The Securities and Exchange Commission, after wrestling with the issue for nearly a year, is expected to adopt a price-test rule for short sales this month. Also, the U.S. Congress is likely to add at least three new short sale rules to the Securities Exchange Act of 1934 as part of its overhaul of financial services regulation.

Sources tell Traders Magazine that the SEC is close to reinstating restrictions on traders who want to sell stock short. The Commission struck the nearly 70-year old uptick rule from the books in 2007, but proposed several possible replacements last year in the wake of heavy pressure to do so from the American public and the Congress.

“There are pretty strong indications that there will be some form of a price test adopted this month,” said one DC-based attorney who did not want his name disclosed.

It is not known which one of the proposed rules will become law, but the betting is on the so-called “alternate uptick rule” proposed by the SEC last August. The rule would require traders who want to short stock to do so by posting an offer at least 1 cent above the best bid. Traders could not short by hitting the bid, the faster of the two selling techniques.

The alternate uptick rule was first proposed by a group of four exchange operators last spring and includes the option of a circuit breaker. If a circuit breaker test was also adopted, short selling would only be restricted if a given stock started falling dramatically–by 10 percent or so over the previous days’ closing price.

Most trading houses are opposed to any new rules, seeing them as unnecessary. Still many are resigned to the inevitability of a new rule. Most hope the SEC will include a circuit breaker test with any rule it adopts.

The SEC would not comment for this article.

Much of the pressure on the SEC to reinstate a price-test rule came from Congress. Senators Ted Kaufman, D-Del., and Johnny Isakson, R-Ga., kicked things off with a bill last March that would’ve forced the SEC to bring back the uptick rule. Now Rep. Barney Frank, D-Mass., is driving the agenda.

As part of H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009,” the sweeping overhaul of regulation of the financial services industry, Congressman Frank has added a little noted amendment targeting short sellers.

The so-called Managers Amendment, which only became public in December, would add three new rules to the ’34 Act. The first would require every institutional investment manager that shorts stock to disclose its short positions to the SEC every week, much as these organizations disclose their long positions every quarter.

The SEC would then be required to make the information public every month. The amendment does not direct the regulator to disclose the identity of the short seller. It did however leave room for the SEC to provide “additional information.”

If the SEC did decide to disclose the identity of the short seller, “that would seriously affect what people do,” Ed Johnsen, a partner with Winston & Strawn, said.

The SEC instituted a similar rule mandating disclosure for one year between summer 2008 and summer 2009 before letting it expire. It then said it was working with the nation’s exchanges to come up with a disclosure plan.

The second amendment would add a clause to the Act that makes it illegal for someone to effect a “manipulative short sale of any security.” In addition, the clause prods the SEC to add its own rules enforcing the new amendment.

The third amendment could potentially have the biggest impact on short sellers. It requires broker-dealers to instruct their customers that they have the right to refuse to loan their stocks for short-selling purposes.

Because stocks sold short are typically borrowed from investors, a refusal on the part of the shareholder to lend would make it impossible for traders to effect a short sale.

Most stocks however are owned by institutions, while the anti-short selling backlash has come mostly from the American public. Large institutions make money lending their securities and so far have shown little appetite for eliminating the practice.

Where the new regulation may have an impact is on less liquid, hard-to-borrow stocks owned by the retail public. “There may be certain short selling that can’t get done because the stocks that had been hard to borrow are now harder to borrow,” Johnsen said.

The Frank amendment is part of the House version of the bill. The Senate is still working on its version. The two must ultimately be reconciled before the bill becomes law. While it is possible the Frank amendment could be dropped from the final bill, Johnsen, for one, believes that to be unlikely.

 Traders Magazine Online News, January 6, 2010, Peter Chapman

The U.S. Securities and Exchange Commission named Carlo di Florio, a partner at audit firm PricewaterhouseCoopers LLP, to oversee inspections of money managers and brokers, the unit faulted for missing Bernard Madoff’s Ponzi scheme.

Di Florio, 42, who was in PricewaterhouseCoopers’ financial services regulatory practice, will take over the Office of Compliance Inspections and Examinations within the next month, the agency said today. Lori Richards (above), the unit’s head for 14 years, left in August after lawmakers said the SEC missed “red flags” pointing to Madoff’s $65 billion fraud.

SEC Chairman Mary Schapiro, who took over a year ago, has replaced senior staff as she seeks to restore confidence in the agency. The SEC announced in October a “top-to-bottom” review of investment-firm examinations after Inspector General H. David Kotz said the regulator missed at least six opportunities to spot Madoff’s fraud.

Di Florio “brings the energy, insight and experience necessary to ensure that we keep pace with the rapid changes in the industry and continue to build upon the reforms of the past year,” Schapiro said in a statement.

The Office of Compliance Inspections and Examinations reviews firms for evidence of fraud and other violations. It shares indications of wrongdoing with the SEC Enforcement Division, which investigates companies and can bring lawsuits. The inspections office has more than 800 employees nationwide.

Madoff Reviews

The inspections unit in 2004 and 2005 reviewed Madoff’s firm, which at the time registered only as a brokerage. Kotz, in a November report, faulted examiners for less-than-thorough searches of SEC databases for information about investigations, examinations and filings that would have shown Madoff’s firm was “high risk” and needed regular reviews.

The division never conducted an inspection of the money- management side of Madoff’s business after he registered with the SEC in 2006. The firm collapsed two years later.

Di Florio, who received law degrees from Georgetown University and Penn State University, will oversee the agency’s inspections of investment advisers, brokers, mutual funds and credit-rating firms. At PricewaterhouseCoopers, he led independent reviews and investigated corporate fraud, corruption, conflicts of interest and money laundering, according to the release.

Di Florio will take over from John Walsh, who became acting director when Richards left on Aug. 7.

Joshua Gallu, Bloomberg, January 4, 2010

You’d better watch out, New York hedge funds: George Canellos is coming to town. Well, he’s already in town. But he is making a list, of those firms accused of wrongdoing and those who seem likelier than others to be wrongdoing. And his inspections staffers will be knocking on their doors. “Investment management, and especially hedge funds, is a big area of emphasis,” Canellos told HedgeFund.net. “Since I started, investment management inspection and enforcement work has consumed a significant portion of my time.” “We have planned a number of significant sweeps of investment advisers,” he added. “In the last few months—really in the last year or two—we have tried to orient our program, especially the investment management program, more towards cause- and risk-based exams,” as opposed to more routine checks. The SEC took a beating over the past year for failing to catch Bernard Madoff’s $65 billion Ponzi scheme despite repeated warnings and several inspections. Now, Canellos said, the SEC is putting a premium on making sure that inspectors are equipped to catch the most sophisticated scams. “A great deal of attention at every level of the SEC, including the commissioners themselves, is being given to developing areas of specialization; trying to make staff smarter and swifter and on the cutting edge of markets,” he said. “We bring in some academics, but mostly industry people to mine all sorts of information to better enable us to understand products and markets and improve our ability to assess financial and compliance risks.”

The Securities and Exchange Commission is stirring anxiety among some financial advisors by reaching out to clients at random, questioning them about their advisory relationship and verifying account assets. The precautionary measure was adopted earlier this year in response to the Bernard Madoff case and other fraud scandals. Advisors and brokerage executives are worried these randomized inquiries will make a client uncomfortable with an advisor or firm even though they are not the result of any suspicious activity. One advisor, based on the West Coast, recounted how a client had called him immediately after fielding one such inquiry from the SEC. “He wanted to know if I had done something to make the SEC suspicious,” the advisor said. “Even though I explained that the checks are at random, it still leaves a bad taste in his mouth.” He likened it to the police questioning a wife about her husband’s recent activities and their marital relationship. Even if police said it was a routine exam, that husband wouldn’t find a happy spouse when he came home that night, the advisor predicted. Ivan Knauer, a partner at Philadelphia-based law firm Pepper Hamilton LLP, says advisors should try to be proactive, and tell their clients about the SEC’s program before they get a call. ”The SEC is just kicking the tires,” Knauer said. “They aren’t accepting advisors’ word at face value any more. They are going to the clearing firms and the customers to make sure they’re getting the returns advisors say they’re getting.” Earlier this year, Knauer served as senior counsel in the SEC’s Enforcement Division, investigating insider trading and other securities law violations. He says the program is, in general, helpful to advisors and clients. As long as an advisor isn’t engaged in fraud they have nothing to worry about, he said. “Advisors can also use this as an excuse to reach out to clients and strengthen that relationship,” Knauer said. He added that advisors can use this as a pretext to discuss all the new measures in place to protect investors and keep their assets safer. Many client-advisor relationships have been damaged over the past year by the financial meltdown, which hit the stock market hard, and by the wave of Madoff-like scandals. The SEC’s Office of Compliance Inspections and Examinations, or OCIE, is conducting the random calls, along with other types of investigations. As of June, there were 425 exam staff members for the oversight of more than 11,000 advisors. About 80% of all OCIE’s exams find some type of deficiency or violation, according to the SEC’s Web site. A spokesman for the SEC said there are several types of third-party verification exams, and each follows its own procedure. He said he could not break out just how many clients were being contacted or how they are chosen. Knauer suspects that this type of regulatory practice, though unusual now, will become normal over time. ”It’s generally a good thing, and client’s shouldn’t be alarmed. The SEC is just doing their job,” he said. Dow Jones, December 29, 2009

]]> http://cardinalcompliance.wordpress.com/2009/12/29/sec-protective-measures-leave-advisors-uneasy/feed/ 0 pomara1 http://cardinalcompliance.wordpress.com/2009/12/19/icap-securities-firm-pays-25m-to-settle-fraud-charges/ http://cardinalcompliance.wordpress.com/2009/12/19/icap-securities-firm-pays-25m-to-settle-fraud-charges/#comments Sat, 19 Dec 2009 22:06:21 +0000 pomara1 http://cardinalcompliance.wordpress.com/?p=761 ]]>  

 ICAP Securities USA, the Jersey City-based U.S. division of a big British brokerage, agreed today to pay $25 million to settle federal regulators’ charges that it deceived customers by displaying thousands of phony trades in U.S. Treasury securities on its screens.

The Securities and Exchange Commission announced the settlement of civil fraud charges with ICAP Securities USA, which it described as the U.S. subsidiary of the world’s largest broker of trades between banks, ICAP PLC of Britain. Inter-dealer brokers, as they are called, match buyers and sellers in over-the-counter markets for securities such as U.S. Treasuries and mortgage-backed bonds.

ICAP Securities USA neither admitted nor denied the SEC’s allegations but did agree to refrain from future violations of the securities laws. The firm was censured and agreed to pay $24 million in civil penalties and $1 million in restitution.

It also agreed to hire an independent consultant to review its internal controls and compliance procedures, and its trading activities.

The censure brings the possibility that the firm could face a stiffer sanction if the alleged infraction is repeated.

The SEC had alleged that from December 2004 through December 2005, ICAP displayed thousands of fictitious trades in Treasuries on its screens, and disseminated false trade information into the market to attract customers’ attention and trades.

The SEC also reached settlements with five ICAP brokers, which it had accused of aiding and abetting the firm’s conduct, and two senior executives accused of failing to adequately supervise the brokers.

The executives are Gregory Murphy, ICAP Securities’ chief operating officer; and Ronald Purpora, the former president of ICAP North America and a member of ICAP PLC’s global executive management group.

Murphy and Purpora each agreed to pay a $100,000 civil fine and to a three-month suspension from working as supervisors at any brokerage firm. The neither admitted nor denied the SEC’s allegations.

The brokers are: Peter Agola, Ronald Boccio, Kevin Cunningham, Donald Hoffman and Anthony Parisi. They each agreed to pay a $100,000 civil fine except for Hoffman, who retired in 2006, who is paying a $50,000 fine. The five also agreed to a three-month suspension from working for any brokerage firm.

The brokers neither admitted nor denied the SEC’s allegations but did agree to refrain from future violations of the securities laws.

By The Associated Press

December 18, 2009,

Some money managers will face surprise audits to make sure they aren’t following in Bernard Madoff’s footsteps, based on a proposal approved by the Securities and Exchange Commission on Wednesday that would tighten supervision of investment managers who have custody or control of their clients’ assets. “Such rules would apply additional safeguards where the safeguards are needed most — that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets,” said SEC Chairwoman Mary Schapiro. Madoff, who is serving a 150-year prison sentence for orchestrating a $50-billion ponzi scheme, didn’t employ an outside custodian, all of which proponents argue helped him facilitate the fraud he committed before his fund collapsed last year.

By Ronald D. Orol for MarketWatch, December 16, 2009

The “customer-facing” side of a broker-dealers business will always get the highest level of scrutiny by the SEC.  But, recent events have caused the agency to take a closer look at those in the “back-office,” where securities transactions are processed.

Daniel Gallagher, Jr., Co-Acting Director of the SEC’s Division of Trading and Markets, recently told a PLI audience (Practicing Law Institute) that critical custody, accounting, transfer agency and account maintenance functions typically are carried out in the “back-office.”  And while the processes require skill and integrity, and broker-dealers have a duty to supervise all of its associated persons, including these persons, many back-office or infrastructure personnel may not be registered (or required to be registered) – i.e., they don’t take qualification exams, and don’t undergo continuing educations.  More fundamentally, they may not be identified to the SEC or an SRO.

Most of the time the system works well, but when the system breaks down, the consequences – as in the Madoff case – can be ruinous.  Prosecutors allege that Bernie Madoff hired numerous employees with little or no prior pertinent training or experience in the securities industry and caused them to communicate with clients and generate false and fraudulent documents.  Employees allegedly were instructed to research daily share prices for blue-chip stocks from the previous month or several months, and then to generate stock-trade confirms for client accounts, which purported to show gains that were later applied to client accounts. 

The situation admittedly was extreme, but it’s nonetheless instructive on how important it is to have knowledgeable, well-trained and well-supervised people in the back-office and that these people are identified to examiners as they plan out their exam strategies and scopes.

SEC’s and FINRA’s Next Steps.  Working closely with senior SEC staff, FINRA has committed to establish a new system to enhance the oversight and professional requirements of personnel performing back-office functions at B/D firms. The SEC has asked FINRA to look hard at the universe of back-office personnel and to cast the regulatory net as broadly as necessary to achieve the right level of back-office oversight for today’s firms.  FINRA will establish an appropriate scope of back-office and infrastructure personnel. 

Compliance Insights Blog 12/15/09

Finra expects to bring enforcement cases on private placements next year, he said.

Reg D refers to the securities regulations that govern the sale of private-placement investments, which are generally exempt from having to be registered with regulators. The investments usually are made in small companies.

The self-regulatory organization has been receiving an increasing number of complaints from investors in recent months concerning sales of private placements, Mr. Shorris said. Finra is looking at misrepresentations made by brokers in connection with the sale of the products, as well as whether sales made to customers were suitable.

Finra has been increasing the resources it devotes to investigations of private placements throughout the year, and it expects to begin bringing cases “soon,” he said.

The industry regulator also is questioning whether brokerage firms and registered representatives who sold the private placements did due diligence on the products they sold, as well as whether some brokerage firms had a conflict of interest with the issuers, Mr. Shorris said.

Among the allegations Finra is looking into is whether private-placement sales were made with only a single source of due-diligence information and whether the due-diligence provider was independent of the company issuing private-placement securities.

“If the due-diligence report was paid for by the issuer, there’s clearly a potential conflict,” Mr. Shorris said.

Finra is also examining whether brokerage firms that sold the products were affiliated with companies that issued the securities, as opposed to sales made by brokerage firms that were independent of the issuers.

“If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product, we have more questions about the access [the brokerage firm] may have had to information about potential wrongdoing about the issuer,” Mr. Shorris said.

Investment News 12/13/09 Sara Hansard

The House of Representatives passed the financial regulatory reform bill Friday afternoon by a narrow margin: 223 votes in favor to 202 against. But it will still be a long time before the regulatory future for broker/dealers and investment advisers is clear.

“I think that all of us assumed that the democrats would find the votes to pass the bill, but still that’s pretty close,” says David Tittsworth, executive director of the Investment Adviser Association. “It’s a big step. But you’ve got a long ways to go before you’ve got anything signed into law. Now the spotlight shifts to the Senate Banking Committee.” Christopher Dodd (D—Conn.), who heads the Senate Banking Committee, put out a draft bill in November. “We’re looking at going well into 2010, before you know what’s going to happen.”

Among other things, the House reform bill sets out to harmonize regulation of broker/dealers and investment advisers and to create a uniform fiduciary duty for all who offer personalized investment advice to retail investors. “The House bill has resulted in a pretty convoluted set of previsions dealing with fiduciary duty,” says Tittsworth. “They’re still able to wear two hats.” In other words, a financial advisor will only be held to a fiduciary standard while he is providing actual advice. Unless an advisor and client establish that they have an ongoing advisory relationship at the start, the advisor can switch to a suitability standard when selling individual investment products.

Still, under the House bill, the SEC will have final say over how many of the bill’s provisions are interpeted, says Tittsworth.

SRO versus SEC

Who will regulate investment advisers is still very much up in the air, after the House of Representatives voted earlier today to strike an amendment from the legislation that would have given FINRA (the Financial Industry Regulatory Authority) jurisdiction over dually registered investment adviser firms. Dually registered firms represent about a quarter of all investment adviser firms, and 80 percent of investment adviser assets, according to the IAA. The amendment was sponsored by Senator Spencer Bachus (R-Al.).

“The likely legacy of the defeat of the Bachus Amendment will be to weaken the support on Capitol Hill for similar FINRA efforts,” says regulatory attorney Bill Singer. “While FINRA has assembled a rumored $1 million war chest to lobby Congress for its various pet projects, the Bachus defeat was quite a black eye for Spencer Bachus and the attendant firestorm of criticism his amendment garnered from NASAA, public advocates, the Financial Planning Coalition, and others will likely serve to warn off many of his colleagues from proposing similar legislation.”

Whether investment advisers should continue to fall under the jurisdiction of the SEC and the states, or an industry-run self-regulatory group, has become the subject of heated debate. Those who argue for the latter say it would be better funded and do a better job of limiting unintended consequences of rule-making.

Under an amendment created by Carolyn McCarthy (D-N.Y.), the SEC will be required to conduct a six month study on the merits of creating an SRO for the RIA/financial planning sector. Some of FINRA’s lobbying dollars will no doubt be used to convince the SEC that it is the one for the job, says Singer. “Similarly, the Financial Planning Coalition is likely emboldened by the stunning reversal of the Bachus Amendment and will probably use its muscle and dollars to advance whatever SRO it deems is in its best interest. We should expect significant pressure from both sides.”

The House bill also includes a provision that would shift greater regulatory responsibility for investment advisers onto the states, by raising the asset minimum for those RIAs falling under the SEC’s jurisdiction to $100 million from $25 million. This would give the states jurisdiction over an additional 4,000 firms.

“Then the SEC can focus on the biggest investment adviser firms, especially the large money managers that need a lot of attention and could cause a systemic problems,” says Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, the North American Securities Administrators Association Inc. “I think that’s a really good solution to the problem of too few resources. Right now, in Texas, we have an inspection cycle of between two and three years. And under this legislation we would have authority for 900 more firms. If we got no more money at all, I could still go out and examine those firms much more frequently than the SEC does. It would be more like four to five years.” Today, most RIA firms get audited by the SEC once every ten years.

Still, some groups say self-regulatory organizations are inherently better at creating rules and keeping firms in line. “We think it’s more important to see Congress authorize and the SEC authorize creation of an industry regulator that’s funded by the industry and has the kind of opportunity for industry involvement that an SRO would provide,” says Dale Brown, president and CEO of the Financial Services Institute, a broker/dealer trade group. “It may be appropriate for FINRA to have that role.”

Registered Rep Magazine,  By Kristen French