A school for day trading securities settled SEC charges for (i) offering security-based swaps to non-eligible contract participants and (ii) failing to effect the transactions on a registered national securities exchange.
According to the SEC Order, the company sold investors educational materials on day trading, including access to a funded trading account. The investors selected securities, options and other investments to build portfolios and, based on the performance of the portfolios, potentially received payouts. The SEC stressed that the trading accounts were simulated.
Based on the price movement of the securities selected in the simulated portfolios, either the customer received a percentage of the simulated profits, or their funding trading account was closed if the value of the portfolio decreased by a predetermined threshold. For example, the company sold a $6,000 package that included access to a $160,000 funded trading account. If the funded account generated profits, then the customer would receive 80% of the profits; if the account lost $8,000, then the account would be closed.
The SEC determined that the agreements offered by the company were security-based swaps because "they provided for the exchange of contingent payments based on the value of U.S. securities without conveying ownership in the underlying securities."
The SEC found that the company violated Section 5(e) of the Securities Act for offering swaps to non-eligible investors and Section 6(l) of the Exchange Act for failing to effect the retail swap transactions on a registered exchange. To settle charges, the company agreed to (i) pay a $130,000 civil money penalty and (ii) cease and desist from future violations.
In a public statement, Commissioner Hester M. Peirce noted, "though not without reservations," that customers transacted with the company voluntarily, sometimes purchasing successive packages if their simulated accounts were closed. She also cited the educational value of such programs and concluded that there is "room in our regulatory framework for creative investor education programs."
Commentary / Stephen Lofchie
It is interesting that the SEC thought to bring this action as a "swaps" case. It would have been more straightforward, and ordinary, to charge the firm with acting as an unregistered broker-dealer and making illegal margin loans. Calling this a swaps case suggests that the conduct in question would have been legal but for the expansion of the SEC's authority under Dodd-Frank; that is not the case. This is not the first time the SEC Enforcement Staff turned an ordinary securities enforcement case into a "swaps" case. See comment in Firm Settles Charges with SEC for Selling Security-Based Swaps to Retail Investors. There is no particular harm in this, because there was a legal breach. Maybe bringing the case as a swaps action is something of a relief from the tedium of work from home.
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