Money Stuff: Investment Banking Without a License

Investment banking is, in the US, a regulated profession. If you are doing certain investment banking activities — like “advising on and/or facilitating … debt and equity offerings, mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations and business combination transactions,” you have to pass a licensing exam and register with Finra, the Financial Industry Regulatory Authority.

This sometimes trips people up, because investment banking is not as clearly defined as some other professions. If I am buddies with a chief executive officer, and I tell her “hey I’ve got another buddy who runs a startup, you should buy them,” and she does and pays me a finder’s fee, did I commit unlicensed investment banking? Maybe? If I am some random celebrity or politician and I get hired by an investment bank to glad-hand clients, can I glad-hand the clients before passing my licensing exams? Not a great idea, but I bet it has happened.

Or new investment banking analysts have a few weeks to study for and pass their licensing exams after they start work. So, for some period of time, they are not licensed investment bankers. Yet they work 100-hour weeks. What do they do? Well, not “advise on and/or facilitate” mergers, in the sense that the first-week analyst is not on the phone with the client’s CEO walking her through merger strategy. But can they format pitchbooks? Probably. Can they show up at client meetings and sit quietly? I do not want to give you any sort of regulatory advice, but I bet (1) that has happened and (2) no one has gotten in trouble for it.

It’s possible that the practical rule is something like: “If you are on the working group list for a live transaction, you’d better be a licensed investment banker.” The WGL is a document that, among other things, tells the client who its advisers are. If your phone number is listed on the WGL, the client might call you for advice, so you need to be licensed to give that advice. If you’re just back in your cubicle toiling on pitchbooks, and the client has never heard of you, then you’re not advising anyone and don’t need a license. This is not any sort of advice, and is certainly not the technical rule, but it feels like roughly the right idea.

At big investment banks, this stuff doesn’t come up that much. Anyone who gets hired into an investment banking role is expected to take their licensing exams as soon as possible. Investment bankers are smart and driven enough, and the exams are easy enough, that they all pass and get licensed pretty quickly. There are temporary gaps, but for the most part any investment banker at a big bank is a licensed investment banker.

Except at Morgan Stanley Budapest I guess? The Wall Street Journal reports:

The Financial Industry Regulatory Authority in the U.S. has opened an inquiry about what kind of work the Budapest bankers were doing, how much contact they had with clients and how they were supervised, people familiar with the matter said. The probe is at an early stage, the people said.

A former employee had contacted the regulator as a whistleblower, the people said, alleging those in the program lacked the proper licenses that work would have required. …

The offshoring of back-office jobs to support bankers on Wall Street has been going on for years. … But those workers aren’t typically allowed to carry out any financial analysis and are viewed as support staff. 

In Budapest, Morgan Stanley took the idea one step further, moving front-office jobs that typically go to graduates of top universities in cities such as London or New York. …

The young analysts in Budapest have similar roles and responsibilities to their peers in London and New York: working on pitch decks to help win the bank business and live deals to help clients raise capital or buy companies. They work the same hours as their counterparts, meaning that analysts supporting the New York office often toiled between 1 p.m. and 7 a.m. local time, according to timestamped messages reviewed by The Wall Street Journal. ...

The bank made clear in a 2024 memorandum to staff that the Budapest analysts “are not licensed to undertake any regulated activities,” including direct contact with clients and any handling of know-your-customer processes.

But the rules weren’t properly enforced, the people said. …

In pitch decks for clients, the analysts were listed as employees on the New York and London teams, sometimes designated with flags of the U.S. and U.K. More recently, another analyst traveled to meet a client based in Europe, people familiar with the matter said.

Plausibly any amount of pitch-deck formatting and maybe even financial modeling is fine, as long as some licensed banker is checking the model and giving the client the advice. But once you show up on the “Our Team” page in the pitchbook, you might be a client adviser.

I should add that the Budapest office seems pretty grueling (1 p.m. to 7 a.m.?) and relatively poorly paid, and “Morgan Stanley has walked back the promise of transfers to the home offices,” so it makes sense that being an unlicensed-investment-banking whistleblower was a better deal than being an unlicensed investment banker.

Elsewhere: 

Anthropic PBC unveiled a set of new artificial intelligence agents designed to handle a broader mix of financial services tasks, part of the company’s push to win over Wall Street.

The Claude maker is releasing AI agents that it says can draft pitch decks for client meetings, review financial statements and escalate cases for compliance review. The new tools — 10 in total — are aimed at professionals across banking, insurance, asset management and financial technology.

Pretty soon every investment bank’s “Our Team” pitchbook page is going to have an entry like “Morgana is our autonomous AI agent who can walk you through the model, explain the deal process and answer all your questions; you can email or even call her any time, day or night.” Will the AI agents have to get their Finra licenses? I’m pretty sure they could pass the exams.

In 1992, Congress passed a law called the Professional and Amateur Sports Protection Act, which made sports gambling illegal in the US with a few exceptions. PASPA did not make betting on sports a federal crime; instead, it forbade US states (other than Nevada) from legalizing sports gambling. States grumbled about this, and in 2018 the US Supreme Court ruled that the law was unconstitutional because it told state legislatures what to do. The Supreme Court concluded:

The legalization of sports gambling requires an important policy choice, but the choice is not ours to make. Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own. Our job is to interpret the law Congress has enacted and decide whether it is consistent with the Constitution. PASPA is not. PASPA “regulate[s] state governments’ regulation” of their citizens. ... The Constitution gives Congress no such power.

And so, from 2018 until about 2025, states were free to regulate sports gambling. Some allowed it, and some did not.

Starting in about 2025, as we have discussed, the situation changed. Kalshi got into the business of offering “event contracts,” which it argued were commodity futures regulated by the US Commodity Futures Trading Commission. A sports bet is, in Kalshi’s view, an event contract, so as a CFTC-regulated commodities futures exchange (or DCM, “designated contract market”), Kalshi could offer sports bets. 

This argument struck a lot of people as crazy, because it is, and various states tried to stop Kalshi from offering illegal sport bets. Kalshi’s response was: “Nyah nyah, we are federally regulated by the CFTC, CFTC regulation preempts state regulation, so we don’t have to follow state gaming rules.” This argument has mostly worked, and in the Trump administration the CFTC has enthusiastically supported it. Sports betting is now federally regulated, and quite lightly regulated: Kalshi can offer sports bets nationwide, to 18-year-olds, without most of the consumer protection rules that state gaming regulators typically require.

So states are now not free to regulate sports gambling: Even in states that ban online sports gambling, you can bet on sports online on Kalshi. The states can’t stop you. We’ve talked about this a lot, it’s wild, whatever.

But there is another implication of this new regime, which is that states might not be free to allow sports gambling. In states that allow online sports gambling, you can go to a state-regulated online sportsbook to place a bet. What is that? Well, it’s a “sports bet” at an “online sportsbook” under the state regulatory regime. But it is also, under the logic of Kalshi and the CFTC, a “swap contract” traded at an “unregistered swaps exchange” under the CFTC’s rules. That is: A state-regulated sportsbook is trading commodities futures with retail customers, but it is not registered with the CFTC.

That might be illegal under federal law. Section 2(e) of the Commodity Exchange Act says that it is “It shall be unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated as a contract market under section 7 of this title.” (An “eligible contract participant” is basically an institutional trader; retail customers have to trade swaps on designated exchanges.)

Therefore, states can’t regulate sports gambling at all. They can’t ban it: The CFTC’s rules preempt state rules and allow nationwide sports gambling on Kalshi. They also can’t license it: The CFTC’s rules preempt state rules and forbid sports bets on state-licensed sportsbooks. Sports betting is entirely out of the states’ hands.

I wrote this last week:

Does the CFTC have exclusive jurisdiction over sports bets? Not just sports bets on Kalshi (or Polymarket), but all sports bets, at an online sportsbook or a Las Vegas casino or your March Madness pool. They are all “swaps,” all the same type of event contract that the CFTC regulates.

And not just sports: Any bet at all, any promise of money “settled based on the occurrence or nonoccurrence of a specified future event,” is a swap regulated by the CFTC and subject to insider trading law.

Now, I should say, this is not legal advice, and it is not actually what the CFTC says. I was writing about a CFTC event-contract insider trading case, brought against a guy who traded on Polymarket, which is (like sportsbooks) not registered with the CFTC. The CFTC, I think, has claimed the power to police fraud in all event contracts, even those that don’t trade on a registered exchange like Kalshi. But it has not claimed that it is illegal for anyone to offer bets without registering with the CFTC, and it has not gone after state-regulated sportsbooks for offering illegal commodities futures contracts.

But that is the obvious implication of the CFTC’s claim that (1) it has exclusive regulatory authority over event contracts and (2) sports bets are event contracts. Here is a CFTC comment letter from Lexicon Labs making this point:

State-regulated sports betting constitutes illegal off-exchange swap trading, expressly prohibited by the CEA.

The Commission is not at liberty to enforce some parts of the statute and ignore others. If the CFTC has exclusive jurisdiction over all event contracts, including those resolving on sports outcomes — and it does — then it has to faithfully enforce all the relevant statutes. ...

Perhaps wary of the implications of combining federal preemption with the CEA’s off-exchange trading prohibitions — namely, the illegality of state-regulated sports gambling — prediction market participants, and at times the Commission itself, have advanced a reading of the statute under which federal and state regimes can co-exist, and the same product can trade on-exchange and off-exchange. The statute simply does not allow it, but courts have set it aside regardless.

If sports bets are really commodities futures, then they have to trade on commodities exchanges.

“Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own,” said the Supreme Court in 2018, but eight years later here we are. Congress has not regulated sports gambling directly: It hasn’t written any sports-gambling laws at all, but the CFTC has decided that sports gambling falls under the Commodity Exchange Act. And so no state is free to act on its own.

Sometimes traders at banks make money by doing illegal stuff: spoofing, or manipulating Libor, or “the big figure trick” (buy at $1.0123, tell the client you bought at $1.0213), or various other nefarious ways of making money. Sometimes the trader who does this will act alone and come up with a nefarious thing that no one has ever thought of before, but most of the time (1) trading desks are pretty tight-knit and (2) they’re reaching into the same bag of illegal tricks.

And so it is not unheard-of for a new junior trader to show up for her first week of work and get two contradictory sorts of training:

1. She will watch a compliance video saying “doooooooon’t do spoofing, spoofing will ruin your life,” and
2. The somewhat more senior trader next to her on the desk will be like “lemme teach you how to spoof, it’s crucial to our job, watch me do it.” And she’ll be like “I thought compliance said” and he’ll be like “lol compliance” and their boss will be like “yeah, lol compliance.”

And the junior trader will either, like, report all of them to compliance and create a lot of bother for herself in her first week, or think “I guess we spoof then” and start doing it herself and create really quite a lot of bother for herself in a few years, when she gets arrested. The Financial Times reports:

Deutsche Bank has denied training employees to engage in market manipulation after a former trader who was convicted of fraud accused the German lender of teaching him to use an illegal trading strategy.

James Vorley, a former London-based commodities trader at Deutsche, is suing the bank for £12mn in London’s High Court over claims he was taught and instructed by more senior employees at the lender to trade in a way that exposed him to criminal prosecution in the US.

Vorley — who has always maintained his innocence — was convicted of wire fraud in federal court in Illinois in 2020. He was sentenced to 12 months and a day in prison for “spoofing” the futures market for gold and silver between 2008 and 2013. …

In its defence filing to the lawsuit, Deutsche denied the allegations, saying Vorley was given “all appropriate training” and “knew or ought to have known that he should not have committed fraud”. ...

It added that if more senior staff taught Vorley or others to use nefarious trading strategies, “any such teaching was informal and not endorsed or otherwise approved” and “was not known” to the lender.

Right, no, that’s the point, the informal training you get from the head of your desk is way more salient and memorable than the compliance video you watch with the sound off.

Well there you go:

Elon Musk agreed to pay $1.5 million to settle Securities and Exchange Commission allegations that he cheated Twitter shareholders in 2022 by failing to properly disclose his growing stake in the social media company.

An Elon Musk revocable trust would pay the penalty to end the SEC’s lawsuit under the plan, which is still subject to court approval. Musk didn’t admit to the regulator’s allegations, according to a filing on Monday.

It’s a much smaller penalty than what Musk’s attorney said the SEC initially sought. The agency in December 2024 asked Musk to pay more than $200 million to settle, according to a letter his lawyers sent to the agency and reviewed by Bloomberg News.

The SEC sued Musk in January 2025, days before President Donald Trump took office, alleging Musk blew the deadline to disclose he accumulated more than 5% of the social-media platform’s stock. That delay cost Twitter shareholders more than $150 million, the regulator said. Musk later bought the company in 2022 and renamed it X.

We’ve talked about this case a bunch of times before. Basically Musk bought 5% of Twitter’s stock, which triggered a requirement that he disclose his stake within 10 days. But he didn’t, and kept buying more stock secretly. When he ultimately did disclose his stake, the stock predictably shot up; by delaying his disclosure, he saved himself about $150 million at the expense of Twitter shareholders. The SEC, back when it didn’t like Musk, sued him for the $150 million. The new SEC changed its mind and settled for $1.5 million.

I suppose it’s worth saying that:

1. The disclosure rules really are designed to protect regular investors in exactly this scenario. When a big investor acquires a big stake in a public company, that is material news to other investors, and the stock predictably shoots up. Disclosure lets regular investors know all the material facts. After Musk’s trades, the SEC actually shortened the disclosure requirement from 10 days to five business days, saying: “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company.” At Twitter, it took 21 days.
2. The disclosure rules are costly for big investors. Musk would have paid an extra $150 million for Twitter if he had followed the rules. Other activist investors who do follow the rules complain that they make activism too difficult: You can’t build a big stake silently, so your ability to profit from your activism is limited. 

But if the rules aren’t binding, well. Musk paid effectively a 1% tax on his savings. “If you’re economic activist investors with political connections,” a reader emailed me, “why would you ever file a 13D on time again?  Just run the same playbook and you’re fine.”

My basic thesis around here is that if you can get the employees and suppliers and customers of a company to do what you tell them to do, then you own the company, even if that is not quite true in a legal sense. “The night watchman controls the company,” I once wrote, “if he can change the locks overnight and not let the managers and directors and shareholders in the door the next morning.” I once contemplated trying to take over the US Consumer Financial Protection Bureau, during a difficult and unsettled time for the agency, by showing up at its offices with bagels. In the right context, a few dozen bagels can work better than a fully financed tender offer.

Anyway here’s a story in the Tulane Hullabaloo about a guy who briefly acquired (?) a New Orleans bar called Bruno’s Tavern by (1) showing up during a difficult and unsettled time, (2) saying he owned it, (3) paying random cash bonuses and (4) being pretty fun and charming:

With a fake New Zealand accent and what one former employee described as “reckless” spending habits, 41-year-old [Isaac] Sylvester claimed to be the owner of Bruno’s in early March, according to former employees. 

The New Orleans Department of Safety and Permits records do not reflect a change of ownership in March. 

“It’s freaky how charismatic [he was] and how easily he won all of us over,” Audrey Gotham, Tulane University sophomore and former Bruno’s employee, said. “All of us had [on] our little rose colored glasses.” …

“He was very reckless with money. Anytime someone would say something or do something that he liked, he would give you 100 bucks,” Kate, a Tulane junior and a former Bruno’s bartender, said. Kate asked to only be identified by her first name. ...

However, as staff got to know Sylvester, the act began to slip. 

“The more he would get drunk, the less his accent would be there,” Gotham said. Another employee said Sylvester sounded “too good to be true.” 

Eventually he lost the bar when he was arrested on a 2017 warrant “for failing to appear at a sentencing hearing in New York after pleading guilty to forgery,” sure. 

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