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