Cybersecurity Disclosures Archives - Page 2 of 3

Division of Enforcement 2019 Annual Report

As my firm does not practice in the enforcement arena, it is not an area I always write about, but this year I found a few trends that are interesting. In particular, just by following published enforcement matters on the SEC’s website, I’ve noticed a large uptick in actions to suspend the trading in, or otherwise take action against, micro- and small-cap companies, especially delinquent filers. I’ve also noticed a large uptick of actions against smaller public and private companies that use misleading means to raise capital from retail investors, and the concurrent use of unlicensed broker-dealers. Of course, there have always been a significant number of actions involving cryptocurrencies. In light of my own observations, I decided to review and report on the SEC’s view of its actions.

As an aside, before discussing the report, I note that the Government Accountability Office (GAO) has raised concerns about the quality of record keeping and documentation maintained by the

December 24, 2019

SEC Testifies At House Financial Services Committee Hearing

On September 24, 2019, all five SEC commissioners gave testimony to, and were questioned by, members of the U.S. House of Representatives Committee on Financial Services. Commissioner Robert J. Jackson, Jr. also gave an opening statement at the Committee hearing.

Commissioner Jackson’s Opening Statement

Commissioner Jackson’s short opening statement was consistent with his prior public views, consisting of a list of three areas in which he believes legislation should intervene to prevent corporate insiders from spending shareholder money to advance their own interests over those of investors.

His first recommendation is to shorten the current four-day 8-K filing requirement in which a company must notify the public of certain material events. For an overview of 8-K filing categories, including the categories that require an advance filing (Regulation FD) or lesser time period than the standard four days, see HERE. Commissioner Jackson states that there is “evidence that corporate insiders often trade during the ‘gap’ between key business events and

October 22, 2019

SEC And FINRA Joint Statement On Custody Of Digital Assets

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a joint statement on broker-dealer custody of digital asset securities (“Joint Statement”). The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years. For example, issues surrounding the custody of digital assets have been continuously cited by the SEC as one of the reasons for the failure to approve a cryptocurrency ETF.

The Joint Statement begins with the admission that historical rules do not adequately cover the complex issues related to digital assets, including rules related to the loss or theft of a security. In recent months the SEC and FINRA staff have been engaging in conversations with industry participants regarding how the rules could be applied or modified to suit the needs of the emerging technology of digital assets.

Any entity that transacts business in digital asset securities must comply with the federal securities

August 6, 2019

FinCEN Guidance On Cryptocurrency

In May 2019, the Financial Crime Enforcement Network (FinCEN) issued a thirty-page comprehensive review of its regulations as pertains to convertible virtual currencies. Previously, in February 2018, FinCEN stated that it expects issuers of initial coin offerings (ICOs) to comply with the Bank Secrecy Act (BSA), including its anti-money laundering (AML) and know your customer (KYC) requirements (see HERE).

In general, entities that are subject to the BSA must: (i) register with FinCEN as a money services business (MSB); (ii) prepare a written AML compliance program that is designed to mitigate risks, including AML risks, and to ensure compliance with all BSA requirements including the filing of suspicious activity reports (SAR) and currency transaction reports; (iii) keep records for certain types of transactions at specific thresholds; and (iv) obtain customer identification information sufficient to comply with the AML program and recordkeeping requirements.

Although the new guidance does not establish any new regulatory requirements, it is the first time

July 16, 2019

Securities Token Or Not? A Case Study – Part III

This is the third part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. In Part 1 of the series, I examined a decentralized token that had been issued without any concurrent capital raise and was able to conclude such token was not a security. Part 1 can be read HERE. In Part 2 I examined a token that was issued with the intent of being a utility token, but as a result of the clear speculative motivation for purchasers, and the lack of decentralization, concluded it was a security. Part 2 can be read HERE.

In this Part 3 of the series, I examine the issuance of the Free Token as a dividend and its cousin the Bounty Token. Unlike the prior blogs in this series, which examined the question of whether a particular token is a security, this blog

October 9, 2018

Securities Token Or Not? A Case Study – Part II

This is the second part in my three-part series laying out fact patterns and discussing whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as Bitcoin and Ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.

In the first part of this series, we examined the Oldie Token and, under the fact pattern presented, was able to determine that the Oldie Token was not a security. Part 1 can be read HERE. In this part we will examine the Functional Token, which has not

October 2, 2018

SEC Strategic Plan

On June 19, 2018, the SEC published a draft Strategic Plan and requested public comment on the Plan. The Strategic Plan would guide the SEC’s priorities through fiscal year 2022. The Plan reiterates the theme of serving the interests of Main Street investors, but also recognizes the changing technological world with a priority of becoming more innovative, responsive and resilient to market developments and trends. The Plan also broadly focuses on improving SEC staff’s performance using data and analytics.

The Strategic Plan begins with a broad overview about the SEC itself, a topic I go back to and reiterate on occasion, such as HERE. The SEC’s mission has remained unchanged over the years, including to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. In addition, according to the Strategic Plan, the SEC:

Engages and interacts with the investing public directly on a daily basis through a variety of channels, including investor roundtables and education

September 18, 2018

SEC Spring 2018 Regulatory Agenda

On May 9, 2018, the SEC posted its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. According to the preamble, information in the agenda was accurate as of March 13, 2018. On April 26, 2018, SEC Chairman Jay Clayton gave testimony before the Financial Services and General Government Subcommittee of the House Committee on Appropriations regarding the SEC’s requested fiscal year 2019 budget. This blog will summarize the newest regulatory agenda and SEC upcoming budgetary requests.

Usually the agenda is separated into two categories: (i) Existing Proposed and Final Rule Stages; and (ii) Long-term Actions. The Spring 2018 agenda is broken down by (i) “Prerule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed

June 26, 2018

The SEC Has Issued New Guidance On Cybersecurity Disclosures

On February 20, 2018, the SEC issued new interpretative guidance on public company disclosures related to cybersecurity risks and incidents. In addition to addressing public company disclosures, the new guidance reminds companies of the importance of maintaining disclosure controls and procedures to address cyber-risks and incidents and reminds insiders that trading while having non-public information related to cyber-matters could violate federal insider-trading laws.

The prior SEC guidance on the topic was dated, having been issued on October 13, 2011. For a review of this prior guidance, see HERE. The new guidance is not dramatically different from the 2011 guidance.

Introduction

The topic of cybersecurity has been in the forefront in recent years, with the SEC issuing a series of statements and creating two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s). Moreover, the SEC has asked the House Committee on Financial

March 27, 2018

The Senate Banking Committee’s Hearing On Cryptocurrencies

On February 6, 2018, the United States Senate Committee on Banking Housing and Urban Affairs (“Banking Committee”) held a hearing on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Both SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo testified and provided written testimony. The marketplace as a whole had a positive reaction to the testimony, with Bitcoin prices immediately jumping up by over $1600. This blog reviews the testimony and provides my usual commentary.

The SEC and CFTC Share Joint Regulatory Oversight

The Banking Committee hearing follows SEC and CFTC joint statements on January 19, 2018 and a joint op-ed piece in the Wall Street Journal published on January 25, 2018 (see HERE). As with other areas in capital markets, such as swaps, the SEC and CFTC have joint regulatory oversight over cryptocurrencies. Where the SEC regulates securities and securities markets, the CFTC

March 6, 2018

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Cybersecurity Disclosures

Division of Enforcement 2019 Annual Report

SEC And FINRA Joint Statement On Custody Of Digital Assets

FinCEN Guidance On Cryptocurrency

Securities Token Or Not? A Case Study – Part III

Securities Token Or Not? A Case Study – Part II

SEC Strategic Plan

SEC Spring 2018 Regulatory Agenda

The Senate Banking Committee’s Hearing On Cryptocurrencies

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