Sweepting Changes for the SEC and CFTC

17 06 2009

The White House today released a “white paper” outlining their plans for reform for the regulation of financial markets.  Two major changes will greatly affect the world of Securities Markets.  The first deals with Hedge Fund filings with the SEC.  From the Wall Street Journal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

It seems that the main target of this regulation is not the hedge funds themselves, but Ponzi schemes.  The registration and reserve requirements will have the affect of allowing the SEC to monitor investments closely.  Ponzi schemes by their nature lack reserves because they are structured based on continuing investment and payouts to where their capitol is always less than what was invested.  This will raise large red flags for the SEC which has been criticized for their inability to spot Ponzi schemes.

The second major change involves an increase of police powers by both the SEC and the CFTCWall Street Journal:

The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal….

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan….

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In their conception, the SEC and the SFTC were not designed as policing bodies, but as regulatory institutions.  It will be interesting to see how they make the shift.   It would involve a major shift in the role played by both bodies.  There may even be some constitutional questions regarding federal policing powers.  Congress, and more importantly, the public ought to take a hard look at the Obama plan and scrutinize the proposed changes.

The white paper has been made available by the Wall Street Journal.  You can access it here.

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Sunshine or a Tight Leash, which works better?

31 03 2009

Gordon Crovitz has an interesting article on the Wall Street Journal discussing the regulation of securities markets in the light of the recent economic failures.  In the article, Covitz argues that even the most liberal minds of the , Brandeis and Franklin Roosevelt specifically, advocated transparency over regulation in response to beginning of the Great Depression.

Supreme Court Justice Louis Brandeis had made the point that “sunlight is the best disinfectant,” and the Securities Act of 1933 mandated the information that public companies would have to share. One indicator that disclosure was more important than regulatory power is that it wasn’t until the following year that the Securities and Exchange Commission (SEC) was created.

What worked to restore confidence in the equity markets then can help to restore confidence in the debt markets now: more disclosure, aimed at making the terms of debt such as mortgages more transparent. Unlike the case of stocks, under current law no one in the chain of making, insuring and rating debt is required to disclose full terms to regulators or to the market. Instead, debt markets function based on best estimates, with mathematical models determining probabilities of cash flows and defaults.

Ever since the models failed due to an unpredicted bubble, the market has been paralyzed with uncertainty. There is still a wide gap between what banks think their bad debt might be worth and what the Treasury or private investors are willing to pay.

In passing the Securities Act of 1933 and the creation of the Securities Exchange Commission the following year, Congress and the Roosevelt Administration showed a preference of transparency over regulation. While both acts created large regulatory provisions to be enforced by a powerful government body, the focus was largely on transparency because those regulatory provisions focused on report requirements by publicly traded companies to the SEC.

Today, advisors to the Obama administration have largely advocated greater regulation and oversight over the trade in securities.  Conservatives argue against this opinion over largely philosophical grounds, rooted in the economic philosophy of the likes of Milton Freidman.  Advocates of free trade have frequently railed over how excessive regulation restricts free trade and inhibits economic growth.  Transparency is viewed as a much better option in that it should accomplish the goals of regulation, while not inhibiting the free market.  As Corvitz stated, modern technology makes transparency an even more viable option.

“Today’s financial crisis was driven in part by a lack of accurate, easily usable information to give investors what they need to make informed, responsible decisions,” testified Mark Bolgiano, chief executive of a nonprofit technology and accounting consortium called XBRL US. “The value of toxic asset-backed securities remains a mystery because information on the underlying loans and ongoing viability of those loans and the securities themselves was not collected consistently and even if it had been, it would not have been in a usable, portable form.”

XBRL sounds complicated, but eXtensible Business Reporting Language is simply a new technology language that allows data to be easily extracted, searched and analyzed. XBRL is already being used for some equity disclosures, tagging financial information into a globally consistent, computer-readable format.

Along with Edgar, the XBRL system could be the most valuable tool to prevent securities fraud.  Let us hope that cooler minds prevail, and that the Obama administration chooses transparency over regulation.





Welcome to Lots, Stocks, and Gavel

22 01 2009

Hello, and welcome to my new project online, a little blog on an aspect of law I find fascinating, securities law.
Why a blog on securities and securities law?

The buying of selling of securities effects us every day, and most of us don’t know it.  Trading in securities is not just something that occurs on Wall Street and the London Stock exchange.  Every time you fill your gas tank, you are purchasing something that was once purchased as a security.  Every time you go to the grocery store, you are purchasing products that were in one way shape or form bought and sold as securities.

The problem most people have with the securities trade is that, although it has an impact on their daily lives, they do not understand what it is, or how it works.  The main purpose of this blog is to give people a forum to better understand what they read on their newspaper headlines.  For example: What did Bernie Madoff do, how did he do it, and how does it affect the people who trusted him?  What is insider trading,  why is it illegal, and what does it have to do Mark Cuban?

What will this blog cover?

Hopefully this blog will be something more than a place for people to go in order to understand the things they hear on the farm report and the stock market page.

Securities law is big in the news these days.  With the largely unprecedented drop in the stock market, the government bailouts of the banks and the automotive industry,  and billion dollar scandals involving prominent traders, issues in securities law are going to be discussed for a long time to come.  This blog will primarily cover the news, including goings on inside the Securities and Exchange Commission, the coming change in rules and legislation, the issues facing the stock market and commodities exchanges, and the enforcement of securities law.  However, unlike the newspapers and the 24hr new channels, I will give a more in depth analysis on what is happening, and will present it in a way that the average layman can understand easily. This blog will also cover issues in securities law globally.  Topics I will discuss include the coming securities law reform in the European Union, and how sharia is influencing the development of securities law in the Middle East.

Since securities law tends to run into other aspects of law, such as bankruptcy, banking, and criminal law; and because of the ongoing crisis in the global economy, this blog will discuss issues beyond the relatively narrow topic of securities.

How did you come up with the name?

Well basically, it is a take of the phrase, “lock, stock, and barrel”.  Since the blog is about securities, I wanted to tie in two more common types of securities, commodities (Lots), and “Stocks”.  I included the “Gavel” because this blog is about the law.