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.


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.

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!

Leave of Absence

17 07 2009

Hi, I have the bar exam in two weeks, so I am taking a leave from writing on this blog. There will be more interesting articles in August. I look forward to writing more soon!

Update: So I wrote another post.   It was just too important on a topic I have been covering.  I am going back to studying.

New Position at the SEC, Chief Operating Officer

3 06 2009

So, as part of the reforms of the Securities and Exchange Commisssion, a new position has been created, Cheif Operating Officer. It appears that the federal securities oversight commission is starting to take on the appearance of a corporation. They are also planning to add an additional 1,100 new hires to their 3,500 employees, according to Reuters. Surrounding all of this are rumors of stripping the SEC of certain powers, creating other agencies to oversee credit cards, even merging the SEC with the CFTC. Beware of interesting times.

I’m Back

26 02 2009


Well the bar is over, and after a month of doing nothing, I am back. There is a whole lot to cover. Expect many posts in the near future!