SEC to increase the responsibility of auditors

14 12 2010

Bloomberg news is reporting that the SEC is looking to update the current broker-dealer audit rules that may have the effect of putting auditor who control their clients assets, on the hook for the accuracy of their reports, as a part of the Dodd-Frank reforms of the financial industry.

As part of the plan, Ms. Schapiro said, the commission is laying the groundwork for implementing new powers spelled out in the Dodd-Frank Act that call for the Public Company Accounting Oversight Board to inspect auditors of all broker-dealers.

The SEC is expanding scrutiny of broker-dealers after investors lost billions of dollars in a Ponzi scheme conducted by Bernard Madoff, whose investment advisory firm also acted as a custodian. The agency last December voted to require that money managers who hold customer cash and securities be subjected to surprise inspections.

“We continue to demonstrate our willingness to prosecute those who betray the trust of the public markets,” Ms. Schapiro said. “But bringing actions after the fact is no substitute for full and honest disclosure at the outset. Enforcement actions are cold comfort for investors who lost their savings after relying on misrepresentations or half-truths.”

While this is directly looks to be a response to the Madoff Ponzi scheme, the roots of this type of compliance is deeper.  Lest we forget the role played by the accounting firm Arthur Anderson in the Enron Scandal.  This type of regulation seems to build on the record keeping and reporting requirements of Sarbanes-Oxely.


Snubbing Stub Quotes

10 11 2010

This is a stub blog post.

The SEC has approved new rules that would prohibit Stub Quotes.

What’s  a stub quote? It is a bid on a stock that is intentionally low, when the quote for the stock is high.  It is used solely as a placeholder on a bid for the stock.  It is not to be taken as a serious offer.

Why ban it? It is thought that the presence of stub quotes in the buying algorithm of electronically traded stocks caused the May 6, stock market flash, when the algorithms mistook them for serious bids.  This combined with the ban on “Naked Access” is intended to prevent further flashes.

SEC Whistleblower Incentives, Good for enforcement? Bad for Business?

9 11 2010

The SEC is currently debating whistleblower incentives.  Under the program, an employee who contacts the SEC concerning possible violations may receive from between 10 and 30 percent of the judgments against their corporation.  The business community has raised concerns about the incentives stating that such incentives are bad for the business environment.  First it creates a defacto company versus employee atmosphere to a scale not seen before.  Previous whistle blower provisions mostly centered on the employee’s job security, in that they were essentially termination proof for one year after reporting potential violations.  By giving employees a monetary incentive to report against their employer, the SEC will have created a hostile work environment where there would be a constant friction between the two, especially if the employee starts to look for violations where there are likely none.   Secondly, in response to firms roles in the recent economic recession, most financial institutions have enacted internal policies and channels for employees to report possible violations.  The new incentives would encourage employees to by-pass the existing channels in favor of reporting directly to the SEC.

SEC Chair Mary Shapiro addressed these issues.  From the Wall Street Journal Online:

After describing the specifics of the program, including how individuals would report fraud and how the SEC would evaluate the merit of such claims, she assured the group that the SEC was keen to “reduce the chance that employees unnecessarily bypass internal compliance programs that their own companies may have established” and the “goal is not to, in any way, reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes.”

However, the end result could be that the SEC may be inundated with complaints from disgruntled employees looking to profit against their employers.   In this environment of fear and hostility towards business, small and large firms may have to end up spending much of capitol, time and opportunity, fighting these allegations, which overall, is a huge negative for a business environment fighting to emerge from recession.  The SEC has posted a full copy of the proposed rules for implemeting the whistleblower provisions.

At the interesection of Business and Politics…

9 11 2010

We see Barney Frank, and a hedge fund which is responsible for section of Massachusetts $46 Billion Employee Pension fund.  From the Boston Herald:

The state’s pension portfolio for thousands of public employees has a $700 million stake in a hedge fund investment firm that is under investigation by the Securities and Exchange Commission for allegations it misled investors by claiming to be a women-owned business.

The firm, Pacific Alternative Asset Management Co. LLC, marketed itself as a firm run and owned by women in a male-dominated industry. Yet it was hedge fund mogul and Barney Frank pal S. Donald Sussman who in 2000 provided a $2 million loan to four entrepreneurs of the fledgling company, giving him a 40 percent stake in the investment manager’s parent company, Paamco Founding Partners Co. LLC.

Investors, including the Bay State’s Pension Reserves Investment Management Board, are concerned about the financial impact of the SEC probe as well as that of a recent lawsuit filed by Sussman against the firm.

The SEC probe concerns information regarding PAAMCO’s loans, alleging that some of the information on the loans was false or misleading.  It is impossible not to wonder about the political implications regarding this fund, since was responsible for a portion of Public Employees pensions, which are most likely union pensions.  To those who study politics, it is common knowledge that the two largest public employee unions, Service Employees International Union (SEIU), and the American Federation of State County and Municipal Employees (AFSCME), have been long-time supporters of the democratic party, and Barney Frank in particular.  It may be worth while diving deeper into the relationship directly between PAAMCO and Rep. Frank.

SEC bans “Naked Access”

5 11 2010

In a unanimous vote, the Securities Exchange Commission issued a ban on so-called “Naked Access” to stock markets.  In a nutshell, the ban prohibits brokerage firms from providing “unfiltered” access to the stock market.   The new rules are supposed to ensure brokers will play the role of gatekeeper between customers and the markets.  Prior to this, brokers would often give customers “access keys” to the markets.

“I have previously likened unfiltered access to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” said SEC Chairman Mary L. Schapiro. “This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive.”

Through sponsored access — especially “unfiltered” or “naked” sponsored access arrangements — there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in “unfiltered” access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.

The new rule is part of a larger effort by the SEC to help ensure that the markets are fair, transparent and efficient. Among other rules recently proposed by the Commission:

The new rules were precipitated by the May 6, 2010 stock market flash.  High Volume Trading firms often use algorithms to determine when and how they will trade stocks.  Under certain conditions, these algorithms will cause automatic buying or selling, without human intervention.  On Sept 30th, the SEC issued a white paper discussing the apparent causes of the flash crash.    The new rules are thought to be a response to the May 6 flash crash, and an attempt to prevent a future flash crash.

However, the root of this change go much deeper.  In 1998, the SEC first allowed electronic trading.  Almost overnight, day trading firms popped up, and every Average Joe became a speculator.  This increased speculation created the market pressure which lead to the burst of the “dot-com” bubble.  Ever since then, the SEC has been crafting rules to further regulate electronic trading.  This new barrier to public access to the markets is likely another attempt to prevent future stock market bubbles.

SEC complaint process coming out of the Stone Age

26 10 2010

The opening scene of the original 1987 film Wall Street, shows an investment brokerage firm using old IBM computers flashing green dot matrix data on a black screen.  It looks like the SEC if finally getting rid of those old machines and is “streamlining the complaint process”… From the Wall Street Journal:

“We will have all of it in one place, searchable, which will do a lot for us in the long run,” he said.

The system will be installed in two phases. The first will improve the agency’s ability to track and search the information it receives, Mr. Khuzami said. In a second phase, which the agency hopes to complete in 2011, more tools for analyzing the data will be put in place.

The system makes it easier to file complaints online, using a tool that prompts the person making the complaint to answer certain questions, depending on the allegation. Staff who receive telephone complaints will use a similar program that will prompt them to ask callers the same questions. SEC employees will key in handwritten complaints using the same format. This will standardize the information available to staff everywhere.

It has taken this long for the SEC to standardize the complaint process?  It is no wonder everyone and their mother seems to be able to get away with securities fraud these days.  When I need to file a trademark application, I go online, I go online, I fill it out, and I am able to search for similar marks to make sure mine is unique.  The Federal Court system is going totally electronic.  Heck, we have had EDGAR for over a decade?  Why is it that the compliance portion of the SEC innovative, while the complaint process is as antiquated as the Securities Exchange Act itself?

And We are Back!

23 10 2010

Yes it has been a long time since I have blogged, but there is too much going on in the financial industry to stay silent. Stay tuned for updates!