Welcome back to the Compliance In Context podcast! On today’s show, we will be providing a comprehensive, deep-dive look at Ponzi schemes—what are they, historical facts and impact, themes and trends, and some best practices to keep in mind to help prevent these types of frauds from occurring inside your firms and with any underlying clients. To help guide us through this important topic and share some fantastic insights for our listeners, we welcome in Daniel Brinks, a Partner with StoneTurn and former regulator who spent more than 15 years at the SEC, most recently serving as a forensic account in the SEC’s Division of Enforcement..

Show

Interview with Daniel Brinks

• Background on Ponzi Schemes
• What are the trends and are there early-detection red flags?
• Why do some fall apart at 18 months versus others that last 10 years?
• How do the feeder frauds operate?
• Why do Ponzi schemes have an air of legitimacy?
• What are the similar characteristics in Ponzi Schemes?
• Custody Rule Impact
• Why has the total number of Ponzi schemes declined in recent years?
• How do compliance officers make sure to prevent these frauds from occuring?

Quotes

05:39: “So his scheme lasted eight months. He raised, you know, $20 million. But I think that the hallmarks of his scheme are still the hallmarks of what we see today. So the hallmarks of the original Ponzi scheme, a promise of high return, low risk…an exotic investment strategy, then the theft of assets, fake account statements. And I think the hallmark of a true Ponzi scheme is the recycling of assets, where you're using the investments of new investors to meet redemption requests from prior investors.” – Daniel Brinks

08:53: “I think the unfortunate and sad truth is that most Ponzi schemes are only uncovered when investors start bringing them to the attention of regulators. So the SEC has a TCR system, and when investors can't get their money back from schemers, they start reporting, 'Where's my money?' And then the SEC starts investigating it. That's unfortunately how most of these schemes fall apart, when they can no longer meet redemption requests and people start making complaints.” – Daniel Brinks

13:44: “I think the two characteristics that exist that investors and investment advisors should be on the lookout for the most is lack of transparency…the hard to get real answers on pieces of paper, statements. Think about as a scheme grows from ten investors to 100 or 200 investors, now you're sending quarterly statements to 200 investors. Like, that's a big administrative lift that probably most schemers don't have the ability to come up with rational answers for, where you're manufacturing complete trading histories that tie out, you know, multiple sets of books. It's really complicated to have multiple sets of books. So when schemes seem to get outside the realm of what people can do easily, information gets harder and harder to come by, and people should take that as a real warning flag when they're not getting, you know, account statements and things like that, or if the account statements look weird, right? They don’t look exactly what you would expect they would look like from a core custodian.” – Daniel Brinks

17:49: “I think another explanation for why [Ponzi schemes have declined] could be because we've generally been in a strong economic cycle. So, economic recessions cause increased numbers of redemption requests, and that puts a lot of pressure on the fund, and it makes them harder to ma- make, to meet those redemption requests. And that's when, whenever there's a recession, we see the number of Ponzi schemes that are prosecuted spike almost immediately. And I think the current strong economic cycle kind of has allowed frauds to go under the radar.”

Welcome back to the Compliance In Context podcast! On today’s show, we discuss how to build a culture of compliance in AI world and some best practices firms are using now to build AI into their respective operations and compliance programs. In our Headlines section, the SEC to Raise Qualified Client Threshold for Performance-Based Fees, SIFMA Re-urges the SEC to Overhaul Communications Retention Rules, and SIFMA Urges SEC to Overhaul Communications Retention Rules, and finally, we close up today with another installment of Outtakes, where we review a recent enforcement action involving fraud and registration charges against three venture capital fund managers and their owner.

Show

Headlines

• SEC issued a final order that adjusts the dollar amount thresholds for “qualified clients” under Rule 205-3 of the Investment Advisers Act
• SIFMA Urges SEC to Overhaul Communications Retention Rules

Interview with Erik Olsen

• How are you seeing firms successfully use AI, both inside and outside of compliance?
• Have you developed an AI policy?
• What voices inside the firm did you engage to help draft it (i.e. what departments were consulted)?
• From an operational perspective, what are the key considerations firms should consider before implementing AI into their systems and processes?
• What impact has incorporating AI into your firm had from a compliance perspective?
• What are some of the best practices you see firms implementing across the compliance program to foster a “culture of compliance” where AI feels ever present?
• Where do you see AI going in the future and what steps are you taking now to help accommodate the changing environment?

Outtakes

• SEC charges venture capital fund managers for making false and misleading disclosures, failing to disclose certain conflicts of interest and failing to comply with Securities Act and Investment Company Act registration requirements.

Quotes

14:13 – “Well, it’s, it’s the new shiny toy, right? It’s the souped-up new shiny toy that, as we always hear, you know, our neighbors down the street have and we don’t have, right? The same way they do marketing or, or something like that. So yeah, I agree with you. We got to figure out what is the use case for us because in, you know, us, you, them, it-it’s not going to be equal. Even though we all do asset management, you know, as we know within even the product lineup and the strategies we offer, it’s not all equal. So we do have to do that analysis. What do we use it for? What type of firm are we? Like I said at the top, we’re about 39 people. That AI use may look totally different than a shop that’s 1,000 people, right? Not only just what it... how you use it, what you’re using it for, but even how you even get to implement it.” – Erik Olsen

16:43 – “We are Microsoft Suite users, right? Copilot is basically in there. So we gave everyone the ability to use Copilot for work-related stuff. And in our acceptable use policy, which is an IT-owned policy, we had a section dedicated to large language learning models and AI and what you--basically the limitations. It was basically Copilot or bust. Here are the finer points. You know, put restrictions around trying to get backdoor access to Claude or Gemini or ChatGPT, whatever, et cetera. So that’s been kind of the last, again, let’s say, call it a year. And of course, people want more, which is fine. And the constant pullback was, “Yes, we want, we want more. Explain that to us,” and us re...

Welcome back to the Compliance In Context podcast! On today’s show, we discuss the FINRA Forward initiative and review some of the recent FINRA rulemaking activity in areas like outside business activities, personal securities transactions, gifts and gratuities, and performance advertising. In our Headlines section, the DOL reinstates the prior fiduciary standard under ERISA and Senator Warren Questions SEC Chair on alleged political interference in enforcement, and finally, we close up today with another installment of Outtakes, where a recent lawsuit filed by a former client against an RIA raises important considerations around appropriate disclosures and applicable standards of care.

Show

Headlines

• The U.S. Department of Labor (“DOL”) restored its prior five-part test for determining “fiduciary” status under the Employee Retirement Income Security Act (“ERISA”)
• Senate Banking Committee Member Elizabeth Warren pressed SEC Chair Paul Atkins to address allegations of political interference in enforcement matters before the agency

Interview with Ed Wegener

• What is FINRA Forward?
• What does FINRA hope to achieve with the FINRA Forward Initiatives?
• What have we seen to-date?
• What are the potential benefits?
• What are some potential challenges?
• What are the key changes in proposed Rule 3290?
• What are the key changes for Rule 3220 related to Gifts and Gratuities?
• What are the key changes Proposed for Advertising (Performance)?

Outtakes

• SEC-registered investment advisor allegedly assured a client that a $10 million bond investment was “guaranteed” before the underlying project collapsed entirely

Quotes

10:55 – “It’s clear that things don’t stay the same. Things change. The way we do business, technology, all of that changes, and it’s important for the rules to keep up with that. As well as show regulators enforce those rules. And so, from time to time, it’s really important to take a look and say, ‘What’s changed?’ and ‘Do we need to realign the rules with those changes?” – Ed Wegener

22:00 – “What you’re going to see is not just much more efficient regulators, which is always good, but more effective regulators. And so it’s important for firms to keep up because what you don’t want is regulators coming in with all this information and data and things that you don’t know about.” – Ed Wegener

22:37 – “There’s an opportunity for a great partnership there, between compliance departments and regulators, and this could be a really good way to do that. And the other thing, too, is all of these things are great. It only takes one big scandal to happen for things to just snap back into a much more reactive mode. So that’s one of the things the industry’s got to keep their eye on the ball, just make sure we’re keeping things in check, because we want to continue the momentum of all these changes and don’t want to have to take a step back.” – Ed Wegener

26:44 – “Probably the most important change in the proposal is that it would only apply to investment-related outside activities. So non-investment-related outside activities (such as being employed at a ride share company or working in a retai...