WASHINGTON—Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules, regulators said Tuesday.
The fines, which many of the banks had already disclosed to shareholders, underscore the market regulators’ stern approach to civil enforcement. Fines of $200 million, which many of the banks will pay under the agreements, have typically been seen only in fraud cases or investigations that alleged harm to investors.
But the SEC, in particular, has during the Biden administration pushed for fines that are higher than precedents, saying it wants to levy fines that punish wrongdoing and effectively deter future potential harm. The SEC’s focus on record-keeping is likely to be extended next to money managers, who also have a duty to maintain written communications related to investment advice.
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Last month, the SEC alleged that hedge-fund manager Deccan Value Investors LP and its chief investment officer failed to maintain messages sent over
Apple
iMessage and WhatsApp. In some cases, the chief investment officer directed an officer of the company to delete their text messages, the SEC said. The claims were included in a broader enforcement action, which Deccan settled without admitting or denying wrongdoing.
The Wall Street Journal reported last month that the settlements announced Tuesday were likely to top $1 billion and would be announced before the end of September.
Eight of the largest entities, including Goldman Sachs and Morgan Stanley, agreed to pay $125 million to the SEC and at least $75 million to the CFTC. Jefferies will pay a total of $80 million to the two market regulators, and
Nomura
NMR -1.20%
agreed to pay $100 million. Cantor agreed to pay $16 million.
The SEC said it found “pervasive off-channel communications.” In some cases, supervisors at the banks were aware of and even encouraged employees to use unauthorized messaging apps instead of communicating over company email or other approved platforms.
“Today’s actions—both in terms of the firms involved and the size of the penalties ordered—underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” said SEC Enforcement Director
Gurbir Grewal.
Bank of America, which faced the highest fine from the CFTC, had a “widespread and long-standing use of unapproved methods to engage in business-related communications,” according to the CFTC’s settlement order. One trader wrote in a 2020 message to a colleague: “We use WhatsApp all the time, but we delete convos regularly,” according to the CFTC.
One head of a trading desk at Bank of America told subordinates to delete messages from their personal devices and to communicate through the encrypted messaging app Signal, the CFTC said. The head of that trading desk resigned this year, although the bank was aware of his conduct in 2021, the CFTC said.
At Nomura, one trader deleted messages on his personal device in 2019 after being told the CFTC wanted them for an investigation, the agency said. The trader made false statements to the CFTC about his compliance with the records request, the regulator said.
Broker-dealers have to follow strict record-keeping rules intended to ensure regulators can access documents for oversight purposes. The firms settling with the SEC and CFTC admitted their employees’ conduct violated those regulations.
JPMorgan Chase
& Co.’s brokerage arm was the first to settle with the two market regulators over its failure to maintain required electronic records. JPMorgan paid $200 million last year and admitted some employees used WhatsApp and other messaging tools to do business, which also broke the bank’s own policies.
Regulators discovered that some JPMorgan communications, which should have been turned over for separate enforcement investigations, weren’t collected because they were sent on employees’ personal devices or apps that the bank didn’t supervise.
WASHINGTON—Securities and Exchange Commission Chairman
Gary Gensler
signaled that he would support Congress handing more authority to the SEC’s sister markets regulator to oversee certain cryptocurrencies such as bitcoin.
Mr. Gensler, speaking at an industry conference, said Thursday he looked forward to working with Congress to give the Commodity Futures Trading Commission added power, to the extent the agency needs greater authority to oversee and regulate “nonsecurity tokens…and the related intermediaries.”
The remarks come amid an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto.
Cryptocurrencies remain largely unregulated by the federal government, leaving investors without protections from fraud and market manipulation that come with many other types of investments. The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers.
The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
Mr. Gensler, who headed the CFTC from 2009 to 2014, qualified his remarks by saying he welcomed working with lawmakers as long as it doesn’t take away power from the SEC.
“Let’s ensure that we don’t inadvertently undermine securities laws,” he said. “We’ve got a $100 trillion capital market. Crypto is less than $1 trillion worldwide. But we don’t want that to somehow undermine what we do elsewhere.”
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Leaders of the Senate Agriculture Committee, which oversees the CFTC, are pitching legislation that would assign oversight of the two largest cryptocurrencies—bitcoin and ether—to that agency. At present, the CFTC generally has the power to regulate derivatives—such as futures and swaps—as opposed to cash or spot markets where the underlying assets are bought and sold for immediate delivery.
The SEC has declined for years to assert jurisdiction over bitcoin and ether, which proponents say are more “decentralized” than other cryptocurrencies. Mr. Gensler noted Thursday that bitcoin is often likened to a digital form of gold, and that it doesn’t bear all of the characteristics of a security.
The bill from the leaders of the agriculture panel is one of several that lawmakers have offered to more tightly oversee cryptocurrencies. In his remarks, Mr. Gensler didn’t express support for any particular bill.
CFTC Chairman
Rostin Behnam
has asked Congress to pass a law that would allow the CFTC to regulate cash markets for certain types of cryptocurrencies and provide it with funding to conduct additional oversight.
After objecting for years to meaningful federal oversight, cryptocurrency lobbyists have recently shifted their focus to convincing lawmakers and regulators that the CFTC should have primary jurisdiction over their industry. They say the SEC’s rules for traditional securities like stocks and bonds don’t fit because cryptocurrencies aren’t organized as traditional corporations with stockholders.
Jake Chervinsky, head of policy at the Blockchain Association, a crypto lobbying group, said in a statement that “decades of legal precedent shows that most digital assets” are commodities.” He said lawmakers should address the issue.
“This is a matter for Congress rather than regulators, and we’re glad to see consensus in Congress that the CFTC, not the SEC, should regulate spot markets,” he said.
While Mr. Gensler’s comments suggest that his agency shouldn’t oversee bitcoin, he said the majority of crypto tokens are securities that fall under his agency’s jurisdiction and should comply with investor-protection laws. Mr. Gensler also said it is possible some crypto intermediaries would need to be dually registered with both his agency and the CFTC, similar to the way some brokers and mutual-fund firms are overseen by both agencies.
Mr. Gensler has also repeatedly demanded that cryptocurrency-trading platforms such as Coinbase Global Inc. register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.
WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam
—Paul Kiernan contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
A South Florida woman known as “Mother Theresa” in her community has been accused of running her business as a lucrative Ponzi scheme that scammed close to $200 million.
Johanna M. Garcia, of North Lauderdale, allegedly defrauded over 15,400 investors of up to $196 million through her company, MJ Capital Funding LLC, NPR reported Tuesday.
Founded in 2020, MJ Capital pledged to connect investors with small businesses through “merchant cash advance,” or MCA.
Described as a “hardworking woman that has her priorities in line” in her company bio, Garcia boasted of being a down-to-earth businesswoman who helped regular people generate wealth — she was even “referred to as ‘Mother Theresa’ [sic] in her community.”
The ruse started to fall apart in April 2021, when a website emerged accusing MJ Capital of running a Ponzi scheme.
Garcia sued the anonymous whistleblower for defamation and continued to collect money from investors through August 2021, when the Securities and Exchange Commission filed a formal complaint against the company.
Johanna M. Garcia allegedly defrauded investors of nearly $200 million. Internet Archive
In the document dated Aug. 9, the SEC alleges that MJ Capital used investors’ cash to fund “outside annualized ‘returns’ of 120%-180%,” while company higher-ups squirreled away investments for personal excursions and luxury goods.
In addition to using new injections of money to satisfy existing investors, the SEC claims that MJ Capital used unlicensed brokers and sales agents to sell unregistered securities.
A federal judge responded to the filing by freezing Garcia’s corporate assets and ordering them into receivership.
While Garcia awaits further investigation, the case against MJ Capital got new fodder last Tuesday, when the SEC filed a second complaint against Pavel Ruiz, a company board member.
The SEC argues that Ruiz, 29, played a “significant role in perpetuating the Ponzi scheme.”
Armed with a team of around 70 sales agents, Ruiz allegedly defrauded over 5,100 investors of at least $46 million, $7.7 million of which he diverted into his personal accounts.
According to the SEC, Ruiz used some of the pocketed money to purchase a luxury car and crypto assets.
The same day as the SEC complaint was released, the US Attorney’s Office for the Southern District of Florida charged Ruiz with conspiring to commit wire fraud.
It is unclear if Garcia, who was not named in the federal case, will face similar charges as well.
If convicted, Ruiz faces up to 20 years in prison.
As of last week, both Garcia and Ruiz had reached partial settlements with the SEC, delaying monetary penalties until the conclusion of any criminal proceedings.
Ruiz is currently free on $250,000 bond.
The MJ Capital scandal is merely the latest in a disturbing string of similar cases, some of which saw investors scammed out of hundreds of millions of dollars.
In March this year, The Post reported on the crackdown on a $300 million Ponzi scheme that ended with FBI gunfire in Las Vegas. Just last month, the SEC filed a complaint against 11 people for their roles in an elaborate crypto pyramid scheme that targeted retail investors.
WASHINGTON—Leaders of a Senate committee are pitching legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest-rate swaps.
Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich.) and top-ranking Republican John Boozman of Arkansas unveiled a plan Wednesday that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class. Currently the CFTC has authority to police derivatives, such as futures and swaps, rather than underlying commodities.
The bill marks the latest salvo in an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto. Thirteen years after bitcoin was created, cryptocurrencies remain largely unregulated by the federal government, leaving investors without key protections from fraud and market manipulation.
The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers. The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
“‘When there’s a topic as hot as crypto, everybody wants a seat at the table.’”
“When there’s a topic as hot as crypto, everybody wants a seat at the table,” said
Aaron Klein,
a senior fellow at Brookings Institution who focuses on financial regulation. “The question is, are we going to have regulatory turf paralysis?”
In practical terms, for federal agencies such as the CFTC, Securities and Exchange Commission, and Federal Reserve, adding crypto to their remit would bring bigger budgets, greater influence and more job opportunities for officials who leave public service. For members of the congressional committees that oversee such regulators, a new industry in their sandbox would create another stream of lobbyists and campaign donations.
“We need to treat this seriously and take our responsibilities seriously for protecting consumers,” Ms. Stabenow said in a virtual press conference alongside Mr. Boozman.
Washington has introduced a flurry of bills in recent months to draw jurisdictional lines. Sens.
Cynthia Lummis
(R., Wyo.) and
Kirsten Gillibrand
(D., N.Y.) unveiled a proposal in June that would create exemptions for cryptocurrencies in securities laws, banking statutes and tax code. In July, leaders of the House Financial Services Committee said they were working on a bill to grant the Federal Reserve a greater role in regulating some stablecoins, crypto tokens pegged against the dollar and other official currencies.
When cryptocurrency lending platform Celsius froze user accounts amid a plunge in valuations, it sent ripples across the industry and raised questions about what happens to user assets if a crypto platform files for bankruptcy. WSJ’s Vicky Ge Huang explains. Photo illustration: Jordan Kranse
Agencies also are seeking to claim territory. CFTC Chairman
Rostin Behnam,
a former staffer to Ms. Stabenow, said last week his agency is “ready and well situated” to oversee spot markets for some cryptocurrencies. He has worked with his former boss for months to help craft legislation that would authorize the CFTC to do so, people familiar with the matter say.
Meanwhile, SEC Chairman
Gary Gensler
has repeatedly demanded that cryptocurrency-trading platforms such as
Coinbase Global Inc.
register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.
“Four years ago when I started this job, there were some people that just thought this thing was all going to blow up and go away, that this was sort of a passing fad,” said Kristin Smith, executive director of the Blockchain Association, a trade group representing crypto firms.
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Now, she said, “We’ve got all these regulators suddenly vying for control.”
After the SEC alleged in an insider-trading case in July that at least seven cryptocurrencies listed on Coinbase should have been registered as securities, Republican CFTC Commissioner
Caroline Pham
accused the SEC of “regulation by enforcement.”
“The SEC is not working together with the CFTC,” Ms. Pham said in an interview. “They go out unilaterally to try to establish precedent that’s going to dramatically reshape the landscape as to what’s a security and what’s a commodity.”
Ms. Pham has posted photos to her
Twitter
account of herself posing alongside crypto lobbyists and executives including
Sam Bankman-Fried,
the billionaire founder of trading platform FTX.
Ms. Pham said that crypto is one of the areas she is focused on, and, “I take pictures with everybody. Like, literally, everybody.”
At the heart of the turf war are questions about how cryptocurrencies fit into the definition of a security, the legal classification that includes stocks and bonds.
Coinbase and other firms have lobbied Congress to create a new category for digital commodities and empower the CFTC to regulate it.
Photo:
Shannon Stapleton/REUTERS
A 1946 Supreme Court case created a test that focuses on whether investors buy an asset in hopes of profiting from the efforts of other people. If so, the issuer is required to register with the SEC and publicly disclose any information that may be material to the security’s price.
Even though investors in bitcoin and ether rely on a network of users and programmers to validate transactions and perform software updates, cryptocurrency enthusiasts insist those groups are too decentralized for the assets to be regulated like securities. Instead, they argue, the assets should be considered commodities, which have a broader definition and no full-time regulator.
Firms such as Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and empower the CFTC to regulate it. The agency has roughly one-sixth the head count of the SEC, and its rules are seen by the industry as easier to comply with than securities laws.
“When you ask the people that are in the industry…almost all feel like the regulator should be primarily the CFTC,” Mr. Boozman said. “The fact that they’re fairly united on that makes it easier on members.”
Crypto skeptics worry that creating a new legal concept for cryptocurrencies could create an alternative to securities registration for a wider variety of assets.
“People who are taking action that could undermine our securities law are playing with fire,” said Dennis Kelleher, president of investor-advocacy group Better Markets. “You may love or hate the SEC, but transparent disclosure, clear rules…and enforcement is what builds trust and confidence in our markets.”
The legislation being unveiled Wednesday would seek to exclude securities from the definition of digital commodities, making it narrower in scope than that of other crypto-related bills floated in recent months, such as the Lummis-Gillibrand proposal.
Ms. Stabenow said she expects the Agriculture Committee to hold a hearing on the bill as early as September.
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The bill would require any entity acting as a digital commodity platform—including crypto exchanges such as Coinbase and FTX—to register with the CFTC as trading facilities, dealers or brokers. The exchanges would have to monitor trading, protect investors from abuse and only offer assets that are resistant to market manipulation, among other requirements.
Platforms also would be obliged to disclose some information about the assets they list, such as operating structure and conflicts of interest. Such information would likely fall short of the extensive disclosures required by the SEC for securities.
The derivatives markets the CFTC currently oversees are dominated by professional investors, such as banks and hedge funds. Crypto markets, by contrast, draw legions of small investors who are more vulnerable to scams.
If the agency wins jurisdiction over bitcoin and ether, the CFTC would have to write rules from scratch to protect such investors.
“How robust would they be and how long would that take?” asked Tyler Gellasch, executive director of the Healthy Markets Association, an investor trade group.
The Elon Musk-Twitter drama keeps taking sometimes bizarre, unexpected turns so whatever I write here could be moot not long after the ink dries.
It’s always been dangerous to talk in absolutes about Musk. He is said to be genius-level smart but he’s done some really dumb things (weird tweets nearly got him jammed up for libel and caused him problems with the Securities and Exchange Commission). His baby, the electric-car giant Tesla, was woefully mismanaged, plagued by production issues, and nearly declared bankruptcy. It miraculously survived and came back stronger, making him the world’s richest man.
More recently, he famously put down a “best and final” offer for financially shaky yet ubiquitous social media company Twitter. The price: $44 billion or $54.20 a share (which included a pot reference; “4:20” is the “time to toke” in weed-smoking culture). It was a hefty premium to its stock price then and even heftier now after the market sell-off.
Twitter’s board ultimately realized that Crazy Elon was offering a once-in-lifetime payday for its beleaguered investors and took the deal.
Musk was on the verge of buying what he called the world’s public square. He would be the king of all media by taking Twitter private and fixing its manifold business flaws (for all its influence, it has no cash flow and no earnings).
Until suddenly he wasn’t.
Somewhere along the line, he got into his head that he was overpaying for a dog with fleas. He put the deal on hold indefinitely. His hardly believable reason for threatening to walk: There are too many fake accounts on Twitter that can’t be monetized by him or anyone else. He also said Twitter was hiding this bot problem, something tantamount to fraud. He wants to take a deeper look at the books.
Elon Musk has said he is worried about the large amounts of fake accounts on Twitter. JOSH EDELSON/AFP via Getty Images
If he were really worried about bots, he wouldn’t have waived due diligence before signing the deal paperwork.
What’s next? The business press has always been skeptical about Musk’s intentions because most of Wall Street has been skeptical. That’s why the stock never traded close to his offer price.
For what it’s worth, here’s the viewpoint of two bankers, one who has worked with his Tesla board, and another at a firm involved in his Twitter financing machinations.
Only on his terms
They say virtually the same thing. Musk is telling people he still wants Twitter. He thinks he can make it work as a private company, clean up the bot problem and sell it at a profit sometime in the next five years.
But Musk wants the company (like everything else) on his terms, which are always in flux. He doesn’t read balance sheets but goes by his gut and has no issue with flouting conventional banker norms (i.e. your word is your bond) to get his prize. His gut told him to waive due diligence. It’s now telling him that even though he signed a deal leaving him on the hook for the $1 billion breakup fee and maybe more in damages, he can get Twitter to the table and agree to his terms, aka a much lower purchase price.
He might be right. Twitter first said it would enforce the initial deal terms, maybe even go to court, but now appears to be playing ball with Musk. It recently said it will turn over more data on its bot issue — a move that means talks are back on. The bankers tell me the Twitter board knows that finding another suitor will be difficult even at around the $40 a share it’s trading at now. The board can’t just accept anything, but also can’t tell Musk to just pound sand.
Elon Musk could lose $1 billion if his Twitter deal falls out.Patrick Pleul/Pool Photo via AP, File
So the thinking among my two guys is that Twitter agrees to a lower price, possibly significantly lower, and Crazy Elon gets his public square, albeit for much cheaper.
That means the deal is on, right? Seems so. But no one really knows with Crazy Elon.
Gensler goes gaga
Left-wing SEC chief Gary Gensler finally announced last week his intentions to overhaul the stock market. Forget about the pretty good deal small investors get now: zero-commission trades and mobile apps that make stock trading seamless and inexpensive for newbies.
Securities and Exchange Commission Gary Gensler is chasing after retail “meme” stock investors.Samuel Corum – CNP / MEGA
Gensler told attendees at an investor conference that bad stuff is happening where no one can see it; too many trades aren’t going to public exchanges. They’re being routed to private trading venues known as dark pools. Investors believe they’re trading for free on Robinhood but could be getting ripped off without knowing it.
Gensler offered no data to show that markets are screwing small investors through its current structure. It’s his hunch.
Upending the markets on a hunch is pretty dangerous stuff. Particularly when you’re simply trying to burnish your class-warfare credentials, as most observers suspect. The good news (and bad news for Gensler): His proposed changes will probably take years to implement as Congress — which will likely be in GOP hands after November — debates their merits.
By that time, it’ll all be over. His current boss, Sleepy Joe Biden, will likely be out of office, replaced by a Republican president or a sober-minded Democrat who will resist “fixing” something that doesn’t need fixing.
WASHINGTON—Regulators proposed new requirements for investment funds that tap into public angst about climate change or social justice, in an effort to address concerns about “greenwashing” by asset managers seeking higher fees.
The Securities and Exchange Commission voted Wednesday to issue two proposals that aim to give investors more information about mutual funds, exchange-traded funds and similar vehicles that take into account so-called ESG—meaning environmental, social and corporate-governance–factors. One of the proposed rules would broaden the SEC’s rules governing fund names, while the other would increase disclosure requirements for funds with an ESG focus.
WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.
The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.
WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.
The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.
WASHINGTON—Regulators proposed expansive new requirements for private investment funds Wednesday as part of a widening effort to police a rapidly growing but relatively opaque corner of the capital markets.
In a Wednesday morning meeting, the Securities and Exchange Commission passed a proposal that would force hedge funds and private-equity funds to provide basic disclosures to their investors and guard against conflicts. The Democratic-controlled commission approved the proposal by a 3-to-1 vote, signaling a strong chance that a final version will be adopted. The agency will now seek public comments for at least two months before issuing a final rule.
WASHINGTON—The Securities and Exchange Commission issued a raft of proposals Wednesday including measures aimed at shoring up money-market funds and curbing executives’ ability to trade their own companies’ stock.
The proposals, some of which surprised Wall Street executives with their scope, indicate that Chairman
Gary Gensler
is moving quickly to enact a policy agenda that observers have called the SEC’s most ambitious in decades. That stands in contrast to other financial regulators, for which President Biden has yet to fill key positions, and saw a nominee withdraw amid Senate skepticism during confirmation.
With a thin majority in Congress, Democrats are leaning on Mr. Gensler to advance progressive priorities such as fighting climate change and curbing the power of big business. The SEC’s authority to write rules for asset managers, publicly traded companies and the stock market provides powerful, if sometimes roundabout, tools for achieving such goals.
The proposals “will go a long way toward increasing corporate transparency and accountability,” Sen.
Sherrod Brown
(D., Ohio), chairman of the Senate Banking Committee, said, praising enhanced disclosures around stock buybacks. “The first step to workers getting their fair share is learning just how much corporate executives are spending on themselves.”
Mr. Gensler’s agenda reflects political divisions. Three of the four proposals garnered party-line votes from the SEC’s five commissioners. Republicans
Hester Peirce
and
Elad Roisman
supported only a plan to tighten rules on how and when corporate insiders can sell their companies’ stocks. The agency is independent of the Biden administration.
The other proposals “are a partisan overreach that will likely diminish investment opportunities, economic growth and capital formation,” Sen.
Pat Toomey
(R., Penn.), the top Republican on the Senate Banking Committee, said.
Two of the proposals put forward Wednesday seek to make the financial system more stable by reducing panicked investors’ tendency to flee money-market funds and by regulating opaque derivatives known as “swaps.” The other two rules would seek to enhance fairness and transparency in the stock market. They would introduce new restrictions on corporate executives’ trading and heighten disclosure requirements around share buybacks by publicly traded companies.
The new rules for money-market mutual funds aim to prevent episodes that occurred during the past two recessions, in 2008 and 2020, when the Federal Reserve was forced to backstop the funds after they were hit with a wave of redemption requests that caused credit markets to seize up.
Money markets are typically used by corporate treasurers, pension funds and millions of individual investors as a safe place to park cash and earn a higher return than they could obtain in a bank account. They provide companies with liquidity for short-term loans, called “commercial paper,” to cover immediate expenses like payroll.
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But money-market funds aren’t regulated like banks, which must meet minimum capital requirements and offer deposit insurance. Regulators say this makes them more susceptible to runs when markets are under severe stress, creating broader risks to the financial system.
“This is about resiliency,” Mr. Gensler said in an interview, noting that Americans have roughly $5 trillion invested in money markets. “Though there have been reforms in 2010 and 2014, we found again in 2020 some instability…with the dash for cash.”
The SEC’s proposed changes include a measure called “swing pricing” that firms including
BlackRock Inc.
and
Federated Hermes Inc.
have warned could destroy a subset of the industry that holds short-term corporate debt and caters to institutional investors. The measure would require these funds to adopt policies for adjusting their share prices by a “swing factor” on days when they have net redemptions. The factor would be determined by transaction costs and the market impact of selling a slice of the fund’s portfolio.
The goal is to protect investors who remain in the fund from dilution by investors who redeem their shares, Mr. Gensler said.
The SEC’s timing caught money-market fund managers off guard, said
John Tobin,
investment chief at Dreyfus Cash Investment Strategies, which oversees $350 billion in money funds. Many didn’t expect to see the new proposed rules until next spring, he said.
The swing-pricing proposal is likely to draw universal industry opposition, said Mr. Tobin, whose business is a unit of
Bank of New York Mellon Corp.
He said the rule would create operational challenges and could encourage institutional investors to head for the exits before a fund executes any swing-price decision.
“It’s definitely a shot across the bow,” he said. “This is a watershed moment.”
The SEC also proposed significant restrictions on arrangements, known as 10b5-1 plans, by which corporate officers and directors schedule stock trades ahead of time to avoid running afoul of insider-trading rules. Among other changes, the agency would require executives to wait 120 days before buying or selling their employer’s stock after setting up or modifying the plans.
That proposal follows academic research suggesting the arrangements are being abused as company leaders cash in at historic levels on their companies’ shares.
“The core issue is that these insiders regularly have material information that the public doesn’t have,” Mr. Gensler said in a statement. Wednesday’s proposed changes seek to ensure their stock trading is done “in a way that’s fair to the marketplace,” he added.
Commissioners also voted 3-2 along party lines to propose increased disclosures around public companies’ stock buybacks, which are also hitting records this year.
Repurchases support stock prices by reducing the number of shares outstanding in a company, lifting the firm’s earnings per share. Like dividends, they enable companies to return cash to investors. But critics, including many Democrats, say buybacks give executives who are partly paid in equity or options a roundabout way of boosting their own compensation, at the expense of workers’ wages or productive investments.
The SEC’s proposal would require stock-buyback disclosures to be more detailed and more frequent. Rather than disclosing monthly aggregate share repurchases once a quarter, companies would have to report buybacks on the next business day. They would also have to indicate whether any executives bought or sold shares within 10 business days of a buyback program’s announcement.
“Companies may determine to allocate capital towards share repurchases for a number of different reasons,” Democratic SEC Commissioner
Allison Lee
said. “But one of those reasons should not be for the opportunistic, short-term benefit of executives.”
The SEC’s chief economist,
Jessica Wachter,
said during the meeting that the costs of complying with the increased disclosure requirements might discourage some companies from buying back stock. Ms. Peirce and Mr. Roisman issued strong dissents against the rule.
“Say ‘dividend,’ and nobody gets angry, but say ‘share buyback,’ and the rage boils over,” Ms. Peirce said. “Today’s proposal channels some of that rage against repurchases in a way that only a regulator can: through painfully granular, unnecessarily frequent disclosure obligations.”
—Justin Baer contributed to this article.
Write to Paul Kiernan at paul.kiernan@wsj.com
Corrections & Amplifications The SEC proposed significant restrictions on 10b5-1 plans. An earlier version of this article incorrectly referred to them as 10b5-5 plans. (Corrected on Dec. 15.)
