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June 29, 2019 - Work Worth Doing - Doug Burgum
37:45
Cryptocurrency, Micro-investing & More: Protecting North Dakota Investors

Innovations in financial technology are making it easier than ever to invest your money. But the wide range of new financial services available can open investors up to unfamiliar risks. Karen Tyler, commissioner of the North Dakota Securities Department, joins us to explain how her team is helping protect North Dakota investors. To learn more about the Securities Department, visit www.nd.gov/securities

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The headlines were dominated by cryptocurrency once again last week when Facebook and a cohort of collaborators announced that they would be developing their own cryptocurrency, Libra.
As one of the most high-profile announcements in the financial technology sector in recent months, Libra has generated worldwide attention.
But what is cryptocurrency?
And for that matter, what exactly is the financial technology sector?
Thankfully, today's guest knows how to answer those questions.
And more importantly, she can tell us what it has to do with North Dakota.
Welcome to Work Worth Doing.
I'm Mark Staples.
Today we're talking to Karen Tyler, North Dakota Securities Commissioner.
The Securities Department is charged with protecting you and any investments you might make.
Stocks, bonds, corporate franchises, and so on.
But microinvesting and the use of cryptocurrency as a so-called investment medium is on the rise, exposing more of our citizens to unfamiliar financial territory that is full of new risks.
This requires that the Securities Department adapt to a changing regulatory environment and stay on top of the latest developments in financial technology.
As they say, time is money, so let's get started.
Here's Governor Burgum and Karen Tyler.
Welcome back to Work Worth Doing.
We're excited to have Karen Tyler with us today.
She is perhaps one of the longest serving cabinet leaders in North Dakota and having served for Governors Hoven and Dalrymple in this position and for good reason that she's doing this because of her extensive experience in the securities industry.
Welcome, Karen.
Great to have you here on the show today and thank you for all the service you've made to North Dakota over all these years.
Thank you, Governor.
It's really a pleasure to be here visiting with you.
We are a small, kind of obscure agency, so I always enjoy the opportunity to talk about what we do.
And of course, it's always a pleasure to talk about serving the citizens of North Dakota.
And I did have the privilege of being appointed by then-Governor Hoven back in 2001, and then reappointed by Governor Dalrymple, and now part of your team.
And it truly is a pleasure and an honor to be serving the citizens of North Dakota in your administration.
And you're saying small and obscure.
I'm going to say small and powerful and important and purposeful because you and your team do important work that touches really almost everybody in the state because everybody in North Dakota has an interaction either directly or indirectly with securities.
And that entire field is being disrupted by technology like every other field.
And one of the things that is hot on the news in your area is cryptocurrencies.
For all the innovation they provide, they also come with some risks and challenges.
But tell us a little bit about how technology disruption is affecting the securities industry and those of you that have to regulate the securities industry.
You know, in our agency, our primary mission, our primary objective is to protect North Dakota investors.
And along with financial technology innovation comes opportunity, but also comes some new risks.
And as regulators, we need to stay on top of that and make sure that the regulations protecting investors are still appropriate and applicable and useful for These new fintech innovations.
Certainly, cryptocurrencies have captured the attention of the public, of investors.
And I think, you know, more recently, just within the last few days, with a company like Facebook announcing that they're going to launch their own cryptocurrency in mid-2020, it's looking like, their own cryptocurrency called Libra, I think that has kind of re-energized the interest around cryptocurrencies.
So this is certainly a very timely podcast to be recording, and the opportunity to talk about it is certainly welcome.
Where cryptocurrencies interface with securities regulation really falls into, I guess, two categories.
First of all, you have the issue of Financial criminals just willing to and ready to exploit anything that is making headlines.
And in this case, kind of perpetually making headlines.
We're reading about cryptocurrencies almost every day.
So really willing to and ready to exploit new innovations.
And just wrap it around a fraud.
There's nothing legitimate about the business.
There's nothing legitimate about the proposition.
It's simply packaging a fraud in something that is making headlines that is the subject of social media buzz.
And so that's one aspect of the type of investment fraud that we're dealing with that relates to cryptocurrency.
There's nothing real there.
It's just A financial criminal wrapping a fraud in a cryptocurrency wrapper.
So let's drill down on that a second.
Because fraud and con artists, however you want to call it, have been around since the beginning of humanity.
But in this context, whether it's, I guess, initial coin offerings, people making promises, how do they find fraud?
How do they reach them in North Dakota?
Is it email phishing?
Is it phone calls?
How are people reached?
What are some of the cons that are out there today?
And how does your agency step in and help protect the North Dakota citizens?
Well, with cryptocurrency-related fraud, that is really pushed primarily through social media channels and the internet.
With initial coin offerings, initial token offerings, those types of Investment alternatives are primarily marketed through social media channels.
Other types of fraud, though, if we're just thinking about more traditional types of fraud, like a Ponzi scheme or a fraudulent oil and gas deal or real estate offering, Those types of more traditional frauds might still fall back on telemarketing or email solicitation and certainly fake websites, that kind of thing.
So those are sort of the usual channels for reaching North Dakota investors.
Back to cryptocurrency-related fraud, it's important, or really any fraud that uses the Internet.
There really are no borders built around the Internet, of course.
And so a lot of the fraud that we're dealing with that is pushed through the Internet channel is really emanating from outside U.S. borders.
So those types of frauds are really challenging to deal with because When an investor loses money to a fraud that is perpetrated through the Internet, emanating from a country outside of the United States, there is little to no chance that we're going to be able to recover assets for harmed investors.
Have you seen that these are on the rise in terms of the amount and number?
Or what advice would you have for North Dakota citizens?
Other than if it appears to be too good to be true, it probably is not true.
Well, really with cryptocurrency-related fraud, a fraud that's just packaged in a cryptocurrency wrapper, Investors really should approach that type of pitch, solicitation, like any other solicitation for investment.
They need to check into the background of the person who's promoting the investment.
They need to find out if the investment can legally be sold in North Dakota.
And this I will probably say more than once during this podcast.
They need to contact our office and And find out if the person promoting the investment is registered in North Dakota and can legally sell investments in the state, and if the security, the investment being sold, is registered or properly exempt from registration and can legally be sold in the state.
These opportunities for investors are changing the norms of regulating the industry.
And it's especially important that the regulators and the securities department can adapt to the changing landscape so they can protect the hard-earned money of North Dakotans and defend against bad actors who want to defraud investors.
The securities department is here to help.
So there's lots of other innovations that are happening.
PayPal's been around for decades, but now with the advent of smartphones, Venmo is very popular, I know, with a generation of young people.
All of these different forms of using financial transactions.
Are your office engaged in making sure that all aspects of financial transactions in North Dakota are run properly?
Or tell us how you interact with the financial industry.
Sure.
So our agency would really only be regulating products and services that are involved in the offer and sale of securities.
So, for example, some recent fintech innovations that would fall under our authority would be Securities-based crowdfunding, the creation of robo-advisors, which provide algorithm-based investment advice, companies that provide micro-investing services or round-up investing services.
These are some new technology, financial technology innovations that actually do involve the offer and sale of securities, And the provision of investment advice.
So even though it is a new form of investment advice or selling securities, the substance is still the same.
It's still a securities transaction.
It's still the provision of investment advice.
So securities laws still apply and our agency regulates that process.
And so, with the advent, you talked about Facebook announcing their proposed Libra cryptocurrency coming out next year.
We've got Bitcoin and dozens of others that are already out.
Does your office receive a lot of calls related to these, or is it more related to investments that might be based in these new electronic currencies?
We don't receive a lot of inquiries regarding cryptocurrency.
We certainly hope that investors would contact our office if they were being pitched an investment related to cryptocurrency.
But as to Bitcoin or as to Libra, we've not been receiving many phone calls.
Interestingly, Facebook seems to be taking steps to really Address the problems of the past, the past being really only 10 years, but we could call it cryptocurrency version 1.0.
So Facebook appears to be structuring their cryptocurrency to deal with volatility issues, because keep in mind that really the original intent of cryptocurrency was to be able to use it as a medium of exchange and a store of value.
But it's really, to this point, I've been used primarily for investment speculation.
So Facebook is trying to turn that back toward that original intent of a medium of exchange that can be used in an electronic payment system on the internet.
And so they have backed Their cryptocurrency or plan to back their cryptocurrency with a reserve fund.
And that reserve fund will be made up of fiat currency denominated assets.
Dollar denominated, pound, euro, franc denominated assets will be in this reserve fund.
to try to stabilize the value of their cryptocurrency.
So that's going to be one big difference in the Libra cryptocurrency as Facebook has proposed it.
Another interesting change in the way Facebook is doing this is that they are actually establishing a centralized governance They're calling it the Libra Association, and this is going to be made up of very well-established large companies that could even be considered competitors of Facebook's Libra.
So they're really trying to do things a little bit differently to establish certainty, less volatility, and be able to to promote the usage of their cryptocurrency as that medium of exchange as opposed to a vehicle for investment speculation.
And one of the benefits, of course, of electronic currency is that it's, you know, digital.
I mean, we got all the aspects and all the benefits of being digital.
One of the other challenges of it is the ability to do anonymous transactions, which, of course, you can do that with cash.
But our banking system has put lots of limits on transactions and cash, anything over...
You know, deposits over $10,000 must be reported.
A lot of those rules that came out in the United States were related to all the cash that was flowing towards criminal activity, and a lot of that related to, you know, the rise of the drug trade in the 1980s.
But now we have ability to do global electronic currency transactions anonymously, and of course I'm sure as a concern of regulators and law enforcement that it appears that a lot of the transactions that are occurring where it is being used is a store of value or for facilitating transactions, and those transactions may be illegal.
Yes, that definitely is a concern for regulators.
Now the flip side of that is that that transaction record can't be altered.
So once regulators have the ability to obtain the information, It can't be altered, so perhaps there is a way to track the activity back to the criminal.
More broadly, I think, you know, we're kind of zeroing in on cryptocurrencies, but I think more broadly in terms of the industry that we regulate They're really looking at uses for the underlying technology, and I think that's where a lot of the opportunity is in terms of financial services, businesses creating smarter ways to do things, more efficient ways to do things, more profitable ways to do things.
But that also creates new challenges for regulators as well, because we have to know how to work with these new technologies as we do our jobs examining these companies and conducting investigations.
Karen, as the Securities Commissioner for North Dakota, you touch so many different organizations that are either working in or selling securities in the state.
Maybe just for listeners, give us a little bit of a securities department by the numbers and help us understand the breadth and the depth of everything that you and your powerful team does every day.
Sure.
Well, I mentioned at the outset that the primary mission of the department was to protect investors.
And the reason for that, if you think about a securities transaction, any type of investment, it is the investor that carries the risk in a securities transaction.
It doesn't matter if it's a stock, a bond, or a mutual fund, or An exchange-traded fund.
It's the investor that carries the risk, and that's why securities laws and rules and regulations are built the way they're built, to protect the investor.
So some of the ways that we do that, that we carry out that mission and our authority, one is all securities industry firms and professionals that want to do business in the state have to be registered with our department.
And that process is facilitated through something called the Central Registration Depository.
And when I mentioned earlier that we really encourage people to check the background of the person soliciting their business, this is how we help them do that.
We utilize this massive database called the Central Registration Depository and it houses the records of all industry, investment industry, firms and professionals in this country.
And so an investor can give us a call and we can check the background of the person and the firm that they're looking at doing business with.
And so all of that information is facilitated through this registration process.
And a firm or professional cannot legally do business in the state unless they are registered.
To give you a sense of how many firms and professionals are registered to do business here, we have almost 1200 broker-dealer firms, brokerage firms, We have over 92,000 agents registered to do business here.
Agents are more commonly known as stockbrokers or investment consultants or financial advisors.
So just thinking about that number, that's one agent for every eight residents of the state.
So there's 92,000.
They don't have to live here, but if it's somebody who's in Montana, South Dakota, Minnesota, New York, Chicago, but they've got clients here in North Dakota, they have to be also registered in North Dakota.
Correct, Governor.
To do business into the state, they have to be registered with our department.
And a little over 1,600 investment advisor representatives.
But again, if I was listening to all those numbers, that's over 100,000 firms and professionals.
And then you throw the securities on top of that.
Enormous amount of complexity.
And on your amazing little team, how many people are managing all that complexity?
So in the North Dakota Securities Department, we have nine team members.
And you're right, we do have a lot of registrants.
And looking at those numbers between financial professionals and the firms that are registered here, along with all of the securities that have to be registered.
Because a security, to be sold in North Dakota, the security actually has to be registered with us or qualify for an exemption.
So between those different registrant categories, we have over 117,000 registrants.
So that actually generates a lot of registration revenue for the state.
We are a revenue-generating agency for the state of North Dakota, and this biennium will bring in over $22 million, probably $22.5 million in registration revenue And I would just point out that most of that revenue actually does come from out of state.
About 99% of our revenue is generated from out of state.
Well, I think it's safe to say that you are probably the most profitable of any state agency that we have relative to the revenue on the top line that's coming in.
It's coming in from out of state and then the efficient management that you're delivering with your little team.
You're an investor, Karen.
Have you ever sat back and said, what's the return on the budget investment?
Well, I'm really glad you asked that question, Governor, because, of course, we have.
And we like to share that number.
Between the registration revenue that we generate from our different registration functions and the money that we have secured to be returned to harmed investors, this biennium, our return on budget investment will be around 1,130%.
So we're very proud of that number.
So if you called and said, I've got a deal for you, I can give you 1,131% return on your dollar, is that when I should call you and say, this sounds too good to be true?
That one does sound too good to be true.
But it is true.
And so again, thank you, you and your team, for the great work you're doing in this super efficient way.
You mentioned, as part of that calculation, money recovered From investors.
Tell us a little bit about the work that you do on the enforcement of investment fraud and how you go about recovering dollars and getting them back to investors who may have been defrauded.
And that's another really important part of our investor protection responsibilities.
We do have the authority to conduct exams of the firms that are registered here, and we also have the authority to conduct investigations.
The exams are really important from the standpoint of deterring bad conduct.
So we have the authority to go into any investment firm, announced or unannounced, And conduct an exam of how they are doing their business.
And these are really focused on how they are interacting with their clients, the recommendations they're making to their clients, because again, it goes back to investors carry all the risk in a securities transaction.
So we conduct those routine exams to sort of deploy a deterrent mechanism for investor protection.
On the investigations side of things, this is really when we have an investor who has been harmed and has filed a complaint with the department.
Very often, an investigation will then result in the execution of a search warrant along the With law enforcement officials, the obtaining of records, the securing of records, and then the launch and completion of a full investigation, the ability to subpoena bank records and recreate money trails and that kind of thing.
If we are dealing with an individual who is registered to work in the industry, who works for a registered firm, we typically have good success in resolving the issue for the investor and securing relief for them and repayment of their assets.
Industry firms, you know, by and large, they want to do business right.
And if an investor is harmed, they want to make things right for that investor.
So we have good success with that.
Where we have challenges really is when we're dealing with that financial criminal that is not registered to do business and really has only one goal, and that is to separate investors from their money, and it's just, you know, a straight theft.
Those types of investigations and cases are much more challenging.
And less likely that we can secure repayment for investors.
But in this last biennium, almost $6 million you recovered.
That's remarkable work on, again, behalf of your team, and I'm sure some very happy investors that thought they'd lost it all, but you were able to recover some of their dollars.
Yes, we had a very large Ponzi scheme that we were investigating over the course of a couple of years, and we were able to secure almost full repayment for investors in that particular investigation.
And that was a classic Ponzi scheme.
In this case, it was fronted by nothing, you know, terribly exciting.
It was fronted by, like a cryptocurrency Ponzi, for example, it was just fronted by bank CDs, fake bank CDs that were paying a slightly better rate of return than a bank in the area might be paying.
It was also fronted with a fake stock trading program as well.
So, again, it was just a Ponzi scheme and the classic Ponzi scheme structure is you use money that you're able to bring in from new investors to pay what looks like a rate of return to earlier investors, but the perpetrator of the fraud is pocketing most of the money.
This was a registered financial professional.
He had been working in the industry for over 25 years.
And he'd been running a Ponzi scheme for about 10 years.
What's really, really tragic and unfortunate about these types of frauds is that it is such a violation of trust because this person, this financial professional, is preying on people who trust him the most.
And there's some real damage that's done there that goes way beyond just the financial losses.
It's not uncommon for the Securities Department to uncover fraudulent schemes and return money to North Dakota investors.
But of course, the goal is to avoid falling victim to one of these scams in the first place.
That's why the Securities Department is focusing on investor education and financial literacy for all ages.
We've talked about industry registration, securities registration, you know, enforcement, investment fraud.
There's a couple other areas of work that you do, and one of those has to do with this very topic of making sure that people are aware of the prevention, not just to fix it after it's happened.
But tell us a little bit about the work you do on investor education.
Investor education, I think, is really the bedrock of building financial security and financial empowerment, and it's a really important part of the work that we do.
We really see it as critical to helping people make good money choices and to help people recognize and avoid investment fraud.
So we run We do a lot of work in our school systems.
We have some great programs that we put into North Dakota schools, if I could talk just about a couple of those.
We have a program that we put into primarily our high schools, and we've been doing this for over 20 years now, so it even predates my term.
But it's called the Stock Market Game, and it's a great Public-private partnership with the SIFMA Foundation, which is an industry organization.
And the Stock Market Game allows students to manage a fictitious $100,000 portfolio, and either individually or in teams, they have to research stocks, make recommendations, structure their portfolios, make buy-sell decisions within their portfolios.
And really, along the way, learn economic and financial concepts, and they also learn team-building skills and communication skills, and it's really a great program all around.
So our agency puts that program into any North Dakota classroom that wants it.
In this last school year, we had 70 schools participate, and over 2,800 students participate in the stock market game.
Another program that I'd like to mention, also in the school system, is it's kind of an innovative way to get kids excited about learning about money.
And this is a program that involves partnering with the National Theater for Children out of Minneapolis.
And it's called Dollars, Dimes, and Decisions.
And every fall, we go on tour with the National Theater for Children, and we put on performances.
Well, they put on performances.
We support them.
In middle schools across either the western or the eastern part of the state, we alternate from the east to the west each year.
And we usually manage to visit 10 to 12 different schools, putting on performances that teach kids about money concepts, budgeting, use of credit, debit cards, a little bit about taxes.
So really important things.
Introductions to money concepts to help them begin at an early age understand how to make good money choices.
The actors do a great job.
It's a lot of fun.
It's interactive, a little bit of improv, and it really resonates with the kids, and then it has a companion curriculum that goes back to the classroom.
On the national front, Karen, you've had an opportunity to serve as president of the North American Securities Administrators Association, which is NASA with an extra A on the end of it.
So almost, you guys are rocket science almost, but you're rocket science and finance.
But tell us a little bit on that, and you've also been on the board of directors of the National Association.
You've been involved in some really large settlements at the national level, but Again, thank you not only for representing North Dakota and serving our citizens, but thank you for participating in leadership at the national level in this industry.
Well, it was a pleasure and an honor to do so.
When I served as president of NASA, it was an interesting time because it was 2007 leading into 2008, and I was not responsible for the financial crisis, but it was certainly an interesting time.
I think it's important for investors to understand, too, that in terms of regulatory structure, there are securities regulators on the state level And our counterpart on the federal level is the Securities and Exchange Commission.
So through our national organization, NASA, we have the opportunity to really collaborate and promote uniformity among state regulators and work very collaboratively with our federal counterpart, the Securities and Exchange Commission.
NASA's a really important part of that equation.
While I was president, one of the big issues that investors were facing in terms of misconduct by the industry was the collapse of the auction rate securities market.
Auction rate securities are kind of a lesser known type of investment instrument, but they were essentially, and they are essentially, long-term debt that's issued primarily by municipalities that behaved like a short-term savings or investing instrument because long-term debt that's issued primarily by municipalities that behaved like a short-term savings or investing instrument because there were regular auctions, maybe
But the auction feature would allow that instrument, a market, to change hands And the interest rate on that instrument would be reset.
So it allowed municipalities to issue their debt a little more cheaply, and it allowed investors to get a little bit better rate of return on something that was viewed as kind of a money market type instrument.
The problem was that the auctions weren't real.
There wasn't enough buyer and seller activity to match up all of the trades, and so the investment firms would have to come in and buy up the excess capacity in the auctions.
And as we all recall, what was happening at that time is the financial condition of these investment firms was continuing to erode, and in the spring of 2008, they could no longer go in as buyers to these auctions, and the auctions froze up.
So long story short is all of these investors who'd been sold what were represented to be like money market accounts couldn't access their money anymore.
And so these were retirees that had their retirement living expenses and those types of instruments.
Parents that were saving for college education that had those expenses coming up pretty quickly.
People who were saving for a down payment on a home.
That was the type of money that had found its way into the auction rate securities.
And so when those auctions froze up, the markets locked.
There were billions and billions of dollars worth of damage that were caused through the lock of the auction rate securities market.
So people perceived they had liquidity and that they could basically not sell at any time, but they could sell in the next few days or the next week.
The next auction, if they wanted liquidity, they had a ready market to sell back into to produce the cash they might need for living or other expenses.
But when you say they froze up, then that liquidity disappeared and their assets were frozen.
That's correct, Governor.
That's exactly what happened.
And thankfully, we were able to work with the firms to reach settlements.
I think there were 14 different firms involved, billions of dollars of assets repaid.
There were certainly some penalties that were assessed as well because of the sales practices and the conduct of the firms.
But we were able to secure relief for retail investors across the country.
Fantastic.
Well, great work on the national front, too, during a very crucial financial crisis for the U.S. Karen, as we wrap up, you know, the show is called Work Worth Doing.
You're like many other leaders here at State.
If you were in the private sector, in the financial securities industry, you could be, I'm sure, compensated more than you are as a dedicated leader of a cabinet agency at the State level.
So you're making a sacrifice to be here personally to serve.
And tell us about work worth doing.
Tell us about the purpose behind what you do and why would you make that choice?
Someone who focuses on the industry and knows about optimization for financials, but here you are giving of your time and your talents to help protect investors in North Dakota.
So just tell us a little bit about what drives you to work on this work worth doing.
You know, it's interesting that when I was thinking about work worth doing and my passion and my dedication to protecting investors, I went back to my days in the industry.
And I think at the time, I really didn't have an appreciation for while working in the securities industry as a I didn't really have an appreciation for the impact that financial regulation has on investor confidence.
And investor confidence, of course, is a critical element of the health and vibrancy and success of our capital markets in this country.
So I have a much better appreciation for that now sitting in the regulator's chair.
And so I really see the value in the work of regulators in promoting and supporting Investor confidence and how that translates into the health of our capital markets.
I think, you know, it is a challenge.
Workforce is a challenge generally in the state.
I know that's been talked about on previous podcasts, and we certainly see that too in our agency, but I think it also is important.
is kind of indicative in terms of what has just transpired in our agency.
We've just had three retirements over the course of the last three years that represented a combined 90 years of experience.
And so what I think that is a testament to is the dedication that The team members in the North Dakota Securities Department have to Investor Protection, a testament to the value that they see in the work that they do, that they truly believe that they are making a difference for the citizens of North Dakota and that it truly is work worth doing.
I want to say thank you to you, thank you to your team, including those people with their long, long dedicated service that have recently retired.
But they have made a difference.
They are making a difference.
Your team continues to make a difference.
And so thank you for all you do to protect the citizens of North Dakota.
The team at Securities comes to work every day with the goal of protecting North Dakota investors.
If you have questions about micro-investing, cryptocurrency, or other types of securities, feel free to contact them.
Send an email tondsecurities atnd.gov or call the department at 701-328-2910.
You can find out more atnd.gov slash securities.
That's all for today's show.
Thanks to Commissioner Karen Tyler for joining us and for explaining to me what Bitcoin is all about once we were off the air.
And a big thanks as always to our audio producer, Alicia Jolliff.
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