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Sell of Security-Based Swaps Leads to Violation of Dodd-Frank

Sunday, November 20, 2016

The Securities and Exchange Commission recently issued a cease and desist order and fine against Forcerank, LLC for its violation of Dodd-Frank restrictions surrounding security-based swaps. Forcerank developed software which allowed players to predict how a group of stocks or exchange traded funds would perform relative to each other over the course of one week. Forcerank’s goal in running the contest was to obtain information which would allow them to create a data set about market expectations that could then be sold to hedge funds.

Forcerank began running the contests in February of 2016. Entrants were required to pay a fee in order to participate in the contests. By June 2016, Forcerank had run more than 200 contests and paid over $15,000 in prizes.

Forcerank’s contests were not reviewed and cleared by any regulatory body as not involving swaps or security-based swaps. Forcerank’s website included a disclosure which addressed concerns that players might have had regarding violations of the law including those regulations surrounding the purchase and sale of security-based swaps. The disclosure said: “’Given that the Forcerank contest is not a security or security based swap, and is a skill based contest, it is not currently regulated by the federal government, any state government, or financial regulatory authority. Forcerank has been in close contact with various financial regulatory authorities both before and after launching Forcerank contests.”

Dodd-Frank amended Section 5 of the Securities Act to make sales and offers of security-based swaps to people who are not “eligible contract participants” unlawful absent an effective registration statement covering the offering. The SEC determined that Forcerank’s entries were in-fact security-based swaps as defined by the Securities Exchange Act of 1934. The SEC concluded that Forcerank LLC violated the Securities Exchange Act of 1934 and the Securities Act of 1933 “. . . when it entered into contracts with Forcerank game players who were not eligible contract participants because no registration statements were in effect for the offer and sale of the contracts and the contracts were not effected on a national securities exchange.”

Consequently, Forcerank was assessed a fine of $50,000 and ordered to cease and desist from further violating securities laws. If you are considering offering a new service, contact Red Oak Compliance Solutions and speak with one of our compliance consultants in an effort to help ensure your firm’s compliance with securities laws.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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