on behalf of Issuer

Payment to foreign official. foreign politicalparty or official. or candidate for foreignpolitical office. for purposes of seeking theuse of influence in order to assist issuer inobtaining or retaining business for or with. ordirecting business to. any person.

Securities Investor Protection Corporation

Refusal to commit funds or act for theprotection of customers.

National securities exchange orregistered securities association

Failure to enforce compliance by members orpersons associated with its members with theExchange Act, rules or orders thereunder. orrules of the exchange or association.

Registered clearing agency

Failure to enforce compliance by itsparticipants with its own rules.

Civil penalty up to $110.000* for a naturalperson or $550,000* for any other person Q[,if greater, the gross gain to the defendant.Penalties are subject to other limitationsdependent on nature of violation. (SecuritiesAct. Section 20(d); Exchange Act, Section21 (d) (3); Investment Company Act, Section42(e); Investment Advisers Act, Section209(e».

Maximum civil penalty: three times profitgained or loss avoided as a result oftransaction (Exchange Act, Section 21A(a)-(b».

Prohibition from acting as an officer ordirector of any public company. (SecuritiesAct, Section 20(e); Exchange Act. Section21 (d)(2».

Maximum civil penalty: $11.000* (ExchangeAct, Section 32(c».

Order directing discharge of obligations andother appropriate relief (SIPA, Section 11 (b».

Writ of mandamus, injunction or orderdirecting such exchange or association toenforce compliance (Exchange Act, Section21 (e».

Writ of mandamus, injunction or orderdirecting clearing agency to enforcecompliance (Exchange Act. Section 21 (e)).

*Adjusted for inflation under Debt Collection Improvement Act.

141

Issuer sUbject to Section 15(d) of 1934Act

Failure to file required information,documents or reports.

Registered Investment company

Name of company or of security issued by itdeceptive or misleading.

Officer, director, member of advisoryboard, adviser, depositor, or underwriterof investment company

Engage in act or practice constituting breachof fiduciary duty involving personalmisconduct

Forfeiture of $110* per day (Exchange Act,Section 32(b».

Injunction against use of name (InvestmentCompany Act, Section 35(d».

Injunction against acting in certain capacitiesfor investment company and otherappropriate relief (Investment Company Act,Section 36(a».

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons SUbject to, Acts Constituting,and Basis for, Enforcement Action

Any person

Willful violation of securities laws or rulesthereunder; willful misstatement in anydocument required to be filed by securitieslaws or rules; willful misstatement in anydocument required to be filed by self-regulatory organization in connection with anapplication for membership or associationwith member.

Issuer subject to Section 12 or 15(d) ofthe Exchange Act; officer or director ofissuer; stockholder acting on behalf ofissuer; employee or agent subject to thejurisdiction of the United States

Payment to foreign official, foreign politicalparty or official, or candidate for foreignpolitical office for purposes of seeking theuse of influence in order to assist issuer inobtaining or retaining business for or with, ordirecting business to, any person.

Sanction

Maximum penalties: $1,000,000 fine and tenyears imprisonment for individuals,$2,500,000 fine for non-natural persons(Exchange Act, Sections 21 (d), 32(a»;$10,000 fine and five years imprisonment (or$200,000 if a public utility holding companyfor violations of the Holding Company Act)(Securities Act, Sections 20(b), 24;Investment Company Act, Sections 42(e), 49;Investment Advisers Act, Sections 209(e),217; Trust Indenture Act, Sections 321, 325;Holding Company Act, Sections 18(1), 29).

Issuer. $2,000,000; officer, director,employee, agent or stockholder - $100,000and five years imprisonment Qssuer may notpay fine for others) (Exchange Act, Section32(c».

*Adjusted for inflation under Debt Collection Improvement Act.

142

Self-Regulatory Organizations: Expenses, Pre-Tax Income, andBalance Sheet Structure

In 1997, the total revenues of all self-regulatory organizations (SROs)with marketplace jurisdiction rose approximately $262.7 million, anincrease of approximately 17% from 1996. The New York StockExchange (NYSE), the National Association of Securities Dealers(NASD), the American Stock Exchange (AMEX), and the ChicagoBoard Options Exchange (CBOE) accounted for 89% of total SROrevenues, unchanged from 1996. Revenues were earned primarily fromlisting or issuer fees, trading fees, and market data fees. For example:

• The NYSE reported total revenue of$639 million, an increase of 14%from 1996, of which 41% consisted of listing fees, 18% consisted oftrading fees, and 15% consisted of market data fees.

• The NASD reported total revenue of $634 million, an increase of21% from 1996, of which 18% consisted of listing fees, 42%consisted of trading and market data fees.

• The AMEX reported total revenue of $198 million, an increase of16% from 1996, of which 8% consisted of listing fees.

The remaining SROs also reported increases in revenues as follows:

• The Boston Stock Exchange (BSE) reported a $2 million increase(14%) to $17.5 million.

• The CBOE reported a $17.9 million increase (16%) to $126.5 million.

• The Pacific Exchange (pCX) reported a $14.8 million increase (25%)to $75.1 million.

• The Philadelphia Stock Exchange (Plfl.X) reported a $9.4 millionincrease (27%) to $44.2 million.

• The Chicago Stock Exchange (CHX) reported a $4.3 million increase(12%) to $41.2 million.

143

• The Cincinnati Stock Exchange reported a $251,000 decrease (-3%)to $8.4 million.

Of the SROs reporting financial information for a 12-month period infiscal year 1997, the PHLX reported the largest percentage increase intotal revenues (27%). The NASD reported the largest dollar volumeincrease in total revenues, $109.6 million.

The total expenses of all marketplace SROs were $1.5 billion in 1997, anincrease of $248 million, or 20%, over 1996. The CBOE incurred thelargest percentage increase in expenses, 37%. The largest dollar volumeincrease in expenses was incurred by the NASD, $122.6 million.Additionally, the following SROs incurred the following increases inexpenses:

• The AMEX incurred a $15.1 million increase (10%).

• The BSE incurred a $ 1.1 million increase (8%).

• The NYSE incurred a $55.3 increase (13%).

• The PCX incurred a $11.1 million increase (23%).

• The PHLX incurred a $6 million increase (18%).

• The CSE incurred a $884,000 increase (20%).

• The CBOE incurred a $34 million increase (37%).

• The CHX incurred a $1.9 million increase (5%).

Aggregate pre-tax income of the marketplace SROs rose to $271 million,an increase of$14.7 million (6%), from the $256 million reported in1996. The NYSE experienced the largest dollar volume increase in pre-tax income, $21.9 million. The remaining SROs reported positive pre-taxincome in 1997. The CBOE and NASD reported positive pre-tax incomefor 1997 that dropped significantly from their 1996 levels. The CSE alsoshowed a positive pre-tax income for 1997 that dropped from it's 1996

144

level. The remaining SROs all experienced increased pre-tax incomeabove their 1996 reported levels.

The total assets of all marketplace SROs amounted to approximately $2.4billion in 1997, an increase of$330.7 million (16%) over 1996. TheNYSE showed the largest dollar volume increase in total assets, $162million (16%), while the NASD showed the largest percentage increase intotal assets, 27% ($149.3 million). The BSE also showed a significantpercentage increase in total assets, 25% ($6.5 million). The AMEX,CSE, CBOE, and PCX also reported increases in total assets equaling$25.5 million ($15%), $2.3 million (21%), $13.4 million (l1%), and$10.8 million (l9% ) respectively.

In 1997, the total liabilities of marketplace SROs increased $168.1 million(18%) over 1996 levels. The NASD showed the greatest percentageincrease, 61% ($113. 2 million), as well as the greatest dollar volumeincrease. Increases in liabilities were also reported by the AMEX ($12million or 20%), BSE ($5.6 million or 29%), NYSE ($76 million or15%), and CBOE ($3 million or 13%).

The aggregate net worth of the marketplace SROs rose $162.6 million in1997 to $1.341 billion, an increase ofl4% over 1996. The CSE incurredthe largest percentage increase in net worth, 25% ($2.2 million), while theNYSE reported the largest dollar volume increase in net worth, $86million (17%). Net worth increases were also reported by the othermarketplace SROs as follows: AMEX ($13 3 million or 12%), BSE($950,000 or 13%), CBOE ($10 million or 11%), NASD ($36 million or10%), PCX ($8.8 million or 24%), PHLX ($2.9 million or 12%) andCHX ($1.7 million or 9%).

Clearing agency results have been presented in two tables by theirrespective types: clearing corporations and depositories. In calendar year1997, aggregate revenues from clearing agency services (both tables)increased $41 million or 7% to $607 million from $566 million in 1996.Interest income declined $2 million, or 4% to $53.5 million in 1997. Allclearing agencies adjust their fee structures and refunds of fees to provideparticipants with attractively priced services, meet expenses, and providethe amount of earnings which they desire to retain.

145

Serv.ce revenues at the depositories totaled $388 million, up $29 millionor 8% from 1996. In 1997, The Depository Trust Company (DTC)increased its service revenue by 10% ($34 million). Its pre-tax earningsdecreased 38%, from $301,000 to $186,000. In addition, thePhiladelphia Depository Trust Company's 1997 service revenuesdecreased 27%. Its operating pretax loss increased fourteen-fold from aloss of $12,000 in 1996 to $1.68 million in 1997.

Depositories continue to expand their base of service revenues byincreasing both the number of equity shares and principal amount of debtsecurities on deposit. This gain occurred, among other reasons, becauseof the continued expansion of depository-eligible issues and theparticipants' increased use of depository services. At year end 1997,DTC alone had more than 1.3 million depository-eligible issues and atotal value of securities in its depository system of more than $17 trillion.

Service revenues of clearing corporations for 1997 increased 24% to$219 million from $177 million for 1996, and earnings for clearingcorporations decreased to $6.2 million in 1997 from $9.5 in 1996, adecrease of35%.

The results were mixed for individual clearing corporations' pre-taxearnings. For example, the National Securities Clearing Corporation didnot report any earnings for 1997, which is no change from 1996. TheGovernment Securities Clearing Corporation reported earnings of $5. 1million for 1997, compared with $3.9 for 1996, an increase of31%. TheOptions Clearing Corporation reported earnings before taxes of$146,000for 1997 compared with $3.3 million in 1996, a decrease of96%. TheStock Clearing Corporation of Philadelphia reported a 1997 loss of$511,000 compared with income of $986,000 in 1996.

The aggregate shareholders' equity of all clearing corporations anddepositories increased from $117 million to $128 million. Aggregateparticipant clearing funds, which protect clearing agencies in the event ofa participants' default, increased from $5.2 billion to $6.2 billion. Ifaparticipant defaults and its losses exceed its deposit at a clearing agency,the entire participants' fund of the clearing agency may be assessed on apro rata basis.

146

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148

Table 9SELF-REGULATORY ORGANIZATIONS-DEPOSITORIES

1997 REVENUES and EXPENSES 11($ in Thousands)

PhiladelphiaDepository Participants Depository

Trust Trust TrustCompany Company Company

(12/31/97) (12/31/97) (12/31/97) Total

RevenuesDepository Services $366,280 $13,290 $8,856 $388,426Interest Income 12,850 15,635 544 29,029Total Revenues 21 $379,130 $28,925 $9.400 $417.455

ExpensesEmployee Costs $216,939 $12,905 $5,778 $235,622Data Processing 23,709 4,669 838 29,216Occupancy Costs 40,479 4,812 0 45,291Depreuanon and

AmortizatIOn ofIntangibles 19,508 0 0 19,508

All Other Expenses 78,309 5,464 $4.464 88,237Total Expense $378,944 $20,073 $11,080 $417,874

Excess of RevenuesOver Expenses 'JJ $186 $1,075 $(1,680) ($419)

Shareholders' EqUity $19,893 $20,073 $3,704 $43,670Participant's Fund $717,475 $260,507 $2,060 $980,042

jJ Although the staff tned to make the presentations comparable, any Single revenue or expensecategory may not be completely comparable between any two depositones because of (I) thevarying classlncanon methods employed by the depositories In reporting operating results and (II)the grouping methods employed by the SEC's staff due to these varying classmcanon methodsIndiVIdual amounts are shown to the nearest thousand Totals are the rounded result of theunderlying amounts and may not be the arhhmenc sums of the parts.

21 Revenues are net of refunds which have the effect of reducmq a clearing agency's base fee rates'JJ Ilus ISthe result of operations and before the effect of wntedowns and Income taxes, which may slgmflcantly

Impact a depoatory's net Income.

149

Certificate of Immobilization

Book entry deliveries continued to outdistance physical deliveries in thesettlement of securities transaction among depository participants of TheDepository Trust Company (DTC). This tendency is illustrated in Table10, Certificate Immobilization Trends. The table captures the relativesignificance of the mediums employed, in a ratio of book-entry deliveriesto certificates withdrawn from DTC. The figures includes Direct Mail byAgents and municipal bearer bonds. In 1997, the total certificateswithdrawn increased by less than 1% from 1996, while the number ofbook-entry deliveries increased by 11%. In 1997, the ratio was overtwice the 1993 ratio of book-entry deliveries rendered for everycertificate withdrawn.

Table 10CERTIFICATE IMMOBILIZATION TRENDS

The Depository Trust Company

Book-entry Deliveriesat DTC (millions)

Total of all Certificates(in thousands)

Book-entry Deliveriesper Certificates Withdrawn

150

151.0 136.0 119.0 106.0 98.3

2,858 2,769 3,270 3,899 4,140

52.7 49.0 36.4 27.1 23.7

Section 13(1)(1) Reports

Institutional investment managers file Forms 13F to report certain equitysecurities holdings of accounts over which they exercise investmentdiscretion (accounts with a fair market value of at least $100 million).The SEC estimates that approximately 2,000 managers are subject to thisfiling requirement.

Generally, the Form 13F filings are public in the Commission's publicreference room within two days of filing; however, the public interest inhaving these reports available electronically has increased. For example,the Commission, and the Commission believes that investors, find theinformation contained in the filings useful in determining institutionalinvestor holdings of an issuer. Issuers, too, should find detail as to theseholdings useful because much of their shareholder list may reflectholdings in "street name" rather than beneficial ownership. Mandatoryelectronic dissemination of this data would help ensure timely andefficient dissemination of this important information. It also would resultin more uniform treatment of public filings made with the SEC byreporting entities and third-party filers.

The Commission therefore recently adopted rule amendments to requireelectronic filing of these reports through use of the SEC's EDGARsystem. (Release No. IC-23640 (Jan. 12, 1999), 64 FR 2843 (Jan. 19,1999». The Commission's action thus affords these reports the samedegree of public availability as other electronic filings made with the SEC.

151

Exemptions

Section l2(h) Exemptions

Section l2(h) of the Exchange Act authorizes us to grant a complete orpartial exemption from the registration provisions of Section l2(g) or fromthe disclosure or insider reporting/trading provisions of the Exchange Actwhere such exemption is consistent with the public interest and the protectionof investors. The applicants for the three applications pending at thebeginning of 1998 did not proceed with their requests during the year.Requested relief was granted to the one application that was :filedduring theyear.

Exemptions for Foreign Private Issuers

Rule l2g3-2 provides various exemptions from the registration provisions ofSection l2(g) of the Exchange Act for the securities of foreign privateissuers. A frequently used exemption is that contained in subparagraph (b),which provides an exemption for certain foreign issuers that furnish specifieddocuments to us on a current basis. Such documents include informationmaterial to an investment decision that the issuer has:

• made or is required to make public pursuant to the law of the country inwhich it is incorporated or organized;

• :filedor is required to :filewith a stock exchange on which its securitiesare traded and which was made public by such exchange; or

• distributed or is required to distribute to its security holders.

Periodically, we publish a list of those foreign issuers that appear to becurrent under the exemptive provision. The current list contains over 1,500foreign issuers.

152

Corporate Reorganizations

During 1998, the Commission entered its appearance in 36 newreorganization cases filed under Chapter 11 of the Bankruptcy Codeinvolving companies with approximately $4 billion in assets and 75,000public investors. Adding these new cases, the Commission was a party ina total of 90 Chapter 11 cases during the year, involving companies withapproximately $23 billion in assets and 450,000 public investors. Duringthe year, 24 cases were concluded through confirmation of a plan,dismissal, or liquidation, leaving 66 cases in which the Commission was aparty at year-end.

Table 11REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICHTHE SEC ENTERED APPEARANCE

1997 199819941997

1995199819981998

199719971997 19981994

Debtor District

Action Auto Rental, Inc. D. OHAdvanced Promotion

Technologies, Inc.I/ S.D. FLAileen, Inc. S.D. NYAlliance Entertainment Corp. D. NY

American Microtel, Inc. D. NYAmerican Rice, Inc. S.D. TXApparel America, Inc. S.D. NYAPS Holdings, Inc. D. DE

Audre Recognition Systems, Inc. S.D. CAAutolend Group, Inc. D. NMBarry's Jewelers, Inc. C.D. CAB-E Holdings, Inc. E.D. WI

FYOpened

1993

FYClosed

153

Table 11 (continued)REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WInCHTHE SEC ENTERED APPEARANCE

FY FYDebtor District Opened Closed

Ben Franklin Retail Stores, Inc. N.D. II.. 1996Bonneville Pacific Corp. D. UT 1992Bradlees, Inc. S.D. NY 1996Bruno's, Inc. D. DE 1998

Builders Transport, Inc. N.D. GA 1998Cable & Co. Worldwide, Inc. S.D. NY 1998Carter Hawley Hale Stores, Inc. C.D. CA 1991Chimneyville Investments Group,Inc. S.D. MS 1998

Cincinnati Microwave, Inc. S.D. OH 1997Clothestime, Inc.I/ C.D. CA 1996 1998CPT Corp.I/ D. MN 1991 1998Craig Consumer Electronics, Inc. C.D. CA 1997

Debbie Reynolds, Hotel &Casino Inc. D. NV 1998

Eastern Air Lines, Inc.1J S.D. NY 1989 1998First City Bancorporation

of Texas, Inc. N.D. TX 1994First Enterprise Financial Group,

Inc. and First EnterpriseAcceptance Company N.D. IL 1998

First Merchants Acceptance Corp.j/ D. DE 1997 1998FPA Medical Management, Inc. D. DE 1998

154

Table 11 (continued)REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICHTHE SEC ENTERED APPEARANCE

FY FYDebtor District Opened Closed

Fruehauf Trailer Corp.I/ D. DE 1997 1998Future Communications, Inc. W.D. OH 1994Gander Mountain, Inc. E.D. WI 1996Geotek Communications, Inc. D. DE 1998Global Environmental

Industries, Inc. W.D. TX 1998Great American Recreation, Inc. D. NJ 1996

Grossman's Inc.j/ D. DE 1997 1998Gulfstar Industries, Inc.j/ M.D. FL 1998 1998Guy F. Atkinson Co. of California N.D. CA 1998Hamburger Hamlet

Restaurants. Inc.l/ C.D. CA 1996 1998

Home Theater ProductsInternational.Jnc.j/ C.D. CA 1996 1998

I C H Corp.I/ N.D. TX 1996 1998International TouristEntertainment Corp.j/ W.D. MI 1997 1998

Jayhawk Acceptance Corp.j/ N.D. TX 1997 1998

King of Video, Inc. D. NY 1989Lifeone,lnc. ~a

National Affiliated Corp. W.D. LA 1998Manhattan Bagel Co., Inc. D. NJ 1998Marvel Entertainment

Group, Inc.I/ D. DE 1997 1998

155

Table 11 (continued)REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICHTHE SEC ENTERED APPEARANCE

FY FYDebtor District Opened Closed

MCorp (MCorp Financial, Inc.& MCorp Management)l! S.D. TX 1989 1998

Media Vision Technology, Inc. N.D. CA 1994Megafoods Stores, Inc.11 D. AZ 1994 1998Molten Metal Technology, Inc. D. MA 1998

National Gypsum Co. N.D. TX 1991Neostar Retail Group, Inc. N.D. TX 1997Omega Environmental, Inc. W.D. WA 1997OTS Holdings, Inc. C.D. CA 1998

Pacific Diagnostic Technologies,Inc. N.D. CA 1998

Pacific Northwest Housing, Inc. D. OR 1998Packaging Research Corp.2/ D. CO 1997 1998Payless Cashways, Inc. W.D. MO 1997

PCA Industries, Inc. E.D. WI 1997Penn Pacific Corp. E.D. OK 1994Physician Clinical Laboratory,Inc.I/ C.D. CA 1997 1998

Powertel USA, Inc. D. NV 1998

RDM Sports Group, Inc. N.D. GA 1997Reconversion

Technologies, Inc.11 N.D. OK 1997 1998Reddie Brake Supply Co., Inc. C.D. CA 1998

156

Table II (continued)REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICHTHE SEC ENTERED APPEARANCE

FY FYDebtor District Opened Closed

Reliance Acceptance Corp.f/k/a Cole Taylor FinancialGroup, Inc. D. DE 1998

Rymer Foods, Inc. N.D. IL 1993Sierra-Rockies Corp. C.D. CA 1998Solv-ex Corp. D. NM 1997Southland Corp.I/ N.D. TX 1991 1998

Standard Oil and Explorationof Delaware, Inc.j/ W.D. MI 1991 1998

Sterling Optical Corp. S.D. NY 1992Stratosphere Corp.I/ D. NY 1997 1998Stream Logic Corp. N.D. CA 1998

Struthers Industries, Inc. N.D. OK 1998Substance Abuse Technologies,Inc.lI S.D. FL 1998 1998

Tan Books & Records, Inc. N.D. IL 1998The Sled Dogs Co. D. MN 1998

Tradetech Americas, Inc. N.D. IL 1998United States Leather, Inc. E.D. WI 1998Venture Stores, Inc. D. DE 1998Westbridge Capitol Corp. D. DE 1998

Western Fidelity Funding, Inc. D. CO 1997Western Pacific Airlines, Inc. D. CO 1998Westmoreland Coal Co. D. CO 1997WRT Energy Corp. W.D. LA 1996

157

Table 11 (continued)REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN wmcaTHE SEC ENTERED APPEARANCE

FY FYDebtor District Opened Closed

Wiz Technology, Inc. C.D. CA 1998Winco Corp. C.D. CA 1998

Total Cases Opened (FY 1998) 36Total Cases Closed (FY 1998) 24

11 Chapter 11 plan confirmed.Y Debtor liquidated under Chapter 7.

158

The Securities Industry: Revenues, Expenses, and Selected BalanceSheet Items

Broker-dealers registered with the Securities and Exchange Commissionearned a pre-tax profit of $20. 1 billion in calendar year 1997. This was$3.1 billion more than that earned the previous year. The pre-tax returnon equity capital of 27.1 % was better than the average results of theprevious decade.

An important factor affecting broker-dealer profits was record transactionactivity. Sales of mutual funds grew by over 40% in 1997. The dollarvalue of equity trades executed on the exchanges and the Nasdaqincreased by 41%. The amount of margin debt outstanding grew by 30%.This increase in transactions translated into revenue growth. Securitiescommissions rose by $4.9 billion to $32.7 billion in 1997. Margin interestof $10.6 billion represented an increase of $3.2 billion. Revenues fromretailing mutual funds grew by $2.3 billion to $12.4 billion.

Underwriting revenues of$14.6 billion were a $2.3 billion increase overthe previous year. While the value of new debt offerings grew by 42%,the more profitable equity offerings were flat in 1997. Proprietary tradinggains were $36.1 billion in 1997, an increase of $5.3 billion.

"All other revenues" grew by $17.6 billion to $101.3 billion in 1997.These revenues are comprised primarily of interest income from securitiespurchased under agreements to resell and fees from handling privateplacements, mergers, and acquisitions. These underlying businesssegments showed substantial growth in 1997. Announced M&A dealsrose by 47%, the dollar value of private placements grew by 74%, andthe dollar value of reverse repurchase agreements rose 15%.

Expenses rose 21% to $187.7 billion in 1997, primarily due to higherinterest expenses. Interest expense, which was the largest expense item in1997, increased by $16.2 billion (25%) to $80.9 billion. Employeecompensation rose 14.9% to $58.6 billion. Total assets grew by $332.6billion to $2,080.2 billion. Equity capital increased by $16.5 billion to$82.3 billion.

159

Table 12

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS1993 - 1997 jJ($ in Millions)

1993 1994 1995 199& 1997P

RevenuesSecurities Commissions $ 19,904.8 $ 19,846.7 $ 23,214.8 s 27,865.6 $ 32,7183Gams (Losses) In Trading and

Investment Accounts 25,427.2 20,218.6 28,962.7 30,768.2 36,067.5Pronts (Losses) from Underwntlng

and Selling Groups 11,2487 6,843.8 8,865.2 12,6133 14,640.9Margin Interest 3,2352 4,668.4 6,470.2 7,3860 10,632.0Revenues from Sale of Investment

Company Shares 8,115.3 6,887.2 7,4335 10,0811 12,420.2All Other Revenues 40,912.6 54,2934 68,467.6 83,6972 101,250.7Total Revenues s 108,843.7 $ 112,758.1 $ 143,414.0 $ 172,411.5 $ 207,7295

ExpensesRegistered Represenlallves'

Compensalion (Par111Only) 21 $ 14,696.0 $ 13,711.0 $ 15,526.5 $ 18,734.2 $ 22,194.3Other Employee Compensation

and Benefits 20,931.3 20,552.2 22,285.4 27,901.7 31,431.2Compensalion to Par1ners and

Voting Stockholder Officers 3,498.0 3,332.4 3,7293 4,396 7 5,018.8Comrmssions and Clearance Paid

to Other Brokers 5,337.8 5,360.3 5.700.2 7,364.2 8,867.4Interest Expenses 26,6156 40,2504 56,877.0 64,698.5 80,889.5Regulatory Fees and Expenses 629.7 627.8 674.1 672 9 845.4All Other Expenses 21 24,096.7 25,431.8 27,296.4 31,664.9 38,421.9Tolal Expenses $ 95,805.1 $ 109,265.9 $ 132,088.9 $ 155,433.0 $ 187,668.4

Income and Profitabl lilyPre-tax Income $ 13,038.6 $ 3,492.2 s 11,325.1 $ 16,978.5 s 20,0611Pre-tax Proht Margin 120 3.1 7.9 9.8 9.7%Pre-tax Return on EqUity 267 6.5 20.1 27.3 27.1%

Assets liabilities and CaPItalTolal Assets $1,240,159.8 $1,251,741.0 $1,493,643.9 $1,747,647.1 $2,080,206 3Liabilities

(a) Unsubordinated liabilities 1,160,456.0 1,169,136.6 1,403,655.1 1,645,303.5 1,950,057.0(b) Subordinated Liabilities 25,787.6 28,809.7 31,279.2 36,577.4 47,879.1(c) TOIaI LiabllilJes 1,186,243.6 1,197,9463 1,434,934.3 1,681,880.9 1,997,936.1

Owners/up EqUity $ 53,916.2 $ 53,794.7 $ 58.709.5 $ 65,766.2 $ 82,270.3

Number of Firms 7,674 7.632 7,722 7,774 7,804

Figures may not add due to rounding.r = reasedp = preliminary1/ Calendar, rather than nscal, year data is reported in this table.?I Registered representatives' compensation for firms that neither carry nor clear is Included In .other expenses"

as thiS expense Item IS not reported separately on Par1IJA of the FOCUS Report

Source' FOCUS Report

160

Table 13UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS1993 - 1997 jJ($ in Millions)

1993 1994 1995 1996' 1997'RevenuesSecurities Commissions $19.3411 $ 19.246.6 s 22.6167 s 27.2451 $ 31,915.1Gains (Losses) in TradlOg and

Investment Accounts 24,042.5 18,918.3 27,088.1 28.322.0 31,872 5Profits (Losses) from Underwriting

and Selling Groups 11,248.6 6,840.5 8.8650 12,6133 14,628.1MarglO Interest 3.229.1 4,6511 6,439.4 7,3538 10,499.4Revenues from Sale of Investment

Company Shares 8,115.3 6,876.4 7,433.4 10,081 1 12,421 8All Other Revenues 40,0863 53,121.4 67,4931 82.689.7 99,8785Total Revenues $106,0629 $109,654.3 $139,935.6 $168,305.0 $201,2155

ExpensesRegistered Representatives'

Compensallon (Part II only) Y $ 14,671.9 $13,689.0 $ 15,5062 $ 18.646.0 22,108.8Other Employee Compensation

and Benefits 20,5149 20,070.8 21,8606 27,416.8 30.8282Compensallon to Partners and

Voting Stockholder Officers 3,2934 3,096.1 3,5113 4,121 9 4.731.5cemnnssons and Clearance Paid

to Other Brokers 5,083.3 5.088.4 5,4574 7,099.3 8,426.4Interest Expenses 26,2229 39,582.1 55,8233 63,595.3 78,915.5Regulatory Fees and Expenses 5733 534.6 6162 622.3 7886All Other Expenses '!J 23.548.2 24,832.5 26,670.8 30,983.6 37,527.2Total Expenses $ 93.908.0 $106,893.5 $129,4459 $152,4852 $183,3262

Income and ProfitabilityPre-tax Income $ 12,1549 $ 2,760.8 $ 10,4897 $ 15,819.8 $17,8893Pre-tax Profit Margin 11.5 2.5 75 94 89Pre-tax Return on EqUIty 26.5 54 197 268 257

Number of Rrms 5,139 5,237 5,310 5,395 5,471

Figures may not add due to rounding.r = rensedp = preliminaryy calendar. rather than hscal, year data is reported in thiS table.'!J Registered representatives' compensation for firms that neither carry nor clear IS included 10 "other expenses"

as thiS expense item is not reported separately on Part IIA of the FOCUS Report

Source: FOCUS Report

161

Table 14UNCONSOUDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBUC BUSINESSYEAR-END, 1993 - 1997 11

($ in Millions)

1993 1994 1995 1996' 1997p

~Cash s 13,128.1 $ 13,500 4 s 14,862.7 $ 16.824.7 s 23.338.5Receivables from Other

Broker -dealers 289.168 0 342,000.1 358,556.9 477,645.9 591,094.5Receivables from Customers 68.526.1 66.911.6 71,004.2 87.064.8 118.272.7Receivables from Non-customers 6,412.5 7.258.1 7,421.0 7.080.4 11,857.6long Positions In Securities

and Commodibes 363,864 3 317,625.7 422.868.7 448,069.1 496.140.4Securities and Investments

not Readily Marketable 4.124.4 4,481.1 5,366 2 5.453.8 8,037.8Secunties Purchased Under Agreements

to Resell (Part II only) 2J 439,431.4 437,805.6 544.832.3 624.210.7 716.089.1Exchange Membership 323.1 353 7 424.1 460.2 545.4Other Assets 2/ 30.615.8 33,818.8 34.206.1 36.234.1 46.826.1Total Assets $1,215.593 8 $1.223,755.0 $1.459.542.3 $1.703.043.7 $2.012,202.1

Liabilities and Eouitv CaoitalBank loans Payable $ 41.991.9 s 34.471.4 s 45,717.6 $ 38.165.7 s 38,323.3Payables to Other Broker-deaJers 105.115.2 130,736.4 152,3288 207.726.7 264.231.1Payables to Non-customers 10,836.0 11.921.5 14,943.8 18,124.7 26,493.9Payables to Customers 90.942.9 98,534.4 111.489.9 143,517.0 187.852.9Short Positions in Securities

and Commodities 199.509 5 196.807.9 195.149.3 236,586.2 246,897.3Secunties Sold Under Repurchase

Agreements (Part II only) 2/ 607.827.1 591,423.1 767.676.1 852.523.9 991.885 3Other Non-subordinated Liabilibes 2/ 83.124.4 80.846.3 85,389.4 107.867.5 132.335.3Subordinated Liabilities 25,370.6 28,493.5 30.9313 36.2295 47,422.6Total liabilities $1.164,717.6 $1,173.2346 $1,403,626.3 $1,640,741.1 $1,935,441.6

Equity Capital s 50,876.2 $ 50.520.4 s 55.916.0 s 62.302.5 s 76,760.4

Number of firms 5.139 5.237 5.310 5.395 5,471

Agures may not add due to rounding.r = revisedp = preliminaryY Calendar, rather than fiscal, year data is reported in thiS table2/ Resale agreements and repurchase agreements for firms that neither carry nor clear are included in "other assets" and

"other non-subordinated liabilities." respectively. as these items are not reported separately on Par1I1A of the FOCUSReport

SOIIce: FOCUS Report

162

Carrying and Clearing Firms

Data for carrying and clearing firms that do a public business is presentedin more detail. Reporting requirements for firms that neither carry norclear are less detailed. Carrying and clearing firms clear securitiestransactions or maintain possession or control of customers' cash orsecurities. These firms produced 82% of the securities industry's totalrevenues in calendar year 1997.

Brokerage activity accounted for about 24 cents of each revenue dollar in1997, about the same as the level in 1996. Securities commissions remainedthe most important component, producing 14 cents of each dollar of revenue.Margin interest generated about six cents of each dollar of revenue, whilerevenues from mutual fund sales accounted for about four cents.

The dealer side produced 64 cents of each dollar of revenue in 1997, downfrom 67 cents in 1996. Sixteen cents came from trading and investments, adecline from 17 cents in 1996. Eight cents came from underwriting, aboutthe same as in 1996. Forty cents came from other securities-related revenues,down about one cent since 1996. This revenue item is comprised primarily ofinterest income from securities purchased under agreements to resell and feesfrom handling private placements, mergers, and acquisitions.

Expenses accounted for 92 cents of each revenue dollar in 1997, resulting in apre-tax profit margin of eight cents per revenue dollar, about one cent lessthan that in 1996. Interest expense was the most important expense item,accounting for 45 cents of each revenue dollar in 1997 compared to 44 centsin 1996. Employee-related expenses-compensation received by registeredrepresentatives, partners and other employees-consumed 28 cents of eachrevenue dollar in 1997, compared to 29 cents in 1996.

Total assets of broker-dealers carrying and clearing customer accounts were$1,957 billion at year-end 1997, a 1<)0./0 increase from 1996. Relative to otherassets, the value of reverse repurchase agreements and the inventory on thebooks of broker -dealers declined during 1997, while the value of receivablesfrom customers and other broker -dealers increased.

Total liabilities increased by about 18% to $1,897 billion in 1997. Owners'equity rose by 21 % to $60.7 billion.

163

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Table 16UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS 11($ in Millions)

199& 1997.Percent Percent PercentoITota! oITotal Change

Dollars Revenues Dollars Revenues 1996-1997RevenuesSecurities CommissIOns $ 19,560.1 13.8% $23,171.7 13.6% 18.5%Gains (Losses) In Trading and

Investment Accounts 23,733.3 167 26,896.6 157 133Profits (Losses) from Under-

writing and Seiling Groups 11,7651 83 13,8306 8.1 17.6Margin Interest 7,353.8 52 10,4994 61 428Revenues from Sale of Invest-

ment Company Shares 5,901.4 4.2 7,2055 4.2 221Miscellaneous Fees 6,375.1 45 8,351.6 4.9 310Revenues from Research 1054 01 685 0.0 -350Other Securities Related Revenues 58,1361 409 68,1968 399 17.3Commodities Revenues 1,570.9 1.1 331.5 02 -789All Other Revenues 7,644.1 5.4 12,271.2 7.2 605Total Revenues $142,145.3 100.0% $170,823.4 1000% 20.2%

ExpensesRegistered Representatives'

Compensation $ 18,6460 131% $22,1088 12.9% 186%Other Employee Compensation

and Benefits 20,503.7 14.4 23,4251 13.7 142Compensation to Partners and

Voting Stockholder Officers 2,368.5 1.7 2,8096 1.6 186Commissions and Clearance Pard

to Other Brokers 3,811.0 27 4,487.5 26 17.8Communications 3,434.5 24 3,897.6 23 135Occupancy and Equipment Costs 4,084.4 2.9 4,551.0 27 114Data Processing Costs 1,700.1 1.2 1,9668 12 15.7Interest Expenses 62,338.2 438 77,317.1 453 240RegUlatory Fees and Expenses 4684 0.3 603.2 04 288Losses In Error Accounts and

Bad Debts 332.2 0.2 454.3 03 368All Other Expenses 11,8505 83 15,3795 9.0 298Total Expenses $129,537.7 911% $157,000.4 91.9% 21.2%

Income and ProfitabilityPre-tax Income s 12,6076 8.9% $13,823.0 8.1% 9.6%Pre-tax Profit Margin 8.9 8.1Pre-tax Retum on EQUIty 26.4 25.0

Number of Rrms 756 786

Rgures may not add due to rounding.r = revisedp = preliminaryjJ calendar, rather than fiscal, year data is reported in this table.Note: Includes information for firms doing a public business that carry customer accounts or clear securities transactions.Source: FOCUS Report

165

Table 17UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING

BROKER-DEALERS 11($ in Millions)

1996' 1997P

Percent Percent Percentof Total oITotal Change

Dollars Assets Dollars Assets 1995-1996~Cash $ 15,319.8 0.9% $ 21,556.7 1.1% 407%Receivables from Other Broker-dealers 458,383.8 27.8 577,081.9 29.5 259

(a) Securities Failed to Deliver 7,381.3 0.4 15,530.5 0.8 110.4(b) Secuntes Borrowed 426,882.9 25.9 532,039.0 27.2 24.6(c) Other 24,119.7 1.5 29,512.4 15 22.4

Receivables from Customers 87,064.8 53 118,272 7 6.0 35.8Receivables from Non-customers 6,474.8 04 11,2093 0.6 73.1Long Positions m Securities and conmemnes 422,3331 25.6 463,8701 237 9.8

(a) Bankers Acceptances, Certificatesof Deposit and Commercial Paper 20,976.8 13 23,191.6 1.2 106

(b) U.S. and Canadian Government Obligations 252,967.2 153 267,463.0 13.7 57(c) State and MUnicipal Government Obligations 10,8296 07 13,203.2 0.7 219(d) Corporate Obligations 83,813.7 5.1 89,235.0 4.6 65(e) Stocks and Warrants 37,5222 23 50,667.1 2.6 35.0(I) OplJons 6,476.7 0.4 7,458 8 0.4 15.2(g) Arbitrage 7,089.4 0.4 8,802.8 0.4 24.2(h) Other secenues 2,303.7 0.1 3,209.1 0.2 393(I) Spot Commodities 3537 0.0 639.4 0.0 808

SecunlJes and Investments Not Readily Marketable 4,877.3 0.3 7,542.3 0.4 54.6~". secunties Purchased Under Agreementsto Resell 624,210.7 37.8 716,089.1 36.6 14.7

Exchange Membership 399.9 0.0 449.3 0.0 12.4Other Assets 31 ,885.3 1.9 41,314.9 2.1 29.6Total Assets $1,650,949.4 100.0% $1,957,386.2 100.0% 18.6%

liabilities and Equity CaortalBank Loans Payable $ 37,510 ..8 2.3% $ 38,135.3 1.9% 1.7%Payables to Other Broker -dealers 190,501.8 11.5 253,096.8 129 32.9

(a) SecurilJes Failed to Receive 9,211.4 0.6 16,879.3 0.9 83.2(b) Securities Loaned 158,120.8 9.6 207,674.7 10.6 31.3(c) Other 23,169.7 1.4 28,542.8 1.5 232

Payables to Non-customers 17,695.1 1.1 26,106.3 1.3 47.5Payables to Customers 143,517.0 8.7 187,852.9 9.6 30.9Short Posnors in secennes

and Commodities 219,186.7 13.3 224,307.8 11.5 2.3Securities Sold Under Repurchase

Agreements (Part" Only) 852,523.9 51.6 991,885.3 50.7 16.3Other Non-subordinated

lIabilllJes 104,853.4 6.4 128,885.9 6.6 22.9Subordinated UabilllJes 35,130.1 2.1 46,412.5 2.4 32.1Totai liabilities $1,600,918.7 97.0% $1,896,682.6 96.9% 18.5%

EqUity Gapitai $ 50,030.6 3.0% $ 60,703.6 3.1% 21.3%

Number of Rrms 756 786

Rgures may not add due to rounding.r = revisedp = preliminary11 Calendar, rather than fiscal, year data is reported in this table.Note: Includes mfonnatioo for finns doing a public business that carry customer accounts or clear securities transactiOllS.Source: FOCUS Report

166

Securities Traded on Exchanges

Market Value and Volume

The market value of equity and option transactions (trading in stocks,options, warrants, and rights) on registered exchanges totaled $6.9 trillionin 1997. Of this total, approximately $6.6 trillion, or 96%, representedthe market value of transactions in stocks, rights, and warrants; $295billion, or 4% were options transactions (including exercises of optionson listed stocks).

The value of equity and option transactions on the New York StockExchange (NYSE) was $5.8 trillion, up 45.7% from the previous year.The market value of such transactions on the American Stock Exchange(AMEX) increased 55.3% to $203.8 billion and increased 39.8% to$803.8 billion on all other exchanges The volume of trading in stocks(excluding rights and warrants) on all registered exchanges totaled 159.7billion shares, a 27% increase from the previous year, with 86.9% of thetotal accounted for by trading on the NYSE.

The volume of options contracts traded (excluding exercised contracts)was 353.8 million contracts in 1997, 20% greater than in 1996. Themarket value of these contracts increased 47.9% to $219 billion. Thevolume of contracts executed on the Chicago Board Options Exchangeincreased 7.6% to 187.2 million. Option trading on the AMEX andPacific Stock Exchange rose 43% and 37.8% respectively while optiontrading on the Philadelphia Stock Exchange increased 38.4%

Nasdaq (Share Volume and Dollar Volume)

Nasdaq share volume and dollar volume information has been reported ona daily basis since November 1, 1971. At the end of 1997, there were6,208 issues in the Nasdaq system, as compared to 6,384 a year earlierand 3,050 at the end of 1980.

Share volume for 1997 was 163.9 billion, compared to 138.1 billion in1996 and 6.7 billion in 1980. The dollar volume of shares traded in the

167

Nasdaq system was $4.5 trillion during 1997, compared to $3.3 trillion in1996 and $68.7 billion in 1980.

Share and Dollar Volume by Exchange

Share volume on all registered stock exchanges totaled 159.9 billion, anincrease of 27% from previous year. The NYSE accounted for 87% ofthe 1997 share volume; the AMEX, 4%; the Chicago Stock Exchange,4%; and the Pacific Stock Exchange, 2%.

The dollar value of stocks, rights, and warrants traded was $6.6 trillion,45.4% higher than the previous year. Trading on the NYSE contributed89% of the total. The Chicago Stock Exchange and Pacific StockExchange contributed 3% and 2% respectively. The AMEX accountedfor 2% of dollar volume.

168

Table 18MARKET VALUE OF EQUITY/OPTIONS SALES ON U.S. EXCHANGES 11

($ in Thousands)

TotalMarket Equity Options Non-EquityValue Stocks 2J Warrants Rights Traded Exercised Options 'JJ

All Registered Exchanges for Past Six Years

Calendar Year: 1992 2,148,790,741 2,031,942,219 658,074 83,842 26,585,937 39,172,724 45,590,0031993 2,728,667,287 2,609,854,352 584,699 65,339 33,779,350 42,983,539 41,400,0091994 2,956,599,170 2,816,810,031 678,024 183,095 35,883,322 44,457,669 58,587,0281995 3,678,326,943 3,506,785,001 970,523 235,647 50,802,752 51,461,348 68,071,6711996 4,719,336,203 4,510,874,989 869,986 34,861 67,861,575 59,451,448 80,243,3451997 6,879,408,633 6,559,348,106 616,256 27,363 104,535,151 100,422,278 114,459,480

Breakdown of 1997 Data by Registered ExchangesAll Registered Exchanges

Exchanges: AMEX 203,786,939 139,498,701 98,090 6,425 35,008,397 22,826,973 6,348,353BSE 80,847,329 80,847,329 0 0 0 0 0CHX~ 212,965,835 212,965,835 0 0 0 0 0CSE 90,534,913 90,534,913 0 0 0 0 0NYSE 5,847,854,938 5,846,637,135 503,200 20,838 415,222 272,894 5,648PSE 150,850,620 122,766,544 13,430 100 17,839,130 10,150,071 81,344PHLX 89,229,253 65,974,522 1,535 0 9,531,183 9,896,540 3,825,473CBOE 179,391,835 123,126 0 0 41,741,218 33,328,829 104,198,662

Figures may not sum due to rounding.1/ Data on the value and volume of equity security sales is reported in connection with fees paid under Section 31 of the Securities Exchange Act of 1934 as amended by the Securities Acts Amendments of 1975.

It covers odd-lot as well as round-lot transactions.2J Includes voting trust certificates, certificate of deposit for stocks, and American Depositary Receipts for stocks but excludes rights and warrants.'JJ Includes all exchange trades of call and put options in stock indices, interest rates, and foreign currencies.~ The Chicago Stock Exchange was formerly the Midwest Stock Exchange. The name change took effect on June 11, 1993.

~ Source: SEC Form R-31 and Options Clearing Corporation Statistical Report.

170

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Table 20SHARE VOLUME BY EXCHANGES 11

(In Percentages)

Total ShareVolume

Year (in Thousands) NYSE AMEX CHIC PSE PHl.X BSE CSE Others

1945 769,018 65.87 21.31 1.77 2.98 1.06 0.66 0.05 6.301950 893,320 76.32 13.54 2.16 3.11 0.97 065 0.09 3.161955 1,321,401 68.85 19.19 2.09 3.08 0.85 0.48 0.05 5.411960 1,441,120 68.47 22.27 2.20 3.11 088 0.38 0.04 2651961 2,142,523 64.99 25.58 2.22 3.41 0.79 0.30 0.04 2.671962 1,711,945 71.31 20.11 2.34 2.95 0.87 0.31 0.04 2.071963 1,880,793 72.93 18.83 2.32 2.82 0.83 029 0.04 1.941964 2,118,326 72.81 19.42 2.43 2.65 0.93 029 0.03 1.441965 2,671,012 69.90 22.53 2.63 2.33 0.81 0.26 0.05 1.491966 3,313,899 69.38 22.84 2.56 268 0.86 0.40 005 1.231967 4,646,553 64.40 28.41 2.35 246 0.87 0.43 0.02 1.061968 5,407,923 61.98 29.74 2.63 2.64 089 0.78 0.01 1.331969 5,134,856 63.16 27.61 2.84 3.47 1.22 051 0.00 1.191970 4,834,887 71.28 19.03 3.16 3.68 1.63 0.51 0.02 0.691971 6,172,668 71.34 18.42 3.52 3.72 1 91 0.43 0.03 0.631972 6,518,132 70.47 18.22 3.71 4.13 2.21 0.59 0.03 0.641973 5,899,678 74.92 13.75 4.09 3.68 219 071 0.04 0.621974 4,950,842 78.47 10.28 440 3.48 1.82 0.86 005 0.641975 6,376,094 80.99 8.97 3.97 3.26 1.54 0.85 013 0.291976 7,129,132 80.05 9.35 3.87 3.93 142 078 0.44 0.161977 7,124,640 79.71 9.56 3.96 372 1.49 066 0.64 0261978 9,630,065 79.53 10.65 3.56 3.84 1.49 060 0.16 0.171979 10,960,424 79.88 10.85 3.30 3.27 1.64 0.55 028 0231980 15,587,986 79.94 10.78 3.84 280 1.54 0.57 0.32 0.211981 15,969,186 80.68 9.32 4.60 287 1 55 051 0.37 0101982 22,491,935 81.22 696 5.09 3.62 2.18 0.48 038 0.071983 30,316,014 80.37 7.45 5.48 3.56 2.20 0.65 019 0.101984 30,548,014 82.54 5.26 6.03 3.31 1 79 0.85 0.18 0041985 37,187,567 81.52 5.78 6.12 3.66 1.47 1 27 015 0.031986 48,580,524 81.12 6.28 5.73 3.68 1.53 133 0.30 0.021987 64,082,996 83.09 5.57 5.19 3.23 1.30 1.28 0.30 0.041988 52,665,654 83.74 4.95 5.26 3.03 129 1.32 0.39 0.021989 54,416,790 81.33 6.02 5.44 3.34 1.80 1 64 0.41 0.021990 53,746,087 81.86 6.23 4.68 3.16 1.82 1 71 0.53 0.011991 58,290,641 82.01 5.52 4.66 3.59 1.60 1.77 0.86 0011992 65,705,037 8134 5.74 4.62 3.19 1.72 1.57 1.83 0.011993 83,056,237 82.90 5.53 4.57 2.81 1.55 1.47 1.17 0.001994 90,786,603 84.55 4.96 3.88 2.37 1.42 1.39 142 0.011995 107,069,656 84.49 4.78 3.67 2.56 1.39 1.45 1.66 0.001996 125,922,577 85.95 4.29 3.37 2.40 1.28 1.29 1.42 0.001997 159,856,674 86.85 3.88 3.75 2.01 109 1.24 118 000

jJ Share volume for exchanges includes stocks, rights, and warrants; calendar, rather than calendar. fiScal, year data are reportedin thiS table.

2/ Includes all exchanges not listed individually.

Source. SEC Form R-31

171

Table 21DOLLAR VOLUME BY EXCHANGES 11

(In Percentages)

Total DollarVolume

Year (10 Thousands) NYSE AMEX CHIC PSE PHLX SSE CSE Others ?J

1950 $ 21,808,284 8591 6.85 2.35 2.19 1.03 1.12 0.11 0.441955 38,039,107 86.31 698 244 1.90 1.03 0.78 009 0.471960 45,309,825 8380 935 272 194 1.03 060 0.07 0.491961 64,071,623 8243 1071 2.75 1.99 1.03 0.49 007 0531962 54,855,293 8632 681 2.75 2.00 1.05 046 007 0541963 64,437,900 8519 7.51 2.72 239 1.06 0.41 006 0661964 72,461.584 8349 845 3.15 2.48 1.14 0.42 0.06 0.811965 89,549,093 81.78 991 3.44 2.43 112 0.42 0.08 0821966 123,697,737 79.77 1184 3.14 2.84 110 056 007 0681967 162,189,211 77.29 1448 3.08 2.79 1.13 066 003 0541968 197,116,367 7355 1799 3.12 2.65 1.13 104 001 0511969 176,389,759 7348 17.59 3.39 3.12 1.43 067 001 0.311970 131,707,946 78.44 11.11 3.76 3.81 199 067 0.03 0.191971 186,375,130 79.07 998 4.00 3.79 229 058 0.05 0.241972 205,956,263 7777 10.37 4.29 3.94 256 0.75 005 0271973 178,863,622 8207 606 4.54 3.55 245 100 006 0.271974 118,828,270 8363 4.40 4.90 3.50 2.03 1.24 006 0.241975 157,256,676 85.20 367 4.64 3.26 173 119 017 0.141976 195,224,812 8435 388 4.76 383 1.69 0.94 0.53 0021977 187,393,084 8396 460 4.79 353 1.62 074 0.75 0011978 251,618,179 83.67 613 4.16 364 162 061 017 0001979 300,475,510 83.72 694 3.83 2.78 180 056 035 0.021980 476,500,688 8353 7.33 4.33 227 1.61 052 0.40 0011981 491,017,139 84.74 5.41 504 2.32 1.60 0.49 040 0001982 603,094,266 8532 327 5.83 3.05 159 0.51 043 0001983 958,304,168 8513 332 6.28 286 1.55 0.66 016 0.041984 951,318,448 85.61 2.26 6.57 2.93 158 0.85 0.19 0.001985 1,200,127,848 85.25 223 6.59 3.06 1.49 120 0.18 0.001986 1,707,117,112 85.02 256 6.00 3.00 157 1.44 0.41 0.001987 2,286,902,788 8679 232 532 2.53 135 133 0.35 0.001988 1,587,950,769 8681 196 546 2.62 1.33 1.34 0.49 0.001989 1,847,766,971 8549 235 546 2.84 1.77 156 0.54 0.001990 1,616,798,075 86.15 233 458 2.77 179 1.63 0.74 0.001991 1,778,154,074 8620 2.31 434 305 154 172 0.83 0011992 2,032,684,135 8647 2.07 428 287 1.70 1.52 1.09 0.001993 2,610,504,390 87.21 208 4.10 238 1.52 1.35 137 0001994 2,817,671,150 88.08 201 3.49 2.09 134 1.31 1.68 0.001995 3,507,991,171 87.71 210 3.26 2.24 1.27 1.43 1.99 0.001996 4,511,779,836 88.91 1.91 3.01 2.03 1.19 132 1.63 0.001997 6,559,991,725 8913 213 3.25 1.87 1.01 123 1.38 0.00

1/ Dollar volume for exchanges mcludes stocks, rights, and warrants; calendar, rather than fiScal, year data are reported 10thiS table.

2/ Includes all exchanges not listed individually.Source: SEC Form R-31

172

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Table 23VALUE OF STOCKS USTED ON EXCHANGES

($ in Billions)

New York American ExcluSivelyAs of Stock Stock On Other

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174Source: SEC Form 1392

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U.S. SECURITIES AND EXCHANGE COMMISSION

Annual Report Division of Enforcement

2018

DISCLAIMER

This is a report of the staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, fndings, or conclusions contained herein.

Report available on the web at www.sec.gov/reports

CONTENTS

Message from the Co-Directors ....................................................................................................................................................................... 1

Introduction ....................................................................................................................................................................................................................... 6

Initiatives .............................................................................................................................................................................................................................. 6

Focus on the Main Street Investor ......................................................................................................................................................... 6

Policing Cyber-Related Misconduct.....................................................................................................................................................7

The Share Class Selection Disclosure Initiative ......................................................................................................................... 8

Discussion and Analysis of Fiscal Year 2018 ...........................................................................................................................................9

Overall Results ........................................................................................................................................................................................................9

Types of Cases.....................................................................................................................................................................................................10

Distributions to Harmed Investors ........................................................................................................................................................11

Disgorgement and Penalties Ordered ..............................................................................................................................................11

Individual Accountability .............................................................................................................................................................................. 12

Relief Obtained .................................................................................................................................................................................................... 12

Litigation .................................................................................................................................................................................................................... 14

Allocation of Resources ........................................................................................................................................................................................ 14

Noteworthy Enforcement Actions ............................................................................................................................................................... 15

Appendix ........................................................................................................................................................................................................................... 19

Endnotes............................................................................................................................................................................................................................38

DIVISION OF ENFORCEMENT ANNUAL REPORT | 1

MESSAGE FROM THE CO-DIRECTORS

Stephanie Avakian CO-DIRECTOR

Steven Peikin CO-DIRECTOR

Last year, the Division of Enforcement issued its frst annual report discussing the enforcement-related accomplishments of the Commission. We continue that practice with this report, which presents and assesses the Division’s work during Fiscal Year (FY) 2018, highlights some of its more signifcant accomplishments, and discusses key initiatives. We believe that the Division’s work this year was a great success.

But how do we measure success? As we have often emphasized, quantitative metrics—for example, the raw number of cases fled or the total amounts of fnes and penalties assessed during an ar-bitrary time period such as a single fscal year—cannot adequately measure the effectiveness of an enforcement program. Indeed, we believe a singular focus on such metrics can result in a misalign-ment of incentives and objectives.

Instead, we believe the effectiveness of the program can better be measured by assessing the nature, quality, and effects of the Com-mission’s enforcement actions. Are we deterring future harm by bringing meaningful cases that send clear and important messages to market participants? Are we protecting investors and markets by holding individuals accountable for wrongdoing and removing bad actors from the securities markets? Are we stripping wrong-doers of their ill-gotten gains and returning money to victims? Are we acting quickly to stop frauds, prevent future losses, and return ill-gotten gains to harmed investors?

To be sure, these measuring sticks are more diffcult to employ than counting up the raw number of cases or offering a gross total of fnancial sanctions. But those raw numbers and gross totals do little to provide a true picture of whether the Division’s efforts have furthered the Commission’s three-part mission of protecting investors, maintaining fair, orderly, and effcient markets, and facilitating capital formation. To effectively assess our performance, and guide our future efforts, we must be more rigorous and thoughtful in our analysis.

In our report last year, we articulated fve principles that would guide the Division’s assessment of its performance: (1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effec-tively further enforcement goals; and (5) constantly assess the allocation of our resources. We believe the efforts of the Division’s dedicated leadership and staff—at headquarters in Washington, DC, and across the country in our 11 regional offces—over the past fscal year refect a faithful adherence to these principles.

2 | U.S. SECURITIES AND EXCHANGE COMMISSION

Principle 1: Focus on the Main Street Investor The Division of Enforcement is focused on protecting the interests of the Main Street, or retail, investor. These are market participants who need and deserve the attention of the Commission. Over the past fscal year, the Division investigated and recommended to the Commission hundreds of cases alleging misconduct perpetrated against retail investors. Many of those cases were simultaneously resolved, resulting in meaningful and prompt relief. The balance are being pursued through litigation. Our focus on identifying and addressing misconduct against Main Street investors has also resulted in a pipeline of hundreds of retail-focused investigations that were ongoing at the close of the fscal year. Importantly, Division personnel again worked diligently to return substantial sums to harmed investors—this year $794 million.

The Division’s focus on protecting Main Street investors was also refected in two important initiatives over the past fscal year. First, the Retail Strategy Task Force, formed in FY 2018, contributed to the Division’s retail focus by leveraging enforcement resources and drawing on expertise from across the Commission to develop and implement strategies and techniques for addressing the types of misconduct that most affect retail investors. And, second, during FY 2018, the Commission announced the Share Class Selection Disclosure (SCSD) Initiative, a program designed to quickly and effciently bring relief to investors who may have been harmed by failures to disclose conficts of interest related to marketing fees and expenses associated with the selection of mutual fund share classes. Scores of investment advisers par-ticipated in the SCSD Initiative, which will result in charges against them. We expect investors to beneft greatly from money that will be repaid to them by participants in the initiative. Importantly, a goal of this initiative is to ensure that advisers and their affliates properly disclose their conficts of interest.

As we said before, we do not believe the Commission faces a binary choice between protect-ing Main Street and policing Wall Street. It must do both. In many cases, including those highlighted by our SCSD Initiative, misconduct at these institutions causes substantial harm to investors on Main Street. This year, as the Division of Enforcement focused its lens on protecting Main Street investors, it continued to investigate and recommend actions against fnancial institutions, intermediaries, and other market participants.

Principle 2: Focus on Individual Accountability Holding individuals accountable for wrongdoing is a key pillar of any strong enforcement program. Institutions act only through their employees, and holding culpable individuals responsible for wrongdoing is essential to achieving our goals of general and specifc deter-rence and protecting investors by removing bad actors from our markets. The SEC’s actions over the past year illustrate the premium we place on establishing individual liability where appropriate. In FY 2018, the Commission charged individuals in more than 70% of the stand alone enforcement actions it brought. Those charged include individuals at the top of the corporate hierarchy, including numerous CEOs and CFOs, as well as accountants, auditors, and other gatekeepers.

DIVISION OF ENFORCEMENT ANNUAL REPORT | 3

Principle 3: Keep Pace with Technological Change Technology continues to transform not only our markets, but also the ability of wrongdoers to engage in cyber-related and other misconduct. The Division of Enforcement has continued to work to keep pace with these important changes.

Notably, in FY 2018, the Division’s Cyber Unit became fully operational and—together with staff across the Division—spearheaded investigations which led to signifcant enforcement actions in the cyber area. For example, the SEC brought an action against the entity formerly known as Yahoo! Inc., which was the agency’s frst case against a public company for fail-ing to properly inform investors about a cyber breach. The SEC also brought its frst action against a frm for violations of the Identity Theft Red Flags Rule, as well as additional cases involving false regulatory flings allegedly made for the purpose manipulating the price of securities.

Led by the Cyber Unit, the Division emerged as a global leader in addressing misconduct relating to digital assets and initial coin offerings (ICOs). We believe our approach to enforce-ment in this space has been thoughtful and consistent. Importantly, it has provided a template for authorities in other countries, where fraud and misconduct targeting U.S. investors often have been based.

Given the explosion of ICOs over the last year, we have tried to pursue cases that deliver broad messages and have market impact beyond their own four corners. To that end, we have used various tools—some traditional, such as the Commission’s trading suspension authority, and some more novel, such as the issuance of public statements—to educate investors and market participants, including lawyers, accountants, and other gatekeepers. We believe these investor-protection efforts have been successful.

We also have recommended enforcement actions for conduct ranging from registration violations, to unregistered broker-dealer activity, to instances in which the purported use of blockchain-related technology is merely a veneer for outright fraud. A poignant example of our impactful approach is the SEC’s enforcement action against the co-founders of a pur-ported fnancial services start-up. This action, coupled with the Enforcement Division’s joint statement with the Commission’s Offce of Compliance Inspections and Examinations urging caution around celebrity promotion of ICOs, brought an almost immediate end to such promotions. Another example is the SEC’s action against an allegedly fraudulent ICO that targeted retail investors to fund what it claimed to be the world’s frst “decentralized bank.” We moved quickly to stop the fraud by obtaining a court order, and the action showcased our ability to obtain a receiver over digital assets.

Finally, the Division has continued to leverage its own technology to accomplish its enforce-ment goals. Using proprietary tools to conduct sophisticated data analysis, the Division has identifed and pursued a wide variety of misconduct, including insider trading, “cherry-pick-ing” schemes, and the sale of unsuitable investment products or programs to retail investors.

4 | U.S. SECURITIES AND EXCHANGE COMMISSION

Principle 4: Impose Remedies That Most Effectively Further Enforcement Goals In each case we bring to the Commission, we seek to recommend a package of remedies and relief that best addresses the underlying misconduct. In most cases, that will include fnancial remedies—i.e., disgorgement, penalties, or both—and bars and suspensions, which help to preserve the integrity of our markets and protect investors. Such relief is essential to ensure ap-propriate punishment, deprive wrongdoers of their ill-gotten gains, deter would-be wrongdoers from violating the federal securities laws, and return funds to harmed investors.

Yet we have increasingly looked to the wide range of other tools at our disposal and aimed, whenever possible, to supplement fnancial remedies by tailoring specifc relief that best ad-dresses the underlying charged conduct. Two examples from the last fscal year include the Commission’s settlement with the CEO of Theranos, and the settlement with Tesla and its Chairman and CEO, both of which paired signifcant monetary relief with investor-oriented undertakings tailored to both remediate the harm visited on shareholders by the misconduct at issue and provide shareholders with greater protection in the future.

In the case of Theranos, the Commission alleged that the CEO had misused her near total control of the company to defraud investors. The Commission’s settlement stripped the CEO of her super-majority voting control and ensured that she would not beneft from any future sale or other liquidation event until other shareholders had frst been made whole. In the case of Tesla, the Commission alleged that the Chairman and CEO had engaged in fraud through a series of false and misleading tweets about a purported take-private transaction. The remedies included not only signifcant penalties, but also substantially enhanced corporate governance—including requiring the appointment of two new independent directors, a new committee of independent directors, and the CEO to step down as the company’s Chair-man—as well as oversight of the CEO’s communication practices.

Principle 5: Constantly Assess the Allocation of Our Resources Effective management and ensuring the appropriate allocation of resources go hand-in-hand. Because we have limited staff (our total headcount is down approximately 10% from its peak in FY 2016), and our responsibilities continue to expand with our ever-evolving market, we must always assess the allocation of our resources.

The results from the past year are derived both from the Division’s dedicated staff rising to the challenge and from an effective allocation of resources. We shifted resources into mar-ket segments presenting emerging risks, including cyber threats and ICOs. We implemented innovative initiatives, such as the SCSD Initiative, which we expect to result in the return of substantial funds to retail investors. And we have paid careful attention to case selection, attempting to open and pursue investigations that are likely to have the most meaningful impact for investors and the markets.

DIVISION OF ENFORCEMENT ANNUAL REPORT | 5

Evaluating Our Efforts Judged on a qualitative basis—including against the guiding principles discussed above—we believe the Division of Enforcement achieved many notable successes in FY 2018—recom-mending that the Commission bring signifcant actions against important market participants, achieving successes for retail investors, fashioning meaningful and effective remedies and relief, and addressing emerging and developing risks.

Above we discussed the limitations of raw quantitative metrics. Notwithstanding the limita-tions associated with such metrics, FY 2018 refected a high level of activity by the Division of Enforcement. The Commission brought 821 actions (490 of which were “stand alone” actions) and obtained judgments and orders totaling more than $3.9 billion in disgorgement and penalties. Signifcantly, it also returned $794 million to harmed investors, suspended trading in the securities of 280 companies, and obtained nearly 550 bars and suspensions. By these raw metrics, our overall results improved compared to FY 2017.

These results were achieved despite signifcant challenges. For one, our personnel resources are down. Due to budgetary constraints, we have lost many of our contracted legal support personnel and we have been subject to an agency-wide hiring freeze, limiting our ability to replace employees who have departed. In addition, we have faced a number of challenging legal decisions. The Supreme Court’s decision in Kokesh v. SEC has limited our ability to obtain disgorgement in certain long-running frauds. With respect to matters that have already been fled, we estimate the decision may cause us to forego up to approximately $900 mil-lion in disgorgement, of which a substantial amount likely could have been returned to retail investors. And a successful constitutional challenge to the appointment of the Commission’s administrative law judges in the Lucia v. SEC Supreme Court case has required the Division to divert substantial trial and other resources to older matters, many of which had been sub-stantially resolved prior to the decision.

The totality and effectiveness of our efforts in the face of these challenges is a testament to the dedication of the women and men of the Division of Enforcement. As a result of their efforts, during the past fscal year, the Division of Enforcement has been successful in its mission. We look forward to continued success in FY 2019 and beyond.

Sincerely,

Stephanie Avakian and Steven Peikin Co-Directors, Division of Enforcement U.S. Securities and Exchange Commission November 2, 2018

DIVISION OF ENFORCEMENT ANNUAL REPORT | 6

INTRODUCTION The Division of Enforcement is responsible for civil enforcement of the federal securities laws. Each year, the SEC brings hundreds of actions against individuals and entities and secures remedies that protect investors by punishing misconduct, deterring wrongdoing, removing bad actors from our markets, and, where possible, compensating harmed investors. These efforts are a critical component of the SEC’s mission to protect investors and maintain conf-dence in the fairness and integrity of U.S. markets.

The Division’s work is guided by fve core principles: (1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effectively further enforcement goals; and (5) constantly assess the alloca-tion of our resources. As detailed below, Enforcement staff’s focus on these key principles led to a number of noteworthy initiatives, cases, and other achievements in FY 2018, all of which were accomplished in the face of resource constraints and a challenging legal landscape for the Commission’s enforcement program.

INITIATIVES The Division of Enforcement covers broad ground. The SEC oversees approximately $90 trillion in annual securities trading, the disclosures of approximately 4,300 exchange-listed public companies valued at approximately $32 trillion, and the activities of over 27,000 registered entities and self-regulatory organizations. At the close of FY 2017, the Division took steps to focus additional resources on two key priority areas: protecting retail inves-tors and combating cyber threats. The Division also announced an important new initiative designed to focus on misconduct that occurs in the interactions between investment profes-sionals and their clients.

Focus on the Main Street Investor During the past fscal year, the Division continued to focus on protecting retail investors. Over half of the stand alone enforcement actions brought by the SEC in FY 2018 involved wrongdoing against retail investors.

The Division’s Retail Strategy Task Force (RSTF), which was formed in FY 2018, has made signifcant contributions to the Division’s retail focus. During FY 2018, the RSTF undertook a number of lead-generation initiatives built on the use of data analytics. All of the RSTF lead-generation initiatives involve collaboration with data analytics groups located through-out the Commission, including the Division of Economic and Risk Analysis (DERA) and the Offce of Compliance Inspections and Examinations (OCIE). These initiatives involve several important issues impacting retail investors, including: disclosures concerning fees and expens-es and conficts of interest for managed accounts; market manipulations; and fraud involving unregistered offerings.

7 | U.S. SECURITIES AND EXCHANGE COMMISSION

Additionally, in partnership with the Division’s Cyber Unit and Microcap Fraud Task Force, as well as the Division of Corporation Finance’s Digital Asset Working Group, the RSTF has launched a lead-generation and referral initiative involving trading suspensions related to companies that purport to be in the cryptocurrency and distributed ledger technology space.

Policing Cyber-Related Misconduct Since the formation of the Cyber Unit at the end of FY 2017, the Division’s focus on cyber- related misconduct has steadily increased. In FY 2018, the Commission brought 20 stand alone cases, including those cases involving ICOs and digital assets. At the end of the fscal year, the Division had more than 225 cyber-related investigations ongoing. Thanks to the work of the Unit and other staff focusing on these issues, in FY 2018 the SEC’s enforcement efforts impact-ed a number of areas where the federal securities laws intersect with cyber issues.

The SEC was active in policing cyber-related misconduct in FY 2018. For instance, at the end of FY 2018, the SEC brought settled proceedings against an Iowa-based broker-dealer and investment adviser related to its failures in cybersecurity policies and procedures surround-ing a cyber intrusion that compromised personal information of thousands of its customers, in violation of Regulations S-P and S-ID. This was the SEC’s frst action charging violations of Regulation S-ID, known as the Identity Theft Red Flags Rule, which is designed to protect customers from the risk of identity theft.1 The SEC also brought charges against a second defendant in connection with a scheme to allegedly manipulate the price of Fitbit securities through false regulatory flings.2 And, the SEC charged a day trader with allegedly participat-ing in a scheme to access the brokerage accounts of more than 100 unwitting victims and make unauthorized trades to artifcially infate the stock prices of various companies.3

ICOs and Digital Assets The Division also remains focused on issues related to ICOs and digital assets. In just a few years, the prevalence of crypto-asset offerings, including ICOs, has exploded. But exuberance around these markets can sometimes obscure the fact that these offerings are often high-risk investments. For instance, the issuers may lack established track records, viable products, business models, or the capacity for safeguarding digital assets from theft by hackers. And some of the offerings are simply outright frauds cloaked in the veneer of emerging technology.

The Enforcement Division recognizes the need to balance its mission to protect investors from the risk posed by fraud and registration violations against the risk of stifing innovation and legitimate capital formation.4 Generally, the Division’s approach to ICOs and digital assets has taken the following forms:

• The Division has used public statements to send messages to the ICO and digital asset market-place on issues such as the potentially unlawful promotion of ICOs by celebrities and others,5 and the risks associated with online trading platforms for digital assets.6

• When warranted, the Division has recommended enforcement actions to the Commission in matters involving ICOs. As of the close of FY 2018, the SEC had brought over a dozen stand alone enforcement actions involving digital assets and ICOs.7 While many of these cases have involved allegations of fraud, the Division also has pursued enforcement actions to ensure com-pliance with the registration requirements of the federal securities laws.8 In the past year, the

DIVISION OF ENFORCEMENT ANNUAL REPORT | 8

Division has opened dozens of investigations involving ICOs and digital assets, many of which were ongoing at the close of FY 2018.

• The Division’s focus also extends beyond the issuers of ICOs. In FY 2018, the Commission announced a settled order against two individuals who ran a self-described “ICO Superstore” that operated as an unregistered broker-dealer and participated in unregistered offerings.9 On the same day, the Commission fled a settled action against a hedge fund manager that violated an investment company registration provision based on its investments in digital as-sets.10

• The Division also has recommended that the Commission use its trading suspension authority to prevent investors from being harmed by possible scams. In both FY 2017 and FY 2018, the Commission suspended trading in the stock of over a dozen publicly traded issuers because of questions concerning, among other things, the accuracy of assertions regarding their invest-ments in ICOs and operation of cryptocurrency platforms.11

Public Company Disclosures of Cybersecurity Risks and Incidents The accuracy of cyber-related disclosures is a signifcant priority for the Commission, as evi-denced by the Commission’s approval in FY 2018 of a statement and interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.12 In FY 2018, the Commission also brought its frst enforcement action involving charges against a public company for failing to properly inform investors about what was then the largest known cyber-intrusion in history. The SEC’s order found that Yahoo! failed to properly assess the scope, business impact, or legal implications of the breach, including whether, when, and how the breach should have been disclosed. To settle the action, the entity formerly known as Yahoo! agreed to pay a $35 million penalty.13

The Share Class Selection Disclosure Initiative The Division of Enforcement also focused on misconduct that occurs in the interactions between investment professionals and retail investors. One aspect of these interactions in-volved disclosure failures relating to marketing and distribution fees paid by advisory clients, often referred to as “12b-1 fees.” These fees are typical for certain share classes offered throughout the mutual fund industry, and advisers are required to accurately disclose their practice of selecting a more expensive mutual fund share class when a lower-cost share class for the same fund is available.

The Commission has brought more than 15 enforcement matters involving share class disclo-sures in just the last fve years and OCIE has continued to make such disclosures a priority in its exams and public statements.14 Despite these efforts, disclosure failures persist. Indeed, at the time the Initiative was announced, the Division had close to a dozen ongoing investiga-tions—which, on average, take nearly two years to complete—relating to these practices.

In an attempt to address this continuing problem, the Division launched the Share Class Selection Disclosure Initiative in FY 2018. The Initiative is a voluntary program for invest-ment advisers to self-report to the Commission their failures to disclose their fnancial conficts of interest relating to compensation they received in the form of 12b-1 fees.15 The Initiative has two goals: (1) ensuring that these conficts are adequately disclosed to investors; and (2) getting money back into the pockets of investors as quickly and effciently as possible.

9 | U.S. SECURITIES AND EXCHANGE COMMISSION

For those who self-reported by the deadline and satisfy the requirements of the Initiative, the Enforcement Division will recommend to the Commission settlements with standardized terms that include antifraud charges and an agreement to pay disgorgement to harmed inves-tors. In an effort to incentivize participation in the Initiative, the Enforcement Division stated that it would recommend that the Commission not impose a penalty against those partici-pating in the Initiative. We believe that by pursuing this Initiative, we will identify, address, and remediate many more violations—and will do so much more quickly—than if we had continued to pursue these violations on a case-by-case basis.

DISCUSSION AND ANALYSIS OF FY 2018 Overall Results In FY 2018, the Commission brought a diverse mix of 821 enforcement actions, of which:

• 490 were “stand alone” actions brought in federal court or as administrative proceedings; • 210 were “follow-on” proceedings seeking bars based on the outcome of Commission actions

or actions by criminal authorities or other regulators; and • 121 were proceedings to deregister public companies—typically microcap issuers—that

were delinquent in their Commission flings.

As we noted in last year’s report, cases brought in connection with certain initiatives—such as the Commission’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative,16 which ran from FY 2015 to FY 2016—can skew the results for a particular year. Accordingly, the tables below present the results over the past four fscal years, both with and without the stand alone actions attributable to the MCDC Initiative:

Enforcement Actions Filed in Fiscal Years 2015 to 2018 (including MCDC)

FY 2018 FY 2017 FY 2016 FY 2015

Stand Alone Enforcement Actions 490 446 548 508

Follow-on Admin. Proceedings 210 196 195 167

Delinquent Filings 121 112 125 132

Total Actions 821 754 868 807

Enforcement Actions Filed in Fiscal Years 2015 to 2018 (excluding MCDC)

FY 2018 FY 2017 FY 2016 FY 2015

Stand Alone Enforcement Actions 490 446 464 449

Follow-on Admin. Proceedings 210 196 195 167

Delinquent Filings 121 112 125 132

Total Actions 821 754 784 748

DIVISION OF ENFORCEMENT ANNUAL REPORT | 10

As the below chart refects, the number of stand alone enforcement actions brought in FY 2018 increased from the prior year.

Enforcement Actions Filed in Fiscal Years 2015 to 2018

1000

800

600

400

200

0 FY2018 FY2017 FY2016 FY2015

USDC & Stand Alone AP Follow On AP Delinquent Filings MCDC

Types of Cases As the below chart illustrates, a signifcant number of the Commission’s 490 stand alone cases in FY 2018 concerned securities offerings (approximately 25%), investment advisory issues (approximately 22%), and issuer reporting/accounting and auditing (approximately 16%). The Commission also continued to bring actions relating to broker-dealer misconduct (13%), insider trading (10%), and market manipulation (7%).

Securities Offering

Inv. Adviser/Inv. Company

Issuer Reporting/Audit & Accounting

Broker Dealer

Insider Trading

Market Manipulation

Public Finance

Foreign Corrupt Practices Act

Miscellaneous

Transfer Agent

NRSRO

SRO/Exchange

2017

2018

0 20 40 60 80 100 120 140

A breakdown of the number and percentage of the types of actions brought in FY 2018 and FY 2017 is in the attached appendix.

Distributions to Harmed Investors The Commission places a signifcant priority on returning funds to harmed investors when-ever possible. Consistent with that goal, a substantial amount of money was returned to harmed investors again in FY 2018.

Money Distributed to Harmed Investors (in millions)

FY 2018 FY 2017 FY2016 FY2015

$794 $1,073 $140 $158

11 | U.S. SECURITIES AND EXCHANGE COMMISSION

A signifcant portion of the total funds distributed in FY 2018 ($474 million) came from one Fair Fund—a distribution from the BP p.l.c. fund. The balance of the funds distributed in FY 2018 ($320 million) came from 46 other distribution funds comprised of 25 Fair Funds ($171 million) and 21 Disgorgement Funds ($149 million).

Disgorgement and Penalties Ordered In FY 2018, the Commission continued to obtain signifcant monetary judgments against par-ties in enforcement actions. All told, parties in the Commission’s actions and proceedings were ordered to pay a total of $2.506 billion in disgorgement of ill-gotten gains, a decrease over the prior year. Penalties imposed totaled $1.439 billion, an increase from the prior year. A signif-cant amount of the money ordered in FY 2018 came from a single case.17 Total monetary relief ordered in FY 2018 increased approximately 4% from the prior year. The following table illus-trates disgorgement and penalties ordered in SEC cases over the past four fscal years:

Total Money Ordered (in millions)

FY 2018 FY 2017 FY2016 FY2015

Penalties $1,439 $832 $1,273 $1,175

Disgorgement $2,506 $2,957 $2,809 $3,019

Total $3,945 $3,789 $4,083 $4,194

As the below table demonstrates, the fve percent of cases that involve the largest fnan-cial remedies account for the majority of all fnancial remedies the Commission obtains. Yet the remaining 95% of cases not only constitute the bulk of the Enforcement Division’s overall activity, but also address the broadest array of conduct.

Total Money Ordered (in millions)

FY 2018 FY 2017 FY 2016 FY 2015

Top 5% Largest Cases

Total Pct Total Pct

$2,537 67%

Total Pct Total Pct

$2,835 69% $3,163 75% $3,041 77%

Remaining 95% Cases $904 23% $1,252 33% $1,248 31% $1,032 25%

Total $3,945 100% $3,789 100% $4,083 100% $4,195 100%

DIVISION OF ENFORCEMENT ANNUAL REPORT | 12

The Supreme Court’s 2017 decision in Kokesh v. SEC,18 in which the Court held that Com-mission claims for disgorgement are subject to a fve-year statute of limitations, continues to have a signifcant effect on the Commission’s efforts to obtain disgorgement. With respect to matters that have already been fled, the Division of Enforcement estimates that the court’s ruling in Kokesh may cause the Commission to forgo up to approximately $900 million in dis-gorgement, of which a substantial amount likely could have been returned to retail investors.

Individual Accountability Individual accountability is critical to an effective enforcement program and is one of the core principles of the Division of Enforcement. In FY 2018, 72% of the Commission’s stand alone actions involved charges against one or more individuals, approximately the same percentage as in FY 2017 (73%). Many of the individuals charged in FY 2018 include senior offcers at prominent issuers and other public fgures, including the CEOs of Tesla Inc.19 and Theranos Inc,20 the former CEO of Seaworld Entertainment Inc.,21 a U.S. Congressman,22 the former CEOs and CFOs of Walgreens Boots Alliance Inc.23 and Rio Tinto p.l.c.,24 and a professional football player.25

The Division also has sought to penalize individuals and require them to pay back illegal gains. In FY 2018, the Commission obtained judgments or orders for disgorgement and/or penalties from over 500 individuals, representing an increase of 9% over FY 2017.

Relief Obtained In every enforcement action, the Division seeks appropriately tailored remedies that further enforcement goals. In addition to disgorgement and penalties, there are a wide array of potential remedies available. In each case, the Division seeks those remedies that will be the most meaningful.

Undertakings One of the most effective forms of equitable relief in Commission enforcement actions are undertakings, which require a defendant to take affrmative steps—either in conjunction with entry of the order or in the future—in order to come into and remain in compliance with the specifc terms of the court’s order. The Commission also has authority to impose similar obligations on respondents in administrative and cease-and-desist proceedings.

While the Division has regularly employed undertakings in its settlement recommendations to the Commission, in FY 2018 it employed this remedial tool in novel ways in two signifcant matters.

• First, the Commission charged Theranos, Inc., a private company, and its founder and CEO with raising more than $700 million from investors in an elaborate, years-long scheme involving exaggerated claims about the company’s technology, business, and fnan-cial performance.26 One of the most important elements of the Commission’s settlement with the CEO were undertakings that (1) required her to relinquish her voting control over Theranos by converting her supermajority shares to common shares, and (2) guar-anteed that in a future sale or other liquidation event, the CEO would not proft from her ownership stake in the company until $750 million had been returned to other Theranos

13 | U.S. SECURITIES AND EXCHANGE COMMISSION

investors.27 The relief embodied in these undertakings addressed a situation where, be-cause of the capital structure of the company, the CEO had nearly complete control of the company. The undertakings were designed to protect investors from potential misuse of that controlling position going forward.

• The Commission also charged the Chairman and CEO of Tesla, Inc. with securities fraud for tweeting a series of false and misleading statements about his plan to take Tesla private.28 The Commission also charged Tesla with failing to maintain disclosure controls and procedures with respect to the CEO’s communications.29 To settle the SEC actions, the CEO and Tesla agreed not only to pay signifcant penalties, but also to a set of compre-hensive undertakings that require, among other things, (1) the CEO to resign as Chairman and be replaced by an independent Chairman, (2) Tesla to add two independent directors to its board, (3) Tesla to establish a committee of independent directors and adopt manda-tory controls and procedures to oversee the CEO’s public communications about the com-pany, and (4) Tesla to employ within its legal department an experienced securities counsel to advise on disclosure issues. 30 These undertakings addressed specifc risks—in this case, the potential harm to investors caused by the CEO’s communication practices and a lack of suffcient oversight and control of those communications.

Bars and Suspensions Imposed One of the most important things that the Commission can do to protect investors is to remove bad actors from positions where they can engage in future wrongdoing. Bars and suspensions are the means by which the Commission prevents wrongdoers from serving as offcers or directors of public companies, dealing in penny stocks, associating with registered entities such as broker-dealers and investment advisers, or appearing or practicing before the Commission as accountants or attorneys.

Enforcement actions resulted in nearly 550 bars and suspensions of wrongdoers in FY 2018.

Trading Suspensions Under the federal securities laws, the Commission may suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met. In FY 2018, the Commission suspended trading in the securities of 280 issuers in order to combat potential market manipulation and micro-cap fraud threats to investors.

Court-Ordered Asset Freezes Court-ordered prejudgment relief in the form of asset freezes is important to the Commis-sion’s ability to protect investors. These freezes prevent alleged wrongdoers from dissipating assets that could otherwise be marshaled for distribution to harmed investors. Wrongdoers often are adept at hiding and moving assets offshore, and the Commission’s ability to ob-tain meaningful fnancial remedies, and to return money to harmed investors, therefore may depend on the ability to obtain an asset freeze at an early stage. These circumstances require seeking federal court action on an emergency basis. In FY 2018, the Commission obtained 26 court-ordered asset freezes.

Enforcement Actions Filed and Enforcement Staff and Contractors

1800

1600

1400

1200

1000

800

600

400

200

0

177 180121

122

807 754 868

1,4311,4401,3931,344

821

FY2015 FY2016 FY2017 FY2018

Enforcement Staff Contractors Total Enforcement Actions Filed

DIVISION OF ENFORCEMENT ANNUAL REPORT | 14

Litigation In FY 2018, the Commission obtained favorable verdicts in three trials against four defendants and an unfavorable verdict in one trial against one defendant. As of the close of the fscal year, the Commission was awaiting a verdict in one completed bench trial. The number of district court trials conducted in FY 2018 (5) is similar to the number of such trials in FY 2017 (4).

In FY 2017, there were various pending constitutional challenges to the Commission’s administrative proceedings (AP) and the appointment of its administrative law judges (ALJ). In June 2018, the Supreme Court held in Lucia v. SEC31 that the appointment of the SEC’s ALJs violated the U.S. Constitution’s Appointments Clause, requiring a new hearing in front of a different fact fnder. After Lucia, the Commission stayed all pending APs. The Commis-sion lifted the stay on August 22, 2018, and approximately 200 APs were reassigned at that time. Addressing these APs will require substantial litigation resources during FY 2019.

ALLOCATION OF RESOURCES The Commission has operated under an agency-wide hiring freeze since late 2016. Conse-quently, the Division’s employee and contractor staffng levels have decreased since the freeze was imposed. The combined number of positions in the Division and the number of contrac-tors supporting our investigation and litigation efforts fell by approximately 10% between FY 2016 and FY 2018. Despite this loss, as the below chart indicates, the Division continued to exhibit signifcant enforcement-related activity.

While this achievement is a testament to the hardworking women and men of the Division, with more resources the SEC could focus more on individual accountability, as individuals are more likely to litigate and the ensuing litigation is resource intensive. Moreover, additional resources would support two key priorities of the Division: protecting retail investors and combating cyber-related threats.

15 | U.S. SECURITIES AND EXCHANGE COMMISSION

NOTEWORTHY ENFORCEMENT ACTIONS While the Division’s efforts resulted in many noteworthy enforcement actions in FY 2018, the matters described below give a sense of some of the actions the Commission brought in areas of the Division’s greatest focus, as well as actions in other areas to demonstrate the breadth of the landscape the Division covers.

In FY 2018, the Commission brought charges against:

Direct Impact on Retail Investors and Conduct of Registrants • Three individuals who allegedly orchestrated a Ponzi-like scheme that raised more than $345

million from over 230 investors across the U.S.32

• A group of unregistered funds and their owner who allegedly defrauded thousands of retail investors, many of them seniors, in a $1.2 billion Ponzi scheme,33 and fve individuals and four companies for allegedly unlawfully selling securities related to the alleged scheme.34

• Five individuals and three companies allegedly behind a $102 million Ponzi scheme that defrauded investors throughout the U.S.35

• A company and its principal who allegedly defrauded at least 150 investors in an $85 million Ponzi scheme.36

• Ameriprise Financial Services Inc. for recommending and selling higher-fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers,37 and for failing to safeguard retail investor assets from theft by its representatives.38

• Wells Fargo Advisors LLC for misconduct in the sale of fnancial products known as market-linked investments to retail investors.39

• The pastor of one of the largest churches in the country and a self-described fnancial planner who allegedly defrauded elderly investors by selling them interests in worthless, pre- Revolutionary Chinese bonds.40

• William Z. (Billy) McFarland, two companies he founded, a former senior executive, and a former contractor, who agreed to settle charges arising out of an extensive, multi-year offering fraud that raised at least $27.4 million from over 100 investors.41

Cyber-Related Misconduct • The entity formerly known as Yahoo! Inc. for misleading investors by failing to disclose one of

the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts.42

• The co-founders of a purported fnancial services start-up with allegedly orchestrating a fraudulent ICO that raised more than $32 million from thousands of investors.43

• Titanium Blockchain Infrastructure Services Inc. and its president, a self-described “blockchain evangelist,” for an alleged ICO fraud that raised as much as $21 million from investors in and outside the U.S.44

• A broker-dealer and investment adviser for failures in cybersecurity policies and procedures surrounding a cyber intrusion that compromised personal information of thousands of customers.45

DIVISION OF ENFORCEMENT ANNUAL REPORT | 16

• An individual involved in an alleged scheme to manipulate the price of Fitbit securities through false regulatory flings.46

• A recidivist securities law violator and his company who allegedly raised up to $15 million from thousands of investors in an ICO by falsely promising a 13-fold proft in less than a month.47

• A company selling digital tokens to investors to raise capital for its blockchain-based food review service, which halted its ICO after being contacted by the Division of Enforcement and agreed to an order in which the Commission found that its conduct constituted unregistered securities offers and sales.48

• AriseBank and its co-founders for allegedly selling a fraudulent ICO that targeted retail investors to fund what it claimed to be the world’s frst “decentralized bank.”49

• A former bitcoin-denominated platform and its operator with allegedly operating an unregistered securities exchange and defrauding users of that exchange, and the operator of the exchange with allegedly making false and misleading statements in connection with an unregistered offering of securities.50

• Longfn Corp., its CEO, and three other affliated individuals for allegedly illegal distributions and sales of restricted shares of Longfn Corp.51

• Two men who allegedly profted from illegal sales of stock of a company claiming to have a blockchain-related business.52

• The founder of a company who perpetrated a fraudulent ICO to fund oil exploration and drilling in California.53

• A hedge fund manager for violating the investment company registration provisions based on its investments in digital assets.54

• TokenLot LLC, a self-described “ICO Superstore,” and its owners for acting as unregistered broker-dealers.55

• An international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins.56

Insider Trading • 56 individuals who allegedly misappropriated or traded unlawfully on material, nonpublic

information including: » A corporate board member and U.S. Congressman, Christopher Collins, whose alleged

tip allowed his son and his son’s tippees to avoid losses by trading in advance of news of negative clinical trial results.57

» An investment banker who allegedly tipped professional football player Mychael Kendricks to trade in advance of four corporate acquisitions being advised by the investment banker’s employer.58

» A former chief information offcer of a U.S. business unit of Equifax Inc. and a former manager, both of whom allegedly traded in advance of the company’s September 2017 announcement of a massive data breach that exposed Social Security numbers and other personal information of approximately 148 million U.S. customers.59

» A credit ratings analyst who allegedly misused his access to information about an impending acquisition to tip two friends who traded ahead of the deal announcement.60

17 | U.S. SECURITIES AND EXCHANGE COMMISSION

» An investment banker who allegedly misused his access to the bank’s confdential information to trade in advance of 12 market-moving announcements involving clients of the bank.61

» A corporate executive who allegedly profted from trading in advance of three disappointing earnings announcements by the Silicon Valley company that employed him.62

Issuer Reporting and Disclosure Issues and Auditor Misconduct • 54 entities and 94 individuals in stand alone actions relating to issuer fnancial reporting and

disclosures in the following categories: revenue and expense recognition problems; faulty valuation and impairment decisions; missing or insuffcient disclosures; misappropriation through accounting misrepresentations; inadequate internal controls; and misconduct by fnancial reporting gatekeepers, including: » Elon Musk, the Chairman and CEO of Tesla Inc., for tweeting a series of false and

misleading statements about his plan to take Tesla private.63

» Tesla Inc. for failing to maintain disclosure controls and procedures with respect to Musk’s communications.64

» Theranos Inc., its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with allegedly raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and fnancial performance.65

» Brazilian oil-and-gas company Petróleo Brasileiro S.A. for misleading U.S. investors by failing to disclose a massive bribery and bid-rigging scheme at the company.66

» Mining company Rio Tinto and two former top executives for allegedly infating the value of coal assets acquired for $3.7 billion and sold a few years later for $50 million.67

» Walgreens Boots Alliance Inc., former CEO Gregory Wasson, and former CFO Wade Miquelon with misleading investors about increased risk that the company would miss a key fnancial goal announced when Walgreen Co. entered into a merger with Alliance Boots GmbH in 2012.68

» Six certifed public accountants—including former staffers at the Public Company Accounting Oversight Board (PCAOB) and former senior offcials at KPMG LLP—arising from their alleged participation in a scheme to misappropriate and use confdential information relating to the PCAOB’s planned inspections of KPMG.69

» SeaWorld Entertainment Inc., its former CEO, and its former vice president of communications for misleading investors about the impact the documentary flm Blackfsh had on the company’s reputation and business.70

» A biopharmaceutical company, its CEO, and its former CFO for misleading investors about the company’s developmental lung cancer drug.71

» Five public companies for failing to provide fnancial statements that were reviewed by their independent external auditor when they fled quarterly reports with the Commission on Form 10-Q.72

DIVISION OF ENFORCEMENT ANNUAL REPORT | 18

Other Noteworthy Actions • Four Transamerica entities for misconduct involving faulty investment models.73

• Merrill Lynch, Pierce, Fenner & Smith for misleading customers about how it handled orders purportedly routed to a dark pool.74

• Panasonic Corp. for accounting fraud violations and violations of the Foreign Corrupt Practices Act (FCPA).75

• Moody’s Investors Service Inc. for internal control failures and failing to clearly defne and consistently apply credit rating symbols.76

• Legg Mason Inc. for violating the FCPA in a scheme to bribe Libyan government offcials.77

• Two frms and 18 individuals in an alleged scheme to improperly divert new issue municipal bonds to broker-dealers at the expense of retail investors, and a municipal underwriter for accepting kickbacks in the scheme.78

• Two investment adviser subsidiaries of Voya Holdings Inc. with failing to disclose conficts of interest and making misleading disclosures in connection with their practice of recalling securities on loan so their affliates could receive tax benefts.79

• 13 registered investment advisers who repeatedly failed to provide required information that the agency uses to monitor risk.80

• Two U.S.-based subsidiaries of Deutsche Bank AG for improper handling of “pre-released” American Depositary Receipts (ADRs).81

• The New York Stock Exchange and two affliated exchanges with regulatory failures in connection with multiple episodes, including several disruptive market events.82

19 | U.S. SECURITIES AND EXCHANGE COMMISSION

APPENDIX

Breakdown of Classification of Stand Alone Enforcement Actions

FY 2018 FY 2017

Actions Pct Actions Pct

Securities Offering 121 25% 94 21%

Inv.estment Advisers / Inv. Company 108 22% 82 18%

Issuer Reporting & Disclosure 79 16% 95 21%

Broker Dealer 63 13% 53 12%

Insider Trading 51 10% 41 9%

Market Manipulation 32 7% 41 9%

Public Finance Abuse 15 3% 17 4%

FCPA 13 3% 13 3%

Miscellaneous 3 1% 7 2%

NRSRO 2 0% 0 0%

Transfer Agent 2 0% 3 1%

SRO or Exchange 1 0% 0 0%

Total 490 100% 446 100%

DIVISION OF ENFORCEMENT ANNUAL REPORT | 20

Enforcement Action Summary Chart for FY 2018 by Primary Classification

(Each action initiated has been included in only one category even though many actions involved multiple allegations and may fall under more than one category. The number of defendants and

respondents is noted parenthetically)

% of Civil and Stand Alone AP

% of (Excluding Stand Alone Follow-On Total Delinquent

Primary Classification Civil Actions AP AP Total Actions Filings)

Broker-Dealer 18 (35) 45 (56) 106 (109) 169 (200) 21% 13%

Delinquent Filings 0 (0) 121 (371) 0 (0) 121 (371) 15% 0%

Foreign Corrupt Practices Act 0 (0) 13 (13) 0 (0) 13 (13) 2% 3%

Insider Trading 37 (56) 14 (18) 0 (0) 51 (74) 6% 10%

Investment Advisers/ Invest-ment Companies

20 (44) 88 (124) 62 (66) 170 (234) 21% 22%

Issuer Reporting and Disclo-sure

30 (72) 49 (76) 27 (28) 106 (176) 13% 16%

Market Manipulation 22 (78) 10 (11) 1 (1) 33 (90) 4% 7%

Miscellaneous 0 (0) 3 (4) 2 (2) 5 (6) 1% 1%

Natl Rec Stat Rating Org (NRSRO)

0 (0) 2 (2) 0 (0) 2 (2) 0% 0%

Public Finance Abuse 7 (27) 8 (11) 3 (3) 18 (41) 2% 3%

Securities Offering 108 (406) 13 (57) 9 (9) 130 (472) 16% 25%

SRO/Exchange 0 (0) 1 (3) 0 (0) 1 (3) 0% 0%

Transfer Agent 1 (2) 1 (2) 0 (0) 2 (4) 0% 0%

Totals 243 (720) 368 (748) 210 (218) 821 (1,686) 100% 100%

Case Name Type of Action Release No. Date Filed

BROKER-DEALER

In the Matter of Maroof Miyana Follow-on Admin. Proc. 34-81790 10/02/17 In the Matter of Wen Chen a/k/a "Wendy Lee" Hwang Follow-on Admin. Proc. 34-81817 10/04/17

In the Matter of Bilal Basrai Follow-on Admin. Proc. 34-81820 10/05/17 In the Matter of Bryce Stirton Follow-on Admin. Proc. 34-81821 10/05/17

In the Matter of Christopher Castaldo Follow-on Admin. Proc. 34-81843 10/10/17 In the Matter of Danny S. Hood Follow-on Admin. Proc. 34-81847 10/11/17

In the Matter of Brandon P. Long Follow-on Admin. Proc. 34-81877 10/16/17 In the Matter of Joseph A. Vitale Follow-on Admin. Proc. 34-81875 10/16/17

In the Matter of Leonard Vincent Lombardo Follow-on Admin. Proc. 34-81886 10/17/17 In the Matter of Loop Capital Markets, LLC Stand-alone Admin. Proc. 34-81898 10/19/17 In the Matter of UBS Financial Services, Inc. Stand-alone Admin. Proc. 33-10433 10/27/17

In the Matter of Jeffrey D. Smith, et al. Follow-on Admin. Proc. 34-81983 10/31/17 SEC v. Thomas J. Buck Civil LR-23974 10/31/17

In the Matter of James P. Kolf Follow-on Admin. Proc. 34-82010 11/03/17 In the Matter of Patric Ken Baccam,

a/k/a Khanh Sengpraseuth Follow-on Admin. Proc. 34-82030 11/08/17 In the Matter of Hui Feng, Esq., et al. Follow-on Admin. Proc. 34-82039 11/08/17

In the Matter of Wells Fargo Advisors, LLC Stand-alone Admin. Proc. 34-82054 11/13/17 SEC v. GreenTree Investment Group, Inc., et al. Civil LR-23990 11/17/17

SEC v. Ibrahim Almagarby, et al. Civil LR-23992 11/17/17 In the Matter of Ivan J.A. Turrentine Follow-on Admin. Proc. 34-82188 11/30/17

SEC v. Zachery S. Berkey, et al. Civil LR-24004 12/06/17 SEC v. Paul W. Smith Civil LR-24133 12/07/17

In the Matter of Robin Glen Charlet Follow-on Admin. Proc. 34-82242 12/08/17 In the Matter of Steven William Sparks Follow-on Admin. Proc. 34-82243 12/08/17

SEC v. Steve Qi, et al. Civil LR-24006 12/08/17 SEC v. Brian Hirsch, et al. Civil LR-24083 12/19/17

In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated Stand-alone Admin. Proc. 34-82382 12/21/17

In the Matter of Daniel Rivas Follow-on Admin. Proc. 34-82393 12/22/17 In the Matter of Khaled "Kal" Bassily Follow-on Admin. Proc. 34-82438 01/03/18

In the Matter of James C. Tao Follow-on Admin. Proc. 34-82454 01/08/18 In the Matter of Donna Boyd (f/k/a Donna Chen) Follow-on Admin. Proc. 34-82453 01/08/18

In the Matter of David B. Kaplan, Esq. Follow-on Admin. Proc. 34-82510 & 34-82511 01/17/18

In the Matter of Industrial and Commercial Bank of China Financial Services, LLC Stand-alone Admin. Proc. 34-83253 01/18/18

In the Matter of Daniel T. Fischer Follow-on Admin. Proc. 34-82603 01/30/18 In the Matter of Thomas Edward Andrews Follow-on Admin. Proc. 34-82619 02/01/18

In the Matter of Scott Walter Christensen Follow-on Admin. Proc. 34-82621 02/01/18 In the Matter of Craig Karlis Follow-on Admin. Proc. 34-82624 02/02/18

In the Matter of Wedbush Securities, Inc. Stand-alone Admin. Proc. 34-82630 02/05/18 In the Matter of Thomas J. Buck Follow-on Admin. Proc. 34-82681 02/09/18

In the Matter of Deutsche Bank Securities, Inc., et al. Stand-alone Admin. Proc. 34-82686 02/12/18 In the Matter of Ameriprise Financial Services, Inc. Stand-alone Admin. Proc. 33-10462 02/28/18

SEC v. Steven J. Muehler, et al. Civil LR-24060 02/28/18 In the Matter of Edwin Shaw, LLC Stand-alone Admin. Proc. 34-82805 03/05/18

In the Matter of Jacob W. L. Stocking Follow-on Admin. Proc. 34-82806 03/05/18 In the Matter of Eric Lovy (f/k/a Eric Beltran) Follow-on Admin. Proc. 34-82821 03/07/18

In the Matter of Deborah D. Kelley Follow-on Admin. Proc. 34-82838 03/09/18 In the Matter of Gregg Z. Schonhorn Follow-on Admin. Proc. 34-82839 03/09/18

In the Matter of David Gray Follow-on Admin. Proc. 34-82880 03/15/18

21 | U.S. SECURITIES AND EXCHANGE COMMISSION

In the Matter of Electronic Transaction Clearing, Inc. Stand-alone Admin. Proc. 34-82898 03/19/18 In the Matter of Wedbush Securities, Inc. Stand-alone Admin. Proc. 34-82954 03/27/18 In the Matter of JH Darbie & Co., Inc., et al. Stand-alone Admin. Proc. 34-82951 03/27/18 In the Matter of Aegis Capital Corporation Stand-alone Admin. Proc. 34-82956 03/28/18

In the Matter of Kevin McKenna, et al. Stand-alone Admin. Proc. 34-82957 03/28/18 In the Matter of Eugene Terracciano Stand-alone Admin. Proc. 34-82958 03/28/18

In the Matter of Kent Maerki Follow-on Admin. Proc. 34-82963 03/29/18 In the Matter of James Moodhe Follow-on Admin. Proc. 34-82977 04/02/18

In the Matter of Gregory John Tuthill Follow-on Admin. Proc. 34-82987 04/04/18 In the Matter of Joshua D. Mosshart Follow-on Admin. Proc. 34-82998 04/05/18 In the Matter of Troy C. Baldridge Follow-on Admin. Proc. 34-83013 04/09/18 In the Matter of Jason A. Wallace Follow-on Admin. Proc. 34-83052 04/16/18

SEC v. John Sherman Jumper, et al. Civil LR-24116 04/17/18 In the Matter of Mark P. French Follow-on Admin. Proc. 34-83078 04/20/18

In the Matter of Winning the Money Game with Ike, Inc. Follow-on Admin. Proc. 34-83110 04/26/18 In the Matter of Tobin J. Senefeld Follow-on Admin. Proc. 34-83121 04/26/18

In the Matter of David Alcorn Follow-on Admin. Proc. 34-83130 04/30/18 In the Matter of Kevin Hamilton Follow-on Admin. Proc. 34-83140 05/01/18

In the Matter of Douglas A. McClain, Jr. Follow-on Admin. Proc. 34-83151 05/02/18 In the Matter of Joseph A. Rubbo Follow-on Admin. Proc. 34-83176 05/04/18

In the Matter of Keith Houlihan Follow-on Admin. Proc. 34-83180 05/07/18 In the Matter of Paul W. Smith Follow-on Admin. Proc. 34-83178 05/07/18

In the Matter of Jason J. Lee, et al. Stand-alone Admin. Proc. 34-83212 05/10/18 In the Matter of Steven J. Dykes Follow-on Admin. Proc. 34-83215 05/11/18

In the Matter of Angela Rubbo Beckcom Monaco Follow-on Admin. Proc. 34-83234 05/15/18 In the Matter of Chardan Capital Markets, LLC Stand-alone Admin. Proc. 34-83251 05/16/18

In the Matter of Jerard Basmagy Stand-alone Admin. Proc. 34-83252 05/16/18 In the Matter of Industrial and Commercial

Bank of China Financial Services, LLC Stand-alone Admin. Proc. 34-83253 05/16/18 In the Matter of Lisa A. Esposito Follow-on Admin. Proc. 34-83291 05/21/18

In the Matter of John C. Knight Follow-on Admin. Proc. 34-83316 05/24/18 In the Matter of Emanuel Pantelakis Follow-on Admin. Proc. 34-83348 05/30/18

In the Matter of George Doumanis Follow-on Admin. Proc. 34-83358 05/31/18 In the Matter of Christopher C. Burtraw Follow-on Admin. Proc. 34-83371 06/04/18

In the Matter of Jason A. Halek Follow-on Admin. Proc. 34-83394 06/07/18 In the Matter of Merrill Lynch, Pierce,

Fenner & Smith Incorporated Stand-alone Admin. Proc. 34-83408 06/12/18 In the Matter of Joseph Mangiapane, Jr. Follow-on Admin. Proc. 34-83448 06/14/18

In the Matter of Nicholas Rubbo Follow-on Admin. Proc. 34-83460 06/19/18 In the Matter of Pasquale Rubbo Follow-on Admin. Proc. 34-83461 06/19/18

In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated Stand-alone Admin. Proc. 33-10507 06/19/18

In the Matter of Wells Fargo Advisors, LLC Stand-alone Admin. Proc. 33-10511 06/25/18 In the Matter of Jon B. Schmidhammer Follow-on Admin. Proc. 34-83552 06/28/18

In the Matter of Bayes Capital, LLC Stand-alone Admin. Proc. 34-83556 06/28/18 In the Matter of Alexander Capital, L.P. Stand-alone Admin. Proc. 34-83562 06/29/18

In the Matter of Philip A. Noto, II Stand-alone Admin. Proc. 34-83563 06/29/18 In the Matter of Barry T. Eisenberg Stand-alone Admin. Proc. 34-83564 06/29/18

In the Matter of Cantor Fitzgerald & Co. Stand-alone Admin. Proc. 34-83565 06/29/18 SEC v. Adam Mattessich, et al. Civil LR-24179 06/29/18

SEC v. Charles Schwab & Co., Inc. Civil LR-24189 07/02/18 In the Matter of Daniel Burgess Follow-on Admin. Proc. 34-83598 07/06/18

In the Matter of Andrew B. Calhoun, IV Follow-on Admin. Proc. 34-83605 07/09/18 In the Matter of Andrew B. Calhoun, Jr. Follow-on Admin. Proc. 34-83606 07/09/18 In the Matter of James M. Unger Follow-on Admin. Proc. 34-83652 07/17/18

In the Matter of Koorosh "Danny" Rahimi Follow-on Admin. Proc. 34-83657 07/17/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 22

In the Matter of BGC Financial, L.P. Stand-alone Admin. Proc. 34-83650 07/17/18 In the Matter of Jefferey A. Gordon Follow-on Admin. Proc. 34-83684 07/20/18

In the Matter of Deutsche Bank Trust Company Americas Stand-alone Admin. Proc. 33-10523 07/20/18

In the Matter of Deutsche Bank Securities, Inc. Stand-alone Admin. Proc. 34-83677 07/20/18 In the Matter of Sycamore Lane Partners, LLC Stand-alone Admin. Proc. 34-83686 07/23/18

In the Matter of Mizuho Securities USA, LLC Stand-alone Admin. Proc. 34-83685 07/23/18 In the Matter of Richard T. Cunniffe Follow-on Admin. Proc. 34-83688 07/23/18

In the Matter of Melanie Ryan Stand-alone Admin. Proc. 33-10524 07/24/18 In the Matter of Brandon T. Neff Stand-alone Admin. Proc. 34-83754 07/31/18

In the Matter of William Z. McFarland Follow-on Admin. Proc. 34-83773 08/03/18 SEC v. Salvadore D. Palermo Civil LR-24229 08/06/18

In the Matter of Gregory G. Young Stand-alone Admin. Proc. 34-83779 08/06/18 In the Matter of Steve Bailen Follow-on Admin. Proc. 34-83801 08/08/18

In the Matter of William Paul Hamilton Follow-on Admin. Proc. 34-83802 08/08/18 In the Matter of Paula Saccomanno Follow-on Admin. Proc. 34-83803 08/08/18

In the Matter of Dennis Swerdlen Follow-on Admin. Proc. 34-83804 08/08/18 In the Matter of Citigroup Global Markets, Inc., et al. Stand-alone Admin. Proc. 34-83859 08/16/18

In the Matter of Jeffrey Scott Davis Follow-on Admin. Proc. 34-83899 08/22/18 In the Matter of Core Performance Management, LLC Follow-on Admin. Proc. 34-83902 08/22/18

In the Matter of Deborah B. Dora Follow-on Admin. Proc. 34-83906 08/22/18 In the Matter of Sharlene F. Mesite Follow-on Admin. Proc. 34-83905 08/22/18

In the Matter of Anadel R. Pinzon Follow-on Admin. Proc. 34-83903 08/22/18 In the Matter of James P. Scherr Follow-on Admin. Proc. 34-83901 08/22/18 In the Matter of James J. O'Neil Follow-on Admin. Proc. 34-83930 08/23/18

In the Matter of Lynette M. Robbins Follow-on Admin. Proc. 34-83957 08/27/18 In the Matter of Chad Anthony Lewis Follow-on Admin. Proc. 34-83981 08/29/18 In the Matter of Bruce A. Broekhuizen Follow-on Admin. Proc. 34-84014 08/31/18

In the Matter of Neil P. Kelly Follow-on Admin. Proc. 34-84016 08/31/18 In the Matter of John M. Kirschenbaum Follow-on Admin. Proc. 34-84015 08/31/18

In the Matter of RMR Asset Management Company Follow-on Admin. Proc. 34-84028 09/04/18 In the Matter of Douglas J. Derryberry Follow-on Admin. Proc. 34-84025 09/04/18

In the Matter of David R. Frost Follow-on Admin. Proc. 34-84030 09/04/18 In the Matter of David S. Luttbeg Follow-on Admin. Proc. 34-84018 09/04/18

In the Matter of Timothy J. McAloon Follow-on Admin. Proc. 34-84026 09/04/18 In the Matter of Ralph M. Riccardi Follow-on Admin. Proc. 34-84029 09/04/18

In the Matter of Dewey T. Tran Follow-on Admin. Proc. 34-84027 09/04/18 In the Matter of Philip A. Weiner Follow-on Admin. Proc. 34-84019 09/04/18

In the Matter of Mark Morrow Follow-on Admin. Proc. 34-84042 09/05/18 SEC v. Jeffrey Goldman, et al. Civil LR-24257 09/05/18

SEC v. Emil Botvinnik Civil LR-24277 09/07/18 SEC v. Jovannie Aquino Civil LR-24277 09/07/18

In the Matter of Cadaret, Grant & Co., Inc., et al. Stand-alone Admin. Proc. 33-10542 09/11/18 In the Matter of TokenLot, LLC, et al. Stand-alone Admin. Proc. 33-10543 09/11/18

SEC v. Michael A. Bressman Civil LR-24300 09/12/18 In the Matter of Convergex Execution Solution, LLC,

n/k/a Cowen Execution Services, LLC Stand-alone Admin. Proc. 34-84116 09/13/18 In the Matter of Citigroup Global Markets, Inc., et al. Stand-alone Admin. Proc. 33-10545 09/14/18

In the Matter of John L. Gathright, Jr. Follow-on Admin. Proc. 34-84163 09/17/18 In the Matter of Jennifer R. Johnson Follow-on Admin. Proc. 34-84181 09/18/18

In the Matter of Susan E. Walker Follow-on Admin. Proc. 34-84182 09/18/18 In the Matter of Allan Michael Roth Follow-on Admin. Proc. 34-84201 09/19/18 In the Matter of Travis A. Branch Follow-on Admin. Proc. 34-84199 09/19/18

In the Matter of David Howard Welch Follow-on Admin. Proc. 34-84234 09/20/18

23 | U.S. SECURITIES AND EXCHANGE COMMISSION

DIVISION OF ENFORCEMENT ANNUAL REPORT | 24

In the Matter of Marc Jay Bryant Follow-on Admin. Proc. 34-84235 09/20/18 In the Matter of Joel N. Burstein Follow-on Admin. Proc. 34-84226 09/20/18 In the Matter of TD Ameritrade, Inc. Stand-alone Admin. Proc. 34-84269 09/24/18 In the Matter of Mary A. Faher Follow-on Admin. Proc. 34-84271 09/24/18 In the Matter of Shawn K. Dicken Follow-on Admin. Proc. 34-84272 09/24/18 In the Matter of Cory Ryan Williams Follow-on Admin. Proc. 34-84268 09/24/18 SEC v. Adam Rentzer Civil LR-24286 09/24/18 SEC v. John Gregory Schmidt Civil LR-24287 09/25/18 In the Matter of SG Americas Securities, LLC Stand-alone Admin. Proc. 33-10560 09/25/18 In the Matter of Voya Financial Advisors, Inc. Stand-alone Admin. Proc. 34-84288 09/26/18 In the Matter of Stephen Romo Follow-on Admin. Proc. 34-84318 09/28/18 In the Matter of John Montague Follow-on Admin. Proc. 34-84310 09/28/18 In the Matter of Paul Katsaros Follow-on Admin. Proc. 34-84306 09/28/18 In the Matter of John Wolle Follow-on Admin. Proc. 34-84316 09/28/18 In the Matter of Credit Suisse Securities (USA), LLC Stand-alone Admin. Proc. 33-10565 09/28/18 In the Matter of COR Clearing, LLC Stand-alone Admin. Proc. 34-84309 09/28/18

DELINQUENT FILINGS

In the Matter of Global Digital Solutions, Inc. Stand-alone Admin. Proc. 34-82404 12/26/17 In the Matter of American Nano Silicon

Technologies, Inc., et al. Stand-alone Admin. Proc. 34-82412 12/27/17 In the Matter of Abakan, Inc., et al. Stand-alone Admin. Proc. 34-82419 12/28/17 In the Matter of Blacksands Petroleum, Inc., et al. Stand-alone Admin. Proc. 34-82463 01/08/18 In the Matter of Ambicon Holdings, Inc., et al. Stand-alone Admin. Proc. 34-82507 01/17/18 In the Matter of Altona Resources, Inc., et al. Stand-alone Admin. Proc. 34-82527 01/18/18 In the Matter of EMRISE Corp. Stand-alone Admin. Proc. 34-82536 01/18/18 In the Matter of Canwealth Minerals Corp., et al. Stand-alone Admin. Proc. 34-82610 02/01/18 In the Matter of California Mines Corp., et al. Stand-alone Admin. Proc. 34-82639 02/06/18 In the Matter of Affirmative Insurance Holdings, Inc., et al. Stand-alone Admin. Proc. 34-82762 02/22/18 In the Matter of New Global Energy, Inc Stand-alone Admin. Proc. 34-82893 03/16/18 In the Matter of NextGlass Technologies Corporation Stand-alone Admin. Proc. 34-82986 04/03/18 In the Matter of MarilynJean Interactive, Inc. Stand-alone Admin. Proc. 34-83087 04/23/18 In the Matter of Oriental Dragon Corp. Stand-alone Admin. Proc. 34-83099 04/25/18 In the Matter of Revolutionary Concepts, Inc. Stand-alone Admin. Proc. 34-83136 04/30/18 In the Matter of Universal Bioenergy, Inc. Stand-alone Admin. Proc. 34-83135 04/30/18 In the Matter of Baltia Air Lines, Inc., et al. Stand-alone Admin. Proc. 34-83184 05/07/18 In the Matter of Content Checked Holdings, Inc., et al. Stand-alone Admin. Proc. 34-83189 05/08/18 In the Matter of Grey Fox Holdings Corp.

(f/k/a Gray Fox Petroleum Corp.), et al. Stand-alone Admin. Proc. 34-83232 05/14/18 In the Matter of Sonora Resources Corp. Stand-alone Admin. Proc. 34-83249 05/15/18 In the Matter of Hedgebrook, et al. Stand-alone Admin. Proc. 34-83245 05/15/18 In the Matter of Solaris Power Cells, Inc., et. al. Stand-alone Admin. Proc. 34-83262 05/16/18 In the Matter of America Greener Technologies, Inc., et al. Stand-alone Admin. Proc. 34-83264 05/16/18 In the Matter of Apptigo International, Inc., et al. Stand-alone Admin. Proc. 34-83285 05/17/18 In the Matter of Play La, Inc., et al. Stand-alone Admin. Proc. 34-83281 05/17/18 In the Matter of Green Parts International, Inc., et al. Stand-alone Admin. Proc. 34-83299 05/21/18 In the Matter of COPsync, Inc., et al. Stand-alone Admin. Proc. 34-83297 05/21/18 In the Matter of Solo International, Inc., et al. Stand-alone Admin. Proc. 34-83312 05/23/18 In the Matter of Mullan Agritech, Inc., et al. Stand-alone Admin. Proc. 34-83314 05/23/18 In the Matter of Mass Hysteria Entertainment

Company, Inc., et al. Stand-alone Admin. Proc. 34-83327 05/24/18 In the Matter of Radiant Oil & Gas, Inc., et al. Stand-alone Admin. Proc. 34-83329 05/24/18 In the Matter of Fern Holdings Corp., et al. Stand-alone Admin. Proc. 34-83373 06/04/18

In the Matter of Escalera Resources Co., Inc., et al. Stand-alone Admin. Proc. 34-83470 06/19/18 In the Matter of FuelNation, Inc., et al. Stand-alone Admin. Proc. 34-83487 06/20/18

In the Matter of Development Capital Group, Inc., et al. Stand-alone Admin. Proc. 34-83488 06/20/18 In the Matter of Inner Systems, Inc., et al. Stand-alone Admin. Proc. 34-83921 08/23/18

In the Matter of Gepco, Ltd., et al. Stand-alone Admin. Proc. 34-83920 08/23/18 In the Matter of American Standard Energy Corp., et al. Stand-alone Admin. Proc. 34-83922 08/23/18

In the Matter of Kvintess F&DI Holdings Corp., et al. Stand-alone Admin. Proc. 34-83924 08/23/18 In the Matter of Forum Acquisitions I, Inc., et al. Stand-alone Admin. Proc. 34-83931 08/24/18

In the Matter of Lightstone Technologies, Inc., et al. Stand-alone Admin. Proc. 34-83932 08/24/18 In the Matter of RS Soda Holdings, Inc., et al. Stand-alone Admin. Proc. 34-83933 08/24/18

In the Matter of Cellular Concrete Technologies, Inc., et al. Stand-alone Admin. Proc. 34-83942 08/24/18

In the Matter of EBHI Holdings, Inc., et al. Stand-alone Admin. Proc. 34-83943 08/24/18 In the Matter of Central Park Acquisition I, Inc., et al. Stand-alone Admin. Proc. 34-83946 08/24/18

In the Matter of Fig Run Acquisition Corporation, et al. Stand-alone Admin. Proc. 34-83939 08/24/18 In the Matter of Middle Kingdom Resources, Ltd., et al. Stand-alone Admin. Proc. 34-83945 08/24/18

In the Matter of Media Group 2000, Inc., et al. Stand-alone Admin. Proc. 34-83944 08/24/18 In the Matter of Rio Bravo Oil, Inc., et al. Stand-alone Admin. Proc. 34-83963 08/27/18

In the Matter of Micra Soundcards, Inc., et al. Stand-alone Admin. Proc. 34-83962 08/27/18 In the Matter of IDO Security, Inc., et al. Stand-alone Admin. Proc. 34-83977 08/28/18

In the Matter of Great Wall Builders, Ltd., et al. Stand-alone Admin. Proc. 34-83980 08/28/18 In the Matter of Equilar Capital Corp., et al. Stand-alone Admin. Proc. 34-83978 08/28/18

In the Matter of Manna Capital, Inc., et al. Stand-alone Admin. Proc. 34-83985 08/29/18 In the Matter of Makism 3D Corp., et al. Stand-alone Admin. Proc. 34-83989 08/29/18

In the Matter of Rotoblock Corporation, et al. Stand-alone Admin. Proc. 34-83991 08/29/18 In the Matter of Gaming Ventures PLC, et al. Stand-alone Admin. Proc. 34-83984 08/29/18

In the Matter of Amonra Omnia, Inc., et al. Stand-alone Admin. Proc. 34-84006 08/30/18 In the Matter of Everyday Assembly Productions, Inc., et al. Stand-alone Admin. Proc. 34-84007 08/30/18

In the Matter of Americas Wind Energy Corporation, et al. Stand-alone Admin. Proc. 34-84008 08/30/18 In the Matter of AlphaMetrix Managed Futures, LLC, et al. Stand-alone Admin. Proc. 34-84005 08/30/18 In the Matter of American First Financial, Inc., et al. Stand-alone Admin. Proc. 34-84041 09/05/18 In the Matter of Alterrus Systems, Inc., et al. Stand-alone Admin. Proc. 34-84040 09/05/18 In the Matter of Allied American Steel Corp., et al. Stand-alone Admin. Proc. 34-84039 09/05/18

In the Matter of Petron Energy II, Inc., et al. Stand-alone Admin. Proc. 34-84052 09/06/18 In the Matter of ScanSys, Inc., et al. Stand-alone Admin. Proc. 34-84048 09/06/18

In the Matter of Nutrastar International, Inc. Stand-alone Admin. Proc. 34-84050 09/06/18 In the Matter of CrossClick Media, Inc., et al. Stand-alone Admin. Proc. 34-84067 09/07/18

In the Matter of China Health Resource, Inc., et al. Stand-alone Admin. Proc. 34-84059 09/07/18 In the Matter of American Locker Group, Inc., et al. Stand-alone Admin. Proc. 34-84064 09/07/18

In the Matter of Fuel Performance Solutions, Inc., et al. Stand-alone Admin. Proc. 34-84061 09/07/18 In the Matter of The Buck A Day Co., Inc., et al. Stand-alone Admin. Proc. 34-84066 09/07/18

In the Matter of Bitzio, Inc., et al. Stand-alone Admin. Proc. 34-84070 09/10/18 In the Matter of EMAV Holdings, Inc., et al. Stand-alone Admin. Proc. 34-84072 09/10/18

In the Matter of Endeavor IP, Inc., et al. Stand-alone Admin. Proc. 34-84080 09/11/18 In the Matter of Crailar Technologies, Inc., et al. Stand-alone Admin. Proc. 34-84086 09/11/18

In the Matter of Golden Global Corp., et al. Stand-alone Admin. Proc. 34-84084 09/11/18 In the Matter of Fastfunds Financial Corporation, et al. Stand-alone Admin. Proc. 34-84082 09/11/18

In the Matter of AFH Acquisition VI, Inc., et al. Stand-alone Admin. Proc. 34-84095 09/12/18 In the Matter of FalconTarget, Inc., et al. Stand-alone Admin. Proc. 34-84091 09/12/18

In the Matter of Golden Pig Ventures, Inc., et al. Stand-alone Admin. Proc. 34-84092 09/12/18 In the Matter of Acquarius Cannibas, Inc., et al. Stand-alone Admin. Proc. 34-84102 09/12/18

In the Matter of Royal B.Y. Investment Management, LLC., et al. Stand-alone Admin. Proc. 34-84088 09/12/18

25 | U.S. SECURITIES AND EXCHANGE COMMISSION

DIVISION OF ENFORCEMENT ANNUAL REPORT | 26

In the Matter of Eco-Trade Corp., et al. Stand-alone Admin. Proc. 34-84094 09/12/18 In the Matter of American Natural Energy Corp., et al. Stand-alone Admin. Proc. 34-84096 09/12/18 In the Matter of CPI Corp., et al. Stand-alone Admin. Proc. 34-84090 09/12/18 In the Matter of Stonewall Financial, Ltd., et al. Stand-alone Admin. Proc. 34-84101 09/12/18 In the Matter of Munro Developments, Inc., et al. Stand-alone Admin. Proc. 34-84104 09/12/18 In the Matter of MedPro Safety Products, Inc., et al. Stand-alone Admin. Proc. 34-84121 09/13/18 In the Matter of AFS Holdings, Inc., et al. Stand-alone Admin. Proc. 34-84110 09/13/18 In the Matter of Montbriar, Inc., et al. Stand-alone Admin. Proc. 34-84112 09/13/18 In the Matter of Geo Reserve Corp., et al. Stand-alone Admin. Proc. 34-84111 09/13/18 In the Matter of Ournett Holdings, Inc., et al. Stand-alone Admin. Proc. 34-84119 09/13/18 In the Matter of Position, Inc., et al. Stand-alone Admin. Proc. 34-84109 09/13/18 In the Matter of AMI James Brands, Inc., et al. Stand-alone Admin. Proc. 34-84173 09/17/18 In the Matter of First Liberty Power Corp., et al. Stand-alone Admin. Proc. 34-84169 09/17/18 In the Matter of ColorStars Group, et al. Stand-alone Admin. Proc. 34-84171 09/17/18 In the Matter of Ampal-American Israel Corporation, et al. Stand-alone Admin. Proc. 34-84178 09/17/18 In the Matter of Avant Diagnostics, Inc., et al. Stand-alone Admin. Proc. 34-84188 09/18/18 In the Matter of China Ginseng Holdings, Inc., et al. Stand-alone Admin. Proc. 34-84190 09/18/18 In the Matter of Swissinso Holding, Inc., et al. Stand-alone Admin. Proc. 34-84184 09/18/18 In the Matter of Epic Stores Corp., et al. Stand-alone Admin. Proc. 34-84186 09/18/18 In the Matter of Entourage Mining, Ltd., et al. Stand-alone Admin. Proc. 34-84193 09/18/18 In the Matter of GSM Group, Inc. Stand-alone Admin. Proc. 34-84211 09/19/18 In the Matter of Bahamas Concierge, Inc., et al. Stand-alone Admin. Proc. 34-84212 09/19/18 In the Matter of Colorado Goldfields, Inc., et al. Stand-alone Admin. Proc. 34-84220 09/19/18 In the Matter of American Petro-Hunter, Inc., et al. Stand-alone Admin. Proc. 34-84218 09/19/18 In the Matter of Coupon Express, Inc., et al. Stand-alone Admin. Proc. 34-84223 09/19/18 In the Matter of American Sands Energy Corp., et al. Stand-alone Admin. Proc. 34-84216 09/19/18 In the Matter of Cybergy Holdings, Inc., et al. Stand-alone Admin. Proc. 34-84249 09/20/18 In the Matter of Petrosonic Energy, Inc., et al. Stand-alone Admin. Proc. 34-84240 09/20/18 In the Matter of Ceelox, Inc., et al. Stand-alone Admin. Proc. 34-84243 09/20/18 In the Matter of Anpulo Food Development, Inc., et al. Stand-alone Admin. Proc. 34-84245 09/20/18 In the Matter of GeneSYS ID, Inc., et al. Stand-alone Admin. Proc. 34-84242 09/20/18 In the Matter of Appian, Inc., et al. Stand-alone Admin. Proc. 34-84228 09/20/18 In the Matter of Be Industries, Inc., et al. Stand-alone Admin. Proc. 34-84250 09/20/18 In the Matter of MaryJane Group, Inc., et al. Stand-alone Admin. Proc. 34-84267 09/21/18 In the Matter of Golden Claw Ventures, Inc., et al. Stand-alone Admin. Proc. 34-84265 09/21/18 In the Matter of Scrap China Corp., et al. Stand-alone Admin. Proc. 34-84253 09/21/18 In the Matter of United Development Funding III, LP, et al. Stand-alone Admin. Proc. 34-84273 09/24/18 In the Matter of Oakridge Global Energy Solutions, Inc. Stand-alone Admin. Proc. 34-84301 09/27/18

FOREIGN CORRUPT PRACTICES ACT

In the Matter of Elbit Imaging, Ltd. Stand-alone Admin. Proc. 34-82849 03/09/18 In the Matter of Kinross Gold Corporation Stand-alone Admin. Proc. 34-82946 03/26/18 In the Matter of The Dun & Bradstreet Corporation Stand-alone Admin. Proc. 34-83088 04/23/18 In the Matter of Panasonic Corporation Stand-alone Admin. Proc. 34-83128 04/30/18 In the Matter of Beam, Inc., n/k/a Beam Suntory, Inc. Stand-alone Admin. Proc. 34-83575 07/02/18 In the Matter of Credit Suisse Group AG Stand-alone Admin. Proc. 34-83593 07/05/18 In the Matter of Legg Mason, Inc. Stand-alone Admin. Proc. 34-83948 08/27/18 In the Matter of Sanofi Stand-alone Admin. Proc. 34-84017 09/04/18 In the Matter of JooHyun Bahn, a/k/a Dennis Bahn Stand-alone Admin. Proc. 34-84054 09/06/18 In the Matter of United Technologies Corporation Stand-alone Admin. Proc. 34-84087 09/12/18 In the Matter of Patricio Contesse Gonzalez Stand-alone Admin. Proc. 34-84280 09/25/18 In the Matter of Petroleo Brasileiro S.A. - Petrobras Stand-alone Admin. Proc. 33-10561 09/27/18 In the Matter of Stryker Corporation Stand-alone Admin. Proc. 34-84308 09/28/18

INSIDER TRADING

SEC v. Arun J. Singh Civil LR-23957 10/03/17 SEC v. Christopher J. Lollar Civil LR-24096 11/01/17 SEC v. Susan L. Ellerin, et al. Civil LR-23986 11/14/17 SEC v. Stephen J. Leonard Civil LR-24005 12/06/17 SEC v. Joseph Spera, et al. Civil LR-24084 12/11/17 SEC v. Lanny Brown, et al. Civil LR-24015 12/14/17 SEC v. Kenneth Peer Civil LR-24012 12/14/17 In the Matter of Anthony P. Chiera, et al. Stand-alone Admin. Proc. 34-82485 01/11/18 SEC v. One or More Unknown Traders in

The Securities of Bioverativ, Inc. Civil LR-24035 01/26/18 SEC v. Todd M. LaVelle Civil LR-24044 02/08/18 In the Matter of Ara Chackerian Stand-alone Admin. Proc. 34-82694 02/12/18 SEC v. Yang Xie Civil LR-24056 02/27/18 SEC v. Robert M. Morano Civil LR-24065 03/05/18 SEC v. Jun Ying Civil LR-24073 03/14/18 SEC v. Saverio J. Barbera Civil LR-24104 04/05/18 SEC v. Charlie Jinan Chen, et al. Civil LR-24097 04/05/18 In the Matter of Douglas Nelson Stand-alone Admin. Proc. 34-83053 04/16/18 SEC v. David A. Zimliki, et al. Civil LR-24134 05/04/18 SEC v. Bovorn Rungruangnavarat Civil LR-24136 05/04/18 SEC v. Woojae (Steve) Jung, et al. Civil LR-24153 05/31/18 SEC v. Kurt J. Bordian Civil LR-24164 06/12/18 SEC v. Sebastian Pinto-Thomaz, et al. Civil LR-24178 06/26/18 SEC v. Sudhakar Reddy Bonthu Civil LR-24183 06/28/18 SEC v. Nelson Molina Civil LR-24186 07/05/18 In the Matter of Michael Johnson Stand-alone Admin. Proc. 34-83602 07/06/18 SEC v. Robert O. Carr, et al. Civil LR-24191 07/10/18 SEC v. Gene Shen Civil LR-24194 07/10/18 SEC v. Matthew Brunstrum, et al. Civil LR-24212 07/24/18 In the Matter of Yao Li Stand-alone Admin. Proc. 33-10525 07/24/18 SEC v. Richard T. Cunniffe Civil LR-24215 07/25/18 SEC v. Anup Madan Civil LR-24221 07/31/18 SEC v. Robert Lozuk Civil LR-24222 07/31/18 In the Matter of Fred Tinker Stand-alone Admin. Proc. 34-83742 07/31/18 In the Matter of Aaron R. Smith Stand-alone Admin. Proc. 34-83795 08/07/18 SEC v. Christopher Collins, et al. Civil LR-24231 08/08/18 SEC v. Lauren Zarsky Civil LR-24231 08/08/18 SEC v. Dorothy Zarsky Civil LR-24231 08/08/18 In the Matter of Honglan Wang Stand-alone Admin. Proc. 34-83857 08/16/18 SEC v. A. Catlin Cade, IV Civil LR-24240 08/17/18 In the Matter of Joseph Jennings, CPA Stand-alone Admin. Proc. 34-83889 08/20/18 In the Matter of Ismail Lila Stand-alone Admin. Proc. 34-83896 08/21/18 In the Matter of James T. Lentz Stand-alone Admin. Proc. 33-10535 08/22/18 SEC v. Steven Fishoff, et al. Civil LR-24245 08/23/18 SEC v. Marvin Mychal-Christopher Kendricks, et al. Civil LR-24252 08/29/18 SEC v. Amer Deeba Civil LR-24251 08/30/18 SEC v. Rong Chen, et al. Civil LR-24269 09/10/18 In the Matter of Thomas Earl Hayden, II, et al. Stand-alone Admin. Proc. 34-84304 09/27/18 In the Matter of Gary Bernard Ross Stand-alone Admin. Proc. 34-84305 09/27/18 In the Matter of Unal Patel, et al. Stand-alone Admin. Proc. 34-84315 09/28/18 SEC v. Bryan B. Long Civil LR-24317 09/28/18 SEC v. Bryan R. Ziegenfuse Civil LR-24298 09/28/18

27 | U.S. SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS/ INVESTMENT COMPANIES

SEC v. Tweed Financial Services, Inc., et al. Civil LR-23959 10/02/17 In the Matter of Sam Sadeghi Follow-on Admin. Proc. IA-4792 10/11/17 In the Matter of Mark Megalli Follow-on Admin. Proc. 34-81861 10/12/17 In the Matter of Jeffery S. Preston Follow-on Admin. Proc. IA-4795 10/13/17 SEC v. John H. Rogicki Civil LR-23970 10/19/17 In the Matter of Kevin J. Amell Follow-on Admin. Proc. IA-4798 10/23/17 SEC v. Mohammed Ali Rashid Civil LR-24093 10/25/17 In the Matter of Canterbury Consulting, Inc. Stand-alone Admin. Proc. 34-81959 10/26/17 In the Matter of Kenneth P. Krueger Stand-alone Admin. Proc. 33-10430 10/26/17 In the Matter of Tamer F. Moumen Follow-on Admin. Proc. IA-4805 11/03/17 In the Matter of Donald H. Ellison Follow-on Admin. Proc. 34-82015 11/06/17 SEC v. Jay Costa Kelter Civil LR-23984 11/09/17 In the Matter of David I. Osunkwo, Esq. Follow-on Admin. Proc. 34-82070 11/14/17 In the Matter of Lawrence E. Penn, III Follow-on Admin. Proc. IA-4811 11/20/17 In the Matter of William P. Carlson, Jr. Follow-on Admin. Proc. IA-4821 12/05/17 In the Matter of Paritosh Gupta, et al. Stand-alone Admin. Proc. IA-4820 12/05/17 In the Matter of Brahman Capital Corp. Stand-alone Admin. Proc. IA-4819 12/05/17 In the Matter of Institutional Investor Advisers, Inc. Stand-alone Admin. Proc. 33-10443 12/08/17 SEC v. Mohlman Asset Management, LLC, et al. Civil LR-24011 12/08/17 In the Matter of Horter Investment Management, LLC Stand-alone Admin. Proc. IA-4823 12/08/17 In the Matter of Ameriprise Financial Services, Inc. Stand-alone Admin. Proc. 34-82244 12/08/17 SEC v. Westport Capital Markets, LLC, et al. Civil LR-24007 12/11/17 In the Matter of Coastal Equities, Inc., et al. Stand-alone Admin. Proc. 34-82282 12/11/17 In the Matter of Justin D. Meadlin Follow-on Admin. Proc. IA-4827 12/13/17 In the Matter of Matrix Capital Markets, LLC, et al. Follow-on Admin. Proc. IA-82361 12/19/17 In the Matter of Courtlin L. Holt-Nguyen Follow-on Admin. Proc. IA-4828 12/19/17 In the Matter of Packerland Brokerage Services, Inc., et al. Stand-alone Admin. Proc. 34-82383 12/21/17 In the Matter of TPG Capital Advisors, LLC Stand-alone Admin. Proc. IA-4830 12/21/17 In the Matter of Southwind Associates of NJ, Inc.

(d/b/a Villafrano Wealth Management), et al. Stand-alone Admin. Proc. 34-82397 12/22/17 SEC v. Robert Gaughran, et al. Civil LR-24022 12/22/17 In the Matter of Train, Babcock Advisors, LLC Stand-alone Admin. Proc. 34-82399 12/22/17 In the Matter of Team Financial Asset

Management, LLC, et al. Stand-alone Admin. Proc. 33-10448 12/22/17 In the Matter of LKL Investment Counsel, LLC

(a/k/a LKL Investments, LLC), et al. Stand-alone Admin. Proc. IA-4836 01/03/18 In the Matter of John Tarpinian Stand-alone Admin. Proc. 34-82509 01/17/18 In the Matter of Frank G. Mazzola Follow-on Admin. Proc. 34-82528 01/18/18 In the Matter of John V. Bivona Follow-on Admin. Proc. 34-82539 01/19/18 In the Matter of Gemini Fund Services, LLC Stand-alone Admin. Proc. IA-4847 01/22/18 In the Matter of AmericaFirst Capital

Management, LLC, et al. Stand-alone Admin. Proc. 33-10454 01/23/18 SEC v. James S. Polese, et al. Civil LR-24037 01/31/18 In the Matter of Mohlman Asset Management, LLC, et al. Follow-on Admin. Proc. IA-4851 01/31/18 In the Matter of Michael S. Moses Follow-on Admin. Proc. IA-4884 02/07/18 In the Matter of Victor M. Dandridge, III Follow-on Admin. Proc. 34-82668 02/08/18 SEC v. Strong Investment Management, et al. Civil LR-24054 02/20/18 In the Matter of Commonwealth Advisors, Inc., et al. Follow-on Admin. Proc. IA-4857 02/22/18 In the Matter of Stephen M. Hicks Follow-on Admin. Proc. 34-82767 02/23/18 In the Matter of Stefan Lumiere Follow-on Admin. Proc. IA-4861 02/28/18 In the Matter of Financial Fiduciaries, LLC, et al. Stand-alone Admin. Proc. IA-4863 03/05/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 28

In the Matter of Valor Capital Asset Management, LLC, et al. Stand-alone Admin. Proc. 34-82816 03/06/18

In the Matter of DMS Advisors, Inc. Follow-on Admin. Proc. IA-4866 03/07/18 In the Matter of Peter R. Kohli Follow-on Admin. Proc. 34-82818 03/07/18

In the Matter of Voya Investments, LLC, et al. Stand-alone Admin. Proc. 34-82837 03/08/18 In the Matter of Howard B. Present Follow-on Admin. Proc. IA-4870 03/29/18

In the Matter of Clayborne Group, LLC, et al. Stand-alone Admin. Proc. IA-4875 04/05/18 In the Matter of Securities America Advisors, Inc. Stand-alone Admin. Proc. IA-4876 04/06/18

In the Matter of Geneos Wealth Management, Inc. Stand-alone Admin. Proc. 34-83003 04/06/18 In the Matter of PNC Investments, LLC Stand-alone Admin. Proc. 34-83004 04/06/18

In the Matter of Tobias J. Preston Follow-on Admin. Proc. IA-4879 04/06/18 In the Matter of Charles G. Preston Follow-on Admin. Proc. IA-4880 04/06/18

In the Matter of Caleb J. Preston Follow-on Admin. Proc. 34-83009 04/06/18 In the Matter of Laura Pendergest-Holt Follow-on Admin. Proc. 34-83030 04/10/18

In the Matter of Arlington Capital Management, Inc., et al. Stand-alone Admin. Proc. IA-4885 04/16/18 In the Matter of Scott Newsholme Follow-on Admin. Proc. 34-83056 04/17/18

In the Matter of Steven M. Simmons Follow-on Admin. Proc. IA-4890 04/20/18 In the Matter of Jeremy R. Lundin Follow-on Admin. Proc. IA-4894 04/23/18 In the Matter of WCAS Management Corporation Stand-alone Admin. Proc. IA-4896 04/24/18

In the Matter of Christopher M. Lee, a/k/a Rashid K. Khalfani Follow-on Admin. Proc. IA-4898 04/26/18

In the Matter of Ikenna Ikokwu Follow-on Admin. Proc. 34-83111 04/26/18 In the Matter of SEI Investments Global Funds Services Stand-alone Admin. Proc. IC-33087 04/26/18

In the Matter of Lauramarie Colangelo Follow-on Admin. Proc. IA-4903 05/02/18 In the Matter of Daniel H. Glick, CPA Follow-on Admin. Proc. 34-83173 &

34-83883 05/04/18 In the Matter of Visium Asset Management, LP Stand-alone Admin. Proc. 33-10494 05/08/18

In the Matter of Steven Ku Stand-alone Admin. Proc. IA-4910 05/08/18 SEC v. Premium Point Investments LP, et al. Civil LR-24138 05/09/18

In the Matter of Yasuna Murakami Follow-on Admin. Proc. IA-4911 05/10/18 SEC v. William M. Jordan Civil LR-24142 05/15/18

In the Matter of Tibor Klein Follow-on Admin. Proc. IA-4913 05/22/18 In the Matter of Perry A. Gruss Follow-on Admin. Proc. IA-4915 05/24/18

In the Matter of Aberon Capital Management, LLC, et al. Stand-alone Admin. Proc. IA-4914 05/24/18 In the Matter of Gregory M. Bercowy Follow-on Admin. Proc. IA-4916 05/29/18

In the Matter of Bristol Group, Inc. Stand-alone Admin. Proc. IA-4922 06/01/18 In the Matter of Biglari Capital, LLC Stand-alone Admin. Proc. IA-4920 06/01/18

In the Matter of Brahma Management, Ltd. Stand-alone Admin. Proc. IA-4921 06/01/18 In the Matter of CAI Managers & Co., L.P. Stand-alone Admin. Proc. IA-4923 06/01/18

In the Matter of Cherokee Investment Partners, LLC Stand-alone Admin. Proc. IA-4924 06/01/18 In the Matter of Ecosystem Investment Partners, LLC Stand-alone Admin. Proc. IA-4925 06/01/18

In the Matter of Elm Partners Management, LLC Stand-alone Admin. Proc. IA-4926 06/01/18 In the Matter of HEP Management Corporation Stand-alone Admin. Proc. IA-4927 06/01/18 In the Matter of Prescott General Partners, LLC Stand-alone Admin. Proc. IA-4928 06/01/18

In the Matter of RLJ Equity Partners, LLC Stand-alone Admin. Proc. IA-4929 06/01/18 In the Matter of Rose Park Advisors, LLC Stand-alone Admin. Proc. IA-4930 06/01/18

In the Matter of Veteri Place Corporation Stand-alone Admin. Proc. IA-4931 06/01/18 In the Matter of Bachrach Asset Management, Inc. Stand-alone Admin. Proc. IA-4919 06/01/18

In the Matter of Lyxor Asset Management, Inc. Stand-alone Admin. Proc. IA-4932 06/04/18 In the Matter of deVere USA, Inc. Stand-alone Admin. Proc. IA-4933 06/04/18

In the Matter of Barbara A. Endres Follow-on Admin. Proc. IA-4934 06/04/18 SEC v. Benjamin Alderson, et al. Civil LR-24157 06/04/18

In the Matter of Gary W. Freeman Stand-alone Admin. Proc. 34-83382 06/05/18 In the Matter of Richard W. Kessler Follow-on Admin. Proc. IA-4938 06/07/18

29 | U.S. SECURITIES AND EXCHANGE COMMISSION

In the Matter of Larry Werbel Follow-on Admin. Proc. IA-4939 06/08/18 In the Matter of Eric Erb Follow-on Admin. Proc. IA-4940 06/13/18

In the Matter of William Jordan Follow-on Admin. Proc. IA-4941 06/14/18 In the Matter of Bryan Lee Addington Follow-on Admin. Proc. 34-83459 06/18/18 In the Matter of Ronald A. Fossum, Jr. Follow-on Admin. Proc. 34-83434 06/19/18

SEC v. Edward Lee Moody, Jr., et al. Civil LR-24184 06/27/18 In the Matter of THL Managers V, LLC, et al. Stand-alone Admin. Proc. IA-4952 06/29/18

In the Matter of Bruce A. Hauptman, et al. Stand-alone Admin. Proc. IA-4950 06/29/18 In the Matter of Aisling Capital, LLC Stand-alone Admin. Proc. IA-4951 06/29/18

In the Matter of Morgan Stanley Smith Barney, LLC Stand-alone Admin. Proc. 34-83571 06/29/18 In the Matter of Roger S. Zullo Follow-on Admin. Proc. 34-83603 07/06/18

In the Matter of Matthew C. Woodard Follow-on Admin. Proc. 34-83611 07/10/18 In the Matter of William M. Greenfield Stand-alone Admin. Proc. IA-4961 07/10/18

In the Matter of Brian S. Eyster Stand-alone Admin. Proc. IA-4962 07/10/18 In the Matter of HBA Advisors, LLC, et al. Stand-alone Admin. Proc. IA-4963 07/10/18

In the Matter of Leonard S. Schwartz Stand-alone Admin. Proc. IA-4964 07/10/18 In the Matter of Romano Brothers & Company Stand-alone Admin. Proc. 34-83613 07/10/18

In the Matter of Ralph Willard Savoie Follow-on Admin. Proc. 34-83615 07/10/18 In the Matter of John B. Engebretson Follow-on Admin. Proc. IA-4967 07/12/18

In the Matter of Norman M.K. Louie, et al. Stand-alone Admin. Proc. 34-83637 07/16/18 In the Matter of Joseph Pinkney Davis, III Follow-on Admin. Proc. IA-4972 07/17/18

In the Matter of Cornelius Peterson Follow-on Admin. Proc. 34-83649 07/17/18 In the Matter of New Silk Route Advisors, L.P. Stand-alone Admin. Proc. IA-4970 07/17/18

SEC v. Temenos Advisory, Inc., et al. Civil LR-24206 07/18/18 In the Matter of Michael Devlin Stand-alone Admin. Proc. IA-4973 07/19/18

SEC v. Kimberly Pine Kitts Civil LR-24208 07/19/18 In the Matter of Beverly Hills Wealth

Management, LLC, et al. Stand-alone Admin. Proc. IA-4975 07/20/18 In the Matter of Jack Jarrell Follow-on Admin. Proc. 34-83697 07/24/18

In the Matter of Gilbert Fluetsch Follow-on Admin. Proc. IA-4977 08/02/18 In the Matter of Melvin Leonard Wimmer, Jr. Follow-on Admin. Proc. IA-4979 08/09/18

In the Matter of Knowledge Leaders Capital, LLC Stand-alone Admin. Proc. IA-4980 08/09/18 In the Matter of Jinesh P. Brahmbhatt Stand-alone Admin. Proc. 34-83817 08/09/18

In the Matter of Ramnik S. Aulakh Stand-alone Admin. Proc. 34-83816 08/09/18 In the Matter of Hamlin Capital Management, LLC Stand-alone Admin. Proc. IA-4983 08/10/18 In the Matter of Lockwood Advisors, Incorporated Stand-alone Admin. Proc. IA-4984 08/14/18

In the Matter of Ameriprise Financial Services, Inc. Stand-alone Admin. Proc. 34-83848 08/15/18 In the Matter of Roger T. Denha Stand-alone Admin. Proc. 34-83873 08/17/18

In the Matter of BKS Advisors, LLC Stand-alone Admin. Proc. IA-4987 08/17/18 In the Matter of Merrill Lynch, Pierce,

Fenner & Smith Incorporated Stand-alone Admin. Proc. 34-83886 08/20/18 SEC v. Michael B. Rothenberg, et al. Civil 2018-160 08/20/18

In the Matter of Biltmore Wealth Management, LLC, et al. Stand-alone Admin. Proc. IA-4990 08/21/18 In the Matter of Aria Partners GP, LLC Stand-alone Admin. Proc. IA-4991 08/22/18

In the Matter of First Western Advisors Stand-alone Admin. Proc. 34-83934 08/24/18 In the Matter of AEGON USA Investment

Management, LLC, et al. Stand-alone Admin. Proc. 33-10539 08/27/18 In the Matter of Bradley J. Beman Stand-alone Admin. Proc. IA-4997 08/27/18

In the Matter of Kevin A. Giles Stand-alone Admin. Proc. IA-4998 08/27/18 SEC v. Grenda Group, LLC, et al. Civil LR-24253 08/30/18

In the Matter of Massachusetts Financial Services Company Stand-alone Admin. Proc. IA-4999 08/31/18

In the Matter of Mark R. Graham, et al. Stand-alone Admin. Proc. IA-5000 09/06/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 30

31 | U.S. SECURITIES AND EXCHANGE COMMISSION

In the Matter of BB&T Securities, LLC, as successor entity to BB&T Investment Services, Inc. Stand-alone Admin. Proc. IA-5002 09/07/18

In the Matter of VSS Fund Management, LLC, et al. Stand-alone Admin. Proc. IA-5001 09/07/18 In the Matter of Crypto Asset Mangement, LP, et al. Stand-alone Admin. Proc. 33-10544 09/11/18 In the Matter of Harbour Investments, Inc. Stand-alone Admin. Proc. 34-84115 09/13/18 SEC v. Tamara Steele, et al. Civil LR-24276 09/14/18 In the Matter of Cushing Asset Management, LP Stand-alone Admin. Proc. IC-33226 09/14/18 In the Matter of Cecil Gregory Earls, et al. Stand-alone Admin. Proc. 33-10546 09/14/18 In the Matter of Capital Analysts, LLC Stand-alone Admin. Proc. IA-5009 09/14/18 In the Matter of Heidi Wivolin Follow-on Admin. Proc. 34-84164 09/17/18 In the Matter of Creative Planning, Inc., et al. Stand-alone Admin. Proc. IA-5035 09/18/18 In the Matter of Karen Bruton, CPA, et al. Follow-on Admin. Proc. IA-5038 &

34-84198 09/19/18 SEC v. World Tree Financial, LLC, et al. Civil LR-24278 09/19/18 In the Matter of Ophrys, LLC Stand-alone Admin. Proc. IA-5041 09/21/18 In the Matter of Dawn Roberts Follow-on Admin. Proc. IA-5044 09/25/18 In the Matter of Todd Wortman Follow-on Admin. Proc. IA-5045 09/25/18 In the Matter of Thomas J. Caufield Follow-on Admin. Proc. IA-5046 09/25/18 In the Matter of Hudson Housing Capital, LLC Stand-alone Admin. Proc. IA-5047 09/25/18 In the Matter of Leroy "Lee" K. Young Follow-on Admin. Proc. 34-84292 09/26/18 In the Matter of Putnam Investment

Management, LLC, et al. Stand-alone Admin. Proc. IA-5050 09/27/18 In the Matter of Ismail Elmas Follow-on Admin. Proc. 34-84300 09/27/18 SEC v. Goldsky Asset Management, LLC, et al. Civil LR-24291 09/27/18 In the Matter of LendingClub Asset

Management, LLC, et al. Stand-alone Admin. Proc. IA-5054 09/28/18 In the Matter of Lawrence Allen DeShetler Follow-on Admin. Proc. IA-5053 09/28/18

ISSUER REPORTING AND DISCLOSURE

SEC v. Gerardo de Nicolas Gutierrez, et al. Civil LR-23964 10/11/17 SEC v. Rio Tinto plc, et al. Civil LR-24085 10/17/17 In the Matter of Jeffrey W. Tomz, CPA Follow-on Admin. Proc. 34-81908 10/19/17 In the Matter of Mayank Gupta, CPA Follow-on Admin. Proc. 34-81911 10/19/17 In the Matter of Harold J. Swart, Jr., CPA Follow-on Admin. Proc. 34-81954 10/26/17 SEC v. Osiris Therapeutics, Inc., et al. Civil LR-23978 11/02/17 In the Matter of Stephen D. Ferrone Follow-on Admin. Proc. 34-82033 11/08/17 In the Matter of Paul Behrens, CPA Follow-on Admin. Proc. 33-10437 11/14/17 In the Matter of Michael C. Sabatino, CPA Stand-alone Admin. Proc. 34-82110 11/17/17 In the Matter of David N. Fuselier Follow-on Admin. Proc. 34-82117 11/20/17 In the Matter of Jon L. Frank Stand-alone Admin. Proc. 34-82154 11/27/17 In the Matter of Thaddeus Bereday Follow-on Admin. Proc. 33-10441 11/30/17 In the Matter of Rahuldev Gandhi, CPA Stand-alone Admin. Proc. 34-82208 12/04/17 In the Matter of Richard J. Koch, CPA Stand-alone Admin. Proc. 34-82207 12/04/17 SEC v. Premier Holding Corporation, et al. Civil LR-24000 12/04/17 In the Matter of Anton & Chia, LLP, et al. Stand-alone Admin. Proc. 34-82206 12/04/17 In the Matter of Provectus Biopharmaceuticals, Inc. Stand-alone Admin. Proc. 34-82292 12/12/17 SEC v. Harry Craig Dees Civil LR-24008 12/12/17 In the Matter of Peter R. Culpepper, CPA Stand-alone Admin. Proc. 34-82293 12/12/17 In the Matter of Alan Shortall Stand-alone Admin. Proc. 33-10449 12/22/17 In the Matter of Justin Samuel Cary, CPA Follow-on Admin. Proc. 34-82554 01/19/18 In the Matter of Cynthia Holder, CPA, et al. Stand-alone Admin. Proc. 34-82556 01/22/18 In the Matter of Brian Sweet, CPA Stand-alone Admin. Proc. 34-82557 01/22/18 In the Matter of Brian S. Block, CPA Follow-on Admin. Proc. 34-82710 02/14/18

SEC v. Alan Weinberg, et al. Civil LR-24051 02/16/18 In the Matter of Simcha Baer, CPA Stand-alone Admin. Proc. 34-82736 02/16/18

In the Matter of Alan Weinberg, CPA, et al. Follow-on Admin. Proc. 34-82744 02/21/18 SEC v. Analytica Bio-Energy Corp., et al. Civil LR-24058 02/28/18

SEC v. Marvin Winick Civil LR-24058 02/28/18 In the Matter of BDO Canada, LLP

(f/k/a BDO Dunwoody, LLP) Stand-alone Admin. Proc. 34-82859 03/13/18 In the Matter of Deloitte & Touche Chartered Accountants Stand-alone Admin. Proc. 34-82861 03/13/18

In the Matter of KPMG Stand-alone Admin. Proc. 34-82862 03/13/18 In the Matter of KPMG, Inc. Stand-alone Admin. Proc. 34-82860 03/13/18

SEC v. Akorn, Inc., et al. Civil LR-24082 03/26/18 In the Matter of Maxwell Technologies, Inc., et al. Stand-alone Admin. Proc. 33-10472 03/27/18

In the Matter of Philip John James, CA, et al. Stand-alone Admin. Proc. 33-10478 04/09/18 In the Matter of Wellness Center USA, Inc. Stand-alone Admin. Proc. 33-10481 04/12/18

SEC v. Andrew J. Kandelapas Civil LR-24111 04/12/18 In the Matter of Li and Company, PC, et al. Stand-alone Admin. Proc. 33-10482 04/12/18

In the Matter of Medifirst Solutions, Inc., et al. Stand-alone Admin. Proc. 34-83067 04/19/18 In the Matter of Altaba Inc., f/d/b/a Yahoo!, Inc. Stand-alone Admin. Proc. 33-10485 04/24/18

SEC v. Revolutionary Concepts, Inc., et al. Civil LR-24126 04/27/18 In the Matter of Winter, Kloman, Moter & Repp, S.C., et al. Stand-alone Admin. Proc. 34-83168 05/04/18

SEC v. Parmjit Parmar, et al. Civil 2018-90 05/16/18 In the Matter of Constant Contact, Inc., et al. Stand-alone Admin. Proc. 33-10504 06/05/18

In the Matter of Michael J. Mona, Jr. Follow-on Admin. Proc. 34-83391 06/06/18 In the Matter of RSM US, LLP Stand-alone Admin. Proc. 34-83428 06/14/18

SEC v. Axesstel, Inc., et al. Civil LR-24181 06/28/18 In the Matter of KBR, Inc. Stand-alone Admin. Proc. 33-10516 07/02/18

In the Matter of The Dow Chemical Company Stand-alone Admin. Proc. 34-83581 07/02/18 SEC v. United Development Funding III, LP, et al. Civil LR-24185 07/03/18

In the Matter of Advanced Drainage Systems, Inc., et al. Stand-alone Admin. Proc. 33-10517 07/10/18 In the Matter of Patrick J. Gray Follow-on Admin. Proc. 34-83620 07/12/18

In the Matter of Genesis Associates Limited Partnership Stand-alone Admin. Proc. 34-83627 07/13/18 SEC v. John D. Schiller, Jr. Civil LR-24202 07/16/18

SEC v. Centor Energy, Inc., et al. Civil LR-24209 07/17/18 In the Matter of Jay C. Lake, CPA Stand-alone Admin. Proc. 33-10519 07/17/18

SEC v. Bhushan Dandawate Civil LR-24210 07/19/18 In the Matter of Kurt J. Bordian, CPA Follow-on Admin. Proc. 34-83772 08/03/18

In the Matter of Ribbon Communications, Inc., et al. Stand-alone Admin. Proc. 33-10528 08/07/18 In the Matter of Daniel M. Fitzpatrick, CPA Follow-on Admin. Proc. 34-83806 08/08/18

In the Matter of Kevin M. Modany, CPA Follow-on Admin. Proc. 34-83805 08/08/18 In the Matter of Lauren Zarsky, CPA Follow-on Admin. Proc. 34-83854 08/15/18

In the Matter of Citigroup, Inc. Stand-alone Admin. Proc. 34-83858 08/16/18 SEC v. Harpreet Grewal Civil LR-24242 08/21/18

In the Matter of Hari K. Ravichandran Stand-alone Admin. Proc. 33-10533 08/21/18 In the Matter of Waruna Tivanka Ellawala Stand-alone Admin. Proc. 33-10534 08/21/18

In the Matter of David Michael Naylor, CPA Follow-on Admin. Proc. 34-83993 08/29/18 In the Matter of Philip R. Jacoby, Jr. Follow-on Admin. Proc. 34-84010 08/30/18

SEC v. Tangoe, Inc., et al. Civil LR-24255 09/04/18 In the Matter of Michael J. Kipp Follow-on Admin. Proc. 34-84022 09/04/18

In the Matter of Joanne K.Viard, CPA Follow-on Admin. Proc. 34-84023 09/04/18 In the Matter of John Pierrard Follow-on Admin. Proc. 34-84024 09/04/18

SEC v. Adam C. Wasserman Civil LR-24265 09/12/18 In the Matter of Holthouse Carlin & Van Trigt, LLP Stand-alone Admin. Proc. 34-84118 09/13/18

In the Matter of Jennifer F. Wolf, CPA Follow-on Admin. Proc. 34-84131 09/14/18 In the Matter of Abtech Holdings, Inc. Stand-alone Admin. Proc. 33-10550 09/17/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 32

33 | U.S. SECURITIES AND EXCHANGE COMMISSION

In the Matter of Glenn R. Rink Stand-alone Admin. Proc. 33-10551 09/17/18In the Matter of Lane J.Castleton Stand-alone Admin. Proc. 33-10552 09/17/18SEC v. Seaworld Entertainment, Inc., et al. Civil LR-24272 09/18/18SEC v. Clovis Oncology, Inc., et al. Civil LR-24273 09/18/18SEC v. Frederick D. Jacobs Civil LR-24272 09/18/18In the Matter of Sientra, Inc. Stand-alone Admin. Proc. 33-10555 09/19/18SEC v. Hani Zeini Civil LR-24275 09/19/18In the Matter of Nasir Shakouri Follow-on Admin. Proc. 34-84205 09/19/18In the Matter of Bronson L. Quon, CPA Follow-on Admin. Proc. 34-84207 09/19/18In the Matter of Robert Torino Follow-on Admin. Proc. 34-84206 09/19/18In the Matter of Barrett Business Services, Inc., et al. Stand-alone Admin. Proc. 33-10557 09/20/18SEC v. James Douglas Miller Civil LR-24282 09/20/18In the Matter of Heartland Payment Systems, LLC,

f/k/a Heartland Payment Systems, Inc., et al. Stand-alone Admin. Proc. 33-10558 09/21/18In the Matter of Cardiff Lexington Corporation

(f/k/a Cardiff International, Inc.) Stand-alone Admin. Proc. 34-84258 09/21/18In the Matter of Cool Technologies, Inc. Stand-alone Admin. Proc. 34-84260 09/21/18In the Matter of Dasan Zhone Solutions, Inc. Stand-alone Admin. Proc. 34-84261 09/21/18In the Matter of Infrax Systems, Inc. Stand-alone Admin. Proc. 34-84263 09/21/18In the Matter of Primoris Services Corporation Stand-alone Admin. Proc. 34-84251 09/21/18In the Matter of First Hartford Corporation Stand-alone Admin. Proc. 34-84262 09/21/18In the Matter of Dennis Wayne Hamilton, CPA Follow-on Admin. Proc. 34-84252 09/21/18In the Matter of Lichter, Yu and Associates, Inc., et al. Stand-alone Admin. Proc. 34-84281 09/25/18In the Matter of Dhru Desai Follow-on Admin. Proc. 34-84291 09/26/18SEC v. Elon Musk Civil 2018-226 09/27/18In the Matter of Walgreens Boots Alliance, Inc., et al. Stand-alone Admin. Proc. 33-10562 09/28/18In the Matter of Mota Group, Inc., et al. Stand-alone Admin. Proc. 33-10564 09/28/18SEC v. Salix Pharmaceuticals, Ltd. Civil LR-24302 09/28/18SEC v. Adam C. Derbyshire Civil LR-24302 09/28/18SEC v. Nutra Pharma Corporation, et al. Civil LR-24295 09/28/18SEC v. Tesla, Inc. Civil 2018-226 09/29/18

MARKET MANIPULATION

In the Matter of Martin T. Cantu Follow-on Admin. Proc. 34-81793 10/02/17In the Matter of Henry Lin-Han Jan Stand-alone Admin. Proc. 33-10431 10/26/17In the Matter of Artemus Mayor Stand-alone Admin. Proc. 33-10432 10/26/17SEC v. John Madsen, et al. Civil LR-23973 10/27/17SEC v. Joseph P. Willner Civil 2017-202 10/30/17In the Matter of Millennium Management, LLC Stand-alone Admin. Proc. 34-81989 10/31/17SEC v. Brian R. Sodi, et al. Civil 2018-38 02/26/18SEC v. Dennis J. Mancino, et al. Civil LR-24067 03/02/18SEC v. Beaufort Securities, Ltd., et al. Civil LR-24067 03/02/18SEC v. Jeffrey O. Friedland, et al. Civil LR-24066 03/05/18In the Matter of Robert Joseph Ritch Stand-alone Admin. Proc. 34-82840 03/09/18In the Matter of Timary Delorme Stand-alone Admin. Proc. 34-82953 03/27/18SEC v. Gregory M. Bercowy Civil LR-24091 04/03/18In the Matter of Matthew T. Mushlin Stand-alone Admin. Proc. 33-10480 04/12/18SEC v. Christopher Davies, et al. Civil LR-24261 04/19/18SEC v. Diane J. Harrison, et al. Civil LR-24122 04/25/18In the Matter of Andy Z. Fan Stand-alone Admin. Proc. 33-10487 04/25/18SEC v. Eddy U. Marin, et al. Civil LR-24127 05/02/18SEC v. Francisco Abellan Villena, et al. Civil LR-24141 05/15/18

In the Matter of Timothy C. Scarpino Stand-alone Admin. Proc. 33-10496 05/15/18 In the Matter of Mark A. Karow, et al. Stand-alone Admin. Proc. 33-10495 05/15/18

SEC v. Niel Martin Nielson Civil LR-24151 05/24/18 SEC v. Carolyne Susan Johnson Civil LR-24151 05/24/18

In the Matter of Arthur Kaplan Stand-alone Admin. Proc. 33-10500 05/24/18 SEC v. Joseph A. Fiore, et al. Civil LR-24171 06/18/18

SEC v. Gannon Giguiere, et al. Civil LR-24201 07/06/18 SEC v. Mark E. Burns Civil LR-24204 07/11/18

SEC v. Howard M. Appel Civil LR-24219 07/27/18 SEC v. Eric P. Lesak, et al. Civil LR-24239 08/21/18

SEC v. In Ovations Holdings, Inc., et al. Civil LR-24260 09/05/18 SEC v. Barry C. Honig, et al. Civil LR-24262 09/07/18

SEC v. Gregory Lemelson, et al. Civil LR-24267 09/12/18 SEC v. Thomas Carter Ronk Civil LR-24297 09/28/18

MISCELLANEOUS

In the Matter of William J. Pulte Stand-alone Admin. Proc. 34-82233 12/07/17 In the Matter of James R.J. Scheltema Follow-on Admin. Proc. 34-82703 02/13/18

In the Matter of Edmund W. Bailey Stand-alone Admin. Proc. 34-82877 03/14/18 In the Matter of Earnest H. (Woody) DeLong, Esq. Follow-on Admin. Proc. 34-83354 05/31/18

In the Matter of FP Resources USA, Inc., et al. Stand-alone Admin. Proc. 34-83626 07/13/18

NATL REC STAT RATING ORG (NRSRO)

In the Matter of Moody's Investors Service, Inc. Stand-alone Admin. Proc. 34-83965 08/28/18 In the Matter of Moody's Investors Service, Inc. Stand-alone Admin. Proc. 34-83966 08/28/18

PUBLIC FINANCE ABUSE

SEC v. Town of Oyster Bay, New York, et al. Civil 2017-213 11/21/17 SEC v. David Webb, Jr. Civil LR-23998 12/01/17

SEC v. Malachi Financial Products, Inc., et al. Civil LR-24025 01/02/18 In the Matter of Anthony A. Stovall Stand-alone Admin. Proc. 34-82443 01/05/18

SEC v. Leonard Genova Civil LR-24059 03/01/18 In the Matter of Barcelona Strategies, LLC, et al. Stand-alone Admin. Proc. 34-83191 05/09/18

In the Matter of Nachman Aaron Troodler, Esq. Follow-on Admin. Proc. 34-83399 06/08/18 In the Matter of Malachi Financial Products, Inc. Follow-on Admin. Proc. 34-83607 07/09/18

In the Matter of Porter B. Bingham Follow-on Admin. Proc. 34-83608 07/09/18 In the Matter of Sofinnova Ventures, Inc. Stand-alone Admin. Proc. IA-4958 07/10/18

In the Matter of Oaktree Capital Management, L.P. Stand-alone Admin. Proc. IA-4960 07/10/18 In the Matter of EnCap Investments L.P. Stand-alone Admin. Proc. IA-4959 07/10/18

SEC v. John A. Paulsen Civil LR-24218 07/26/18 In the Matter of Charles Kerry Morris Stand-alone Admin. Proc. 33-10529 08/14/18

SEC v. Core Performance Management, LLC, et al. Civil 2018-153 08/14/18 SEC v. RMR Asset Management Company, et al. Civil 2018-153 08/14/18

In the Matter of NW Capital Markets, Inc., et al. Stand-alone Admin. Proc. 34-83840 08/14/18 In the Matter of Eric Hall & Associates, LLC, et al. Stand-alone Admin. Proc. 34-84224 09/20/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 34

35 | U.S. SECURITIES AND EXCHANGE COMMISSION

SECURITIES OFFERING

SEC v. N1 Technologies, Inc., et al. Civil LR-23958 10/03/17 SEC v. Marc A. Celello Civil LR-23962 10/05/17 SEC v. Michael Scronic Civil LR-24094 10/05/17 SEC v. James M. Schneider Civil LR-23965 10/11/17 SEC v. Andrew H. Wilson Civil LR-23965 10/11/17 SEC v. JustInfo, LLC, et al. Civil LR-23967 10/11/17 SEC v. Lisa Bershan, et al. Civil LR-23966 10/11/17 In the Matter of Mergenet Medical, Inc., et al. Stand-alone Admin. Proc. 33-10426 10/16/17 SEC v. Randall James Civil LR-23972 10/26/17 In the Matter of YourPeople, Inc.,

dba Zenefits FTW Insurance Services, et al. Stand-alone Admin. Proc. 33-10429 10/26/17 SEC v. The End of the Rainbow Partners, LLC, et al. Civil LR-23987 11/08/17 SEC v. Paul Z. Singer, et al. Civil LR-23982 11/09/17 In the Matter of Nathan Whitney Drage, Esq. Follow-on Admin. Proc. 34-82106 11/17/17 SEC v. Joseph A. Rubbo, et al. Civil LR-24026 11/30/17 SEC v. PlexCorps, et al. Civil LR-24079 12/01/17 SEC v. Donald E. MacCord, Jr., et al. Civil LR-24001 12/04/17 SEC v. James C. Tao, et al. Civil LR-24003 12/05/17 In the Matter of Munchee, Inc. Stand-alone Admin. Proc. 33-10445 12/11/17 In the Matter of William B. Peiffer, Esq. Follow-on Admin. Proc. 34-82294 12/12/17 SEC v. Ray C. Davis, et al. Civil LR-24013 12/14/17 SEC v. Ronald A. Fossum, Jr., et al. Civil LR-24017 12/19/17 SEC v. Stephen C. Peters, et al. Civil LR-24019 12/20/17 SEC v. Robert H. Shapiro, et al. Civil LR-24020 12/20/17 SEC v. DaRayl D. Davis, et al. Civil LR-24087 12/22/17 SEC v. Owen H. Naccarato Civil LR-24024 12/26/17 In the Matter of Punch TV Studios, Inc. Stand-alone Admin. Proc. 33-10452 01/09/18 SEC v. David S. Haddad, et al. Civil LR-24028 01/11/18 SEC v. Daniel B. Vazquez, Sr., et al. Civil LR-24031 01/12/18 SEC v. AriseBank, et al. Civil LR-24088 01/25/18 SEC v. Nicholas J. Genovese, et al. Civil LR-24038 02/02/18 In the Matter of Andrew H. Wilson, Esq. Follow-on Admin. Proc. 34-82632 02/05/18 In the Matter of Thomas Osmonde Russell, III, Esq. Follow-on Admin. Proc. 34-82651 02/07/18 In the Matter of Jay Mac Rust, Esq. Follow-on Admin. Proc. 34-82688 &

34-82691 02/12/18 SEC v. Timothy S. Batchelor Civil LR-24045 02/13/18 In the Matter of Barry M. Skinner, et al. Stand-alone Admin. Proc. 33-10458 02/16/18 SEC v. Jonathan Strum Civil LR-24051 02/16/18 SEC v. Sharone Perlstein, et al. Civil LR-24051 02/16/18 SEC v. Jersey Consulting, LLC, et al. Civil LR-24064 02/20/18 In the Matter of Jonathan Strum, Esq. Follow-on Admin. Proc. 34-82743 02/21/18 SEC v. Jon E. Montroll, et al. Civil LR-24078 02/21/18 SEC v. Steven Ventre, et al. Civil LR-24055 02/26/18 SEC v. AmeraTex Energy, Inc., et al. Civil LR-24057 02/27/18 SEC v. Americrude, Inc., et al. Civil LR-24068 03/07/18 In the Matter of Merrill Lynch, Pierce,

Fenner & Smith Incorporated Stand-alone Admin. Proc. 33-10465 03/08/18 In the Matter of Credit Karma, Inc. Stand-alone Admin. Proc. 33-10469 03/12/18 SEC v. Spark Trading Group, LLC, et al. Civil LR-24080 03/12/18 SEC v. Elizabeth Holmes, et al. Civil LR-24069 03/14/18 SEC v. Ramesh "Sunny" Balwani Civil LR-24069 03/14/18 SEC v. McKinley Mortgage Co., LLC, et al. Civil LR-24076 03/22/18

SEC v. Kirbyjon Hines Caldwell, et al. Civil LR-24089 03/29/18 SEC v. Shae Yatta Harper Civil LR-24089 03/29/18

SEC v. Michael A. Liberty, et al. Civil LR-24092 03/30/18 SEC v. Sohrab ("Sam") Sharma, et al. Civil LR-24090 04/02/18

SEC v. Longfin Corp., et al. Civil LR-24106 04/04/18 SEC v. Peter H. Pocklington, et al. Civil LR-24098 04/05/18

SEC v. The Lifepay Group, LLC, et al. Civil LR-24107 04/06/18 SEC v. Amrit J. S. Chahal Civil LR-24114 04/12/18

SEC v. Arthur Lamar Adams, et al. Civil LR-24129 04/20/18 SEC v. PixarBio Corp., et al. Civil LR-24121 04/24/18

In the Matter of AF Ocean Investment Management Company Stand-alone Admin. Proc. 33-10488 04/25/18

In the Matter of ChinAmerica Andy Movie Entertainment Media Company Stand-alone Admin. Proc. 33-10489 04/25/18

SEC v. Adam Tracy, et al. Civil LR-24132 05/01/18 SEC v. Keith Houlihan Civil LR-24137 05/04/18

In the Matter of Shae Yatta Harper, Esq. Follow-on Admin. Proc. 33-10492 05/04/18 SEC v. Keenan Gracey Civil LR-24144 05/10/18

SEC v. The Falls Event Center, LLC, et al. Civil LR-24139 05/10/18 SEC v. Brent Borland, et al. Civil LR-24147 05/16/18

SEC v. Bud Genius, Inc., et al. Civil LR-24148 05/21/18 SEC v. Titanium Blockchain Infrastructure

Services, Inc., et al. Civil LR-24160 05/22/18 SEC v. Taylor Moffitt, et al. Civil LR-24148 05/22/18

In the Matter of Adam S. Tracy, Esq. Follow-on Admin. Proc. 34-83304 05/23/18 SEC v. Curative Biosciences, Inc.

f/k/a Healthient, Inc., et al. Civil LR-24180 05/30/18 SEC v. Steven Pagartanis Civil LR-24152 05/30/18

SEC v. Isaac Grossman, et al. Civil LR-24162 06/04/18 SEC v. Paul Gilman, et al. Civil LR-24156 06/04/18

SEC v. Ralph T. Iannelli, et al. Civil LR-24158 06/05/18 SEC v. Texas Coastal Energy Company, LLC, et al. Civil LR-24169 06/19/18

SEC v. Perry Santillo, et al. Civil LR-24172 06/19/18 SEC v. James E. Hocker Civil LR-24173 06/21/18

SEC v. James VanBlaricum, et al. Civil LR-24176 06/26/18 SEC v. Donato J. Dandreo, III Civil LR-24177 06/29/18

SEC v. T.J. Jesky, Esq., et al. Civil LR-24190 07/02/18 SEC v. The Owings Group, LLC, et al. Civil LR-24187 07/06/18 SEC v. Moddha Interactive, Inc., et al. Civil LR-24199 07/09/18

SEC v. Edward A. Young, et al. Civil LR-24211 07/11/18 SEC v. John Geraci Civil LR-24205 07/17/18

SEC v. Stephen J. Barber, et al. Civil LR-24207 07/18/18 SEC v. Daniel Rudden, et al. Civil LR-24216 07/19/18

SEC v. William Z. ("Billy") McFarland, et al. Civil LR-24213 07/24/18 SEC v. David A. Harbour Civil LR-24220 07/31/18

SEC v. Roger Duffield, et al. Civil LR-24232 08/02/18 SEC v. Palm House Hotel, LLLP, et al. Civil LR-24224 08/03/18

SEC v. John C. Maccoll Civil LR-24230 08/09/18 SEC v. Alexander Charles White, et al. Civil LR-24234 08/13/18

SEC v. Chad Anthony Lewis Civil LR-24233 08/13/18 In the Matter of Tomahawk Exploration, LLC, et al. Stand-alone Admin. Proc. 33-10530 08/14/18

SEC v. Equitybuild, Inc., et al. Civil LR-24237 08/15/18 In the Matter of William E. Dawn Follow-on Admin. Proc. 34-83851 08/15/18

SEC v. Richard J. Greenlaw, et al. Civil LR-24246 08/17/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 36

37 | U.S. SECURITIES AND EXCHANGE COMMISSION

SEC v. Intertech Solutions, Inc., et al. Civil LR-24241 08/20/18 SEC v. Barry M. Kornfeld, et al. Civil LR-24243 08/20/18 SEC v. Lynette M. Robbins, et al. Civil LR-24243 08/20/18 SEC v. 1 Global Capital, LLC, et al. Civil LR-24249 08/23/18 SEC v. James Bernard Moore, et al. Civil None 08/27/18 SEC v. Sandy J. Masselli Jr., et al. Civil LR-24248 08/28/18 SEC v. Robert William Dorrance Civil LR-24256 08/30/18 SEC v. Scott Stacy Phelps, et al. Civil LR-24254 08/30/18 SEC v. Michael E. Cone, et al. Civil 2018-177 09/05/18 SEC v. Brian Weber, et al. Civil None 09/05/18 SEC v. Joel N. Burstein Civil LR-24259 09/06/18 SEC v. Contrarian Investments, LLC Civil LR-24263 09/07/18 SEC v. Nevada Sports Investment Group, LP Civil LR-24264 09/07/18 SEC v. Joseph M. Laura, et al. Civil LR-24266 09/07/18 SEC v. Kevin B. Merrill, et al. Civil 2018-201 09/13/18 SEC v. Thomas J. Caufield Civil LR-24270 09/17/18 SEC v. Ernest J. Romer, III Civil LR-24274 09/18/18 SEC v. Leroy "Lee" Young, et al. Civil LR-24279 09/19/18 In the Matter of Michael L. LaPenna Stand-alone Admin. Proc. 33-10553 09/19/18 In the Matter of Phillip R. Grogan, Esq. Stand-alone Admin. Proc. 33-10554 09/19/18 In the Matter of CMB Export, LLC, et al. Stand-alone Admin. Proc. 33-10559 09/21/18 SEC v. William C. Skelley, et al. Civil LR-24288 09/26/18 SEC v. James Thomas Bramlette, et al. Civil LR-24289 09/26/18 SEC v. 1pool, Ltd., a/k/a 1Broker, et al. Civil 2018-218 09/27/18 SEC v. Timothy J. Atkinson, et al. Civil 2018-216 09/27/18 SEC v. Ronald C. Montano, et al. Civil 2018-216 09/27/18 SEC v. Justin Blake Barrett, et al. Civil 2018-216 09/27/18 SEC v. Robert A. Ferrante, et al. Civil None 09/27/18 SEC v. NL Technology, LLC, et al. Civil LR-24293 09/27/18 SEC v. Carlos I. Uresti, et al. Civil LR-24296 09/28/18 SEC v. Russell Craig, et al. Civil LR-24303 09/28/18

SRO/EXCHANGE

In the Matter of New York Stock Exchange, LLC, et al. Stand-alone Admin. Proc. 33-10463 03/06/18

TRANSFER AGENT

SEC v. Quicksilver Stock Transfer, LLC, et al. Civil LR-24033 01/24/18 In the Matter of Manhattan Transfer Registrar

Company, et al. Stand-alone Admin. Proc. 33-10497 05/17/18

DIVISION OF ENFORCEMENT ANNUAL REPORT | 38

Endnotes

1 https://www.sec.gov/news/press-release/2018-22. 2 https://www.sec.gov/news/press-release/2018-130. The frst defendant was charged in FY 2017.

https://www.sec.gov/news/press-release/2017-107. 3 https://www.sec.gov/news/press-release/2017-202. 4 https://www.sec.gov/news/press-release/2018-240. 5 https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos. 6 https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-

platforms-trading. 7 https://www.sec.gov/spotlight/cybersecurity-enforcement-actions (collecting cases). 8 https://www.sec.gov/news/press-release/2017-227;

https://www.sec.gov/news/press-release/2018-126; https://www.sec.gov/news/press-release/2018-61. 9 https://www.sec.gov/news/press-release/2018-185. 10 https://www.sec.gov/news/press-release/2018-186. 11 Id. (collecting trading suspensions). 12 https://www.sec.gov/news/press-release/2018-22. 13 Id. (collecting trading suspensions). 14 https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2018.pdf;

https://www.sec.gov/ocie/announcement/ocie-risk-alert-advisory-fee-expense-compliance.pdf. 15 https://www.sec.gov/enforce/announcement/scsd-initiative. 16 The MCDC Initiative was a voluntary self-reporting program that targeted material misstatements and

omissions in municipal bond offering documents. The MCDC Initiative led to a large number of enforcement actions brought in FY 2015 and FY 2016.

17 Money ordered in FY 2018 includes In the Matter of Petroleo Brasileiro S.A. – Petrobras, AP File No. 3-18843, Securities Exchange Act Release No. 34-84295 (Sept. 27, 2018), which orders payment of disgorgement and prejudgment interest totaling $933,473,797 and a penalty of $853,200,000 and provides that certain of respondent’s obligations for those amounts (all but $85,320,000) shall be deemed satisfed if, within one year, it makes payments in related actions involving the Department of Justice, a class action settlement fund, and Brazilian authorities.

18 137 S. Ct. 1635 (2017). 19 https://www.sec.gov/news/press-release/2018-226. 20 https://www.sec.gov/news/press-release/2018-41. 21 https://www.sec.gov/news/press-release/2018-198. 22 https://www.sec.gov/news/press-release/2018-151. 23 https://www.sec.gov/news/press-release/2018-220. 24 https://www.sec.gov/news/press-release/2017-196. 25 https://www.sec.gov/news/press-release/2018-170. 26 https://www.sec.gov/news/press-release/2018-41. 27 Id. 28 https://www.sec.gov/news/press-release/2018-219. 29 https://www.sec.gov/news/press-release/2018-226. 30 Id. 31 138 S. Ct. 2044 (2018). 32 https://www.sec.gov/news/press-release/2018-201. 33 https://www.sec.gov/news/press-release/2017-235. 34 https://www.sec.gov/news/press-release/2018-157. 35 https://www.sec.gov/news/press-release/2018-110. 36 https://www.sec.gov/news/press-release/2018-77.

39 | U.S. SECURITIES AND EXCHANGE COMMISSION

37 https://www.sec.gov/news/press-release/2018-26. 38 https://www.sec.gov/news/press-release/2018-154. 39 https://www.sec.gov/news/press-release/2018-112. 40 https://www.sec.gov/news/press-release/2018-51. 41 https://www.sec.gov/news/press-release/2018-141. 42 https://www.sec.gov/news/press-release/2018-71. 43 https://www.sec.gov/news/press-release/2018-53. 44 https://www.sec.gov/news/press-release/2018-94. 45 https://www.sec.gov/news/press-release/2018-213. 46 https://www.sec.gov/news/press-release/2018-130. 47 https://www.sec.gov/news/press-release/2017-219. 48 https://www.sec.gov/news/press-release/2017-227. 49 https://www.sec.gov/news/press-release/2018-8. 50 https://www.sec.gov/news/press-release/2018-23. 51 https://www.sec.gov/news/press-release/2018-61. 52 https://www.sec.gov/news/press-release/2018-126. 53 https://www.sec.gov/news/press-release/2018-152. 54 https://www.sec.gov/news/press-release/2018-186. 55 https://www.sec.gov/news/press-release/2018-185. 56 https://www.sec.gov/news/press-release/2018-218. 57 https://www.sec.gov/news/press-release/2018-151. 58 https://www.sec.gov/news/press-release/2018-170. 59 https://www.sec.gov/news/press-release/2018-115; https://www.sec.gov/news/press-release/2018-40. 60 https://www.sec.gov/news/press-release/2018-113. 61 https://www.sec.gov/news/press-release/2018-97. 62 https://www.sec.gov/news/press-release/2018-142. 63 https://www.sec.gov/news/press-release/2018-219. 65 https://www.sec.gov/news/press-release/2018-226. 65 https://www.sec.gov/news/press-release/2018-41. 66 https://www.sec.gov/news/press-release/2018-215. 67 https://www.sec.gov/news/press-release/2017-196. 68 https://www.sec.gov/news/press-release/2018-220. 69 https://www.sec.gov/news/press-release/2018-6. 70 https://www.sec.gov/news/press-release/2018-198. 71 https://www.sec.gov/news/press-release/2018-199. 72 https://www.sec.gov/news/press-release/2018-207. 73 https://www.sec.gov/news/press-release/2018-167. 74 https://www.sec.gov/news/press-release/2018-108. 75 https://www.sec.gov/news/press-release/2018-73. 76 https://www.sec.gov/news/press-release/2018-169. 77 https://www.sec.gov/news/press-release/2018-168. 78 https://www.sec.gov/news/press-release/2018-153. 79 https://www.sec.gov/news/press-release/2018-35. 80 https://www.sec.gov/news/press-release/2018-100. 81 https://www.sec.gov/news/press-release/2018-138. 82 https://www.sec.gov/news/press-release/2018-31.

U.S. Securities and

Exchange Commission

100 F Street NE

Washington, DC 20549

www.sec.gov

1 (Slip Opinion) OCTOBER TERM, 2018

Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

LORENZO v. SECURITIES AND EXCHANGE COMMISSION

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 17–1077. Argued December 3, 2018—Decided March 27, 2019

Securities and Exchange Commission Rule 10b–5 makes it unlawful to (a) “employ any device, scheme, or artifice to defraud,” (b) “make any untrue statement of a material fact,” or (c) “engage in any act, prac-tice, or course of business” that “operates . . . as a fraud or deceit” in connection with the purchase or sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135, this Court held that to be a “maker” of a statement under subsection (b) of that Rule,one must have “ultimate authority over the statement, including its content and whether and how to communicate it.” Id., at 142 (em-phasis added). On the facts of Janus, this meant that an investment adviser who had merely “participat[ed] in the drafting of a false statement” “made” by another could not be held liable in a private ac-tion under subsection (b). Id., at 145.

Petitioner Francis Lorenzo, while the director of investment bank-ing at an SEC-registered brokerage firm, sent two e-mails to prospec-tive investors. The content of those e-mails, which Lorenzo’s boss supplied, described a potential investment in a company with “con-firmed assets” of $10 million. In fact, Lorenzo knew that the compa-ny had recently disclosed that its total assets were worth less than $400,000.

In 2015, the Commission found that Lorenzo had violated Rule 10b–5, §10(b) of the Exchange Act, and §17(a)(1) of the Securities Act by sending false and misleading statements to investors with intent to defraud. On appeal, the District of Columbia Circuit held that Lo-renzo could not be held liable as a “maker” under subsection (b) of the Rule in light of Janus, but sustained the Commission’s finding with respect to subsections (a) and (c) of the Rule, as well as §10(b) and

2 LORENZO v. SEC

Syllabus

§17(a)(1).

Held: Dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b–5(a) and (c), as well as the relevant statutory provisions, even if the disseminator did not “make” the statements and consequently falls outside Rule 10b–5(b). Pp. 5–13.

(a) It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent todefraud. By sending e-mails he understood to contain material un-truths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to de-fraud” within the meaning of subsection (a) of the Rule, §10(b), and§17(a)(1). By the same conduct, he “engage[d] in a[n] act, practice, orcourse of business” that “operate[d] . . . as a fraud or deceit” undersubsection (c) of the Rule. As Lorenzo does not challenge the appeals court’s scienter finding, it is undisputed that he sent the e-mails with“intent to deceive, manipulate, or defraud” the recipients. Aaron v. SEC, 446 U. S. 680, 686, and n. 5. Resort to the expansive dictionarydefinitions of “device,” “scheme,” and “artifice” in Rule 10b–5(a) and §17(a)(1), and of “act” and “practice” in Rule 10b–5(c), only strength-ens this conclusion. Under the circumstances, it is difficult to see how Lorenzo’s actions could escape the reach of these provisions.Pp. 5–7.

(b) Lorenzo counters that the only way to be liable for false state-ments is through those provisions of the securities laws—like Rule10b–5(b)—that refer specifically to false statements. Holding to thecontrary, he and the dissent say, would render subsection (b) “super-fluous.” The premise of this argument is that each subsection gov-erns different, mutually exclusive, spheres of conduct. But this Court and the Commission have long recognized considerable overlapamong the subsections of the Rule and related provisions of the secu-rities laws. And the idea that each subsection governs a separatetype of conduct is difficult to reconcile with the Rule’s language, since at least some conduct that amounts to “employ[ing]” a “device, scheme, or artifice to defraud” under subsection (a) also amounts to “engag[ing] in a[n] act . . . which operates . . . as a fraud” under sub-section (c). This Court’s conviction is strengthened by the fact that the plainly fraudulent behavior confronted here might otherwise fall outside the Rule’s scope. Using false representations to induce thepurchase of securities would seem a paradigmatic example of securi-ties fraud. Pp. 7–9.

(c) Lorenzo and the dissent make a few other important arguments. The dissent contends that applying Rules 10b–5(a) and (c) to conduct like Lorenzo’s would render Janus “a dead letter.” Post, at 9. But

3 Cite as: 587 U. S. ____ (2019)

Syllabus

Janus concerned subsection (b), and it said nothing about the Rule’s application to the dissemination of false or misleading information.Thus, Janus would remain relevant (and preclude liability) where anindividual neither makes nor disseminates false information— provided, of course, that the individual is not involved in some other form of fraud. Lorenzo also claims that imposing primary liability upon his conduct would erase or at least weaken the distinction be-tween primary and secondary liability under the statute’s “aiding and abetting” provision. See 15 U. S. C. §78t(e). But the line the Court adopts today is clear: Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b–5(a) and (c), §10(b), and §17(a)(1), even if they are secondarily liable under Rule 10b–5(b). As for Lorenzo’s suggestion that those like him ought to beheld secondarily liable, this offer will, too often, prove illusory.Where a “maker” of a false statement does not violate subsection (b)of the Rule (perhaps because he lacked the necessary intent), a dis-seminator of those statements, even one knowingly engaged in an egregious fraud, could not be held to have violated the “aiding and abetting” statute. And if, as Lorenzo claims, the disseminator has not primarily violated other parts of Rule 10b–5, then such a fraud, whatever its intent or consequences, might escape liability altogeth-er. That anomalous result is not what Congress intended. Pp. 9–13.

872 F. 3d 578, affirmed.

BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and GINSBURG, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. THOM-

AS, J., filed a dissenting opinion, in which GORSUCH, J., joined. KAV-ANAUGH, J., took no part in the consideration or decision of the case.

_________________

_________________

1 Cite as: 587 U. S. ____ (2019)

Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in thepreliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Wash-ington, D. C. 20543, of any typographical or other formal errors, in orderthat corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES

No. 17–1077

FRANCIS V. LORENZO, PETITIONER v. SECURITIES AND EXCHANGE COMMISSION

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

[March 27, 2019]

JUSTICE BREYER delivered the opinion of the Court. Securities and Exchange Commission Rule 10b–5 makes

it unlawful:

“(a) To employ any device, scheme, or artifice to defraud,

“(b) To make any untrue statement of a material fact . . . , or

“(c) To engage in any act, practice, or course of busi-ness which operates or would operate as a fraud or deceit . . . in connection with the purchase or sale of any security.”17 CFR §240.10b–5 (2018).

In Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135 (2011), we examined the second of these provisions, Rule 10b–5(b), which forbids the “mak[ing]” of “any untrue statement of a material fact.” We held that the “maker of a statement is the person or entity with ultimate authority over the statement, including its con-tent and whether and how to communicate it.” Id., at 142 (emphasis added). We said that “[w]ithout control, a person or entity can merely suggest what to say, not

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‘make’ a statement in its own right.” Ibid. And we illus-trated our holding with an analogy: “[W]hen a speechwriter drafts a speech, the content is entirely within the controlof the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said.” Id., at 143. On the facts of Janus, this meant that an invest-ment adviser who had merely “participat[ed] in the draft-ing of a false statement” “made” by another could not beheld liable in a private action under subsection (b) of Rule10b–5. Id., at 145.

In this case, we consider whether those who do not “make” statements (as Janus defined “make”), but who disseminate false or misleading statements to potentialinvestors with the intent to defraud, can be found to have violated the other parts of Rule 10b–5, subsections (a) and (c), as well as related provisions of the securities laws,§10(b) of the Securities Exchange Act of 1934, 48 Stat.891, as amended, 15 U. S. C. §78j(b), and §17(a)(1) of the Securities Act of 1933, 48 Stat. 84–85, as amended, 15 U. S. C. §77q(a)(1). We believe that they can.

I A

For our purposes, the relevant facts are not in dispute. Francis Lorenzo, the petitioner, was the director of in-vestment banking at Charles Vista, LLC, a registeredbroker-dealer in Staten Island, New York. Lorenzo’s onlyinvestment banking client at the time was Waste2Energy Holdings, Inc., a company developing technology to con-vert “solid waste” into “clean renewable energy.”

In a June 2009 public filing, Waste2Energy stated thatits total assets were worth about $14 million. This figureincluded intangible assets, namely, intellectual property, valued at more than $10 million. Lorenzo was skeptical of this valuation, later testifying that the intangibles were a “dead asset” because the technology “didn’t really work.”

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During the summer and early fall of 2009, Waste2Energy hired Lorenzo’s firm, Charles Vista, to sellto investors $15 million worth of debentures, a form of “debt secured only by the debtor’s earning power, not by a lien on any specific asset,” Black’s Law Dictionary 486(10th ed. 2014).

In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its intellectual property was worthless, that it had “ ‘ “[w]rit[ten] off . . . all [of its] in-tangible assets,” ’ ” and that its total assets (as of March31, 2009) amounted to $370,552.

Shortly thereafter, on October 14, 2009, Lorenzo sent two e-mails to prospective investors describing the deben-ture offering. According to later testimony by Lorenzo, he sent the e-mails at the direction of his boss, who supplied the content and “approved” the messages. The e-mails described the investment in Waste2Energy as having “3 layers of protection,” including $10 million in “confirmed assets.” The e-mails nowhere revealed the fact that Waste2Energy had publicly stated that its assets were in fact worth less than $400,000. Lorenzo signed thee-mails with his own name, he identified himself as “Vice President—Investment Banking,” and he invited the recipients to “call with any questions.”

B In 2013, the Securities and Exchange Commission

instituted proceedings against Lorenzo (along with hisboss and Charles Vista). The Commission charged that Lorenzo had violated Rule 10b–5, §10(b) of the Exchange Act, and §17(a)(1) of the Securities Act. Ultimately, theCommission found that Lorenzo had run afoul of these provisions by sending false and misleading statements to investors with intent to defraud. As a sanction, it fined Lorenzo $15,000, ordered him to cease and desist from violating the securities laws, and barred him from working

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in the securities industry for life. Lorenzo appealed, arguing primarily that in sending the

e-mails he lacked the intent required to establish a viola-tion of Rule 10b–5, §10(b), and §17(a)(1), which we have characterized as “ ‘a mental state embracing intent to deceive, manipulate, or defraud.’ ” Aaron v. SEC, 446 U. S. 680, 686, and n. 5 (1980). With one judge dissenting,the Court of Appeals panel rejected Lorenzo’s lack-of-intent argument. 872 F. 3d 578, 583 (CADC 2017). Lo-renzo does not challenge the panel’s scienter finding.Reply Brief 17.

Lorenzo also argued that, in light of Janus, he could not be held liable under subsection (b) of Rule 10b–5. 872 F. 3d, at 586–587. The panel agreed. Because his boss “asked Lorenzo to send the emails, supplied the central content, and approved the messages for distribution,” id., at 588, it was the boss that had “ultimate authority” over the content of the statement “and whether and how to communicate it,” Janus, 563 U. S., at 142. (We took thiscase on the assumption that Lorenzo was not a “maker”under subsection (b) of Rule 10b–5, and do not revisit thecourt’s decision on this point.)

The Court of Appeals nonetheless sustained (with one judge dissenting) the Commission’s finding that, by know-ingly disseminating false information to prospective inves-tors, Lorenzo had violated other parts of Rule 10b–5, subsections (a) and (c), as well as §10(b) and §17(a)(1).

Lorenzo then filed a petition for certiorari in this Court.We granted review to resolve disagreement about whether someone who is not a “maker” of a misstatement under Janus can nevertheless be found to have violated the other subsections of Rule 10b–5 and related provisions of the securities laws, when the only conduct involved concerns amisstatement. Compare e.g., 872 F. 3d 578, with WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F. 3d 1039, 1057–1058 (CA9 2011).

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II A

At the outset, we review the relevant provisions of Rule10b–5 and of the statutes. See Appendix, infra. As we have said, subsection (a) of the Rule makes it unlawful to “employ any device, scheme, or artifice to defraud.” Sub-section (b) makes it unlawful to “make any untrue state-ment of a material fact.” And subsection (c) makes itunlawful to “engage in any act, practice, or course of busi-ness” that “operates . . . as a fraud or deceit.” See 17 CFR §240.10b–5.

There are also two statutes at issue. Section 10(b)makes it unlawful to “use or employ . . . any manipulative or deceptive device or contrivance” in contravention of Commission rules and regulations. 15 U. S. C. §78j(b). Byits authority under that section, the Commission promul-gated Rule 10b–5. The second statutory provision is§17(a), which, like Rule 10b–5, is organized into threesubsections. 15 U. S. C. §77q(a). Here, however, we con-sider only the first subsection, §17(a)(1), for this is theonly subsection that the Commission charged Lorenzowith violating. Like Rule 10b–5(a), (a)(1) makes it unlaw-ful to “employ any device, scheme, or artifice to defraud.”

B After examining the relevant language, precedent, and

purpose, we conclude that (assuming other here-irrelevant legal requirements are met) dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b–5, as well as the relevant statutory provisions. In our view, that is so even if the disseminator did not “make” the statements and consequently falls outside subsection (b) of the Rule.

It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within

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their scope the dissemination of false or misleading infor-mation with the intent to defraud. By sending emails heunderstood to contain material untruths, Lorenzo “em-ploy[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of subsection (a) of the Rule, §10(b),and §17(a)(1). By the same conduct, he “engage[d] in a[n]act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c) of the Rule. Recall that Lorenzo does not challenge the appeals court’s scien-ter finding, so we take for granted that he sent the emails with “intent to deceive, manipulate, or defraud” the recipi-ents. Aaron, 446 U. S., at 686, n. 5. Under the circum-stances, it is difficult to see how his actions could escapethe reach of those provisions.

Resort to dictionary definitions only strengthens this conclusion. A “ ‘device,’ ” we have observed, is simply“ ‘[t]hat which is devised, or formed by design’ ”; a “ ‘scheme’ ” is a “ ‘project,’ ” “ ‘plan[,] or program of some-thing to be done’ ”; and an “ ‘artifice’ ” is “ ‘an artful strata-gem or trick.’ ” Id., at 696, n. 13 (quoting Webster’s Inter-national Dictionary 713, 2234, 157 (2d ed. 1934)(Webster’s Second)). By these lights, dissemination offalse or misleading material is easily an “artful stratagem”or a “plan,” “devised” to defraud an investor under subsec-tion (a). See Rule 10b–5(a) (making it unlawful to “employ any device, scheme, or artifice to defraud”); §17(a)(1) (same). The words “act” and “practice” in subsection (c)are similarly expansive. Webster’s Second 25 (defining“act” as “a doing” or a “thing done”); id., at 1937 (defining “practice” as an “action” or “deed”); see Rule 10b–5(c) (making it unlawful to “engage in a[n] act, practice, or course of business” that “operates . . . as a fraud or deceit”).

These provisions capture a wide range of conduct.Applying them may present difficult problems of scope in borderline cases. Purpose, precedent, and circumstance

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could lead to narrowing their reach in other contexts. But we see nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospec-tive investors with the intent to defraud. And while one can readily imagine other actors tangentially involved in dissemination—say, a mailroom clerk—for whom liability would typically be inappropriate, the petitioner in thiscase sent false statements directly to investors, invited them to follow up with questions, and did so in his capacityas vice president of an investment banking company.

C Lorenzo argues that, despite the natural meaning of

these provisions, they should not reach his conduct. This is so, he says, because the only way to be liable for false statements is through those provisions that refer specifi-cally to false statements. Other provisions, he says, con-cern “scheme liability claims” and are violated only when conduct other than misstatements is involved. Brief for Petitioner 4–6, 28–30. Thus, only those who “make” un-true statements under subsection (b) can violate Rule 10b–5 in connection with statements. (Similarly, §17(a)(2)would be the sole route for finding liability for statementsunder §17(a).) Holding to the contrary, he and the dissentinsist, would render subsection (b) of Rule 10b–5 “super-fluous.” See post, at 6–7 (opinion of THOMAS, J.).

The premise of this argument is that each of theseprovisions should be read as governing different, mutuallyexclusive, spheres of conduct. But this Court and the Commission have long recognized considerable overlapamong the subsections of the Rule and related provisions of the securities laws. See Herman & MacLean v. Huddle-ston, 459 U. S. 375, 383 (1983) (“[I]t is hardly a novel proposition that” different portions of the securities laws “prohibit some of the same conduct” (internal quotation

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marks omitted)). As we have explained, these laws marked the “first experiment in federal regulation of the securities industry.” SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 198 (1963). It is “understand-able, therefore,” that “in declaring certain practices unlaw-ful,” it was thought prudent “to include both a general proscription against fraudulent and deceptive practices and, out of an abundance of caution, a specific proscriptionagainst nondisclosure” even though “a specific proscription against nondisclosure” might in other circumstances be deemed “surplusage.” Id., at 198–199. “Each succeedingprohibition” was thus “meant to cover additional kinds ofillegalities—not to narrow the reach of the prior sections.” United States v. Naftalin, 441 U. S. 768, 774 (1979). We have found “ ‘no warrant for narrowing alternative provi-sions . . . adopted with the purpose of affording added safeguards.’ ” Ibid. (quoting United States v. Gilliland, 312 U. S. 86, 93 (1941)); see Affiliated Ute Citizens of Utah v. United States, 406 U. S. 128, 152–153 (1972) (While “thesecond subparagraph of [Rule 10b–5] specifies the makingof an untrue statement . . . [t]he first and third subpara-graphs are not so restricted”). And since its earliest days, the Commission has not viewed these provisions as mutu-ally exclusive. See, e.g., In re R. D. Bayly & Co., 19 S. E. C. 773 (1945) (finding violations of what would become Rules 10b–5(b) and (c) based on the same misrepresentationsand omissions); In re Arthur Hays & Co., 5 S. E. C. 271 (1939) (finding violations of both §§17(a)(2) and (a)(3) based on false representations in stock sales).

The idea that each subsection of Rule 10b–5 governs aseparate type of conduct is also difficult to reconcile withthe language of subsections (a) and (c). It should go with-out saying that at least some conduct amounts to “em-ploy[ing]” a “device, scheme, or artifice to defraud” undersubsection (a) as well as “engag[ing] in a[n] act . . . which operates . . . as a fraud” under subsection (c). In Affiliated

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Ute, for instance, we described the “defendants’ activities” as falling “within the very language of one or the other of those subparagraphs, a ‘course of business’ or a ‘device, scheme, or artifice’ that operated as a fraud.” 406 U. S., at 153. (The dissent, for its part, offers no account of how thesuperfluity problems that motivate its interpretation can be avoided where subsections (a) and (c) are concerned.)

Coupled with the Rule’s expansive language, whichreadily embraces the conduct before us, this considerable overlap suggests we should not hesitate to hold that Lo-renzo’s conduct ran afoul of subsections (a) and (c), as well as the related statutory provisions. Our conviction is strengthened by the fact that we here confront behavior that, though plainly fraudulent, might otherwise falloutside the scope of the Rule. Lorenzo’s view that subsec-tion (b), the making-false-statements provision, exclusively regulates conduct involving false or misleading statementswould mean those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether. But using false representations toinduce the purchase of securities would seem a paradig-matic example of securities fraud. We do not know whyCongress or the Commission would have wanted to disarmenforcement in this way. And we cannot easily reconcile Lorenzo’s approach with the basic purpose behind these laws: “to substitute a philosophy of full disclosure for thephilosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.” Capital Gains, 375 U. S., at 186. See also, e.g., SEC v. W. J. Howey Co., 328 U. S. 293, 299 (1946) (the securities lawswere designed “to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits”).

III Lorenzo and the dissent make a few other important

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arguments. They contend that applying subsections (a) or (c) of Rule 10b–5 to conduct like his would render our decision in Janus (which we described at the outset, su-pra, at 1–2) “a dead letter,” post, at 9. But we do not see how that is so. In Janus, we considered the language insubsection (b), which prohibits the “mak[ing]” of “anyuntrue statement of a material fact.” See 564 U. S., at 141–143. We held that the “maker” of a “statement” is the “person or entity with ultimate authority over the state-ment.” Id., at 142. And we found that subsection (b) did not (under the circumstances) cover an investment adviserwho helped draft misstatements issued by a different entity that controlled the statements’ content. Id., at 146– 148. We said nothing about the Rule’s application to the dissemination of false or misleading information. And we can assume that Janus would remain relevant (and pre-clude liability) where an individual neither makes nor disseminates false information—provided, of course, that the individual is not involved in some other form of fraud.

Next, Lorenzo points to the statute’s “aiding and abet-ting” provision. 15 U. S. C. §78t(e). This provision, en-forceable only by the Commission (and not by private parties), makes it unlawful to “knowingly or recklessly . . . provid[e] substantial assistance to another person” who violates the Rule. Ibid.; see Janus, 564 U. S., at 143 (cit-ing Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994)). Lorenzo claims that imposing primary liability upon his conduct would erase or at least weaken what is otherwise a clear distinc-tion between primary and secondary (i.e., aiding and abetting) liability. He emphasizes that, under today’sholding, a disseminator might be a primary offender withrespect to subsection (a) of Rule 10b–5 (by employing a “scheme” to “defraud”) and also secondarily liable as an aider and abettor with respect to subsection (b) (by provid-ing substantial assistance to one who “makes” a false

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statement). And he refers to two cases that, in his view, argue in favor of circumscribing primary liability. See Central Bank, 511 U. S., at 164; Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148 (2008).

We do not believe, however, that our decision creates a serious anomaly or otherwise weakens the distinction between primary and secondary liability. For one thing, itis hardly unusual for the same conduct to be a primary violation with respect to one offense and aiding and abet-ting with respect to another. John, for example, might sell Bill an unregistered firearm in order to help Bill rob abank, under circumstances that make him primarily li-able for the gun sale and secondarily liable for the bank robbery.

For another, the cases to which Lorenzo refers do not help his cause. Take Central Bank, where we held that Rule 10b–5’s private right of action does not permit suitsagainst secondary violators. 511 U. S., at 177. The hold-ing of Central Bank, we have said, suggests the need for a “clean line” between conduct that constitutes a primaryviolation of Rule 10b–5 and conduct that amounts to a secondary violation. Janus, 564 U. S., at 143, and n. 6. Thus, in Janus, we sought an interpretation of “make”that could neatly divide primary violators and actors too far removed from the ultimate decision to communicate a statement. Ibid. (citing Central Bank, 511 U. S. 164). The line we adopt today is just as administrable: Those whodisseminate false statements with intent to defraud are primarily liable under Rules 10b–5(a) and (c), §10(b), and §17(a)(1), even if they are secondarily liable under Rule10b–5(b). Lorenzo suggests that classifying dissemination as a primary violation would inappropriately subject peripheral players in fraud (including him, naturally) tosubstantial liability. We suspect the investors who re-ceived Lorenzo’s e-mails would not view the deception so

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favorably. And as Central Bank itself made clear, even a bit participant in the securities markets “may be liable as a primary violator under [Rule] 10b–5” so long as “all of the requirements for primary liability . . . are met.” Id., at 191.

Lorenzo’s reliance on Stoneridge is even further afield. There, we held that private plaintiffs could not bring suit against certain securities defendants based on undisclosed deceptions upon which the plaintiffs could not haverelied. 552 U. S., at 159. But the Commission, unlike private parties, need not show reliance in its enforcementactions. And even supposing reliance were relevant here,Lorenzo’s conduct involved the direct transmission of false statements to prospective investors intended to induce reliance—far from the kind of concealed fraud at issue in Stoneridge.

As for Lorenzo’s suggestion that those like him ought tobe held secondarily liable, this offer will, far too often,prove illusory. In instances where a “maker” of a false statement does not violate subsection (b) of the Rule (per-haps because he lacked the necessary intent), a dissemina-tor of those statements, even one knowingly engaged in an egregious fraud, could not be held to have violated the “aiding and abetting” statute. That is because the statute insists that there be a primary violator to whom the sec-ondary violator provided “substantial assistance.” 15 U. S. C. §78t(e). And the latter can be “deemed to be in violation” of the provision only “to the same extent as the person to whom such assistance is provided.” Ibid. In other words, if Acme Corp. could not be held liable under subsection (b) for a statement it made, then a knowing disseminator of those statements could not be held liable for aiding and abetting Acme under subsection (b). And if, as Lorenzo claims, the disseminator has not primarilyviolated other parts of Rule 10b–5, then such a fraud, whatever its intent or consequences, might escape liability

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altogether.That is not what Congress intended. Rather, Congress

intended to root out all manner of fraud in the securities industry. And it gave to the Commission the tools to accomplish that job.

* * * For these reasons, the judgment of the Court of Appeals

is affirmed. So ordered.

JUSTICE KAVANAUGH took no part in the considerationor decision of this case.

Opinion of the Court

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Appendix to opinion of the Court

APPENDIX

17 CFR §240.10b–5

“It shall be unlawful for any person, directly or indirectly,by the use of any means or instrumentality of interstatecommerce, or of the mails or of any facility of any national securities exchange,

“(a) To employ any device, scheme, or artifice to defraud,

“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in or-der to make the statements made, in the light of the circumstances under which they were made, not mis-leading, or

“(c) To engage in any act, practice, or course of busi-ness which operates or would operate as a fraud or deceit upon any person

in connection with the purchase or sale of any security.”

15 U. S. C. §78j

“It shall be unlawful for any person, directly or in-directly, by the use of any means or instrumentality of in- terstate commerce or of the mails, or of any facility of any national securities exchange—

* * *

“(b) To use or employ, in connection with the purchaseor sale of any security registered on a national securities ex- change or any security not so registered, or any securities-based swap agreement[,] any manipulative or decep- tive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as

Opinion of the Court

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Appendix to opinion of the Court

necessary or appropriate in the public interest or for the protection of investors.”

15 U. S. C. §77q

“(a) Use of interstate commerce for purpose of fraud ordeceit

“It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or anysecurity-based swap agreement . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—

“(1) to employ any device, scheme, or artifice to de-fraud, or

“(2) to obtain money or property by means of any untrue statement of a material fact or any omission tostate a material fact necessary in order to make thestatements made, in light of the circumstances under which they were made, not misleading; or

“(3) to engage in any transaction, practice, or courseof business which operates or would operate as a fraud or deceit upon the purchaser.”

15 U. S. C. §78t

“(e) Prosecution of persons who aid and abet violations

“For purposes of any action brought by the Commission . . . , any person that knowingly or recklessly providessubstantial assistance to another person in violation of a provision of this chapter, or of any rule or regulationissued under this chapter, shall be deemed in violation of such provision to the same extent as the person to whomsuch assistance is provided.

_________________

_________________

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THOMAS, J., dissenting

SUPREME COURT OF THE UNITED STATES

No. 17–1077

FRANCIS V. LORENZO, PETITIONER v. SECURITIES AND EXCHANGE COMMISSION

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

[March 27, 2019]

JUSTICE THOMAS, with whom JUSTICE GORSUCH joins,dissenting.

In Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135 (2011), we drew a clear line between primary and secondary liability in fraudulent-misstatement cases:A person does not “make” a fraudulent misstatement within the meaning of Securities and Exchange Commis-sion (SEC) Rule 10b–5(b)—and thus is not primarily liable for the statement—if the person lacks “ultimate authorityover the statement.” Id., at 142. Such a person could,however, be liable as an aider and abettor under principlesof secondary liability.

Today, the Court eviscerates this distinction by holding that a person who has not “made” a fraudulent misstate-ment can nevertheless be primarily liable for it. Because the majority misconstrues the securities laws and flouts our precedent in a way that is likely to have far-reachingconsequences, I respectfully dissent.

I To appreciate the sweeping nature of the Court’s hold-

ing, it is helpful to begin with the facts of this case. On October 14, 2009, the owner of the firm at which petitioner Frank Lorenzo worked instructed him to send e-mails to two clients regarding a debenture offering. The owner

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THOMAS, J., dissenting

explained that he wanted the e-mails to come from thefirm’s investment-banking division, which Lorenzo di-rected. Lorenzo promptly addressed an e-mail to eachclient, “cut and pasted” the contents of each e-mail—which he received from the owner—into the body, and “sent [them] out.” App. 321. It is undisputed that Lorenzo did not draft the e-mails’ contents, though he knew that theycontained false or misleading statements regarding the debenture offering. Both e-mails stated that they were sent “[a]t the request of ” the owner of the firm. Id., at 403, 405. No other allegedly fraudulent conduct is atissue.

In 2013, the SEC brought enforcement proceedings against the owner of the firm, the firm itself, and Lorenzo.Even though Lorenzo sent the e-mails at the owner’s request, the SEC did not charge Lorenzo with aiding and abetting fraud committed by the owner. See 15 U. S. C. §§ 77o(b), 78o(b)(4)(E), 78t(e). Instead, the SEC charged Lorenzo as a primary violator of multiple securities laws,1

including Rule 10b–5(b), which prohibits “mak[ing] any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” 17 CFR §240.10b– 5(b) (2018); see Ernst & Ernst v. Hochfelder, 425 U. S. 185, 212–214 (1976) (construing Rule 10b–5(b) to require scien-ter). The SEC ultimately concluded that, by “knowinglysen[ding] materially misleading language from his own email account to prospective investors,” App. to Pet. forCert. 77, Lorenzo violated Rule 10b–5(b) and several other antifraud provisions of the securities laws. The SEC “barred [him] from serving in the securities industry” forlife. Id., at 91.

The Court of Appeals unanimously rejected the SEC’sdetermination that Lorenzo violated Rule 10b–5(b). Ap-

—————— 1 For ease of reference, I use “securities laws” to refer to both statutes

and SEC regulations.

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THOMAS, J., dissenting

plying Janus, the court held that Lorenzo did not “make” the false statements at issue because he merely “transmit-ted statements devised by [his boss] at [his boss’] direc-tion.” 872 F. 3d 578, 587 (CADC 2017). The SEC has not challenged that aspect of the decision below.

The panel majority nevertheless upheld the SEC’s deci-sion holding Lorenzo primarily liable for the same falsestatements under other provisions of the securities laws—specifically, §10(b) of the Securities Exchange Act of 1934(1934 Act), Rules 10b–5(a) and (c), and §17(a)(1) of the Securities Act of 1933 (1933 Act). Unlike Rule 10b–5(b),none of these provisions pertains specifically to fraudulent misstatements.

II Even though Lorenzo undisputedly did not “make” the

false statements at issue in this case under Rule 10b–5(b),the Court follows the SEC in holding him primarily liablefor those statements under other provisions of the securi-ties laws. As construed by the Court, each of these moregeneral laws completely subsumes Rule 10b–5(b) and §17(a)(2) of the 1933 Act in cases involving fraudulentmisstatements, even though these provisions specifically govern false statements. The majority’s interpretation ofthese provisions cannot be reconciled with their text or our precedents. Thus, I am once again compelled to “disa-gre[e] with the SEC’s broad view” of the securities laws. Janus, supra, at 145, n. 8.

A I begin with the text. The Court of Appeals held that

Lorenzo violated §10(b) of the 1934 Act and Rules 10b–5(a) and (c). In relevant part, §10(b) makes it unlawful for a person, in connection with the purchase or sale of a security,“[t]o use or employ . . . any manipulative or deceptivedevice or contrivance” in contravention of an SEC rule. 15

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THOMAS, J., dissenting

U. S. C. §78j(b). Rule 10b–5 was promulgated under thisstatutory authority. That Rule makes it unlawful, in connection with the purchase or sale of any security,

“(a) To employ any device, scheme, or artifice to defraud,

“(b) To make any untrue statement of a material fact . . . , or

“(c) To engage in any act, practice, or course of busi-ness which operates or would operate as a fraud or deceit . . . .” 17 CFR §240.10b–5.

The Court of Appeals also held that Lorenzo violated §17(a)(1) of the 1933 Act. Similar to Rule 10b–5, §17(a) ofthe Act provides that it is unlawful, in connection with the offer or sale of a security,

“(1) to employ any device, scheme, or artifice to de-fraud, or

“(2) to obtain money or property by means of any untrue statement of a material fact . . . ; or

“(3) to engage in any transaction, practice, or courseof business which operates or would operate as a fraud or deceit upon the purchaser.” 15 U. S. C. §77q(a)(1).

We can quickly dispose of Rule 10b–5(a) and §17(a)(1).The act of knowingly disseminating a false statement at the behest of its maker, without more, does not amount to “employ[ing] any device, scheme, or artifice to defraud” within the meaning of those provisions. As the contempo-raneous dictionary definitions cited by the majority make clear, each of these words requires some form of planning, designing, devising, or strategizing. See ante, at 6. We have previously observed that “the terms ‘device,’ ‘scheme,’ and ‘artifice’ all connote knowing or intentional practices.” Aaron v. SEC, 446 U. S. 680, 696 (1980) (emphasis added).In other words, they encompass “fraudulent scheme[s],”

5 Cite as: 587 U. S. ____ (2019)

THOMAS, J., dissenting

such as a “ ‘short selling’ scheme,” a wash sale, a matchedorder, price rigging, or similar conduct. United States v. Naftalin, 441 U. S. 768, 770, 778 (1979) (applying §17(a)(1)); see Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 473 (1977) (interpreting the term “manipulative” in§10(b)).

Here, it is undisputed that Lorenzo did not engage inany conduct involving planning, scheming, designing, or strategizing, as Rule 10b–5(a) and §17(a)(1) require for aprimary violation. He sent two e-mails drafted by a supe-rior, to recipients specified by the superior, pursuant to instructions given by the superior, without collaboratingon the substance of the e-mails or otherwise playing anindependent role in perpetrating a fraud. That Lorenzo knew the messages contained falsities does not change theessentially administrative nature of his conduct here; hemight have assisted in a scheme, but he did not himself plan, scheme, design, or strategize. In my view, the plaintext of Rule 10b–5(a) and §17(a)(1) thus does not encom-pass Lorenzo’s conduct as a matter of primary liability.

The remaining provision, Rule 10b–5(c), seems broaderat first blush. But the scope of this conduct-basedprovision—and, for that matter, Rule 10b–5(a) and §17(a)(1)—must be understood in light of its codificationalongside a prohibition specifically addressing primaryliability for false statements. Rule 10b–5(b) imposesprimary liability on the “make[r]” of a fraudulent mis-statement. 17 CFR §240.10b–5(b); see Janus, 564 U. S., at 141–142. And §17(a)(2) imposes primary liability on a person who “obtain[s] money or property by means of ” a false statement. 15 U. S. C. §77q(a)(2). The conduct-based provisions of Rules 10b–5(a) and (c) and §17(a)(1) must be interpreted in view of the specificity of these false-statement provisions, and therefore cannot be con-strued to encompass primary liability solely for false statements. This view is consistent with our previous

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THOMAS, J., dissenting

recognition that “each subparagraph of §17(a) ‘proscribes adistinct category of misconduct’ ” and “ ‘is meant to cover additional kinds of illegalities.’ ” Aaron, supra, at 697 (quoting Naftalin, supra, at 774; emphasis added).

The majority disregards these express limitations.Under the Court’s rule, a person who has not “made” a fraudulent misstatement within the meaning of Rule 10b–5(b) nevertheless could be held primarily liable for facili-tating that same statement; the SEC or plaintiff need onlyrelabel the person’s involvement as an “act,” “device,”“scheme,” or “artifice” that violates Rule 10b–5(a) or (c). And a person could be held liable for a fraudulent mis-statement under §17(a)(1) even if the person did not ob-tain money or property by means of the statement. In short, Rule 10b–5(b) and §17(a)(2) are rendered entirely superfluous in fraud cases under the majority’s reading.2

This approach is in tension with “ ‘the cardinal rule that, if possible, effect shall be given to every clause and part of a statute.’ ” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U. S. 639, 645 (2012) (quoting D. Ginsberg & Sons, Inc. v. Popkin, 285 U. S. 204, 208 (1932)). I would therefore apply the “old and familiar rule” that “the specificgoverns the general.” RadLAX, supra, at 645–646 (inter-nal quotation marks omitted); see A. Scalia & B. Garner, Reading Law 51 (2012) (canon equally applicable to stat-utes and regulations). This canon of construction appliesnot only to resolve “contradiction[s]” between general andspecific provisions, but also to avoid “the superfluity of a specific provision that is swallowed by the general one.” RadLAX, 566 U. S., at 645. Here, liability for false state-——————

2 I recognize that §17(a)(1) could be deemed narrower than §17(a)(2) in the sense that it requires scienter, whereas §17(a)(2) does not. Aaron v. SEC, 446 U. S. 680, 697 (1980). But scienter is not disputed in this case, and the specific terms of §17(a)(2) are otherwise completely subsumed within the more general terms of §17(a)(1), as interpreted by the majority.

7 Cite as: 587 U. S. ____ (2019)

THOMAS, J., dissenting

ments is “ ‘specifically dealt with’ ” in Rule 10b–5(b) and §17(a)(2). Id., at 646 (quoting D. Ginsberg & Sons, supra, at 208). But Rule 10b–5 and §17(a) also contain generalprohibitions that, “ ‘in [their] most comprehensive sense,would include what is embraced in’ ” the more specificprovisions. 566 U. S., at 646. I would hold that the provi-sions specifically addressing false statements “ ‘must beoperative’ ” as to false-statement cases, and that the more general provisions should be read to apply “ ‘only [to] such cases within [their] general language as are not within the’ ” purview of the specific provisions on false state-ments. Ibid.

Adopting this approach to the statutory text would alignwith our previous admonitions that the securities lawsshould not be “[v]iewed in isolation” and stretched to their limits. Hochfelder, 425 U. S., at 212. In Hochfelder, for example, we concluded that the key words of §10(b) em-ployed the “terminology of intentional wrongdoing” and thus “strongly suggest[ed]” that it “proscribe[s] knowing or intentional misconduct,” even though the statute did not expressly state as much. Id., at 197, 214. We took a similar approach to §17(a)(1) of the 1933 Act. Aaron, 446 U. S., at 695–697. We have also limited the terms of Rule 10b–5 by recognizing that it was adopted pursuant to§10(b) and thus “encompasses only conduct already pro-hibited by §10(b).” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008); see Hochfelder, supra, at 212–214.

Contrary to the suggestion of the majority, this ap-proach does not necessarily require treating each provi-sion of Rule 10b–5 or §17(a) as “governing different, mu-tually exclusive, spheres of conduct.” Ante, at 7. Nor does it prevent the securities laws from mutually reinforcing one another or overlapping to some extent. Ante, at 7–8. It simply contemplates giving full effect to the specificprohibitions on false statements in Rule 10b–5(b) and

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THOMAS, J., dissenting

§17(a)(2) instead of rendering them superfluous. The majority worries that this approach would allow

people who disseminate false statements with the intentto defraud to escape liability under Rule 10b–5. Ante, at 9. That is not so. If a person’s only role is transmittingfraudulent misstatements at the behest of the statements’ maker, the person’s conduct would be appropriately as-sessed as a matter of secondary liability pursuant to pro-visions like 15 U. S. C. §§77o(b), 78t(e), and 78o(b)(4)(E). And if a person engages in other acts prohibited by theRule, such as developing and employing a fraudulent scheme, the person would be primarily liable for that conduct.

The majority suggests that secondary liability may oftenprove illusory. It hypothesizes, for example, a situation in which the “maker” of a false statement does not know that it was false and thus does not violate Rule 10b–5(b), but the disseminator knows that the statement is false. Un-der that scenario, the majority fears that the person dis-seminating the statements could be “engaged in an egre-gious fraud,” yet would not be liable as an aider and abettor for lack of a primary violator. Ante, at 12. This concern is misplaced. As an initial matter, I note that §17(a)(2) does not require scienter, so the maker of the statement may still be liable under that provision. Aaron, supra, at 695–697. Moreover, an ongoing, “egregious”fraud is likely to independently constitute a primaryviolation of the conduct-based securities laws, whollyapart from the laws prohibiting fraudulent misstatements.Here, by contrast, we are concerned with the dissemina-tion of two misstatements at the request of their maker. This type of conduct is appropriately assessed under prin-ciples of secondary liability.

B The majority’s approach contradicts our precedent in

9 Cite as: 587 U. S. ____ (2019)

THOMAS, J., dissenting

two distinct ways.First, the majority’s opinion renders Janus a dead let-

ter. In Janus, we held that liability under Rule 10b–5(b)was limited to the “make[r]” of the statement and that “[o]ne who prepares or publishes a statement on behalf of another is not its maker” within the meaning of Rule 10b–5(b). 564 U. S., at 142 (emphasis added). It is undisputedhere that Lorenzo was not the maker of the fraudulent misstatements. The majority nevertheless finds primary liability under different provisions of Rule 10b–5, without any real effort to reconcile its decision with Janus. Al-though it “assume[s] that Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information,” in the next breath the majority states that this would be true only if “the indi-vidual is not involved in some other form of fraud.” Ante, at 10. Given that, under the majority’s rule, administra-tive acts undertaken in connection with a fraudulent misstatement qualify as “other form[s] of fraud,” the ma-jority’s supposed preservation of Janus is illusory.

Second, the majority fails to maintain a clear line between primary and secondary liability in fraudulent-misstatement cases. Maintaining this distinction is im-portant because, as the majority notes, there is no privateright of action against mere aiders and abettors. Ante, at 10; see Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 191 (1994). Here, however, the majority does precisely what we declined todo in Janus: impose broad liability for fraudulent mis-statements in a way that makes the category of aiders and abettors in these cases “almost nonexistent.” 564 U. S., at 143. If Lorenzo’s conduct here qualifies for primary liabil-ity under §10(b) and Rule 10b–5(a) or (c), then virtually any person who assists with the making of a fraudulent misstatement will be primarily liable and thereby subject not only to SEC enforcement, but private lawsuits.

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THOMAS, J., dissenting

The Court correctly notes that it is not uncommon forthe same conduct to be a primary violation with respectto one offense and aiding and abetting with respect toanother—as, for example, when someone illegally sells a gun to help another person rob a bank. Ante, at 11. But this case does not involve two distinct crimes. The majority has interpreted certain provisions of an offense so broadlyas to render superfluous the more stringent, on-pointrequirements of a narrower provision of the same offense.Criminal laws regularly and permissibly overlap with eachother in a way that allows the same conduct to constitutedifferent crimes with different punishments. That differs significantly from interpreting provisions in a law to com-pletely eliminate specific limitations in a neighboring provision of that very same law. The majority’soverreading of Rules 10b–5(a) and (c) and §17(a)(1) isespecially problematic because the heartland of theseprovisions is conduct-based fraud—“employ[ing] [a] device, scheme, or artifice to defraud” or “engag[ing] in any act,practice, or course of business”—not mere misstatements.15 U. S. C. §77q(a)(1); 17 CFR §§240.10b–5(a), (c).

The Court attempts to cabin the implications of itsholding by highlighting several facts that supposedlywould distinguish this case from a case involving a secre-tary or other person “tangentially involved in dissemi-nat[ing]” fraudulent misstatements. Ante, at 7. None of these distinctions withstands scrutiny. The fact that Lorenzo “sent false statements directly to investors” in e-mails that “invited [investors] to follow up with ques-tions,” ibid., puts him in precisely the same position as a secretary asked to send an identical message from her e-mail account. And under the unduly capacious interpreta-tion that the majority gives to the securities laws, I do notsee why it would matter whether the sender is the “vicepresident of an investment banking company” or a secre-tary, ibid.—if the sender knowingly sent false statements,

11 Cite as: 587 U. S. ____ (2019)

THOMAS, J., dissenting

the sender apparently would be primarily liable. To be sure, I agree with the majority that liability would be “inappropriate” for a secretary put in a situation similar toLorenzo’s. Ibid. But I can discern no legal principle in themajority opinion that would preclude the secretary from being pursued for primary violations of the securities laws.

* * * Instead of blurring the distinction between primary and

secondary liability, I would hold that Lorenzo’s conduct did not amount to a primary violation of the securities laws and reverse the judgment of the Court of Appeals.Accordingly, I respectfully dissent.

October 17, 2018

SEC WARNS PUBLIC COMPANIES ON CYBER-FRAUD CONTROLS

To Our Clients and Friends:

On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud. The report described the SEC Division of Enforcement's investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1]

Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies' internal accounting controls to prevent unauthorized payments violated the federal securities laws. The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets.

While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks. The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats. The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action.

The Report of Investigation

Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate. While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued. Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain. (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.)

The October 16 report details the Enforcement Division's investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or "BECs" – that had been perpetrated. The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to

2

a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors' accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills.

According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company's existing cybersecurity controls or to appropriately question the veracity of the emails. The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on "weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective."

SEC Cyber-Fraud Guidance

Cybersecurity has been a high priority for the SEC dating back several years.

The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls. For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers. The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2]

The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies. However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3]

But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime. The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions. (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4])

Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5] Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company's cybersecurity efforts. The guidance further discussed the need to maintain effective disclosure controls and procedures. However, the February guidance did not address specific controls to prevent cyber incidents in the first place.

The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring. The SEC noted that the internal controls provisions of the federal securities laws are

3

not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act. But the SEC emphasized that such controls must be "attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws." The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part "because the responsible personnel did not sufficiently understand the company's existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability."

The SEC concluded that public companies' "internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds" and "must calibrate their internal accounting controls to the current risk environment."

Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks. Whether a company's controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate. Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams.

However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action. Persons responsible for designing and maintaining the company's internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company's liability for future data breaches and cyber-frauds.

[1] SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf.

[2] SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213. This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules.

[3] SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71.

[4] SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186.

[5] SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf. The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report.

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Gibson Dunn's lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work

in the firm's Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors:

Marc J. Fagel - San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell - New York (+1 212-351-3981, asouthwell@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Securities Enforcement Group:

New York Barry R. Goldsmith - Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld - Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com)

Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com)

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Washington, D.C. Richard W. Grime - Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com)

Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com)

San Francisco Marc J. Fagel - Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com)

Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com)

Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com)

Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com)

Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com)

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Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com)

Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com)

Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com)

Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com)

Privacy, Cybersecurity and Consumer Protection Group:

Alexander H. Southwell - Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall - Dallas (+1 214-698-3256, sroyall@gibsondunn.com)

Debra Wong Yang - Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba - Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)

Richard H. Cunningham - Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)

Joshua A. Jessen - Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)

Kristin A. Linsley - San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon - Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)

Shaalu Mehra - Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson - Dallas (+1 214-698-3203, knelson@gibsondunn.com)

Eric D. Vandevelde - Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner - Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)

Michael Li-Ming Wong - San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)

Ryan T. Bergsieker - Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)

© 2018 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 15, 2019

2018 YEAR-END SECURITIES ENFORCEMENT UPDATE

To Our Clients and Friends:

I. Introduction: Themes and Developments

A. 2018 In Review

The Securities and Exchange Commission, like most federal agencies, ended 2018 with a whimper, not a bang. Most staffers were furloughed as part of the federal government shutdown, a note on the SEC homepage cautioning that until further notice only a limited number of personnel would be on hand to respond to emergency situations.

The shutdown curtailed the Division of Enforcement's ability to close out the year with a raft of last-minute filings, not to mention causing most SEC investigations to grind to a halt. That said, between the December 27 shutdown and the date of this publication, the SEC did manage to institute two enforcement actions – a settlement with a car rental company for accounting errors occurring between 2012 and 2014[1]; and a settlement with a small accounting firm for failing to comply with the Custody Rule in connection with audits of an investment adviser conducted between 2012 and 2015.[2] Given the age of the conduct, it is unclear the nature of the "emergency" requiring unpaid SEC staffers to come to work in the midst of the shutdown to release these two particular cases, though perhaps an impending statute of limitations was to blame.

While the shutdown may have cut the Enforcement Division's year short, it was more than compensated for by the flurry of actions filed as the agency's September 30 fiscal year-end loomed. Indeed, the SEC issued nearly a dozen press releases announcing enforcement actions on the last three days of the fiscal year, including several significant cases involving prominent public companies and financial institutions.

The (fiscal) year-end rush appeared intended to blunt some of the criticism of the Enforcement Division's productivity in the new administration. After filing 446 new stand-alone enforcement actions in fiscal 2017, an over 18% drop from the 548 actions filed in 2016, the docket recovered somewhat in 2018, with the SEC filing 490 new actions.[3] (The SEC's tally of "stand-alone" enforcement actions excludes "follow-on" proceedings sanctioning individuals separately charged for violating the securities laws, and routine administrative proceedings to deregister the stock of companies with delinquent SEC filings.) While still falling short of the final years under the prior SEC and Enforcement Division leadership, the current Division Directors were quick to note in their Annual Report that the 2015 and 2016 results were somewhat skewed by the SEC's Municipalities Continuing Disclosure (MCDC) Initiative, under which municipal securities issuers and underwriters who self-reported disclosure violations to the Division received leniency. The initiative produced nearly 150 enforcement actions; stripped of those matters, the 2018 results actually exceeded those of recent years.

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The Division Directors further explained that these results were achieved notwithstanding a hiring freeze in place at the SEC since the onset of the Trump administration, and the Division's Annual Report included a plea for additional resources. As stated in the Report, "While this achievement is a testament to the hardworking women and men of the Division, with more resources the SEC could focus more on individual accountability, as individuals are more likely to litigate and the ensuing litigation is resource intensive." The Directors also noted the challenges posed by the Supreme Court's decision in Kokesh v. SEC, which confirmed a strict five-year statute of limitations on SEC demands for disgorgement[4], as well as the Court's more recent decision in Lucia v. SEC, which held that the SEC's method of appointing its administrative law judges violated the Appointments Clause of the U.S. Constitution and has necessitated the potential re-litigation of myriad administrative proceedings.[5]

Thematically, the Enforcement Division (as well as SEC Chairman Clayton) repeatedly reiterated their focus on protecting "retail" or "Main Street" investors. Indeed, the Division's Annual Report invoked the word "retail" no fewer than twenty-six times. (A close second was "cyber," another Division priority, which appeared twenty-four times in the Report.) The "retail" focus has led the SEC to highlight cases in which average investors appear to be victimized, particularly offering frauds, pump-and-dump-schemes, and misconduct by investment advisers and broker dealers directed at individual clients. For fiscal 2018, according to the Annual Report, securities offering cases (which range from Ponzi schemes to various disclosure and registration violations in connection with securities offerings) comprised 25% of the year's enforcement actions, the largest single category. Cases against investment advisers and investment companies were just behind at 22% of the caseload; and while the SEC continues to bring cases involving private funds and institutional investors, the lion's share of investment adviser cases fit within the SEC's "retail" focus.

Despite efforts in recent years for the Enforcement Division to renew its scrutiny of public company financial reporting and disclosure – which in the past had often been the top category of SEC enforcement actions, representing a quarter or more of the docket – such cases comprised only 16% of the SEC's enforcement actions in 2018. Rounding out the docket were cases involving broker-dealers (13%), insider trading (10%), and market manipulation (7%); FCPA cases and public finance abuse checked in at 3% of the enforcement filings apiece.

B. Whistleblowers

The whistleblower bounty program enacted as part of Dodd-Frank continues to grow apace with each new year. In its November 2018 annual report to Congress, the SEC's Office of the Whistleblower reported that the program had once again netted a record number of tips.[6] A total of 5,282 whistleblower complaints were received in fiscal 2018, up nearly 18% from 2017. (The report noted that the Whistleblower Office appears to have its share of vexatious whistleblowers who submit an "unusually high" number of tips, which are excluded from the tally.)

As with enforcement cases ultimately filed by the Enforcement Division in 2018, the largest single category for tips for 2018 was offering frauds, representing 20% of all complaints; tips concerning corporate disclosures and financials were a close second, representing 19% of the complaints.

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The SEC has also continued to announce large award payments to whistleblowers whose tips led to successful enforcement actions. In September, the SEC announced that it had awarded $39 million to a single whistleblower, the second highest award in the history of the program; the same investigation also resulted in a $15 million payment to a second whistleblower.[7] However, due to the whistleblower regulations' confidentiality requirements, the nature of the enforcement action resulting in these awards is not reported.

The SEC announced two additional whistleblower awards later that same month. First, the SEC reported a $1.5 million payment, while noting that "the award was reduced because the whistleblower did not promptly report the misconduct and benefitted financially during the delay."[8] And in a second case, the SEC awarded $4 million to an overseas whistleblower, touting the important service that even those outside the U.S. can provide to the SEC.[9] The SEC further heralded the tipster's continuing assistance throughout the course of the investigation.

According to its most recent release, the SEC has now awarded over $326 million to 59 individuals under its whistleblower program.

C. Cybersecurity and Cryptocurrency

As noted above, the SEC's Enforcement Division remains acutely focused on all things "cyber." While this has manifested itself primarily, in recent months, on enforcement actions involving cryptocurrency and digital assets, the Division also had several noteworthy firsts in matters of cybersecurity in the latter half of the year.

First, in September, the SEC brought its first enforcement action alleging violations of the Identity Theft Red Flags Rule.[10] The SEC alleged that a broker-dealer lacked adequate safeguards to prevent intruders from resetting contractor passwords in order to gain access to personal information about certain customers. Without admitting the allegations, the firm agreed to pay a $1 million penalty and to retain a consultant to evaluate its compliance with the Safeguards Rule and the Identity Theft Red Flags Rule.

Then, in October, the Enforcement Division issued a report on its investigations of nine public companies which had been victimized by cyber fraud.[11] According to the SEC, attackers had used fraudulent emails to pose as executives or vendors in order to dupe company personnel into sending about $100 million (in the aggregate) into bank accounts controlled by the perpetrators. The SEC declined to charge the companies with wrongdoing, but cautioned companies that the internal controls provisions of the federal securities laws require them to ensure they have adequate policies and procedures to mitigate such incidents and safeguard shareholder assets.[12]

But most of the high-tech action happened on the cryptocurrency front, with the Enforcement Division similarly touting a number of firsts. Most of these actions related to registration-related conduct engaged in after the Commission's 2017 DAO Report, in which the Commission concluded that digital assets may be securities under the federal securities laws.

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In September, the SEC settled an action against a so-called "ICO superstore" and its owners for acting as unregistered broker-dealers by operating a website that permitted visitors to purchase tokens in ICOs and engage in secondary trading.[13] This was the first case in which the SEC charged unregistered broker-dealers for selling digital assets. Collectively, the company and owners paid nearly $475,000 in disgorgement, while the owners also paid $45,000 each in penalties and consented to industry and penny stock bars and an investment company prohibition with a right to reapply after three years.

The same day, the SEC found for the first time that a hedge fund manager's investments in digital assets constituted an investment company registration violation.[14] According to the SEC, the fund falsely claimed to be regulated by and to have filed a registration statement with the SEC, and raised more than $3.6 million in four months. It also engaged in an unregistered public offering and invested more than 40% of its assets in digital asset securities. The fund and its sole principal consented to pay a combined $200,000 penalty to settle the case.

In November, the SEC settled an action against the founder of a digital token-trading platform, finding for the first time that such a platform operated as an unregistered national securities exchange.[15] The platform in question matched buyers and sellers of digital assets, executed smart contracts, and updated a distributed ledger via the Ethereum blockchain, among other things. The founder consented to disgorge $300,000 and pay a $75,000 penalty. The SEC noted that its investigation remains ongoing.

Also in November, the SEC settled actions against two technology companies for failing to register their ICOs pursuant to federal securities laws.[16] Both companies raised over $10 million worth of digital assets to fund their respective business ventures. These were the first cases in which the SEC imposed civil penalties solely for ICO-related registration violations. The companies consented to return funds to investors, register their tokens as securities, file periodic reports with the SEC for at least one year, and pay $500,000 in total penalties.

That same month, the SEC also for the first time brought actions against individuals for improperly promoting ICOs. The SEC settled actions against two celebrities for their respective failures to disclose that they were being compensated for promoting upcoming ICOs on their social media accounts.[17] The celebrities received approximately $350,000 in total for their promotions, all of which they were required to disgorge, along with $400,000 in total penalties. The celebrities also consented to a combined five-year ban on promoting any security.

The second half of this year also saw the SEC crack down on ICOs claiming to be registered with the SEC. In October, the SEC suspended trading of a company's securities after the company issued two press releases falsely claiming to have partnered with an SEC-qualified custodian for use with cryptocurrency transactions and to be conducting an "officially registered" ICO.[18] Also in October, the SEC obtained an emergency court order halting a planned ICO that falsely claimed to be SEC-approved.[19] On October 11, a federal judge froze the assets of the defendants—the company and its founder. Notably, in one of the few setbacks to the SEC's aggressive enforcement program in the cryptocurrency space, the same judge subsequently denied the SEC's motion for a preliminary injunction, finding that the Commission had failed to show that the digital asset offered in the ICO was a security subject to federal securities laws.[20] Litigation remains ongoing.

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Finally, September saw the SEC file a litigated action against an international securities dealer and its CEO for soliciting investors to buy and sell securities-based swaps.[21] The SEC filed the case after an undercover FBI agent allegedly purchased securities-based swaps on the company's platform despite not meeting the required discretionary investment thresholds. The SEC alleged that the company failed to register as a security-based swaps dealer and transacted the securities-based swaps outside of a registered national exchange.

II. Issuer and Auditor Cases

A. Accounting Fraud and Internal Controls

In July, the SEC charged a drainage pipe manufacturer and its former CFO with reporting and accounting violations.[22] According to the SEC, the company allegedly overstated its income before taxes from 2013-2015 as a result of insufficient internal accounting controls, improper accounting, and "unsupported journal entries directed or approved" by the former CFO. Without admitting or denying the allegations, the company agreed to pay a $1 million penalty while the CFO agreed to pay a $100,000 penalty, reimburse the company approximately $175,000 in stock sale profits, and be barred from practicing as an accountant before the SEC.

In early September, the SEC announced a settlement with a telecommunications expense management company and three members of the company's senior management related to allegedly fraudulent accounting practices.[23] According to the complaint, the company prematurely reported revenue for work that had not been performed or for transactions that did not actually produce revenue. The SEC also alleged that the company's former senior vice president of expense management operations falsified business records that were provided to auditors. The company and three executives agreed to pay a combined penalty of $1.67 million to settle the allegations. The litigated action against the senior VP of expense management operations remains pending.

Later that month, the SEC charged a U.S.-based CFO of a public company in China with using his personal bank account to transfer over $400,000 in corporate funds from China to the U.S. to pay the company's U.S. expenses.[24] The SEC's complaint alleged that he had previously engaged in the same practice for at least two other China-based public companies. The SEC contended that the commingling of corporate and personal funds put the company's assets at risk of misuse and loss, and that the CFO had failed to implement an adequate set of internal accounting controls. The CFO agreed to settle the charges without admitting wrongdoing, agreeing to pay a $20,000 fine and to be barred from serving as a public company officer or director for five years.

Also in September, the SEC initiated enforcement actions against a business services company, its former CFO, and the company's former controller related to allegations of accounting fraud.[25] The complaint alleged that the CFO manipulated the company's books to hide the increasing expense of its workers' compensation relative to revenue from its independent auditor. When the company announced that it needed to restate its financial results to reflect the actual workers' compensation expenses, the stock price fell by 32%. Without admitting or denying the allegations, the company agreed to pay $1.5 million to settle the charges, and the controller, who allegedly approved some of the CFO's

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accounting entries, agreed to pay $20,000 and be suspended from appearing before the SEC as an accountant for one year. The case against the CFO is being litigated, and he has also been charged criminally by the United States Attorney's Office for the Western District of Washington. The company's CEO, who was not charged with wrongdoing, agreed to pay the company back his $20,800 in cash bonuses received during the period of the alleged accounting violations.

The following day, a pipeline construction company agreed to settle charges that it failed to implement adequate internal accounting controls, and failed to adequately evaluate its control deficiencies when assessing the effectiveness of its Internal Control over Financial Reporting ("ICFR"), after problems with its revenue recognition surfaced.[26] According to the SEC, the company used contingent cost estimates to cover potential risks inherent in a project that could add unanticipated expenses to its total costs. The company failed to implement adequate controls around its contingent cost estimates, despite recognizing that such estimates were critical for properly recognizing revenue. Without admitting liability, the company agreed to pay a $200,000 civil penalty.

Later in September, the SEC announced a settled action against a pharmaceutical company and its former CFO for allegedly understating the amount of inventory held by its wholesaler customers, which occurred as a result of the company flooding its distribution channel with products.[27] According to the complaint, this created more short-term revenue at the expense of future sales. Without admitting or denying the allegations, the company agreed to be enjoined from future violations and the former CFO agreed to pay approximately $1 million in penalties and disgorgement, be subject to an officer and director bar for five years, and to be barred from appearing before the SEC as an accountant with a right to apply for reinstatement after five years.

In a November case involving the Kenyan subsidiary of a U.S.-based tobacco company, the SEC charged that managers at the subsidiary overrode existing internal controls and failed to report accounting errors to the parent company.[28] As a result, the parent company filed materially misstated financial statements for more than four years, including errors to its inventory, accounts receivable, and retained earnings numbers. The parent company agreed to settle the internal controls violations on a no admit/no deny basis. The SEC imposed a cease-and-desist order, noting the company's remedial actions already undertaken, including sharing the results of its internal investigation with the SEC, hiring new accounting control positions within the African region, and implementing new internal accounting control procedures and policies.

In December, the SEC filed a complaint against a multinational agricultural company and its executive chairman, alleging that they concealed substantial losses by improperly accounting for the divestiture of its China-based operating company.[29] According to the SEC, the company overstated the value of stock received in the transaction and assigned a value of nearly $60 million to worthless land use rights. The company agreed to pay a $3 million penalty and to cooperate with the SEC in future investigations, without admitting or denying the allegations. Additionally, the CEO agreed to pay $400,000 and accept a five year officer and director bar.

The next day, the SEC brought charges against a natural food company stemming from alleged weaknesses in the company's internal controls regarding end-of-quarter sales practices that helped the

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company meet its internal sales targets.[30] According to the SEC, the company's sales personnel regularly offered incentives to customers to move inventory near quarter-end, including the right to return products that expired or spoiled prior to ultimate purchase, cash incentives, substantial discounts, and extended payment terms. The company had failed to implement adequate controls to both detect and document these practices. According to the SEC's press release, no monetary penalties were imposed based on the company's self-reporting to the SEC and significant remediation efforts, which included significant organizational changes and changes to its revenue recognition policies.

Also in December, the SEC also instituted settled proceedings against a publicly-traded issuer of subprime automobile loan securities related to allegations that the company failed to accurately calculate its credit loss allowance from certain impaired loans and failed to segregate those loans from its general loan assets.[31] The SEC also alleged that flaws in the company's internal controls led to its errors in calculating credit loss allowance and caused the company to restate its financial statements twice in a one-year period. Without admitting or denying the allegations, the company agreed to pay a $1.5 million penalty.

Finally, the SEC brought a settled proceedings against five separate companies for filing quarterly financial forms without having their financial statements reviewed in advance, which is a violation of Regulation S-X.[32] The SEC announced the charges against all five companies in a single press release, and each company agreed to remedial action, including payment of penalties ranging from $25,000 to $75,000.

B. Misleading Disclosures

Beyond the accounting-related cases discussed above, the SEC pursued an unusual number of cases based on misleading disclosures by public companies in the latter half of the year.

Misleading Metrics

Many of the disclosure cases instituted by the SEC involved the use of allegedly misleading metrics of interest to investors.

In July, the SEC filed settled proceedings against an engineering and construction company related to allegations that it inflated a key performance metric and had various accounting control deficiencies.[33] According to the SEC's order, the company's "work in backlog" metric, which measured the revenue the company expected to earn from future firm orders under existing contracts, improperly included at least $450 million from orders that the company had not received. Additionally, the SEC alleged that the company's deficient accounting controls caused it to make inaccurate estimates of the costs to complete seven contracts, leading the company to restate its earnings. Without admitting wrongdoing, the company agreed to pay a $2.5 million penalty.

In August, the SEC separately instituted proceedings against a cloud communications company and two of its executives as well as executives at two online marketing companies related to allegations that they provided misleading numbers to investors. In the first order, the SEC alleged that the company projected first quarter 2015 revenue of $74 million based on improperly reclassified sales forecasts when the CFO

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was aware of red flags that undermined confidence in that figure.[34] Just a week before the end of the quarter, the company announced revenue projects that were approximately $25 million lower, causing the stock price to fall 33%. Without admitting wrongdoing, the company agreed to pay $1.9 million and the two executives agreed to pay penalties ranging from $30,000 to $40,000. In the second complaint, the SEC alleged that the former CEO and CFO of two online marketing companies, which formed a parent-subsidiary relationship in 2016, knowingly provided inflated subscriber figures.[35] These charges arose out of a settled enforcement action the SEC brought against the companies themselves in June, in which the parent company agreed to pay a $8 million penalty. Without admitting or denying the allegations, the two executives agreed to pay $1.38 million and $34,000, respectively.

In September, the SEC announced a settled action with a payment processing company and its CEO.[36] According to the SEC's allegations, the company materially overstated a key operating metric that caused research analysts to overrate the company's stock and promoted it in its filings with the SEC, even though both the company and CEO had reason to know that the metric was inaccurate. Without admitting or denying the allegations, the company agreed to pay a penalty of $2.1 million while the former CEO agreed to pay $120,000.

Finally, in a relatively novel action, the SEC settled charges against a seller of home and business security services for failing to afford equal or greater prominence to comparable GAAP earnings measures in two of its financial statements containing non-GAAP measures.[37] While the SEC has highlighted concerns about the prominence of non-GAAP metrics previously, this appears to be the first case in which that issue alone has resulted in an enforcement action. Without admitting or denying the allegations, the company agreed to pay $100,000 to settle the matter.

Executive Perks

The SEC also brought several cases involving executive perks. In July, the SEC announced a settlement with a chemical company related to charges that the company allegedly failed to adequately disclose approximately $3 million in perquisites given to its CEO in its 2013-2016 proxy statements.[38] The SEC alleged that the company failed to disclose personal benefits not widely available and not integrally and directly related to an executive's job duties. The company agreed to pay a $1.75 million penalty and hire an independent consultant to help implement new perquisite disclosure policies.

Also in July, the SEC alleged that the CEO of an oil company hid approximately $10.5 million in personal loans from a company vendor and a prospective member of the board.[39] Additionally, the SEC alleged that the CEO received undisclosed compensation and perks, and that the company failed to report more than $1 million in excess compensation in its disclosures. Without admitting or denying the SEC's allegations, the CEO agreed to pay a $180,000 penalty and be subject to a five year bar from serving as an officer or director of a public company. The board member also agreed to pay a penalty.

Other Disclosures

In July, the SEC instituted settled proceedings against a publicly-traded real estate investment trust and four executives, alleging that they failed to adequately disclose certain cashflow issues and the status of

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real property within its portfolio.[40] The parties agreed to settle the charges without admitting or denying the allegations.

In September, the SEC instituted proceedings against an industrial waste water treatment company and two senior executives, alleging that they failed to disclose to investors certain contractual contingencies that had not occurred in a material contract with Nassau, New York.[41] To settle the allegations, without admitting or denying the SEC's findings, the company agreed to pay $133,000 in penalties, disgorgement, and pre-judgment interest and the two executives agreed to pay civil penalties of $60,000 and $35,000 respectively.

Also in September, the SEC announced a settlement with SeaWorld Entertainment Inc. and its former CEO.[42] The SEC's complaint alleged that the company and its CEO failed to adequately disclose the damaging impact a critical documentary had on the company's business. Without admitting or denying the allegations, the company and former CEO agreed to pay $5 million in penalties and disgorgement. A former vice president of communications also agreed to pay $100,000 in disgorgement and prejudgment interest, without admitting or denying the allegations.

That same day, the SEC filed a settled action against a biopharmaceutical company, its CEO, and former CFO, related to allegations that the company failed to timely disclose questions about the efficacy of its flagship lung cancer drug.[43] Without admitting or denying the SEC's allegations, the company and the executives agreed to the payment of disgorgement and penalties.

Later that month, the SEC filed a settled action against a large drugstore chain, its former CEO, and former CFO for failing to communicate the increased risk of missing operating income projections in the wake of a corporate merger.[44] The SEC alleged that in 2012, one of the predecessor entities had reaffirmed earlier projections despite internal projections showing an increased risk of falling short. Without admitting or denying the allegations, the company paid a $34.5 million penalty and the two executives each agreed to pay $160,000.

And at the end of September, the SEC announced a settlement with Tesla, Inc. and its CEO arising out of the CEO's tweets about plans to take the company private.[45] The SEC alleged that the potential transaction was subject to numerous contingencies, and that the company lacked sufficient controls to review the CEOs tweets. Without admitting or denying the allegations, the company and its CEO agreed to pay civil penalties; additionally, the CEO agreed to step down from the board and be replaced by an independent chairman, and the company agreed to install two new independent directors, implement controls to oversee the CEO's tweets, and establish a new committee of independent directors.

C. Auditor Cases

In September, the SEC instituted proceedings against an accounting firm for improper professional conduct and violations of the securities law during the course of an audit of an information technology company.[46] According to the SEC's complaint, the firm ignored a series of red flags concerning cash held by a related entity and provided an unqualified opinion. The firm and two of its principals agreed to be barred from appearing before the SEC as accountants for five years, and to pay monetary penalties.

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In October, the SEC suspended three former accountants from a larger audit firm related to allegations that they violated auditing standards and engaged in unprofessional conduct during an audit of an insurance company.[47] According to the SEC's order, the audit team fell behind schedule during the audit, but the senior manager directed team members to sign off on "predated" workpapers to make it appear that the audit had been completed before the company's annual report was filed with the SEC. The SEC also concluded that the engagement partner and quality review partner failed to exercise due professional care that would have prevented these deficiencies in the audit. Without admitting or denying the SEC's findings, the three accountants agreed to be suspended from practicing before the SEC as accountants for periods ranging from one to five years, pending applications for reinstatement.

In December, the SEC instituted proceedings against an audit firm, two of its partners, and two partners from a now-defunct auditing firm, relating to "significant failures" in their audit of a company that went bankrupt after the discovery of more than $100 million in federal tax liability.[48] According to the SEC's order, the firm identified pervasive risks of fraud in the company but failed to undertake additional steps to address the risk. The SEC also alleged that the audit firm was not actually independent of the company due to an ongoing business relationship. To settle the allegations, the firm agreed to pay a penalty of $1.5 million, and hire an independent compliance consultant. All four partners agreed to be suspended from practicing before the SEC for between one and three years, and to pay penalties ranging from $15,000 to $25,000.

Finally, outside the public company audit context, the SEC charged an audit firm with failing to maintain its independence when conducting "Custody Rule" and broker-dealer audits. The SEC alleged that the firm violated independence standards by both preparing and auditing client financial statements, accompanying notes, and accounting entries for more than 60 audits over five years. Without admitting nor denying the allegations, the firm settled with the SEC, agreeing to pay a $300,000 penalty and to cease any engagements that fall within the purview of the SEC for one year. If the firm later chooses to accept such engagements, it must retain an independent complaint consultant for a three-year period and comply with all of the consultant's recommendations for auditor independence.

D. Private Company Cases

Finally, the SEC brought a number of financial reporting and disclosure cases against private (or pre-public) companies, including the following:

In September, the SEC instituted settled proceedings against a seller of drones, toys, and other consumer products and its CEO related to allegations that they provided inaccurate sales information to the company's auditor, which caused its Form S-1 registration statement to overstate the company's revenue by approximately 15%.[49] Without admitting or denying the SEC's allegations, the CEO agreed to pay a $10,000 penalty and the company agreed to withdraw its registration statement, which had never been declared effective.

Also in September, the SEC instituted proceedings against a California-based medical aesthetics company and its former CEO.[50] The SEC alleged that just days before the company was going to close a stock offering, the CEO learned that its Brazilian manufacturer's certificate to sell products in the

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European Union had been suspended, but concealed it from the company's General Counsel and underwriters. After the offering closed and the suspension subsequently became public, the stock price fell by 52% and the CEO continued to misrepresent his knowledge. The SEC settled with the company, recognizing the company's self-reporting to the SEC and extensive cooperation. The SEC is litigating against the CEO.

In November, the SEC instituted proceedings against an entertainment media company and five of its former officers and directors.[51] According to the complaint, the company purchased downloads for its mobile app from outside marketing firms in order to boost its download ranking in the Apple App Store. The company allegedly misrepresented to its shareholders why its app had risen in the download rankings, and continued to allegedly lie to shareholders about the growth of its downloads even after it stopped paying for downloads and its rankings plummeted. The parties agreed to settle the charges without admitting or denying the allegations; the individuals agreed to pay penalties of varying amounts, three agreed to a permanent officer and director bar, and one agreed to a five-year bar.

III. Investment Advisers and Funds

A. Fees and Expenses

In November, a California-based investment adviser settled allegations that it overcharged clients by failing to apply "breakpoint" discounts as provided in its fee schedule.[52] According to the SEC, the adviser's fee schedule entailed "breakpoints" which would decrease advisory fees as the amount of client assets under management increased. For approximately eight years, however, the advisory fee discounts were applied haphazardly, resulting in overcharges to certain client accounts. Without admitting the allegations, the adviser agreed to pay a penalty of $50,000. The SEC recognized that, during the investigation, the adviser undertook remedial efforts, including reimbursements to clients of overcharged fees and modifications to its policies.

In December, a formerly SEC-registered fund manager settled allegations that it misallocated expenses (such as rent, overhead, and compensation) to its business development company clients as well as failed to review valuation models that caused a client to overvalue its portfolio companies.[53] The adviser agreed to pay approximately $2.3 million disgorgement and prejudgment interest, as well as a civil money penalty of approximately $1.6 million.

Also in December, the SEC filed a settled administrative proceeding against a Milwaukee-based investment adviser and its owner/chairman in connection with alleged undisclosed fees.[54] According to the SEC, the adviser added a sum to client transactions, which it called a "Service Charge." Part of this "Service Charge" would go towards paying a third-party broker, while the remainder went to the adviser. The SEC alleges that the adviser did not disclose these payments to clients. Without admitting or denying the allegations, the investment adviser and its owner agreed to pay approximately $470,000 in disgorgement and prejudgment interest, as well as a $130,000 civil penalty.

Later that month, the SEC settled with a private equity fund adviser for allegedly improperly allocating compensation-related expenses to three private equity funds that it advised.[55] According to the SEC, firm employees charged the funds for work unrelated to the three funds, violating the mandates of the

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governing documents of the funds. The alleged wrongdoing spanned four years. The firm cooperated extensively with the SEC, and the Commission accounted for those remedial efforts in settlement. The firm agreed to more than $2 million in disgorgement and a civil monetary penalty of $375,000. In a similar case also filed in December, the SEC settled with a fund manager for inadequate disclosures regarding certain expense allocations, as well as the alleged failure to disclose potential conflicts of interest arising from certain third-party service providers.[56] Without admitting or denying the SEC's allegations, the company agreed to pay $1.9 million in disgorgement and prejudgment interest and a $1 million civil penalty to settle the charges.

At the end of December, the SEC settled with a private equity investment adviser in connection with allegations of improper expense allocations.[57] According to the SEC, the investment adviser manages private equity funds and as well as co-investment funds on behalf of the company's employees. The two types of funds invest alongside each other. When the adviser sought to acquire certain portfolio companies, co-investors were able to provide additional capital to invest. According to the SEC, over the course of approximately fifteen years, the adviser failed to allocate certain expenses on a proportional basis between the private equity funds and the co-investor funds. In connection with settlement, the SEC acknowledged that, following an examination by the Commission's Office of Compliance Inspections and Examinations but prior to being contacted by the Division of Enforcement staff, the adviser proactively made full reimbursements, with interest, to affected funds. The adviser agreed to pay a civil money penalty of $400,000.

The SEC also brought a number of cases involving wrap fee programs.

In August, an investment advisory firm settled allegations that it lacked policies and procedures to provide investors with sufficient information for investors to evaluate the appropriateness of their investments in the company's wrap fee programs.[58] Without admitting or denying the allegations, the firm agreed to pay a $200,000 civil penalty and to undertake efforts to enhance its procedures. And in September, an affiliated investment adviser settled allegations that it failed to disclose conflicts of interest in connection with wrap fee programs.[59] According to the SEC, over the course of three years, the investment adviser recommended that its clients invest in wrap fee programs, one of which was sponsored by the investment adviser. Without admitting or denying the allegations, the company agreed to pay a $100,000 civil penalty.

B. Conflicts of Interest

In July, the SEC filed a settled administrative proceeding against the managing partner and chief compliance officer of a private equity fund adviser, alleging that he arranged for one of his funds to make a loan to a portfolio company, the proceeds of which were used to purchase his personal interest in the company.[60] The SEC alleged that the manager failed to disclose the conflicted transaction to the fund's limited partnership advisory committee. The manager agreed to pay a civil money penalty of $80,000 without admitting or denying the allegations. The SEC's order noted that the fund ultimately did not lose any money on the transaction.

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In late August, the SEC instituted settled proceedings against an investment adviser in connection with alleged failures to disclose a conflict of interest relating to third-party products.[61] According to the SEC, the adviser's retail advisory accounts were invested in third-party products that a U.S. subsidiary of a foreign bank managed. In contravention of established practice, the adviser's governance committee did not vote on a proposed recommendation to terminate the third-party products, and instead later permitted new adviser accounts to invest in these products. In so doing, according to the SEC, the adviser did not disclose a conflict of interest. Without admitting or denying the allegations, the adviser agreed to pay nearly $5 million in disgorgement and prejudgment interest, as well as a $4 million penalty.

C. Fraud and Other Misconduct

In July, the SEC charged a Connecticut-based advisory firm and its CEO with placing around $19 million of investor funds into risky investments, including into companies in which they had an ownership stake, while charging large commissions on top of those investments.[62] The complaint further alleged that the company overbilled some of its clients by calculating fees based on the earlier value of investments that had decreased in value. The case is being litigated.

In August, a Michigan-based investment management firm and its representative settled claims that they had engaged in a cherry-picking scheme.[63] According to the SEC, the representative disproportionately allocated profitable trades to favored accounts, including personal and family accounts, at the expense of other clients. The firm agreed to pay $75,000, and the individual respondent agreed to pay approximately $450,000 in disgorgement and penalties and to be barred from the industry. The following month, the SEC pursued similar cherry-picking claims against a Louisiana-based adviser and its co-founder.[64] That case is being litigated. According to the SEC, it was the sixth case arising out of a recent initiative to combat cherry picking.

September was a particularly busy month, as the SEC settled a number of fraud-based cases with investment advisers. The SEC settled charges with two New York City-based investment advisers and their 100% owner and president.[65] The advisers allegedly engaged in a complex scheme to conceal the loss in the value of their clients' assets by making false statements, improperly redeeming investments, and failing to disclose a variety of conflicts of interest. To settle the charges, the advisers agreed to jointly and severally pay disgorgement of approximately $1.85 million and a civil penalty of $600,000.

Also in September, the SEC charged a hedge fund adviser and its principal with running a "short and distort" scheme, taking a short position and then making a series of false statements to shake investor confidence and lower the stock price of a publicly-traded pharmaceutical company.[66] According to the SEC, the fund used written reports, interviews and social media to spread untrue claims, driving the stock price down by more than a third. The matter is being litigated.

Later that month, the SEC settled with an asset manager, its former president, and its former CFO.[67] The asset manager and former president were charged with fraudulently using investor funds to purchase interests in products offered by the firm's parent corporation to benefit the parent, at which the former president also worked. The individuals were also charged with improperly adjusting fund

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returns to show more favorable results to investors. No charges were pursued against the parent corporation because of its prompt reporting of the misconduct, extraordinary cooperation with the SEC, and the reimbursement of around $1 million to adversely impacted investors. The company settled for more than $4.2 million in penalties and disgorgement. The former president and CFO agreed to pay penalties, and the president also agreed to a three-year bar from the securities industry.

Early in December, an investment company settled charges of improperly recording and distributing taxable dividends, when those monies should have been recorded as return of capital.[68] According to the SEC, while the error was not quantitatively large, it impacted a key metric used by investors and analysts to evaluate performance. The only sanction imposed was a cease-and-desist order. The firm admitted that its conduct violated federal securities laws and consented to the imposition of the order.

D. Share Class Selection

The SEC has been particularly focused on advisers which recommend mutual funds to clients without adequately disclosing the availability of less expensive share classes. In February 2018, the Division of Enforcement announced its Share Class Selection Disclosure Initiative, under which the Division agreed not to recommend financial penalties against advisers which self-report violations of the federal securities laws relating to mutual fund share class selection and promptly return money to victimized investors. While the SEC has yet to announce any enforcement actions resulting from the self-reporting initiative, it has filed a number of actions against advisers which did not self-report such violations.

In August, the SEC filed a settled administrative proceeding against a Utah-based investment adviser and broker-dealer relating to mutual fund distribution fees, known as 12b-1 fees.[69] According to the SEC, for more than four years, the company, in its capacity as a broker-dealer, reaped compensation in the form of 12b-1 fees due to its clients' mutual fund investments. However, the company, in its capacity as an investment adviser, disclosed to advisory clients that it did not receive compensation from the sale of mutual funds. In addition, the adviser recommended more expensive share classes of certain mutual funds when cheaper shares of the same funds were available. The company agreed to pay over $150,000 to compensate advisory clients and a $50,000 civil money penalty.

In mid-September, the SEC filed a settled administrative proceeding against a limited liability company in connection with 12b-1 fees.[70] According to the SEC, for approximately three years, the adviser improperly collected 12b-1 fees from clients by recommending more expensive mutual fund share classes with 12b-1 fees when lower-cost share classes, without 12b-1 fees, were available. Further, the SEC alleged that the adviser received, but did not disclose, compensation it received when the adviser invested its clients in certain no-transaction fee mutual funds. The SEC acknowledged remedial acts undertaken and the company's cooperation with the Commission. The adviser agreed to pay over $1.3 million in disgorgement and penalties.

On the same day in late December, the SEC settled two additional share class selection cases. In the first, a Tennessee-based investment adviser settled charges in connection with the recommendation and sale of higher-fee mutual fund shares when less expensive share classes were available.[71] The SEC alleged that for a period of approximately four years, the company's president and investment adviser

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representative were the top two recipients of avoidable 12b-1 fees. The investment adviser agreed to pay approximately $850,000 in disgorgement and prejudgment interest, as well as $260,000 as a civil penalty; collectively, the two individuals agreed to pay approximately $430,000 in disgorgement and prejudgment interest, in addition to $140,000 in civil penalties. In the second case, the SEC settled charges with two investment advisers and a CEO of one of the firm on the ground that, despite the availability of less expensive share classes of the same funds, advisory clients' funds were invested in mutual fund share classes that paid 12b-1 fees to the firms' investment adviser representatives.[72] In total, the investment advisers and CEO agreed to pay more than $1.8 million to settle the charges.

E. Misleading Disclosures

The SEC brought a number of cases alleging misleading disclosures and omissions in the second half of 2018. In July, the SEC announced a settlement with a California-based investment adviser and its majority owner.[73] In the firm's written disclosures to clients, the firm allegedly made material misstatements about the firm's financial condition – most saliently, omitting to disclose the firm was insolvent during the relevant period and was operating on $700,000 in loans. The SEC also alleged that the firm improperly withheld refunds of prepaid advisory fees from clients who requested via email to terminate their relationships. The firm and its majority owner agreed to pay $100,000 and $50,000 respectively in civil monetary penalties to settle the charges.

In August, the SEC settled two cases based on failures to disclose and misleading disclosures by investment advisers. First, a Boston–based employee-owned hedge fund sponsor settled with the SEC over allegations of omissions, misrepresentations, and compliance failures relating to its practices which resulted in materially different redemption amounts when the fund lost value in a short period of time.[74] The allegations included a failure to implement a compliance program consistent with the adviser's obligations under the Advisers Act, a lack of disclosure to all investors of their option to redeem their investment in the fund, and inaccurate statements concerning assets in the Form ADV filed annually with the SEC. The firm agreed to pay a civil penalty of $150,000.

Four days later, the SEC settled with four related investment adviser entities for allegedly misleading investors through the use of faulty investment models.[75] According to the SEC, the quantitative investment models contained errors, and after discovering the issue the firms discontinued their use but did not disclose the errors. The entities agreed to pay $97 million in disgorgement and penalties without admitting liability. Two individual defendants, the former Chief Investment Officer and the former Director of New Initiatives of one of the entities, were also charged and settled with civil penalties of $65,000 and $25,000 respectively.

Also in August, the SEC filed a litigated case against a Buffalo-based advisory firm and principal.[76] According to the SEC, in anticipation of an SEC imposed bar, the owner of the firm sold the firm to his son. Yet, after the imposition of the bar, his son failed to apprise clients of the bar and made misleading statements when clients inquired about the bar. Moreover, the father allegedly impersonated his son when on phone calls with clients.

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A Massachusetts-based investment manager settled with the SEC on the final day of August.[77] The company allegedly disseminated advertisements touting hypothetical returns based on blended research strategies while failing to disclose that some key quantitative ratings were determined using a retroactive, back-tested application of the financial model. The company agreed to pay a civil penalty in the amount of $1.9 million to settle the allegations of violating the Advisers Act by publishing, circulating, and distributing advertisements containing misleading statements of material fact.

In the first week of September, the SEC settled with a private investment firm and its managing partner for allegedly failing to provide limited partners in a fund with material information related to a change in the valuation of the fund.[78] The respondents jointly agreed to pay a civil penalty in the amount of $200,000. A week later, the SEC filed a lawsuit against an Indianapolis-based investment advisory firm and its sole owner for omitting to disclose that the firm and its owner would receive commissions of almost 20% on sales of securities which it encouraged its clients to buy.[79] The latter case is being litigated.

In December, the SEC settled with a California-based registered investment adviser for material misstatements and omissions in its advertising materials, allegedly inflating the results and success of the back-tested performance for one of its indexes over the course of eight years.[80] The adviser agreed to pay a civil penalty of $175,000.

And in late December, the SEC brought its first enforcement action against robo-advisers for misleading disclosures.[81] Robo-advisers provide software-based, automated portfolio management services. In the first robo-adviser case, the company disclosed to clients that it would monitor client accounts for "wash sales," which could negate the tax-loss harvesting strategy it provided to clients. According to the SEC, however, for approximately three years the adviser did not provide such monitoring, and wash sales took place in almost one-third of accounts enrolled in the tax-loss harvesting program. This robo-adviser agreed to pay a $250,000 penalty. In a separate case, a second robo-adviser agreed to settle charges that it provided misleading performance information on its website and social media. According to the SEC, the company purported to show its investment performance as compared to robo-adviser competitors, but only included a small fraction of its client accounts in the comparison. This adviser agreed to pay a $80,000 penalty to settle the matter.

F. Other Investment Adviser Issues

Supervision and Oversight

In August, the SEC announced a settled action against a Minnesota-based diversified financial services company that had allegedly failed to protect retail investor assets from theft by its agents.[82] The SEC alleged that the respondents' agents, many of whom pled guilty to criminal charges, committed fraudulent actions such as stealing client funds and forging client documents. The company allegedly failed to adopt and implement policies and procedures reasonably designed to safeguard investor assets against misappropriation by its representatives. The company agreed to pay a penalty of $4.5 million to settle the charges.

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In November, the SEC settled charges with a formerly registered investment adviser and its former CEO for negligently failing to perform adequate due diligence on certain investments.[83] The SEC alleges that the firm failed to implement and reasonably design compliance policies and procedures which led to a failure to escalate and advise clients regarding concerns surrounding the investments, which turned out to be fraudulent. Without admitting or denying the allegations, the firm agreed to pay a $400,000 civil penalty and the CEO agreed to a $45,000 civil penalty.

Cross-Trades

The SEC brought a handful of cases involving cross-trades between client accounts which favored one client at the expense of another. In August, an investment adviser settled allegations that it had engaged in mispriced cross trades that resulted in the allocation of market savings to selected clients.[84] According to the SEC, approximately 15,000 cross trades were executed at the bid price, resulting in the allocation of market savings to the adviser's buying clients, while depriving selling clients of market savings. The SEC further alleged that the adviser cajoled broker-dealers into increasing the price of certain municipal bonds and executed cross trades at these inflated prices, thereby causing buying advisory clients to overpay in these transactions. To settle the matter, the adviser agreed to reimburse its clients over $600,000, plus interest, and pay a $900,000 penalty. The following month, the SEC instituted a similar settled administrative proceeding against a Texas-based investment adviser for failing to disclose two cross trades, causing its clients to sustain $125,000 in brokerage fees.[85]

Also in September, the SEC brought a settled action against a Boston firm and one of its portfolio managers, alleging that they facilitated a number of pre-arranged cross-trades between advisory client accounts that purposefully benefited certain clients at the expense of others.[86] In addition to paying a $1 million penalty, the company agreed to reimburse approximately $1.1 million to its harmed clients. The former portfolio manager agreed to pay a $50,000 penalty and to submit to a nine-month suspension.

Testimonial Rule Violations

In July, the SEC instituted five distinct settled proceedings against two registered investment advisers, three investment adviser representatives, and one marketing consultant in connection with violations of the Testimonial Rule, which bars investment advisers from publishing testimonial advertisements.[87] The advertisements were published on social media and YouTube. The civil penalties ranged from $10,000 to $35,000 for each of the individuals.

In September, a Kansas-based investment adviser and its president/majority owner agreed to settle charges in connection with violations of the Testimonial Rule and ethics violations.[88] The SEC alleges that the investment adviser broadcast advertisements through the radio, and one of the radio hosts later became a client and broadcast his experience. According to the SEC, the investment adviser contravened its policies by not monitoring the radio coverage. The firm agreed to pay a civil penalty of $200,000. Separately, the company's president/majority owner violated the company's code of ethics by not reporting transactions in brokerage accounts held for the benefit of his family. He agreed to pay a civil penalty of $50,000.

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Pay To Play Abuses

There were two "pay to play" cases settled on the same day in July. In the first matter, the SEC alleged that three associates of a California-based investment adviser made campaign contributions to candidates who had the ability to decide on the investment advisers for public pension plans.[89] Within two years of the contributions, in contravention of the Advisers Act, the investment adviser received compensation in connection with advising the public pension plans. The investment adviser agreed to pay a civil penalty of $100,000. In the other case, the SEC alleged that the firm's associates made contributions in a number of states, and the investment adviser similarly received payment to advise public pension plans in those states.[90] The investment adviser agreed to pay a $500,000 civil penalty to settle the charges.

Custody Rule Compliance

The second half of the year entailed two Custody Rule cases against New York-based investment advisory firms. Neither firm distributed annual audited financial statements in a timely fashion. In the July matter, the SEC also alleged that the investment adviser lacked policies and procedures to preclude violations of the Advisers Act. Without admitting or denying the allegations, the adviser agreed to pay a $75,000 civil penalty.[91] In the September matter, the SEC also alleged that the firm violated the Compliance Rule by failing to review its policies and procedures on an annual basis.[92] Without admitting or denying the allegations, the adviser agreed to pay $65,000 as a civil penalty.

IV. Brokers and Financial Institutions

A. Supervisory Controls and Internal Systems Deficiencies

In the latter half of 2018, the SEC brought a number of cases relating to failures of supervisory controls and internal systems – an increase in this area over the first half of the year. As part of its ongoing initiative into American Depositary Receipt ("ADR") practices, the SEC brought numerous cases relating to the handling of ADRs—U.S. securities that represent foreign shares of a foreign company and require corresponding foreign shares to be held in custody at a depositary bank. In July, the SEC announced settled charges against two U.S. based-subsidiaries, a broker-dealer and a depositary bank, of an international financial institution alleging improper ADR handling that led to facilitating inappropriate short selling and profits.[93] Without admitting or denying the allegations, the subsidiaries agreed to pay $75 million in disgorgement and penalties. In September, the SEC brought settled charges against a broker-dealer and subsidiary of a French financial institution; the broker-dealer agreed to pay approximately $800,000 in disgorgement and penalties without admitting or denying the findings.[94] In December, the SEC settled charges against a depositary bank; the bank agreed to pay $38 million in disgorgement and penalties without admitting or denying the findings. [95]

And finally, also in December, the SEC brought settled charges in two cases for providing ADRs to brokers when neither the broker nor its customer owned the corresponding foreign shares. In the first December case, the SEC settled charges with a depositary bank headquartered in New York; the bank agreed to disgorgement, interest, and penalties of approximately $55 million without admitting or denying the charges.[96] In the second case, the SEC settled charges with another depositary bank, a subsidiary of a large New York financial services firm.[97] The SEC's order alleged that the improper

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ADR handling led to inappropriate short selling and dividend arbitrage. The firm agreed to pay over $135 million in disgorgement, and penalties without admitting or denying the charges.

In addition to the ADR cases, the SEC also brought supervision cases for the failure to safeguard customer information and for the failure to supervise representatives who sold unsuitable products. In July, the SEC brought settled charges against an international investment banking firm for failing to maintain and enforce policies and procedures designed to protect confidential customer information, including the failure to maintain effective information barriers.[98] The SEC's order alleged that traders at the bank regularly disclosed material nonpublic customer stock buyback information to other traders and hedge fund clients; the bank agreed to a $1.25 million penalty without admitting or denying the charges. In September, the SEC announced settled charges against a New York-based broker-dealer and two of its executives for failure to supervise representatives in sales of a leveraged exchange-traded note ("ETN") linked to oil.[99] The SEC's order alleged that the broker-dealer's representatives did not reasonably research or understand the risks of the ETN or the index it tracked. The broker-dealer agreed to pay over $500,000 in penalties, interest, and customer disgorgement without admitting or denying the charges, and the two executives agreed to penalties as well as a 12-month supervisory suspension. The broker who recommended the largest number of ETN sales also agreed to a penalty of $250,000.

Along with the supervisory cases described above, the SEC also brought a few cases relating to internal controls. In August, the SEC announced settled charges in two cases against a large financial institution and two subsidiary broker-dealers involving books and records, internal accounting controls, and trader supervision.[100] The charges in one action related to losses due to trader mismarking and unauthorized proprietary trading, which the SEC alleged were not discovered earlier due to a failure to supervise. In the second action, the SEC alleged that the bank lacked controls necessary to prevent certain fraudulent loans. The financial institution and subsidiaries agreed to pay over $10 million without admitting or denying the allegations.

Also in August, the SEC initiated settled proceedings against a credit ratings agency for alleged internal controls deficiencies relating to a purported failure to consistently apply credit ratings symbols which were used in models used to rate residential mortgage backed securities.[101] The ratings agency agreed to pay over $16 million without admitting or denying the allegations.

B. Anti-Money Laundering

As in the first half of the year, the SEC continued to bring a number of cases in the anti-money laundering ("AML") area, all relating to the failure to file suspicious activity reports ("SARs"). The Bank Secrecy Act requires broker-dealers to file SARs to report transactions suspected to involve fraud or with no apparent lawful purpose.

In July, the SEC announced the settlement with a national broker-dealer relating to the failure to file SARs on the transactions of independent investment advisers that it had terminated.[102] The broker-dealer agreed to pay a $2.8 million penalty to settle the action, without admitting or denying the charges. Similarly, in September, the SEC instituted a settled administrative proceeding against a New York brokerage firm for failing to file SARs relating to a number of terminated investment

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advisers.[103] Without admitting or denying the allegations, the firm agreed to pay a penalty of $500,000; the SEC's Order noted that the settlement took into account remedial acts undertaken by the firm. Also in September, the SEC settled charges against a clearing firm for failure to file SARs relating to suspicious penny stock trades.[104] As part of the settlement, the clearing firm agreed to pay a penalty of $800,000 without admitting or denying the allegations, and also agreed that it would no longer sell penny stocks deposited at the firm.

In December, the SEC brought settled charges against a broker-dealer alleging that during the period 2011-2013 it neglected to monitor certain movements of funds through customers' accounts and to properly review suspicious transactions flagged by its internal monitoring systems.[105] The firm agreed to pay a $5 million penalty to resolve the charges, as well as a $10 million penalty to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) and the Financial Industry Regulatory Authority (FINRA) to resolve parallel charges. The broker-dealer did not admit or deny the SEC's allegations except to the extent they appeared in the settlement with FinCEN.

Also In December, the SEC announced settled charges against a broker-dealer for the failure to file SARs concerning over $40 million in suspicious wire transfers made by one customer in connection with a payday lending scam.[106] The firm agreed to certain undertakings, including the hiring of an independent compliance consultant, without admitting or denying the allegations. The U.S. Attorney's Office for the Southern District of New York also instituted a settled civil forfeiture action against the broker-dealer in which it paid $400,000; the U.S. Attorney's Office additionally entered into a deferred prosecution agreement with the firm.

C. Market Abuse Cases

In the second half of 2018, the SEC's Market Abuse Unit was involved in bringing three cases relating to "dark pools" (i.e., private exchanges) and the use and execution of customer orders. In September, the SEC announced settled charges against a large financial institution relating to alleged misrepresentations in connection with the operation of a dark pool by one of its affiliates.[107] The SEC alleged that the firm misled customers relating to high-frequency trading taking place in the pool and also failed to disclose that over half of the orders routed to the dark pool were executed in other trading venues. The firm and its affiliate agreed to pay over $12 million in disgorgement and penalties without admitting or denying the SEC's allegations.

Also in September, the SEC, together with the New York Attorney General ("NYAG"), brought settled charges against an investment bank relating to the execution of customer orders by one of its desks responsible for handling order flow for retail investors.[108] The SEC alleged that while the firm promoted the desk's access to dark pool liquidity, a minimal number of orders were executed in dark pools; additionally, the firm allegedly failed to disclose that retail customers did not receive price improvement on non-reportable orders. The firm agreed to pay a total of $10 million ($5 million to the SEC and $5 million to the NYAG) without admitting or denying the allegations.

And in November, the SEC brought charges against a financial technology company and its affiliate for misstatements and omissions relating to the operation of the firm's dark pool.[109] The SEC alleged

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that the firm failed to safeguard subscribers' confidential trading information despite assuring firm clients that it would do so, and also did not disclose certain structural features of the dark pool to clients. The firm and its affiliate agreed to pay a $12 million penalty to settle the charges without admitting or denying the allegations.

D. Books and Records

In July, the SEC brought settled charges against a New York-based broker-dealer relating to its failure to preserve records.[110] The SEC alleged that the broker-dealer deleted audio files after receiving a document request from the Division of Enforcement (because the department responsible for the files was unaware of the request), and also failed to maintain books and records that accurately recorded expenses. Without admitting or denying the allegations, the firm agreed to pay a penalty of $1.25 million.

In September, the SEC announced charges against a broker-dealer for providing the SEC with incomplete and deficient securities trading information known as "blue sheet data" used by the SEC in its investigations.[111] The SEC's order alleged that approximately 29% of the broker-dealer's blue sheet submissions over a four-year time period contained deficiencies due to coding errors. The broker-dealer admitted the findings in the SEC's Order and agreed to pay a $2.75 million penalty to settled the charges. In December, the SEC instituted settled administrative proceedings against three broker-dealers for recordkeeping violations in another matter relating to deficient blue sheet data submissions.[112] The SEC's Orders noted that as a result largely of undetected coding errors, the three firms submitted blue sheet data that continued various inaccuracies. The three broker-dealers admitted the findings in the SEC's Orders and agreed to pay penalties totaling approximately $6 million. The SEC's Orders noted the remedial efforts undertaken by the firms, including the retention of an outside consultant and the adoption of new policies and procedures for processing blue sheet requests.

E. Individual Brokers

Finally, in addition to its cases involving large financial institutions, the SEC brought a number of cases against individual broker-dealer representatives. In September, the SEC filed complaints against two brokers in New York and Florida for excessive trading in retail customer accounts which generated large commissions for the brokers but caused losses for their customers.[113] The case is being litigated.

Also in September, the SEC filed a complaint against a broker for a cherry-picking scheme in which the broker allegedly misused his access to an allocation account to cherry pick profitable trades for his own account while placing unprofitable trades in customer accounts.[114] The SEC noted that it uncovered the alleged fraud using data analysis. The case is being litigated, and the U.S. Attorney's Office for the District of Massachusetts announced parallel criminal charges.

Finally, in December, the SEC settled with a self-employed trader (and entities that he owned and controlled) for violations of Rule 105 of Regulation M, which prohibits a person from purchasing an equity security during the restricted period of an offering where that person has sold short the same security.[115] The SEC's Order alleged that the trader violated Rule 105 by effecting short sales during restricted periods and mismarking short sales as "long sales" in a total of 116 offerings. The trader

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agreed to pay disgorgement, interest, and penalties total approximately $1.1 million without admitting or denying the charges

V. Insider Trading

A. Cases Against Corporate Insiders

Corporate Executives

July was a busy month for corporate executives accused of insider trading and tipping. First, the SEC charged the former CEO of a New Jersey-based payment processing company and his romantic partner in an insider trading scheme that leveraged nonpublic information about the potential acquisition of his company by another payment processing company.[116] On the CEO's instructions and with his funds, the romantic partner opened a brokerage account and used almost $1 million of the funds to purchase stock in the target company. According to the SEC, the pair generated $250,000 in profits after the merger was announced. The case is being litigated.

The SEC also settled with a former VP of Investor Relations at a company operating country clubs and sports clubs alleged to have traded in his company's stock after learning that it was negotiating to be acquired.[117] After receiving an inquiry from FINRA, the officer resigned from the company and retained counsel who reported the misconduct to the SEC and provided them substantiating documentation. In return, the SEC agreed to a settlement that involved disgorgement of his profits of approximately $78,000 and a civil penalty equal to about one-half of the disgorgement amount.

Later in July, the SEC sued a senior executive at a Silicon Valley tech company for allegedly short selling as well as selling stock in his company ahead of three different quarterly announcements that the company was likely going to miss its revenue guidance.[118] According to the SEC, the executive made nearly $200,000 in profits from these trades. Without admitting wrongdoing, the executive agreed to disgorge his profits and pay a corresponding civil penalty, and to bebarred from acting as an officer or director of a public company for five years. The SEC noted that it had utilized data analysis from its Market Abuse Unit's Analysis and Detection Center to detect suspicious trading patterns in advance of earnings announcements over time.

And at the end of July, the SEC sued a VP of Finance who learned from a senior executive at his company that a Chinese investment group might acquire the company.[119] While preparing financial projections and conducting diligence, the VP allegedly used his spouse's brokerage account to purchase shares of his company. When it became public that his company had rejected the Chinese investment group's offer in the hopes of receiving a higher price, the company's share increased 24%, resulting in the VP earning nearly $90,000. Without admitting liability, the officer agreed to disgorgement of his gains and a corresponding civil penalty.

In August, the SEC charged a former biotech executive and others with participating in a scheme that generated $1.5 million of profits by trading ahead of the announcement of a licensing agreement between his company and another large pharmaceutical company.[120] According to the complaint, the executive informed a friend of the license agreement. The friend then tipped a former day trader, who,

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in connection with an insider-trading ring, purchased stock and options and made $1.5 million in illegal profits when the agreement was announced and the company's stock price jumped 38 percent. In a parallel action, the U.S. Attorney's Office for the District of New Jersey charged the day trader and four members of his group with illegal insider trading ahead of secondary public stock offerings. All five defendants have pled guilty to the parallel criminal charges; the four members of the insider-trading ring other than the trader have agreed to partial settlements with the SEC for conduct including their trading on the license agreement, with potential monetary sanctions to be determined at a later date. The SEC is continuing a previous action against the trader for alleged insider trading ahead of the secondary stock offerings.

In August, the SEC sued a former Sales VP at a cemetery and funeral home operator for allegedly benefiting from confidential information obtained through his employer.[121] After learning about a substantial decline in sales that would necessitate a reduction in the company's distribution payments, the executive sold all of his shares in the company. As part of a settlement, the executive agreed to pay disgorgement and a civil penalty.

Also in August, the SEC settled charges against a former executive of a cloud security and services company.[122] According to the SEC, the executive informed his two brothers, to whom he had gifted stock in the past, that the company would miss its revenue guidance, and contacted his brothers' brokerage firm to coordinate the sale of all of their stock. When the negative news was announced, the stock price dropped significantly and the brothers collectively avoided losses of over $580,000. Under the terms of his settlement, the former executive will be barred from serving as an officer or director of a public company for two years and will pay a $581,170 penalty.

In September, the SEC brought a settled action against a former executive at a mortgage servicing company.[123] The SEC alleged that the executive engaged in insider trading surrounding three separate events, including the resolution of litigation and a CFPB enforcement action against the company, as well as negotiations to sell the company. Without admitting or denying the allegations, the executive agreed to disgorge his ill-gotten gains of almost $65,000 and to pay a penalty equal to the disgorgement amount.

In October, the SEC charged a company's former Director of SEC Reporting with trading ahead of a corporate acquisition.[124] The complaint alleged that the individual bought call options and stock in a company targeted for acquisition by a subsidiary of the company. The matter is being litigated.

In November, the acquisition of two health care networks by a large health care company led to two separate misappropriation cases. The SEC charged a man with insider trading based on information he misappropriated from his wife, a human resources executive at the acquiring company, about the planned acquisitions.[125] According the SEC, the man overheard his wife's phone calls while she was working at home. The husband agreed to pay disgorgement of about $64,000 and a penalty of $72,144. The SEC also settled an insider trading charge against a man alleged to have misappropriated information from his brother, an executive at one of the target companies.[126] According to the SEC, the insider had shared the information in confidence at a family holiday party. The trader agreed to pay disgorgement and penalties totaling about $40,000.

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Board Members

In a high profile case involving drug trials, the SEC and DOJ filed parallel charges for insider trading against a U.S. Congressman, his son, and a host of other individuals.[127] According to the SEC's complaint, the Congressman learned of negative drug trial results through his seat on a biotech company's board. The Congressman allegedly provided his son the inside information, who then told a third individual. Over the next few days, the Congressman's son, the third individual, and a number of their friends and family members sold over a million shares of the biotech company's stock, which plummeted more than 92 percent following the announcement of the negative results. As a result of the trading, the Congressman's son and the third individual avoided approximately $700,000 in losses. Two of the individuals sued ultimately settled with the SEC without admitting or denying the charges, agreeing to disgorge their gains totaling approximately $35,000 and to pay a matching civil penalty. The SEC's cases against the Congressmen, his son, and a third individual are ongoing.

In August, the SEC sued the son of a bank board member who learned of the bank's potential acquisition by another bank from his father prior to the acquisition's public announcement.[128] The son realized approximately $40,000 in gains after the acquisition became public. Without admitting or denying the charges, the son agreed to disgorge the gains and to pay a matching civil penalty.

Employee Insiders

In July, the SEC sued a former financial analyst at a medical waste disposal company and his mother for trading on inside information that the company would miss its revenue guidance.[129] Following the company's earnings announcement, its stock fell 22%, resulting in the analyst and his mother avoiding losses and earning profits of approximately $330,000. Both the analyst and his mother agreed to settle the case without admitting liability. They will be required to disgorge their profits and pay a civil penalty in amounts to be later determined by the court.

Also in July, in the second SEC case arising out of the Equifax data breach, the SEC charged a software engineer tasked with constructing a website for consumers who were impacted by the data breach for trading the company's stock before the data breach was publicly disclosed .[130] The engineer was fired after refusing to cooperate with the company's investigation, though he and the SEC ultimately settled the case. As part of that settlement, the engineer was ordered to disgorge $75,000 in profits. The U.S. Attorney's Office also filed criminal charges against the engineer.

The SEC also filed a number of cases involving corporate scientists. In July, the SEC charged a scientist at a California biotech company for trading based on positive developments in a genetic sequencing platform.[131] According to the SEC, the scientist traded during company trading blackouts, in a brokerage account not disclosed to his employer. He settled the case, agreeing to disgorge approximately $40,000 in profits and paying a similar civil penalty. In August, the SEC filed suit against a scientist who learned that his healthcare diagnostics company was about to acquire another company in a tender offer.[132] On the date the acquisition was announced, his company's stock increased 176%. As part of the settlement, the scientist agreed to disgorge $14,000 in profits and pay a corresponding civil penalty. And in a third case, the SEC settled with a scientist at a pharmaceutical company for allegedly

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trading in advance of positive results of a clinical trial.[133] The scientist agreed to disgorgement of $134,000, but based on her voluntarily coming forward and reporting her improper trades, the SEC agreed to a reduced penalty of $67,000.

The SEC brought charges in August against an in-house attorney for a shipping company who traded on inside information that his company had entered into a strategic partnership with a private equity fund.[134] As part of a settlement, he was ordered to disgorge nearly $30,000 in profits with a matching civil penalty.

And in September, the SEC charged a former professional motorcycle racer handling promotional activities for a beverage company, as well as his father, family friend, and investment adviser, with insider trading for tipping and trading ahead of an impending deal with a large beverage company.[135] According to the SEC, after the racer had learned a significant deal was imminent, the four individuals collectively purchased over $770,000 in stock and options, in certain instances borrowing funds for the purchases. Following the announcement, they made over $283,000 in trading profits. Without admitting or denying the findings, the individuals agreed to disgorge ill-gotten gains and to pay civil penalties.

B. Misappropriation by Investment Professionals and Other Advisors

Several deal advisors, including bankers, corporate advisors, and accountants, were charged with insider trading by the SEC. In August, the SEC charged a professional football player and a former investment banker with insider trading in advance of corporate acquisitions.[136] The SEC alleges that after meeting at a party, the player began receiving illegal tips, facilitated through coded text messages and FaceTime conversations, from the banker about upcoming corporate mergers. The player allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired, in one instance generating a nearly 400 percent return. In return, he is alleged to have rewarded the analyst by setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star's music video in which the player made a cameo appearance. The SEC action is being litigated; both men have pled guilty to related criminal charges. In November, the SEC also charged a family friend of the banker in connection with the same scheme.[137] The U.S. Attorney's Office announced parallel criminal charges against this individual.

In September, the SEC filed insider trading charges against a corporate deal advisor for trading in securities of two China-based companies based on confidential information about their impending acquisitions.[138] According to the SEC, the individual, who had been providing advice to the acquiring companies, opened a brokerage account in his wife's name and used that account to generate more than $79,500 in trading profits. That same executive later became a director at a Hong Kong-based investment banking firm. In connection with advising a client on an acquisition of its rival, he was alleged to have again used his wife's brokerage account to buy high risk call options, which he sold after news of the acquisition for profits of more than $94,400. The case is being litigated.

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And in December, the SEC charged an individual with misappropriating information from his fiancé, an investment banker working on a merger between two airline companies.[139] According to the SEC, the trader overheard calls his now-wife made at home on nights and weekends, purchasing call options in the target company and netting approximately $250,000 in profits. Without admitting or denying liability, the trader agreed to disgorge his profits and pay a matching penalty.

Also in December, the SEC alleged that an IT contractor working at an investment bank had traded, and tipped his wife and father, based on information he'd learned from the bank.[140] According to the SEC, the three collectively reaped approximately $600,000 in profits by trading in advance of at least 40 corporate events. The SEC obtained a court-ordered freeze of assets in multiple brokerage accounts connected to the alleged trading.

The SEC brought several cases against accountants and their tippees. In August, the SEC brought a settled action against a CPA who learned of an acquisition through his work as an accountant providing tax advice to a private company owned by a member of one of the companies.[141] The individual agreed to disgorge his profits of approximately $8,000 and pay a matching civil penalty.

Also that month, the SEC sued a former director of a major accounting and auditing firm for trading ahead of a merger between two of the firm's clients.[142] According to the SEC, after learning of the planned merger, the director used a relative's account to purchase call options, which increased in value by about $150,000 following announcement of the merger. Though the director later allowed the options to expire without selling or exercising them, he did not inform his employer that he controlled the account when the relative's name appeared on a list of individuals in connection with a FINRA investigation into suspect trading. Without admitting liability, the director agreed to pay a $150,500 penalty and to be barred from appearing and practicing before the SEC as an accountant for two years.

The SEC brought several other cases involving misappropriation by industry professionals. In July 2018, the SEC settled charges against a broker who traded ahead of a multi-billion dollar acquisition.[143] According to the SEC, the broker misappropriated the information from a friend who was a certified public accountant providing personal tax advice to a senior executive at the company being acquired, and who had shared the information in confidence. Without admitting liability, he agreed to disgorgement of his nearly $90,000 in profits, a comparable civil penalty, and debarment from being a broker. And in September, the SEC settled a claim against a CPA and a doctor for allegedly trading while in possession of confidential information regarding an impending acquisition.[144] According to the SEC, the CPA misappropriated the information from a friend who worked at one of the companies. The SEC alleges that after the CPA shared the information with the doctor, both purchased call options in the target company. Both the CPA and doctor agreed to pay disgorgement and civil penalties.

VI. Municipal Securities and Public Finance Cases

With the SEC's Municipalities Continuing Disclosure (MCDC) Initiative (which as noted above generated a significant number of cases) completed, the SEC's Public Finance Abuse Unit returned to its traditionally slower pace, filing just a few cases in the latter half of the year.

27

In August, the SEC charged two firms and 18 individuals with participating in a municipal bond "flipping" scheme (i.e. improperly obtaining new bond allocations from brokers and reselling to broker-dealers for a fee.[145] According to the SEC, the firms and their principals used false identities to pose as retail investors in order to receive priority from the bond underwriters, and then resold the bonds to brokers for a pre-arranged commission. The SEC also charged a municipal underwriter with taking kickbacks as part of the scheme. Most of the parties settled (with sanctions including disgorgement, penalties, and industry bars and suspensions), but aspects of the case are being litigated as well. The SEC filed another settled case for municipal bond flipping in December.[146]

In September, the SEC instituted a settled action against a municipal adviser and its principal for failing to register as municipal advisor and failing to disclose its nonregistration to a school district to which it provided services.[147] The firm and its principal agreed to pay about $50,000 in disgorgement and penalties, and the principal agreed to be barred from the securities industry.

[1] Admin. Proc. File No. 3-18965, In re Hertz Global Holdings, Inc. (Dec. 31, 2018), available at www.sec.gov/litigation/admin/2018/33-10601.pdf.

[2] Admin. Proc. File No. 3-18966, In re Katz, Sapper & Miller, LLP (Jan. 9, 2019), available at www.sec.gov/litigation/admin/2019/34-84980.pdf.

[3] See SEC Press Release, SEC Enforcement Division Issues Report on FY 2018 Results (Nov. 2, 2018), available at www.sec.gov/news/press-release/2018-250; and accompanying Annual Report at www.sec.gov/files/enforcement-annual-report-2018.pdf.

[4] For more on Kokesh, see Gibson Dunn Client Alert, United States Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct (June 5, 2017), available at www.gibsondunn.com/united-states-supreme-court-limits-sec-power-to-seek-disgorgement-based-on-stale-conduct/.

[5] For more on Lucia, see Gibson Dunn Client Alert, Supreme Court Rules That SEC ALJs Were Unconstitutionally Appointed (June 21, 2018), available at www.gibsondunn.com/supreme-court-rules-that-sec-aljs-were-unconstitutionally-appointed.

[6] Whistleblower Program, 2018 Annual Report to Congress, available at www.sec.gov/files/sec-2018-annual-report-whistleblower-program.pdf.

[7] SEC Press Release, SEC Awards more Than $54 Million to Two Whistleblowers (Sept. 6, 2018), available at www.sec.gov/news/press-release/2018-179.

[8] SEC Press Release, Whistleblower Receives Award of Approximately $1.5 Million (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-194.

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[9] SEC Press Release, SEC Awards Almost $4 Million to Overseas Whistleblower (Sept. 24, 2018), available at www.sec.gov/news/press-release/2018-209.

[10] SEC Press Release, SEC Charges Firm with Deficient Cybersecurity Procedures (Sept. 26, 2018), available at www.sec.gov/news/press-release/2018-213.

[11] SEC Press Release, SEC Investigative Report: Public Companies Should Consider Cyber Threats When Implementing Internal Controls (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236.

[12] For further discussion, see Gibson Dunn Client Alert, SEC Warns Public Companies on Cyber-Fraud Controls (Oct. 27, 2018), available at www.gibsondunn.com/sec-warns-public-companies-on-cyber-fraud-controls/.

[13] SEC Press Release, SEC Charges ICO Superstore and Owners with Operating as Unregistered Broker-Dealers (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-185.

[14] SEC Press Release, SEC Charges Digital Asset Hedge Fund Manager with Misrepresentations and Registration Failures (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-186.

[15] SEC Press Release, SEC Charges EtherDelta Founder with Operating an Unregistered Exchange (Nov. 8, 2018), available at www.sec.gov/news/press-release/2018-258.

[16] SEC Press Release, Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities (Nov. 16, 2018), available at www.sec.gov/news/press-release/2018-264.

[17] Admin. Proc. File No. 3-18906, In re Floyd Mayweather Jr. (Nov. 29, 2018), available at www.sec.gov/litigation/admin/2018/33-10578.pdf; SEC Admin. Proc. File No. 3-18907, In re Khaled Khaled (Nov. 29, 2018), available at www.sec.gov/litigation/admin/2018/33-10579.pdf.

[18] SEC Press Release, SEC Suspends Trading in Company for Making False Cryptocurrency-Related Claims about SEC Regulation and Registration (Oct. 22, 2018), available at www.sec.gov/news/press-release/2018-242.

[19] SEC Press Release, SEC Stops Fraudulent ICO That Falsely Claimed SEC Approval (Oct. 11, 2018), available at www.sec.gov/news/press-release/2018-232.

[20] R. Todd, Judge to SEC: You Haven't Shown This ICO Is a Security Offering, The Recorder (Nov. 27, 2018), available at www.law.com/therecorder/2018/11/27/judge-to-sec-this-ico-isnt-a-security-offering/.

[21] SEC Press Release, SEC Charges Bitcoin-Funded Securities Dealer and CEO (Sept. 27, 2018), available at www.sec.gov/news/press-release/2018-218.

29

[22] Admin. Proc. File No. 3-18582, SEC Charges Pipe Manufacturer and Former CFO with Reporting and Accounting Violations (July 10, 2018), available at www.sec.gov/enforce/33-10517-s.

[23] SEC Press Release, SEC Charges Telecommunications Expense Management Company with Accounting Fraud (Sept. 4, 2018), available at www.sec.gov/news/press-release/2018-175.

[24] SEC Litigation Release, SEC Charges Outsourced CFO with Accounting Controls Deficiencies (Sept. 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24265.htm.

[25] SEC Press Release, Business Services Company and Former CFO Charged With Accounting Fraud (Sept. 20, 2018), available at www.sec.gov/news/press-release/2018-205.

[26] Admin. Proc. File No. 3-18816, Pipeline Construction Company Settles Charges Relating to Internal Control Failures (Sept. 21, 2018), available at www.sec.gov/enforce/34-84251-s.

[27] SEC Press Release, SEC Charges Salix Pharmaceuticals and Former CFO With Lying About Distribution Channel (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-221.

[28] Admin. Proc. File No. 3-18891, Tobacco Company Settles Accounting and Internal Control Charges (Nov. 9, 2016), available at www.sec.gov/enforce/34-84562-s. For a description of the company's remedial measures, see www.sec.gov/litigation/admin/2018/34-84562.pdf.

[29] SEC Press Release, SEC Charges Agria Corporation and Executive Chairman With Fraud (Dec. 10, 2018), available at www.sec.gov/news/press-release/2018-276.

[30] SEC Press Release, SEC Charges The Hain Celestial Group with Internal Controls Failures (Dec. 11, 2018), available at www.sec.gov/news/press-release/2018-277.

[31] Admin. Proc. File No. 3-18932, SEC Charges Santander Consumer for Accounting and Internal Control Failures (Dec. 17, 2018), available at www.sec.gov/enforce/34-84829-s.

[32] SEC Press Release, Public Companies Charged with Failing to Comply with Quarterly Reporting Obligations (Sept. 21, 2018), available at www.sec.gov/news/press-release/2018-207.

[33] SEC Press Release, SEC Charges KBR for Inflating Key Performance Metric and Accounting Controls Deficiencies (July 2, 2018), available at www.sec.gov/news/press-release/2018-127.

[34] SEC Press Release, SEC Charges Cloud Communications Company and Two Senior Executives With Misleading Revenue Projections (Aug. 7, 2018), available at www.sec.gov/news/press-release/2018-150.

[35] SEC Press Release, SEC Charges Former Online Marketing Company Executives With Inflating Operating Metrics (Aug. 21, 2018), available at www.sec.gov/news/press-release/2018-161.

[36] Admin. Proc. File No. 3-18819, SEC Charges Payment Processing Company and Former CEO for Overstating Key Operating Metric (Sept. 21, 2018), available at www.sec.gov/enforce/33-10558-s.

30

[37] Admin. Proc. File No. 3-18955, In re ADT Inc. (Dec. 26, 2018), available at www.sec.gov/litigation/admin/2018/34-84956.pdf.

[38] Admin. Proc. File No. 3-18570, Dow Chemical Agrees to $1.75 Million Penalty and Independent Consultant for Failing to Disclose Perquisites (July 2, 2018), available at www.sec.gov/enforce/34-83581-s.

[39] SEC Press Release, SEC Charges Oil Company CEO, Board Member With Hiding Personal Loans (July 16, 2018), available at www.sec.gov/news/press-release/2018-133.

[40] SEC Litigation Release, SEC Charges Real Estate Investment Funds and Executives for Misleading Investors (July 3, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24185.htm.

[41] Admin. Proc. File No. 3-18770, SEC Charges Arizona Company And Two Senior Executives In Connection With Misleading Disclosures About Material Contract (Sept. 17, 2018), available at www.sec.gov/enforce/33-10550-s.

[42] SEC Press Release, SeaWorld and Former CEO to Pay More Than $5 Million to Settle Fraud Charges (Sept. 18, 2018), available at www.sec.gov/news/press-release/2018-198.

[43] SEC Press Release, Biopharmaceutical Company, Executives Charged With Misleading Investors About Cancer Drug (Sept. 18, 2018), available at www.sec.gov/news/press-release/2018-199.

[44] SEC Press Release, SEC Charges Walgreens and Two Former Executives With Misleading Investors About Forecasted Earnings Goal (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-220.

[45] SEC Press Release, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge (Sept. 29, 2018), available at www.sec.gov/news/press-release/2018-226.

[46] Admin. Proc. File No. 3-18838, In re Lichter, Yu and Associates, Inc. et al. (Sept. 25, 2018), available at www.sec.gov/litigation/admin/2018/34-84281.pdf.

[47] SEC Press Release, SEC Suspends Former BDO Accountants for Improperly "Predating" Audit Work Papers (Oct. 12, 2018), available at www.sec.gov/news/press-release/2018-235.

[48] SEC Press Release, SEC Charges Audit Firm and Suspends Accountants for Deficient Audits (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-302.

[49] Admin. Proc. File No. 3-18856, SEC Charges Drone Seller for Failing to Ensure Accuracy of Financial Statement in Advance of Planned IPO (Sept. 28, 2018), available at www.sec.gov/enforce/33-10564-s.

31

[50] SEC Litigation Release, SEC Charges Medical Aesthetics Company and Its Former CEO with Misleading Investors in a $60 Million Stock Offering (Sept. 19, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24275.htm.

[51] SEC Press Release, SEC Charges Giga Entertainment Media, Former Officers and Directors with Fraud in Pay-For-Download Campaign (Nov. 15, 2018), available at www.sec.gov/news/press-release/2018-263.

[52] Admin. Proc. File No. 3-18901, SEC Charges San Jose Investment Adviser for Overcharging Fees (Nov. 19, 2018), available at www.sec.gov/enforce/ia-5065-s.

[53] Admin. Proc. File No. 3-18909, Investment Adviser Settles Charges Related to Expense Misallocation and Valuation Review Failures (Dec. 3, 2018), available at www.sec.gov/enforce/33-10581-s.

[54] Admin. Proc. File No. 3-18926, SEC Charges Milwaukee-Based Advisory Firm for Receiving Undisclosed Compensation on Client Transactions (Dec. 12, 2018), available at www.sec.gov/enforce/34-84807-s.

[55] Admin. Proc. File No. 3-18935, SEC Charges Private Equity Fund Adviser for Overcharging Expenses (Dec. 17, 2018), available at www.sec.gov/enforce/ia-5079-s.

[56] Admin. Proc. File No. 3-18930, SEC Settles with Investment Adviser Who Failed to Disclose Conflicts of Interest and Misallocated Expenses (Dec. 13, 2018), available at www.sec.gov/enforce/ia-5074-s.

[57] Admin Proc. File No. 3-18958, In re Lightyear Capital LLC (Dec. 26, 2018), available at www.sec.gov/litigation/admin/2018/ia-5096.pdf.

[58] Admin. Proc. File No. 3-18638, SEC Charges Investment Adviser for Compliance Failures Relating to Wrap Fee Programs (Aug. 14, 2018), available at www.sec.gov/enforce/ia-4984-s.

[59] Admin. Proc. File No. 3-18730, SEC Charges Investment Adviser for Failing to Fully Disclose Affiliate Compensation Arrangement (Sept. 7, 2018), available at www.sec.gov/enforce/ia-5002-s.

[60] Admin. Proc. File No. 3-18604, In re Michael Devlin (July 19, 2018), available at www.sec.gov/litigation/admin/2018/ia-4973.pdf.

[61] SEC Press Release, Merrill Lynch Settles SEC Charges of Undisclosed Conflict in Advisory Decision (Aug. 20, 2018), available at www.sec.gov/news/press-release/2018-159.

[62] SEC Press Release, SEC Charges Investment Adviser and CEO with Misleading Retail Investors (July 18, 2018), available at www.sec.gov/news/press-release/2018-137.

32

[63] Admin. Proc. File No. 3-18649, In re Roger T. Denha (Aug. 17, 2018), available at www.sec.gov/litigation/admin/2018/34-83873.pdf; Admin. Proc. File No. 3-18648, In re BKS Advisors LLC (Aug. 17, 2018), available at www.sec.gov/litigation/admin/2018/ia-4987.pdf.

[64] SEC Litigation Release, SEC Charges Investment Adviser and Senior Officers with Defrauding Clients (Sept. 20, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24278.htm.

[65] Admin. Proc. File No. 3-18724, In re Mark R. Graham et al. (Sept. 6, 2018), available at www.sec.gov/litigation/admin/2018/ia-5000.pdf.

[66] SEC Litigation Release, SEC Charges Hedge Fund Adviser with Short-And-Distort Scheme (Sept. 13, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24267.htm.

[67] SEC Press Release, SEC Charges LendingClub Asset Management and Former Executives With Misleading Investors and Breaching Fiduciary Duty (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-223.

[68] Admin. Proc. File No. 3-18912, In re KCAP Financial, Inc. (Dec. 4, 2018), available at www.sec.gov/litigation/admin/2018/34-84718.pdf.

[69] Admin. Proc. File No. 3-18673, In re First Western Advisors (Aug. 24, 2018), available at www.sec.gov/litigation/admin/2018/34-83934.pdf.

[70] Admin. Proc. File 3-18765, In re Capital Analysts, LLC (Sept. 14, 2018), available at www.sec.gov/litigation/admin/2018/ia-5009.pdf.

[71] Admin. Proc. File No. 3-18952, SEC Charges Tennessee Investment Advisory Firm and Two Advisory Representatives with Steering Clients to Higher-Fee Mutual Fund Share Classes (Dec. 21, 2018), available at www.sec.gov/enforce/34-84918-s.

[72] SEC Press Release, Two Advisory Firms, CEO Charged With Mutual Fund Share Class Disclosure Violations (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-303.

[73] Admin. Proc. File No. 3-18607, SEC Charges Beverly Hills Investment Adviser for Improper Fees and False Filings (July 20, 2018), available at www.sec.gov/enforce/ia-4975-s.

[74] Admin. Proc. File No. 3-18657, In re Aria Partners GP, LLC (Aug. 22, 2018), available at www.sec.gov/litigation/admin/2018/ia-4991.pdf.

[75] SEC Press Release, Transamerica Entities to Pay $97 Million to Investors Relating to Errors in Quantitative Investment Models (Aug. 27, 2018), available at www.sec.gov/news/press-release/2018-167.

33

[76] SEC Press Release, SEC Charges Buffalo Advisory Firm and Principal With Fraud Relating to Association With Barred Adviser (Aug. 30, 2018), available at www.sec.gov/news/press-release/2018-172.

[77] Admin. Proc. File No. 3-18704, In re Mass. Financial Services Co. (Aug. 31, 2018), available at www.sec.gov/litigation/admin/2018/ia-4999.pdf.

[78] Admin. Proc. File No 3-18729, In re VSS Fund Mmgt. LLC and Jeffrey T. Stevenson (Sept. 7, 2018), available at www.sec.gov/litigation/admin/2018/ia-5001.pdf.

[79] SEC Press Release, SEC Charges Investment Advisers With Defrauding Retail Advisory Clients (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-195.

[80] Admin. Proc. File No. 3-18948, In re Sterling Global Strategies LLC (Dec. 20, 2018), available at www.sec.gov/litigation/admin/2018/ia-5085.pdf.

[81] SEC Press Release, SEC Charges Two Robo-Advisers With False Disclosures (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-300.

[82] SEC Press Release, SEC Charges Ameriprise Financial Services for Failing to Safeguard Client Assets (Aug. 15, 2018), available at www.sec.gov/news/press-release/2018-154.

[83] Admin. Proc. File No. 3-18884, SEC Charges Advisory Firm With Due Diligence and Monitoring Failures (Nov. 6, 2018), available at www.sec.gov/enforce/ia-5061-s.

[84] Admin. Proc. File No. 3-18636, SEC Charges Investment Adviser With Mispricing Cross Trades Between Clients (Aug. 10, 2018), available at www.sec.gov/enforce/ia-4983-s.

[85] Admin. Proc. File No. 3-18767, In re Cushing Asset Management, LP (Sept. 14, 2018), available at www.sec.gov/litigation/admin/2018/ic-33226.pdf.

[86] Admin. Proc. File No. 3-18844, SEC Orders Putnam to Pay $1 Million Penalty, Suspends and Fines Former Portfolio Manager for Prearranged Cross-Trades (Sept. 27, 2018), available at www.sec.gov/enforce/ia-5050-s.

[87] Admin. Proc. File Nos. 3-18586, 3-18587, 3-18588, 3-18589, 3-18590, SEC Charges Investment Advisers and Representatives for Violating the Testimonial Rule Using Social Media and the Internet (July 10, 2018), available at www.sec.gov/enforce/3-18586-90-s.

[88] Admin. Proc. File No. 3-18779, Investment Adviser and Its President Settle Charges for Testimonial Rule and Code of Ethics Violations (Sept. 18, 2018), available at www.sec.gov/enforce/ia-5035-s.

[89] Admin. Proc. File No. 3-18585, In re Oaktree Capital Management, L.P. (July 10, 2018), available at www.sec.gov/litigation/admin/2018/ia-4960.pdf.

34

[90] Admin. Proc. File No. 3-18584, In re EnCap Investments L.P. (July 10, 2018), available at www.sec.gov/litigation/admin/2018/ia-4959.pdf.

[91] Admin. Proc. File No. 3-18599, Investment Adviser Settles Charges for Custody Rule Violations (July 17, 2018), available at www.sec.gov/enforce/ia-4970-s.

[92] Admin. Proc. File No. 3-18837, Investment Adviser Settles Charges for Custody Rule and Compliance Rule Violations (Sept. 25, 2018), available at www.sec.gov/enforce/ia-5047-s.

[93] SEC Press Release, Deutsche Bank to Pay Nearly $75 Million for Improper Handling of ADRs (Jul. 20, 2018), available at www.sec.gov/news/press-release/2018-138.

[94] SEC Press Release, SG Americas Securities Charged for Improper Handling of ADRs (Sept. 25, 2018), available at www.sec.gov/news/press-release/2018-211.

[95] SEC Press Release, Citibank to Pay More Than $38 Million for Improper Handling of ADRs (Nov. 7, 2018), available at www.sec.gov/news/press-release/2018-255.

[96] Admin. Proc. File No. 3-18933, In re Bank of New York Mellon (Dec. 17, 2018), available at www.sec.gov/litigation/admin/2018/33-10586.pdf.

[97] SEC Press Release, JPMorgan to Pay More Than $135 Million for Improper Handling of ADRs (Dec. 26, 2018), available at www.sec.gov/news/press-release/2018-306.

[98] SEC Press Release, SEC Charges Mizuho Securities for Failure to Safeguard Customer Information (Jul. 23, 2018), available at www.sec.gov/news/press-release/2018-140.

[99] SEC Press Release, SEC Obtains Relief to Fully Reimburse Retail Investors Sold Unsuitable Product (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-184.

[100] SEC Press Release, Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls (Aug. 16, 2018), available at www.sec.gov/news/press-release/2018-155-0.

[101] SEC Press Release, SEC Charges Moody's With Internal Controls Failures and Ratings Symbols Deficiencies (Aug. 28, 2018), available at www.sec.gov/news/press-release/2018-169.

[102] SEC Litigation Release, SEC Charges Charles Schwab with Failing to Report Suspicious Transactions (Jul. 9, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24189.htm.

[103] Admin. Proc. File No. 3-18829, In the Matter of TD Ameritrade, Inc. (Sept. 24, 2018), available at www.sec.gov/litigation/admin/2018/34-84269.pdf.

[104] SEC Press Release, Brokerage Firm to Exit Penny stock Deposit Business and Pay Penalty for Repeatedly Failing to Report Suspicious Trading (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-225.

35

[105] Admin. Proc. File No. 3-18931, SEC Charges UBS Financial Services Inc. with Anti-Money Laundering Violations (Dec. 17, 2018), available at www.sec.gov/enforce/34-84828-s.

[106] Admin. Proc. File No. 30-18940, Broker-Dealer Settles Anti-Money Laundering Charges (Dec. 19, 2018), available at www.sec.gov/enforce/34-84851-s.

[107] SEC Press Release, SEC Charges Citigroup for Dark Pool Misrepresentations (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-193.

[108] SEC Press Release, Credit Suisse Agrees to Pay $10 Million to Settle Charges Related to Handling of Retail Customer Orders (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-224.

[109] SEC Press Release, SEC Charges ITG With Misleading Dark Pool Subscribers (Nov. 7, 2018), available at www.sec.gov/news/press-release/2018-256.

[110] SEC Press Release, SEC Charges BCG Financial for Failure to Preserve Documents and Maintain Accurate Books and Records (Jul. 17, 2018), available at www.sec.gov/news/press-release/2018-134.

[111] SEC Press Release, Broker-Dealer to Pay $2.75 Million Penalty for Providing Deficient Blue Sheet Data (Sept. 13, 2018), available at www.sec.gov/news/press-release/2018-191.

[112] SEC Press Release, Three Broker-Dealers to Pay More Than $6 Million in Penalties for Providing Deficient Blue Sheet Data (Dec. 10, 2018), available at www.sec.gov/news/press-release/2018-275.

[113] SEC Press Release, SEC Charges Two Brokers With Defrauding Customers (Sept. 10, 2018), available at www.sec.gov/news/press-release/2018-183.

[114] SEC Press Release, SEC Uses Data Analysis to Detect Cherry-Picking By Broker (Sept. 12, 2018), available at www.sec.gov/news/press-release/2018-189.

[115] Admin. Proc. File No. 3-18941, In the Matter of Andrew Nicoletta et al. (Dec. 19, 2018), available at www.sec.gov/litigation/admin/2018/34-84876.pdf.

[116] SEC Litigation Release, SEC Charges Former Heartland CEO, Romantic Partner in Insider Trading Scheme (Jul. 10, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24191.htm.

[117] SEC Litigation Release, SEC Charges Former Executive for Insider Trading (Jul. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24186.htm.

[118] SEC Press Release, SEC Detects Silicon Valley Executive's Insider Trading (Jul. 24, 2018), available at www.sec.gov/news/press-release/2018-142.

[119] Admin. Proc. File No. 3-18618, SEC Charges VP of Finance with Insider Trading (Jul. 31, 2018), available at www.sec.gov/enforce/34-83742-s.

36

[120] SEC Litigation Release, SEC Charges Former Pharma Executive and Others with Insider Trading (Aug. 23, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24245.htm.

[121] Admin. Proc. File No. 3-18665, In re James T. Lentz (Aug. 22, 2018), available at www.sec.gov/litigation/admin/2018/33-10535.pdf.

[122] SEC Litigation Release, SEC Charges Former Senior Executive At Silicon Valley Company with Insider Trading (Aug. 30, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24251.htm.

[123] SEC Litigation Release, SEC Charges Former Vice President of Ocwen Financial Corporation with Insider Trading (Sept. 28, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24298.htm.

[124] SEC Litigation Release, SEC Charges Ebay's Former Director of SEC Reporting with Insider Trading (Oct. 16, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24317.htm.

[125] SEC Litigation Release, SEC Charges Husband with Insider Trading Ahead of Announcements by Wife's Employer (Nov. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24340.htm.

[126] SEC Litigation Release, SEC Charges California Software Consultant with Insider Trading (Nov. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24338.htm.

[127] SEC Press Release, SEC Charges U.S. Congressman and Others With Insider Trading (Aug. 8, 2018), available at www.sec.gov/news/press-release/2018-151; see also SEC Litigation Release, SEC Announces Settlement with Two Traders in Innate Insider Trading Case (Aug. 16, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24236.htm.

[128] Admin. Proc. File No. 34-83795, SEC Charges California Bank Board Member's Son with Insider Trading (Aug. 7, 2018), available at www.sec.gov/enforce/34-83795-s.

[129] SEC Litigation Release, SEC Charges Former Stericycle Financial Analyst and His Mother with Insider Trading (Jul. 24, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24212.htm.

[130] SEC Litigation Release, Former Equifax Manager Charged With Insider Trading (Jul. 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24183.htm.

[131] SEC Litigation. Release, Former Biotech Company Employee Charged with Insider Trading (Jul. 10, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24194.htm.

[132] SEC Litigation Release, SEC Charges Scientist for Insider Trading (Aug. 1, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24221.htm.

[133] Admin. Proc. File No. 3-18645, In re Honglan Wang (Aug. 16, 2018), available at www.sec.gov/litigation/admin/2018/34-83857.pdf.

[134] Admin. Proc. File No. 3-18655, SEC Charges Former In-House Counsel with Insider Trading (Aug. 21, 2018), available at www.sec.gov/enforce/34-83896-s.

37

[135] SEC Press Release, SEC Charges Former Professional Motorcycle Racer, his Investment Adviser, and Others With Insider Trading (Sept. 27, 2018), available at www.sec.gov/enforce/34-84304-s.

[136] SEC Press Release, SEC Charges NFL Player and Former Investment Banker With Insider Trading (Aug. 29, 2018), available at www.sec.gov/news/press-release/2018-170.

[137] SEC Press Release, SEC Charges Family Friend of Former Investment Banker With Insider Trading (Nov. 2, 2018), available at www.sec.gov/news/press-release/2018-251.

[138] SEC Litigation Release, SEC Charges Acquisition Advisor with Insider Trading (Sept. 14, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24269.htm.

[139] SEC Litigation Release, SEC Charges Husband of Investment Banker with Insider Trading (Dec. 17, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24375.htm.

[140] SEC Press Release, SEC Halts Alleged Insider Trading Ring Spanning Three Countries (Dec. 6, 2018), available at www.sec.gov/news/press-release/2018-273.

[141] SEC Litigation Release, SEC Charges Certified Public Accountant with Insider Trading (Aug. 21, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24240.htm.

[142] Admin. Proc. File No. 3-18652, Former Director At Major Accounting Firm Settles Insider Trading Charges (Aug. 20, 2018), available at www.sec.gov/enforce/34-83889-s.

[143] Admin. Proc. File No. 3-18574, In re Michael Johnson (July 6, 2018), available at www.sec.gov/litigation/admin/2018/34-83602.pdf.

[144] Admin. Proc. File No. 3-18858, In re Unal Patel (Sept. 28, 2018), available at www.sec.gov/litigation/admin/2018/34-84315.pdf.

[145] SEC Press Release, SEC Files Charges in Municipal Bond "Flipping" and Kickback Schemes (Aug. 14, 2018), available at www.sec.gov/news/press-release/2018-153.

[146] Admin. Proc. File No. 3-18936, SEC Charges Former Municipal Bond Salesman with Fraudulent Trading Practices (Dec. 18, 2018), available at www.sec.gov/enforce/33-10587-s.

[147] Admin. Proc. File No. 3-18803, SEC Bars Head of Unregistered Municipal Advisory Firm for Failing to Disclose Material Facts to School District (Sept. 20, 2018), available at www.sec.gov/enforce/34-84224-s.

38

The following Gibson Dunn lawyers assisted in the preparation of this client update: Marc Fagel, Amy Mayer, Andrew Paulson, Tina Samanta, Elizabeth Snow, Craig Streit, Collin James Vierra,

Timothy Zimmerman and Maya Ziv.

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39

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© 2019 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Vol. 52 No. 3 February 6, 2019

MARC J. FAGEL and MARK K. SCHONFELD are partners in

Gibson, Dunn & Crutcher’s San Francisco and New York offices,

respectively, and co-chairs of the firm’s Securities Enforcement

Practice Group. Before joining the firm, they served as Regional

Directors in the SEC’s San Francisco and New York regional

offices, respectively. Their e-mail addresses are

mfagel@gibsondunn.com and mschonfeld@gibsondunn.com.

Co-author DAN LI, not currently admitted to the practice of law,

is an associate in the firm’s New York office.

INSIDE THIS ISSUE

● IMPLICATIONS AND OPPORTUNITIES OF LUCIA V. SEC, Page 27

● CLE QUESTIONS, Page 31

February 6, 2019 Page 21

SEC ENFORCEMENT DIVISION ISSUES ITS 2018 REPORT CARD

The SEC’s fiscal 2018 enforcement report summarizes the number and types of enforcement actions pursued by the SEC’s Enforcement Division over the past year. The authors discuss the data and assess the trends and priorities highlighted by the report.

By Marc J. Fagel, Mark K. Schonfeld, and Dan Li *

On November 2, 2018, the Securities and Exchange

Commission’s Division of Enforcement reported its

results for the fiscal year ended September 30, 2018.1

The annual report assesses the nearly 500 new cases

filed by the agency over the past year.

For decades, the Enforcement Division of the

Securities and Exchange Commission has debated –

internally – how best to measure its effectiveness at

enforcing the federal securities laws. After all, numbers

alone – whether it is the number of cases filed,

defendants charged, or sanctions ordered – do not tell the

whole story. In fact, if the measure of success is

whether the Commission is able to anticipate and

———————————————————— 1 See SEC Press Release, SEC Enforcement Division Issues

Report on FY 2018 Results (Nov. 2, 2018), available at

www.sec.gov/news/press-release/2018-250. The report is

available at www.sec.gov/files/enforcement-annual-report-

2018.pdf.

proactively assess and mitigate emerging risks, the

historical numbers may actually tell us little. Even

worse, a focus on metrics alone can create perverse

incentives for the Division to pursue easy cases rather

than more complex matters that may have far greater

market impact.

This year, that debate took on a public face as senior

management and Commissioners gave speeches echoing

similar themes – that quantitative metrics are not the best

measure of the success of an enforcement and regulatory

agency. One couldn’t help but wonder if the public

discussion was an exercise in expectation-management

for a year of numerical declines. As it turned out, the

numbers were actually up year-over-year, although,

depending on how the numbers are tabulated, down from

the prior administration.

Beneath the surface of the numbers, the Enforcement

Division emphasizes how it has dedicated attention and