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DIVISION OF SECURITIES UPDATE
August 4, 2017
Utah Division of Securities
Keith Woodwell
Benjamin Johnson
Ken Barton
AGENDA
Keith Woodwell -- Regulatory Statistics and
Enforcement Trends
Benjamin Johnson – Corporate Finance Developments
Ken Barton -- Market and Regulatory Changes
Impacting Securities Industry
Statistics and Trends
225
164
110 10991
124
New Complaints
Statistics and Trends
62
4439
51
33
48
New Investigations
Statistics and Trends
46
82 85 86100
87
New Audits
Statistics and Trends
81 81
47
7668
53
New Enforcement Cases
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
B/D AGENTS
2010 2011 2012 2013
2014 2015 2016 2017
0
1,000
2,000
3,000
4,000
5,000
6,000
I/A REPS
2010 2011 2012 2013
2014 2015 2016 2017
Up 37% Up 51%
Enforcement Trends
• Common Scams
• Ponzi Schemes Connected to Real Estate
• Advance Fee Schemes
• New Technology Start-ups
• Common Violations Found in Exams• Books and Records
• Reporting and Supervision of Outside Business Activities
• Unlicensed Representatives
• Unsuitable Investments
Areas of Enforcement Focus
• Alternative Investment Products Sales Practices• Advertising Materials, Seminars, Unlicensed Investment Advice by
Insurance Agents
• Affiliate Relationships with Credit Unions
• Settlement Negotiations• Push for Admissions, Neither Admit nor Deny Converts to
Admissions if Fines Not Paid, Deposit Fines in Attorney Trust Account
Phillips v. Dept. of Commerce
• Utah Court of Appeals decision; May 18, 2017
• Securities fraud case related to bogus MLM and emerald investment
• Issues on Appeal by Phillips:
• (1) part of the Division's enforcement action was time-barred
• (2) the penalty exceeded the Commission's statutory authority
• (3) the penalty was unconstitutionally excessive under the Eighth Amendment to the United States Constitution
Phillips v. Dept. of Commerce
• No Statute of Limitations on Administrative Enforcement Actions
• Statute has now been amended to impose 10-year statute of limitations on administrative actions
• Court analyzed the factors for determining the amount of a fine under R164-3-1(B)(1) (now codified as Utah Code Ann. Section 61-1-31) and held that the Commission needed to issue a “unitary fine” after consideration all of the factors outlined in the rule (now statute).
Utah’s “Securities Fraud Reporter Program Act” (Whistleblower Law)
• Low Threshold: Material assistance on case which results in collection of penalties over $50,000.
• First Whistleblower Award granted in 2014.
• § 61-1-101 et. Seq.
CORPORATE FINANCE DEVELOPMENTS
Benjamin Johnson
Director of Registration and Licensing
DOL FIDUCARY RULE
Ken Barton
Compliance Section Director
DOL FIDUCIARY RULE
• Over $24.5 trillion dollars of retirement assets
• Impacts retirement assets (401a, 401k, 403b, any type of IRA,)
• ERISA ’74, TEFRA’82, TRA’86, etc. USC Labor Regulations and Internal Revenue Code
• Treasury (IRS) enforcement
• Rule under legal and political challenges
• SEC wants to make it’s own rules
Why?
Mean w/Retirement Account $95kMedian w/Retirement Account $60kMean Savings All Families $5K
Fees impact Retirement Savings
STATED PURPOSE
• Demographic changes in retirement saving- Defined contribution over pension
- Longer life spans
• Consumer protections
• Over $400 billion in fee savings
• Consumers believed providers had a “best interest of the customer responsibility”
“TORTURED” TIMELINE
Final RuleIssued
06Apr16
Effective07Jun16
60 days inFed Register
General Application
Date09Jun17
Full RuleCompliance
01Jan18
10
1st
Proposed Rule2010
2nd
Proposed Rule2015
15 16 16 17
Trump “MemoTo Review”03Feb17
17
DOL Delays Application
Date 03Mar17
17
DOL Field Bulletin No
Enforcement 10Mar17
17 17 17 18 20
DOLSeeks“Input”
30Jun17
House PanelRepeals
DOL Rule20Jul17
REGULATORY IMPACT
• Increasing number of RIA and IAR licensees
• New product offerings:Fee-based version of commissioned products
• Higher fee products are going to suffer
• Lower revenues offset with cost savings move to digital and passive models
DIGITAL INVESTMENT ADVICE
Digital Evolution
Digital Overview
• Rapidly changing the advice offering- Growing comfort with technology- Boomers, GenXers, and Millennials- Shift to passive investments- 2016 AUM $300b to 2020 AUM $2.2t
M&A and In House Offerings
SEC CONCERNS
• “What does a fiduciary duty even look like or meanfor a robo adviser” SEC Commissioner Kara Stein
• How can a robo adviser offer personalized advice?
• How can we know advice is free from conflictsof interest?
• How can we know the robo advice is acting in the best interest of the customer
SEC CONCERNS
• “What does a fiduciary duty even look like or meanfor a robo adviser” SEC Commissioner Kara Stein
• How can a robo adviser offer personalized advice?
• How can we know advice is free from conflictsof interest?
• How can we know the robo advice is acting in the best interest of the customer
FINRA FINDING• Investor Profiling
REGULATORY IMPACT
• Governance and Supervision
• Algorithms
• Input Outputs
• Hidden conflicts of interests
• Non-Quantitative customer events
• Digital product development faster than regulations
Black Box
Q & A
Utah Division of Securities
801-530-6600