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Posts Tagged ‘Finance’

Is Virtual Currency Here To Stay?

Posted on: November 15th, 2017

By: Matthew S. Jones

With the growing interest in Bitcoin, Ethereum, and Litecoin, it was only a matter of time the U.S. Securities and Exchange Commission (“SEC”) and Internal Revenue Service (“IRS”) weighed in on the legality of such “cryptocurrency”. But what is “cryptocurrency”? It is a medium of exchange that functions like money, but is independent from national borders, central banks, sovereigns, or fiats. In the most basic sense, it only exists in the virtual world, traded on multiple global platforms, in an effort to secure and verify transactions easier.

Cryptocurrency is growing more and more popular because of the increased privacy, fast transactions (almost instantaneous), irrevocability, inexpensiveness, and global reach. In fact, approximately 80,000 to 220,000 transactions occur per day, representing over $50 million in estimated daily volume. Further, there are approximately 1,100 digital currencies in existence at this time.

So how does cryptocurrency work? Well, through a process called “the blockchain protocol.” This technology records all bitcoin transactions and removes the financial middleman, allowing transactions to be finalized within minutes. Each transaction is verified and creates a log that is public record.

However, with the use and trade of these new currencies on the rise, as well as the unknown allure of such cryptocurrencies, there has been an increase in ponzi schemes. These schemes essentially promise customers an opportunity to invest in Bitcoin when in fact, the customers are only brought into the company’s ponzi scheme.

In an effort to promote safety in the trade of these currencies, the SEC declared that any cryptocurrency token deemed to be a security must be registered with the SEC or otherwise be exempt. If such cryptocurrency is not registered or exempt from registration, the issuer and other participants may be subject to liabilities and other remedies under state and federal securities laws. Such regulation by the SEC is important to help prevent fraudulent transactions.

Additionally, with the increased trading of cryptocurrency as a security, there are tax implications as well. For example, Bitcoin value has increased approximately 800% over the past year. This has caught the IRS’s attention since tax reporting on such trades/profits does not match the actual number of individuals involved in such trading. However, this should come as no surprise given the significant and fast increases in value of cryptocurrency.

So, to answer the question posed by this blog’s title: it depends. At this point, it seems as if cryptocurrency is not going anywhere in the near future. The increased interest, fast transactions, and global reach will likely continue to drive the cryptocurrency’s use. However, with the SEC and IRS close behind to ensure its proper use, it may only be a matter of time until such currencies cease to exist or hold value.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].

FINRA Tightens Expungement Requirements

Posted on: October 12th, 2017

By: Brett C. Safford

On September 25, 2017, the Financial Industry Regulatory Authority (FINRA) issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance” (hereafter, the “Notice”). The Notice continues the recent pattern of FINRA issuing rules and notices which further limit a broker’s ability to expunge his or her Central Registration Depository (CRD) record.

In 2015, FINRA launched an extensive advertising campaign for its BrokerCheck website. FINRA describes BrokerCheck as “a free tool to research the background and experience of financial brokers, advisers and firms.” However, as BrokerCheck becomes an increasingly utilized resource for customers and potential employers, the impact of a broker’s disclosures on his or her career becomes more significant. With the increased impact of a broker’s disclosures, the necessity of ensuring that those disclosures are accurate likewise increases. Consequently, expungement—a legal action which allows brokers to remove inaccurate disclosures—has taken on greater importance.

FINRA’s expungement procedures are governed by FINRA Rules 12805 and 13805. In the Notice, FINRA advises, “The procedures are intended to ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2080.” The three “narrow” grounds specified in FINRA Rule 2080 are: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.”

By describing the grounds for expungement set forth in Rule 2080 as “narrow,” FINRA is signaling to its arbitrators that expungements are the exception, not the norm. The Notice further advises, “Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances. Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Yet, FINRA fails to define “appropriate circumstances” or how to assess “meaningful investor protection” or “regulatory value.” Arbitrators are also instructed to request a copy of the broker’s BrokerCheck report and to “carefully review the report when considering whether expungement is appropriate.” Arbitrators are to “pay particular attention to the ‘Disclosure Events’ section of the report.” The Notice, however, is unclear as to what arbitrators should take away from their review the BrokerCheck report. No guidance is offered as to what extent arbitrators should factor a broker’s prior disclosures into their analysis of the pending request for expungement.

The Notice also emphasizes that “[i]t is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to” and instructs arbitrators to allow the customer and their counsel to appear at the hearing; allow the customer to testify (in person, telephonically, or by other method); and allow the customer’s counsel or a pro se customer to introduce documents and evidence, cross-examine the broker and witnesses, and present opening and closing arguments at the hearing. In expungement only cases where an associated person files arbitration claims solely for the purpose of seeking expungement, the Notice advises arbitrators to “order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer’s arbitration case that gave rise to the customer dispute information (underlying arbitration).”

Finally, the Notice states, “A broker may not file a request for expungement of customer dispute information arising from an underlying customer arbitration until the underlying customer arbitration has concluded.” When the broker is a named respondent in the underlying customer arbitration and he or she can present a defense, this rule prevents inconsistent rulings, i.e., the broker is found liable for claims in the underlying customer arbitration while obtaining expungement of that claims in the expungement-only arbitration, or vice versa. However, this rule also applies to brokers who are not named in the underlying customer arbitration. This means that before bringing an action to expunge a meritless disclosure from his or her CRD records, an unnamed, falsely-accused broker must sit on the sideline and await the resolution of an arbitration which he or she cannot present a defense. As such, a broker’s BrokerCheck report can include a false and erroneous disclosure for years before expungement is obtained—causing significant harm to the broker’s professional reputation.

In sum, the Notice continues the trend of FINRA toughening the requirements for expungement. Public protection against crooked brokers is essential and needed, but FINRA’s expungement guidance is increasingly creating a framework in which innocent brokers may struggle to obtain necessary and justified expungements.

If you have any questions or would like more information, please contact Brett Safford at [email protected].