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29 Jan 2018
CFTC – Err on the Side of Caution

The Commodity Futures Trading Commission aims to “foster open, transparent, competitive, and financially sound markets” by ensuring the derivatives markets is free from fraud and manipulation.[1] The CFTC notices the significant impact of cryptocurrencies on the market, especially in light of bitcoin’s popularity, however the Commission is wary of the lack of enforcement as it announced the third case of fraud within a week.

On January 24, 2018 the CFTC discovered that the cryptocurrency known as “My Big Coin” from My Big Coin Pay Inc., founded by Randall Carter and Mark Gillespie, fraudulently induced 28 people to invest a total of $6 million. What did Carter and Gillespie do with the funds from My Big Coin? Law360 reports they used the funds for “shopping sprees and [to] pay off earlier investors.”[2] The lack of regulation coupled with the public’s eagerness to purchase cryptocurrencies has created unprotected gaps in the market leaving investors vulnerable to fraud. Fraudulent market participants are capitalizing on the hype of bitcoin by creating their own “coins” and advertising false promises to potential consumers.  Carter and Gillespie assured investors that their cryptocurrency was “widely accepted as MasterCard, that it was back by gold and that there was a genuine market for it”.[3] Unfortunately for the 28 investors, these allegations were false. Chief James McDonald of the CFTC stated: “The CFTC is actively policing the virtual currency markets and will vigorously enforce the anti-fraud provisions of the Commodity Exchange Act”.[4]

What is in store for the future of cryptocurrency and blockchain technology regulation? The Securities and Exchange Commission and CFTC stated: “A key issue before market regulators is whether our historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets.”[5] Technological advancements create the potential for investors to drive the market. Regulations need to be set in place as currently market participants are increasingly vulnerable to fraud and manipulation. However, current policies were not created to regulate such technological practices such as cryptocurrency exchanges and blockchain technology. The law and regulations are living instruments – they are designed to be challenged and restructured in light of new obstacles. It is imperative that agencies implement new policies that truly reflect the needs of the market.

Tips for investors to avoid cryptocurrency fraud:

  • Consult the CFTC and SEC websites. Both Commissions provide a series of guidelines and notes on what to look out for.
  • Do your due diligence! Research the cryptocurrency and ensure it is being traded on a bona fide platform. Ask: Is the product and offering legal? Can I sell when I want to? Does the product comply with existing fintech regulations?
  • Speak to your financial advisor to understand the inherent risks.

[1] U.S. Commodity Futures Trading Commission. “Mission and Responsibilities.” Available at: Accessed on Jan. 25, 2018.

[2] Newsham, Jack. (Jan. 24, 2018). “CFTC Announces 3rd Cryptocurrency Fraud Suit in 1 Week.” Law360. Available at: Accessed on Jan. 25, 2018.

[3] Ib.

[4] Ib.

[5] SEC. (Jan. 25, 2018) “Statements by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo: Regulators are Looking at Cryptocurrency.” SEC. Available at: Accessed on Jan. 25, 2018.

19 Jan 2018
Financing Bitcoin?

Bitcoin continues to be the most popular cryptocurrency. Despite its fluctuating value, investors are still drawn to investing in the cryptocurrency and using it for financing purposes. Financing secured by bitcoin could help increase the cryptocurrency’s value. However, because cryptocurrency regulations are in the early stages, there are a variety of obstacles in the way.

Bitcoin uses blockchain technology, a decentralized digital ledger, which allows users to anonymously transfer payments on the internet without an intermediary, such as a financial institution. How are payments tracked? Since blockchain is not centralized, the users control the database using cryptographic keys. These keys essentially secure the users financial assets and the ledger will track every purchase or transfer bitcoin. There are two types of keys, public and private. Where the public key provides the blockchain users identity, the private key allows the user to send the cryptocurrency. The private key, however, should not be shared with anyone. This is what creates a security problem when securing bitcoin for financing.

Can bitcoin be used to secure financing? The issue is that the law has not developed at the same pace as the technology, so how can bitcoin be used as collateral for a loan and provide the lender security, such as in the event of bankruptcy? Article 9 of the Uniform Commercial Code (UCC) provides provisions regulating security interests in property. Typically a commodity is used as collateral for a loan, however, cryptocurrencies do not fall neatly within its provisions because regulators cannot agree on what cryptocurrencies are. Cryptocurrencies have been defined as “virtual currenc[ies]”, “property” and even a “commodit[ies]”, but this does not provide clear guidelines.[1] Matthew Frankle and Nora Wong suggest that in order to perfect a security interest for cryptocurrencies, such as bitcoin, and satisfy Article 9 of the UCC, “the lender would need a security agreement with the borrower to establish the lien and to file a financing statement in the borrower’s jurisdiction.”[2]

However, although this may fulfill the requirements for the UCC, it falls short it other areas. The issue relates to the blockchain and the use of private keys. At the moment, although the technology is protected, it does not provide adequate security for the lender as a third party can be aware of the key and transaction and the lender lacks full control. “To alleviate the risk of destruction or theft of the collateral, no untrusted third party must know or have access to the private key.”[3] There have been instances where individuals have lost their private keys; this possibility creates a risk to the lender.[4] To secure bitcoin for financing the technology and regulators need to find a solution that alleviates a risk to lenders, protects their interest, and ensures there is actual delivery to the lender.

[1] Frankle, M. and Wong, N. (Jan. 18, 2018) “The Challenges of Bitcoin Financing.” Law360. Available at: Accessed on Jan. 19, 2018.

[2] Ib.

[3] Ib.

[4] Ib. See footnote 27.

12 Jan 2018
The Rise of Cryptocurrencies

In 2017 the value of Bitcoin surged by 1,200 percent, ending the year at a value over $19,000 per Bitcoin. Although the value has decreased to around $13,000 today, Bitcoin remains the strongest cryptocurrency. The combination of more companies implementing blockchain technology and the surge of cryptocurrency investors has created a competitive market. Bitcoin may be the most popular, but it is not the only digital currency at the table.

The New York Times compiled a list of the top cryptocurrencies that puts Ripple in second place. [1] Ripple (XRP), which started in 2012, saw a 35,000 percent growth in 2017. Ripple provides the platform to “send money globally” with blockchain technology.[2] Its members include American Express, Santander, MUFG Bank of Tokyo Mitsubishi UFG, UBS and many more. Ripple is “the world’s only enterprise blockchain solution for global payments.”[3] Ripple’s coin XRP can be purchased by individuals with a variety of exchanges such as Kraken and CoinOne.[4]

NEM (XEM), a cryptocurrency and blockchain platform, grew by 29,000 percent in 2017. NEM’s coin XEM, which can be purchased with bitcoin or traditional currency, even provides an additional safety measure called multi signature accounts to secure your cryptocurrency.

Stellar (XLM) was created by Stellar and IBM in an effort to “[improve] the speed of global payments.”[5] Stellar creates an open access “hybrid blockchain” platform that provides all actors equal access to their global financial network. The company aptly describes its model as the “future of banking” as it successfully uses blockchain technology to facilitate secure cross-border transactions. Stellar provides lumens as a digital currency, which can be purchased through Stellar Decentralized Exchange, Kraken and more.[6]

Ethereum (ETH) is a blockchain platform primarily for smart contracts, which allows Ethereum users to even crowdfund new projects. Users can “create a contract that will hold a contributor’s money until any given date or goal is reached. Depending on the outcome, the funds will either be released to the project owners or safely returned back to the contributors.”[7] Whereas Bitcoin is used as a currency, smart contracts have a greater function as they are used as “currency, a presentation of an asset, a virtual share, a proof of membership or anything at all.”[8] Ethereum grew by 9,200 percent in 2017, and can be purchased on platforms such as Coinbase.

Bitcoin Cash (BCH), also available on Coinbase, grew by 500 percent in 2017, but was only released on August 1, 2017. Bitcoin cash was created from Bitcoin as peer-to-peer electronic cash. Bitcoin cash allows investors to send money globally at a low cost within minutes using a secure system.[9]

[1] Reuters. (Jan. 3, 2018) “Bitcoin May Be King, but Ripple Dark Horse in Crypto Currency.” Available at: Accessed on Jan. 12, 2018.

[2] Ripple. Overview. Available at: Accessed on Jan. 12, 2018.

[3] Ripple. Home Page. Available at: Accessed on Jan. 12, 2018.

[4] See

[5] Reuters. (Jan. 3, 2018) “Bitcoin May Be King, but Ripple Dark Horse in Crypto Currency.” Available at: Accessed on Jan. 12, 2018.

[6] See

[7] Ethereum. Home Page. Available at: Accessed on Jan. 12, 2018.

[8] Ib.

[9] See

22 Dec 2017
Protecting Investors with Cybersecurity Measures

In September 2017, the Securities and Exchange Commission (SEC) implemented two initiatives to combat cybersecurity threats and secure the interests of retail investors; the Cyber Unit and the Retail Strategy Task Force. The Cyber Unit, collaborating with the Enforcement Division, targets misconduct on the market such as: market manipulation, hacking non-disclosed information, cyber intrusions and threats on trading platforms and investor accounts, and violations pertaining to blockchain technology and initial coin offerings.[1] The Retail Strategy Task Force specifically aims to protect the interests and welfare of retail investors by identifying market misconduct such as fraud. Stephanie Avakian, Co-Director of the SEC Enforcement Division explains that “[c]yber-related threats and misconduct are among the greatest risks facing investors and the securities industry.”[2] These two initiatives facilitate the SEC in detecting early signs of market misconduct and manipulation.

How can investors protect themselves? Investors should be familiar with the fundamentals of cybersecurity in order to further safeguard their information. In the age of the internet, investors often opt in to receiving information from their broker-dealers online. It is important to know how to respond to suspicious emails or phishing attempts to protect online investment accounts. For instance, if an investor receives an email from their broker regarding a compromise of their account information, before responding to the email or clicking on the provided link, investors should contact their brokers using the contact information on the broker’s website.

How can investors ensure their information is secure on their smart phones and tablets? Make sure that online investment accounts that can be accessed via smartphone applications are password protected and that all apps are up to date. Phones and tablets should be automatically secured by passwords or biometric safeguards, such as thumbprints. Add apps that will allow you to find your phone if it gets lost or stolen and to erase data from phones remotely. The SEC recommends turning off the automatic Wi-Fi setting, particularly in public areas. Instead investors should manually select which Wi-Fi network they want to connect to. If you need to use public Wi-Fi in a café or park, you should use SSL-secured sites only. Browsers such as Google Chrome will specify whether sites are  secure, not secure or dangerous. For additional security measures, you can also download apps created for phones and tablets to prevent and detect viruses or malware.

In case an investor’s online investment account has suspicious or unauthorized activity it is important to immediately notify the brokerage or investment firm. Investors typically have two options, either change the passwords associated with the account or close the account and transfer any assets to a new account.[3] Unauthorized access is typically a result of a data breach or identity theft. To prevent unauthorized access, investors should regularly monitor online investment accounts and credit reports.

“The cloud” allows smartphone, tablet and computer users to easily store and access their information on all devices. To protect sensitive information, such as account numbers and passwords, ensure your cloud provider uses verification and encryption methods or simply do not store those documents online.

Take the SEC’s five question quiz here to see if you are cyber-savvy.

[1] Securities and Exchange Commission. (Sept. 25, 2017) “SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors.” SEC. Available at: Accessed on Dec. 22, 2017.

[2] Ib.

[3] Securities and Exchange Commission. (Sept. 22, 2015) “Investor Alert: Identity Theft, Data Breachesyou’re your Investment Accounts.” Available at: Accessed on Dec. 22, 2017.

15 Dec 2017
Challenges and Opportunities Facing Investors and the SEC in 2018

Earlier this month, SEC Commissioner Kara M. Stein, discussed her views regarding the challenges and opportunities facing investors and investment managers in the current economic climate at the Investment Company Institute’s 2017 Securities Law Developments Conference. The purpose of the conference was to create space for dialogue between the SEC and investment advisers and managers regarding the most pressing matters impacting investors, particularly retail investors. “[I]nvestors need to have confidence in the safety and soundness of investment products … investor trust cannot be designed or manufactures. Trust must be earned – through diligence, through restraint, and through experience.”[1] With this in mind, Stein discussed issues impacting investors in today’s market: disclosures and investor trust.


How will disclosure change in 2018? Over the past thirty years the way investors submit their disclosure forms has become more efficient with technology. Forms can now be easily filed on EDGAR, the SEC’s online company filing database. However, there is always room for improvement. The SEC is committed to expanding their use of technology to help investors make quicker, efficient, and more informed decisions. “[W]e can envision a future where users query SEC data from their smartphones. Or, perhaps even through social media.”[2] Greater use of technology can revolutionize disclosures. If investors could access secure information, provided by the SEC, on their smartphones, tablets, and computers, then disclosures could be designed for each investor in a more comprehensive way. The SEC’s Investment Advisor Committee has also proposed to create summary shareholder reports to be sent to investors either by mail or e-mail. Providing these reports via e-mail will significantly reduce costs of printing and delivery.

Stein expressed her concerns regarding a heavier reliance on technology. For instance, there is a proposed rule, 30e-3, which would make shareholder reports accessible via e-delivery. As e-delivery has proven to be efficient, useful, and environmentally friendly, the issue here is that it would shift the burden onto investors, regardless of whether they opt in to use the e-delivery service. Although many will utilize the electronic access, not everyone will have access to the internet. The SEC must find a balance in 2018 between advancing their systems with technology and protecting the interests of investors.

Investor Trust

The securities market requires investor trust, particularly retail investors. Investment advisers and managers bare a great deal of responsibility – in June 2017, retirement investments made up $26 trillion. Regulating this area has proven to be difficult over the years, although lately, particularly for retirement funds, policies have been implemented to create greater transparency among broker-dealer and investors. Regulations around the globe have attempted to bridge the gap between investors and advisers by enforcing policies to be transparent with fees and expenses, prevent conflicts of interest and bias, and continue to provide high-quality advice. [3] These factors are paramount in fortifying investor trust. Stein suggests that when conflicts arise between investors and advisers, the advisers should settle the conflicts not by applying a one-size-fits-all standard, but by applying the standard that “is appropriate for the conduct in which the person is engaging”[4] – this needs to be the change for 2018.

[1] Stein, Kara M. (Dec. 7, 2017) “Address at Investment Compant Institute’s 2017 Securities Law Developments Conference.” Securities and Exchange Commission, Speeches. Available at: Accessed on Dec. 15, 2017.

[2] Ib.

[3] See Guzov, LLC. “EU Regulation Impact Wall Street”. Available at:; Guzov, LLC. “The Fiduciary Rule: What does it apply to?” Available at:

[4] Op. Cit. n1.

08 Dec 2017
Five More Minutes for the NYSE

In August, the New York Stock Exchange (NYSE) requested the U.S. Securities and Exchange Commission (SEC) to postpone what time public companies disclose their end-of-day news. The NYSE proposed that companies should only release this information at 4:05 p.m. Eastern Time, instead of the official closing at 4:00 p.m., in an effort to limit “price discrepancies and market confusion.”[1] How will five extra minutes realistically impact the market and reduce confusion amongst investors?

The proposal sets out to amend Section 202.6 of the NYSE Listed Company Manual. The purpose of the amendment is to ensure that the Designated Market Maker (DMM), which facilitates closing at 4:00 p.m., is more accurate. Order Imbalance Information is published by the NYSE until 4:00 p.m.; this overlap in time creates price discrepancies. Order Imbalance Information establishes “real-time order imbalance information and information indicating the price at which closing interest may be executed in full and the price at which Exchange Book and closing-only interest may be executed in full.”[2] Because this process is up until 4:00 p.m., the DMM closing process can only take information that is published before 4:00 p.m. The extra five minutes gives companies the time to publish more accurate information within the time it takes for the closing auction, which will make a significant impact on other exchanges that are still open after the NYSE closing auction. Without the five minutes, there are clear pricing discrepancies between the NYSE closing price and the trading price on other markets.

Why five minutes? Other times were previously proposed by the NYSE, such as ten and fifteen, but five minutes is typically the time it take to complete closing auctions at the end of the day. The NYSE’s proposal explains that the five minute “prohibition would mitigate the risk of market disruption and investor confusion associated with the occurrence of significant news-related price volatility on other markets during the brief period between the NYSE’s official closing time and the completion of the closing auction”.[3] In effect, this modification will create a fairer market for investors and market actors.

The SEC on December 4, 2017 approved the NYSE’s proposal and declared it complied with the standards of the Securities and Exchange Act. Public companies must now either wait until 4:05 p.m. to publish their end-of-day news or until closing auctions are finished, depending on which ends first. Are there any exceptions? Yes, if it is a “non-intentional disclosure in order to comply with Regulation [Fair Disclosure]”,[4] which stipulates that public companies publish material information to all investors at the same time.[5]

[1] Zanki, Tom. (Dec. 5, 2017) “SEC Approves NYSE Plan to Delay End-of-Day Material News.” Law360. Available at: Accessed on Dec. 8, 2017.

[2] Securities and Exchange Commission. (Aug. 29, 2017) Release No.34-81494; File No.SR-NYSE-2017-32. Available at: Accessed Dec. 8, 2017. p.6

[3] Rhodes, Adam. (Aug. 30, 2017) “NYSE Wants Cos. To Delay End-of-Day Material News.” Law360. Available at: Accessed on Dec. 8, 2017.

[4] Op. Cit. n1.

[5] Regulation FD. Available at:

05 Dec 2017
Less SEC Enforcement Measures Against Private Equity Firms?

Under the new chairman, Jay Clayton, the U.S. Securities and Exchange Commission seems to have shifted its focus from regulating private equity firms and advisers to individual misconduct.[1] Over the past years, particularly under the term of Mary Jo White, the SEC strictly monitored private equity advisers, which ultimately resulted in these firms establishing new practices, hiring chief compliance officers, and ensuring transparency on fees for services and potential conflicts.

The rate of private equity investments has significantly increased over the past decade. In 2000, private equity advisers managed $700 billion, and in 2015 the figure jumped to $4.2 trillion.[2] However, private equity advisers were not under the Commission’s radar until the enactment of the Dodd-Frank Act in 2010, which required private equity advisers to register with the SEC. The SEC’s Division of Enforcement also expanded in 2010, adding an Asset Management Unit to monitor the activities of private equity advisers, and the SEC Office of Compliance Inspections and Examinations (OCIE) established the Private Funds Unit to provide periodic examinations to increase transparency and identify any problems.

By 2014, the OCIE detected a number of deficiencies within private equity firms, such as “allocation of expenses, hidden fees, and issues related to marketing and valuation”,[3] which led to a number of enforcement actions against private equity advisers. The SEC targeted the following issues:

  • Advisers that receive undisclosed fees and expenses;
  • Advisers that impermissibly shift and misallocate expenses; and
  • Advisers that fail to adequately disclose conflicts of interests, including conflicts arising from fee and expense issues.[4]

The increase of private equity investments prompted the implementation of regulations and enforcement actions during Mary Jo White’s term at the SEC. The Commission set out to ensure that private equity advisers complied with these regulations to protect the interests of investors. Actions were commenced against large firms, such as The Blackstone Group in 2015 for breaches of fiduciary duties resulting in a $39 million settlement. Enforcement actions such as these compelled private equity firms to implement stricter compliance measures.

Andrew Ceresney, former Director of the SEC Division of Enforcement, explains that “the increased transparency has fostered a healthy dialogue between investors and advisers on what sorts of fees are appropriate and who should receive those fees.”[5] The SEC’s actions have increased the standard of transparency and reporting to protect investors. This standard has now been adopted by private equity firms, which is why the SEC’s focus has shifted towards other pressing issues – monitoring the actions of individual wrongdoers and protecting retail investors.

[1] Horney, Benjamin. (Nov. 17, 2017) “Lack of SEC Enforcement Doesn’t Mean PE is Off the Hook.” Law360. Available at: Accessed on Dec. 1, 2017.

[2] Ceresney, Andrew. (May 12, 2006) “Securities Enforcement Forum West 2016 Keynote Address: Private Equity Enforcement.” Securities Enforcement Forum West. p.1.

[3] Ib. p.2.

[4] List quoted from ib. p.3.

[5] Ib. p.6.

03 Nov 2017
Celebrities and Cryptocurrencies

Cryptocurrencies have become increasingly popular over the past year, especially Bitcoin which has increased over 800 percent in value.[1] Today, the cryptocurrency is worth over $7,300 per bitcoin. Bitcoin’s value has jumped this week due to the Chicago Merchantile Exchange’s (CME) statement that they are planning to launch Bitcoin futures in this year’s fourth quarter.[2] Providing futures, which are contracts setting forth the time and date an asset must be purchased or sold, will “provide investors with transparency, price discovery and risk transfer capabilities.”[3] Reuters explains how this is “a major step in the digital currency’s path toward legitimacy and mainstream financial adoption”[4] if this plan receives approval from regulators. However, offering bitcoin futures to promote cryptocurrencies is not what is troubling regulators.

The Securities and Exchange Commission (SEC) published a statement on November 1, 2017 regarding the potential unlawful promotion of celebrity endorsements of cryptocurrencies.[5] The SEC explains that investments in Initial Coin Offerings (ICOs) can include securities, therefore individuals who offer and sell these securities must comply with U.S. federal securities laws or they will be violating the anti-touting and anti-fraud provisions. The SEC states that:

“Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.”[6]

As the use of cryptocurrencies becomes more popular, the SEC wants to ensure that individuals are making strategic and safe investment decisions rather than making investments based on a celebrity endorsement. Typically these celebrities do not have the “expertise to ensure that the investment is appropriate and in compliance with federal securities laws”, therefore it is essential that the details of the promotion are clearly disclosed.[7] Even the U.S. Federal Trade Commission warned ninety celebrities, “influencers”, and brands that endorsements for products on the market must disclose to the public whether there was a paid deal.[8] The SEC notes that investors should always do independent research before investing and has provided an Investor Alert guideline available here.

[1] Kelly, J. (Nov. 1, 2017) Reuters. Available at: Accessed on Nov. 3, 2017.

[2] CME Group ( Oct. 31, 2017) “CME Group Announces Launch of Bitcoin Futures.” CME Group News Release. Available at: Accessed on Nov. 3, 2017.

[3] Ib. per Terry Duffy, CME Group Chairman and Chief Executive Officer.

[4] Kelly, J. (Nov. 1, 2017) Reuters. Available at: Accessed on Nov. 3, 2017.

[5] U.S. Securities and Exchange Commission (Nov. 1, 2017) “Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others.” SEC Public Statement. Available at: Accessed on Nov. 3, 2017.

[6] Ib.

[7] Ib.

[8] Fair, L. (Sept. 7, 2017) “Three FTC Actions of Interest to Influencers.” Federal Trade Commission. Available at: Accessed on Nov. 3, 2017.

13 Oct 2017
U.S. Regulators and the Fintech Industry: Unity for Innovation

The U.S. needs a “sandbox for regulators” that would encourage government agencies to explore blockchain and related technological innovations to avoid falling behind forces that are reshaping the markets they govern”.

Jeff Bandman, the owner of the advisory firm Bandman Advisors and former fintech advisor for the CFTC, presented a plan for U.S. regulators to help drive innovation for the fintech industry on October 12, 2017 at the U.S. Securities and Exchange Commission panel. Since the rise of blockchain technology there has been an increasing tension between the fintech industry and regulators; the foundation of the issue being that regulators have not agreed on a way to regulate the industry. Why? Because they both grow at different rates. This is evident through the growth of bitcoin (the most common use for blockchain technology so far). Bitcoin’s value in the past year has jumped from $400 per bitcoin to over $5,600. For the past year there has been a period of adjustment for regulators, but now they must decide how to react to an advancing industry. Blockchain technology has the potential to revolutionize clearing and settlement, in addition to other sectors such as decentralizing healthcare data. The fintech industry is revamping the way companies conduct business, how information is stored and exchanged, and the way in which people invest.

Regulators move at a much slower pace than the technology because they must ask the essential questions to safeguard the market and protect investors’ interests. Bandman poses the important question: “what is the proper role of the regulator?” Bandman explains that, yes regulators need to “ask the tough questions” and ensure “customer protection, market integrity, [and] financial stability”, yet they must also “engage with these new technologies and innovators, to learn about their capabilities, and make themselves accessible to innovators.” Essentially, for blockchain technology and fintech to progress, government agencies, particularly the SEC, need to become familiar with the application of these innovations when drawing up regulations. There needs to be active engagement on both ends.

As cybersecurity breaches for large companies and institutions, including the SEC, become a common occurrence, it is paramount that regulators play an active role with the fintech industry to safeguard sensitive data. Bandman explains that blockchain technology’s advance cryptography and decentralized nature “may make information stored in distributed ledgers safer than traditional methods”. However, this poses a new obstacle for regulators. The decentralized nature of blockchain technology means that regulators need to shift their focus from central actors to activities. For investor related activities this would actually be beneficial for regulators as they would be able to detect fraudulent and illicit activities quicker than by going through an intermediary party such as a broker or bank. Bandman asserts that if regulators integrate blockchain technology, it will give them access to “real-time regulation” on the markets instead of waiting for end of day reports. This in effect will greatly benefit regulators so that they can “see through the windshield instead of the rear-view mirror. They may be able to detect wrongdoing, or predator or deceptive practices, at a much earlier stage.”

The technology is new and continues to change day to day, however, U.S. regulations must reflect the nature of the fintech industry and ensure that new guidelines and laws integrate these innovations.

22 Sep 2017
Equifax Security Breach: The Impact on Investors

Equifax disclosed that it occurred a data breach on September 7, 2017, which impacted 143 million Americans. The New York Times adequately explains the magnitude of the recent Equifax data breach:

“Equifax warehouses the most intimate details of Americans’ financial lives, from the credit cards in their wallets to the size of their medical bills. But the company doesn’t face the constant monitoring and auditing that help strengthen banks’ systems and data protections. Despite the wealth of sensitive information in its database, Equifax, in essence, falls through the regulatory cracks.”

The compromised data included sensitive information such as Social Security numbers, credit card information, birth dates, and addresses. Equifax is now facing a variety of potential legal action. Consumers have brought a class action and there are clear regulatory failures that the company must face, however, for the purposes of this blog we are going to discuss the different types of claims investors can bring against Equifax.

Law360’s Pro Say podcast invited Carmen Germaine, a Senior Securities Reporter, to discuss the different legal avenues available to investors. Investors can bring two types of claims, the first being an investor class action, where the investors allege the company committed securities fraud and the investors in turn suffered economic loss. Here, investors are alleging that the company knew or ought to have known that the cybersecurity was insufficient, concealed its defects, or lied to investors about how the security quality. The second option is a derivatives lawsuit where investors allege that the company’s board of directors breached their fiduciary duty and knowingly used inadequate cybersecurity measures or actively attempted to harm the company and its investors. Germaine explains that these cases are hard for investors to bring because in class actions there needs to be a drop in the company’s stock price to claim damages, and typically companies who disclose data breaches do not see a shift in their stock price, and derivative suits need to demonstrate that the board of directors intentionally harmed the company or were negligent.

Showing a loss to the investors’ bottom line is not difficult here. Equifax’s stock decreased by 14 percent from the time they disclosed the data breach to when the market opened, giving investors proof of economic loss. Over the past three months the company’s stock steadily remained around $140, but on September 7, 2017 the stock took a significant dive and dropped to its lowest point in the past year on September 15 to $92.98. There have also been other factors that will help investors bring a claim. Equifax was hacked in May of this year, but was aware of their cybersecurity vulnerabilities in March and did not disclose the breach until September. This will bring up issues with the Securities and Exchange Commission (SEC) as they investigate whether Equifax took too long to disclose the information and if they took the appropriate measures to safeguard their systems. There have also been accusations that executives of the company committed insider trading as they sold around $1.8 million of stock a couple of days after the breach was discovered. Germaine points out how these executives most likely did not trade based on the non-public material information, however, this will still give weight to a derivatives law suit. It will exemplify how the executives were either not made aware of financially pertinent material after a data breach in their company when they should have been made aware, or that they knew and traded based on that information.

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