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Regulation Best Interest (Reg BI), which was instituted in June 2020, dramatically changed the relationship between broker-dealers and retail investors. Prior to Reg BI, broker-dealers owed a duty to investors to only recommend securities that the broker-dealer believed to be “suitable” for a particular investor based on such investor’s investment profile. Reg BI was implemented to replace the “suitability” standard and to impart on stockbrokers a duty owed to investors that was more analogous to the fiduciary duties owed to clients of financial advisors. Reg BI is made up of four core obligations, including a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation. If your stockbroker sold you investments that were not in your best interests or in line with your investment profile, you should contact a knowledgeable Securities Fraud Lawyer, like the lawyers at Malecki Law in New York, to determine whether you have a case.

Within Reg BI’s Care Obligation is a seemingly disregarded requirement on broker-dealers to consider “reasonably available alternatives” (RAAs) when making recommendations to retail customers. This requirement applies to recommendations of investments, account types, and even investment strategies made by a broker to their retail investor client. The RAA requirement is encompassed by a broker-dealer’s obligation to “have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the risks, rewards, and costs associated with the recommendation…”

For a stockbroker to believe that a particular recommendation is in the best interest of an investor, logically the stockbroker must consider other available products that might be able to achieve the investor’s goals with less risk and/or costs. The SEC has described the RAA requirement as a “key component” in achieving compliance with Reg BI’s Care Obligation. If you have experienced investment losses from products recommended by your stockbroker and your broker failed to consider reasonably available alternatives, you should consult a Regulation Best Interest law firm, like Malecki Law in NYC.

In March 2024, Evershed Sutherland (US) LLP released its annual report (the Report) detailing disciplinary and enforcement actions initiated by the Financial Industry Regulatory Authority (“FINRA”) during the 2023 year. The Report outlines how FINRA seemingly stepped up its investigatory efforts in 2023, levying $89 million in fines against member firms and associated persons. Comparatively, FINRA reported just $54.5 million in fines during 2022, representing an increase of over 60%. Over a quarter of the fines handed out by FINRA last year can be attributed to the $24 million fine received by Bank of America Securities, Inc. for engaging in “spoofing” and related supervisory failures.

Despite FINRA’s bolstered fine revenue in 2023, FINRA ordered member firms to pay far less restitution to investors compared to past years. In 2023, FINRA ordered just $7 million in restitution compared to $21 million ordered in 2022, representing a 66% decrease. On December 6, 2023, FINRA announced sanctions against four firms, including M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc., totaling over $2.6 million, which included $1 million in restitution paid to retail customers. Notably, this was the only million-dollar restitution ordered by FINRA in 2023, a stark decline from 2021 when FINRA handed out ten of such orders. If you are a financial professional who received an 8210 Request from FINRA, you should consult an experienced Securities Industry Regulatory Defense law firm, like Malecki Law in New York, to help navigate you through the process.

FINRA’s increased fine totals in 2023 were surprisingly achieved through comparatively fewer disciplinary actions. 2021 currently represents the high-water mark of FINRA disciplinary actions in recent years, totaling 569 actions. In 2023, FINRA initiated just 453 enforcement and disciplinary actions. This was the fewest number of disciplinary actions initiated by FINRA in the preceding decade and a stark contrast to FINRA’s disciplinary efforts between 2014 and 2017 when FINRA brought over one thousand disciplinary actions annually. The considerable drop-off in FINRA disciplinary actions since 2017 seems to coincide with Robert Cook taking over as FINRA’s President and Chief Executive Officer. Cook joined FINRA in August 2016 with a primary goal of taking “a fresh look at” FINRA’s enforcement program. If you are a stockbroker or financial advisor who is concerned with the language on your Form U5, you should consult a knowledgeable FINRA Expungement Attorney, like the attorneys at Malecki Law, to determine whether you can bring an action to have the concerning language removed from your Central Registration Depository (CRD).

On May 13, 2024, E*Trade’s trading platform was down at market open, which caused its customers to be unable to sign in, halting their ability to buy or sell securities. Many retail investors took social media by storm about the event. If you were locked out of your online brokerage platform, you should consult an Investor Protection law firm in New York, like Malecki Law.

This may remind you of the GameStop short-squeeze and rise of Reddit investors during the wake of COVID, where a trading freeze ensued.

Keith Gill, who led the Reddit craze in 2021, also known as the “Roaring Kitty,” woke up from his social media nap and made his return by posting a picture on Sunday night of a man seemingly leaning forward in his video game chair, indicating the intent to become re-involved. Mr. Gill made a few other cryptic posts, one of which depicted a movie villain stating, “Fine, I’ll do it myself.”

On March 18, 2024, the Securities and Exchange Commission (the SEC) announced that it had settled charges against two registered investment advisers (RIAs) related to false and misleading representations about each RIA’s alleged use of artificial intelligence (AI) in effecting financial services, conduct which the SEC coined as “AI Washing.” In total, the SEC collected $400,000 in civil penalties from the firms, with Delphia (USA) Inc. (Delphia) agreeing to pay $225,000 and Global Predictions Inc. (Global Predictions) agreeing to pay $175,000. As AI increasingly takes over the mainstream in the coming years, investors must remain attentive to the representations RIAs and broker-dealers make about utilizing AI in the financial services they offer to public investors.

Delphia is primarily in the business of offering robo-advisory services to retail investors. “Robo-advisors” are typically algorithm driven platforms that offer investors automated investment advice based on data provided to the platform by the investor with very little, if any, human interaction. In touting its robo-advisory services to the public, Delphia represented that investor data was actively utilized to “train” and “power” its proprietary algorithms that was capable of making investment predictions up to “two years into the future.” In reality, the SEC found that Delphia never successfully implemented its investor data-driven algorithms and misrepresented its AI capabilities to the public. Notably, Delphia was also investigated by the SEC for identical conduct in 2021. If you are being investigated by the SEC, you need skilled Regulatory Lawyers in New York, like Malecki Law, to get you through the investigation.

Global Predictions offers retail investors non-discretionary investment advice, namely portfolio allocation recommendations, through its proprietary investment application PortfolioPilot and the use of proprietary algorithms. Global Predictions represented to the public that it was the “first regulated AI financial advisor” and that it actively utilized AI capabilities in the services offered to investors. After its investigation, the SEC determined that Global Predictions made false and misleading representations on its Form ADV, press releases, website, social media accounts, and paid testimonials about the company’s AI capabilities which Global Predictions was unable to substantiate. The SEC also determined that Global Predictions violated the SEC’s Amended Marketing Rule and failed to implement policies and procedures related to achieve compliance with the same. If you have made investment decisions based on AI-related misrepresentations made to you by your investment adviser or stockbroker, you should consult an experienced, AI-Securities Fraud Attorney, like the ones at New York’s Malecki Law.

On May 6, 2024, Robinhood announced that its crypto unit (Robinhood Crypto) received a Wells Notice from the SEC on May 4, 2024. According to MarketWatch, Robinhood’s stock price dropped more than 9% following the public disclosure of the Wells Notice.

Robinhood further disclosed that the Wells Notice was related to an investigation that was previously disclosed at the end of February, due to receipt of subpoenas related to its crypto operations. If your company received a Wells Notice or a subpoena, you should retain a SEC Regulatory Defense law firm, like Malecki Law in New York, to communicate directly with the SEC on your behalf.

According to CNBC, Robinhood’s disclosure of receipt of the Wells Notice further indicated that the SEC believes it violated both Sections 15(a) and 17A of the Securities Exchange Act of 1934. More specifically, it appears that the SEC believes digital assets offered on the Robinhood Crypto platform qualify as securities, and therefore should have been registered with the SEC. However, it is unclear which digital assets are in question, or if the SEC is simply targeting all digital assets offered on the platform.

Did you notice electronic funds transferred out of your bank account? Did you authorize these transfers? If your answers are yes and no, respectively, you need to reach out to an Unauthorized Electronic Funds Transfers lawyer in New York, like the lawyers at Malecki Law, to review your circumstances.

A threshold determination is whether the account at issue is a consumer account or a commercial/business account. This is because the law generally treats these types of accounts differently. There are two potential avenues for recourse, the Electronic Funds Transfer Act (EFTA) for consumer accounts and Article 4A under the Uniform Commercial Code (UCC) for commercial accounts. Notably, the UCC generally does not apply to scenarios which the EFTA governs. See § 4A-108. Relationship to Electronic Fund Transfer Act for more. You need to have a law firm well-equipped to analyze which law may govern, such as an Unauthorized Electronic Funds Transfers law firm like Malecki Law in New York.

Claims Under the EFTA

On Wednesday, April 17, 2024, Malecki Law’s Jenice L. Malecki, Esq., will participate in a virtual panel organized by the New York State Bar Association (NYSBA). This is a joint effort by the NYSBA’s Commercial and Federal Litigation Section’s Securities Arbitration Committee and the Dispute Resolution Sections’ Securities Disputes Committee. Ms. Malecki will speak alongside her colleagues in the industry, Howard Fischer, and Joe Wojciechowski. If you incurred investment losses due to crypto-based products, you need to consult with a Crypto-Based Investment attorney in New York, like the lawyers at Malecki law.

The panel is called “The Current State of Crypto Cases: What Theories Are Being Developed to Support claims Relating to Crypto Losses?” It will begin at 12:00 p.m. EST and end at 1:00 p.m. EST. The panel will focus on liability related to crypto recommendations and broker-dealers. It is free to attend, please click here to register.

Ms. Malecki is looking forward to discussing her first-hand experiences with broker-dealer liability as it relates to crypto-based investment recommendations. Malecki Law has recently settled with a large crypto-based broker-dealer, where Ms. Malecki had the opportunity to learn more about broker-dealer liability in the context of crypto losses. Further, Ms. Malecki enjoys speaking on panels and sharing information with other lawyers in the industry, in an effort to protect investors like yourself. Did your broker recommend that you invest in crypto-based investments? Were those investment recommendations in your best interest? You should reach out to a Crypto-Based Investment law firm, like Malecki Law in New York.

On January 10, 2024, the Securities and Exchange Commission (SEC) approved eleven applications for the first ever Bitcoin Spot exchange-traded funds (ETFs), which have been publicly listed and subsequently trading in the secondary market since their approval. This was the first time that the marketplace had seen an attempt to make crypto-based securities available to a regular retail investor, like yourself. Click here for the related Malecki Law firm blog post [to link to Adam’s general blog about the approval]. If your broker has recommended that you purchase Bitcoin Spot ETFs, you may need to consult with a Crypto-Based Securities lawyer in New York, like the lawyers at Malecki Law, to determine whether that investment recommendation was made in your best interest.

The SEC’s approval of the Bitcoin Spot ETFs may have opened the door for similar Spot ETFs tied to other cryptocurrencies. The SEC’s second round of ETF reviews is currently underway, as there are at least eight issuers with pending applications for Ethereum Spot ETFs, including Fidelity, BlackRock, Invesco with Galaxy, Grayscale, Hashdex, 21 Shares with ARK, VanEck, and Franklin Templeton. These ETFs would work in the same practical sense as the Bitcoin Spot ETFs, except, they would be tied to the cryptocurrency Ethereum rather than Bitcoin. If your financial advisor is recommending that you invest in Ethereum Spot ETFs, if they are approved by the SEC, you should consult with a lawyer from Malecki Law, a Crypto-Based Securities law firm in New York, to see if your advisor is making investment recommendations in your best interest, as required by Regulation Best Interest.

Bitcoin and Ethereum generally maintain the largest market capitalizations for cryptocurrencies, Bitcoin being number one and Ethereum being number two. As of March 26, 2024, Bitcoin had a market capitalization of over $1.3 trillion while Ethereum had a market cap over $425 billion. Based on this, it would make sense for Ethereum Spot ETFs to follow Bitcoin Spot ETFs. However, there may be less optimism for Ethereum. Noelle Acheson, a crypto researcher, author, and host of the Markets Daily podcast, indicated that there is a “conceptual problem for Ether that didn’t apply to bitcoin.” At the same time, others in the industry maintain the belief that Ethereum Spot ETFs make sense (click here for a related Nasdaq article). Did your broker recommend that you invest in crypto-based securities? Did your broker obtain important investor profile information, like your risk tolerance and liquidity needs, before making such a recommendation? If the answer is no, you should speak with a lawyer at a Crypto-Based Securities law firm, like the lawyers at Malecki Law in New York, to review your situation.

FINRA has recently proposed changes to its Rule 3240, which allows for scenarios where brokers can borrow from or lend to their clients. FINRA’s rule proposal would strengthen and clarify the general prohibition against these types of arrangements and would narrow the exceptions that fall under the prohibition. In its request for comments, the SEC cited Malecki Law’s previous comment addressed to FINRA, dated February 14, 2022 (see Footnote 32 on page 23).

The current comment period closed last week, on February 12, 2024. Malecki Law submitted its public comment on the proposal last week, along with three other organizations. If your broker requests that you lend them money or borrow money from them, you may need to contact a Securities Fraud law firm in New York, like Malecki Law, to analyze whether that arrangement is allowed under FINRA Rule 3240.

This is not the first time FINRA attempted to make Rule 3240 more stringent. FINRA made a similar proposal in December 2021, and that comment period ended on February 14, 2022. Malecki Law also submitted on public comment on that proposal. Click here for the related Malecki Law firm blog post and click here for the related Regulatory Notice 21-43.

On Wednesday, January 10, 2024, for the first time in U.S. history, the Securities and Exchange Commission (SEC) approved the listing and trading of spot bitcoin exchange-traded funds (ETFs). Among those includes the Bitwise Bitcoin ETF (BITB)—the first spot bitcoin ETF issued by Bitwise Asset Management. Less than two months later, on Friday March 8, 2024, the price of Bitcoin, the largest cryptocurrency by market capitalization, reached an all-time high of more than $70,000. With the inflated price of Bitcoin and its newfound accessibility that BITB provides, there is a crucial question that every investor should have on their mind: is investing in BITB in my best interest? The purchase of these investments, according to Regulation Best Interest, should only be made by an investment recommendation if it is in your best interest after diligent consideration by your financial professional. A Crypto-Securities law firm in New York, like Malecki Law, can help you determine whether Regulation Best Interest was violated.

As demonstrated by its name, an ETF is a pooled investment security that has attributes similar to both a stock and a mutual fund. “Exchange-traded” refers to the security’s ability to be traded on the market like a stock, while “fund” refers to its ability to consist of a diverse allocation of assets like a mutual fund. The concept of Bitcoin ETFs is not new to the world of securities, for example, Bitcoin futures ETFs, or ETFs that invest in Bitcoin Futures contracts (time-limited agreements to buy or sell Bitcoin at some point in the future), have been around since 2021. However, Bitcoin futures ETFs have unappealing features like “roll premiums,” which are costs incurred when selling expiring contracts and buying new ones. Additionally, futures contracts do not accurately track the spot prices of Bitcoin, meaning the immediate or current price of Bitcoin, so returns may never be as high as spot market prices. You may need a Crypto-Securities attorney in New York, like the lawyers at Malecki Law, to analyze your crypto-based investments to determine your potential losses.

On the other hand, spot Bitcoin ETFs do in fact provide investors with the spot price of Bitcoin and do not rely on futures contracts. Spot Bitcoin ETFs hold Bitcoin as its underlying asset, meaning the ETF actually holds an equivalent amount of Bitcoin to back every share of the ETF that is sold. These shares, which are priced to reflect the spot price of Bitcoin, can be traded on traditional stock exchanges. Therefore, purchasing shares of a spot bitcoin ETF is a relatively easy way for investors to gain Bitcoin exposure to his or her investment portfolio.

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