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A Sea Change In Short Selling Regulation

August 10, 2009 (By Peter Chepucavage)

From “Plexus Nexus”, by Peter Chepucavage

We have noticed with frustration the Commission’s recent actions’ confirmation of a change from pre-trade regulation to post trade regulation of abusive short selling. It’s an affirmation of the wisdom of unsafe sex if it can be fixed later. The essence of our argument is found in a recent courageous Dow Jones article by Joe Checkler (http://compliancex.typepad.com/compliancex/2009/08/even-with-new-rules-naked-short-violations-hard-to-enforce.html). These arguments were also reinforced by CEO Neiderhauer of the NYSE who recently stated:

“But even if we get that done, your second part of your question is the important part. What was really broken in this country was not the trading rules. It was the borrowing, lending and delivery rules. They were not being enforced. People were not borrowing stock and had no intention of borrowing stock when they shorted. And that was our big issue with the SEC in the previous administration. Enforce the rules.

“Settlement’s supposed to be T-plus-three in this country, not T-plus-100. And there were a lot more aged fails than people thought. So I think tightening up those rules has made a big difference and has dramatically reduced the amount of naked short selling. [entire post]

Tags: liquidity, madoff, neiderhauer, ponzi, reg sho, short selling
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File No. S7-08-09 Uptick Rule Reinstatement Proposals

May 10, 2009 (By Peter Chepucavage)

From “Plexus Nexus”, by Peter Chepucavage

The elimination of the tick test is perhaps the most significant deregulation move in memory and should be done cautiously especially for the the smaller issuers and in light of the acknowledged current weaknesses of Reg. SHO –IASBDA COMMENT LETTER 12/19/06.

The Commission has proposed a reinstitution of the uptick and or circuit breaker rule 10 years from the date it first sought comments on eliminating the rule in its 1999 concept release and 2 years after it eliminated it. These rules are generally referred to as price tests. It is understandable why public pressure brings about this reversal, but we wish to focus on the uncertainty of price tests vs. the absolute certainty of a pre-borrow rule as explained in former Commissioner Campos letter of March 25,2009. The history of price tests shows that in good markets they are orphans but in bad markets they have many parents. We previously warned that the total removal of the tick test was neither required nor justified but our warnings were summarily rejected because in our view the policy was fixed in advance of the comments. In addition neither our comments or Amex’s are referenced in the current release so we are compelled to reference them.

In response to IASBDA’s comment regarding allowing issuers to have a choice as to whether or not they want their stock to be subject to a price test, we have determined not to take such action at this time. A primary goal of the amendments is to bring uniformity to, and simplify, short sale regulation. To allow issuers to have a choice as to whether or not their stock is subject to a price test would undermine this primary objective. In addition, we note that in the Proposing Release we specifically requested comment from issuers regarding their views of the impact of the proposed amendments on their securities.62 We did not, however, receive any comments from issuers. [entire post]

Tags: amex, circuit breaker, commissioner campos, fail position, hedge, iasbda, index(es), inspector general, leslie boni, listing, naked short selling, nscc, otcbb, pre-borrow, proposing release, reg sho, regulation(s), restriction(s), russell 3000, sec, shorting, small public compan(y)(ies), threshold security, tick test, uptick rule, volatility
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Regulatory Reform In The Obama Era

April 22, 2009 (By Peter Chepucavage)

From “Plexus Nexus”, by Peter Chepucavage

(Co-authored by Tony Broy) — Senator Jack Reed, a Democrat and Chairman of the Senate Subcommittee on securities said last Thursday he will hold a hearing to review the Securities and Exchange Commission from top to bottom and see where improvements can be made and would call in experts to offer recommendations. While there may well be benefits to this effort, it will also slow down any internal efforts by the commission to restructure. We offer the following as a temporary solution that can be implemented without legislation.

REGULATION BY ENFORCEMENT IS NOT WISE

Expectations are high for serious reform and much of that expectation suggests more SEC enforcement staff. But as explained in the Center for Capital Markets Competitiveness Report on the Efficiency and Effectiveness of the SEC, http://www.uschamber.com/assets/ccmc/090211ccmc_sec_speed.pdf (CCM REPORT) enforcement should not be the primary venue for implementing policy. The SEC must not always be reactive. We believe there is much confusion about the role of such staff. By its very nature enforcement staff pursue sanctions after the fact. The former Enforcement Director admitted as much at the congressional hearing. They do not perform surveillance or examine. A wiser approach or strategy might be how to prevent problems through an increase in preventative staff or better use of current resources. Harry Markopolis-HM- made the same point in his testimony at the Congressional hearing.

ALLOCATION OF RESOURCES IS VITAL

There are currently at least 6 entities regulating the securities side of financial services. The SEC has 3500 employees. FINRA has 3000 employees. The NYSE regulatory staff has approximately 300-500 employees and the NASDAQ regulatory staff has additional personnel. The 50 states have approximately 500-700 employees in their securities administrator’s offices and attorney general’s offices. [entire post]

Tags: broker-dealer(s), ccm report, compliance, congress, democrat, derivative(s), enforcement, finra, fund, gao, jack reed, legislation, nyse, ocie, otc, oversight, regulation(s), sanction(s), sec, securities, senate, sifma, subcommittee, the fed, violation, wall street, whistle blower
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FINRA Rules Relating To Research, Rumors, Frontrunning And The Fiduciary Duty Debate

March 30, 2009 (By Peter Chepucavage)

From “Plexus Nexus”, by Peter Chepucavage

One of the major issues in the current debate over financial reform is whether investment advisors should be required to join an SRO. A fundamental aspect of the debate is their fiduciary duty as compared to a broker’s suitability responsibility. An additional issue is whether hedge funds should register as IA’S. Contemporaneously with the debate, FINRA has proposed numerous rules regarding the duties of brokers. Furthermore hedge fund litigation continues over trading ahead of research reports and/or pending orders. The following is an attempt to tie these rules together in the current context of the debate over hedge fund regulation and fiduciary duties.

There has long been uncertainty over the bds’ use of pending research reports and orders. Ad hoc attempts to clarify these issues over the years have lead to additional questions. These pronouncements seem designed to provide needed guidance albeit in a fragmented fashion. But they may also be an attempt to get ahead of their fiduciary controversy. Essentially they say neither you nor your clients can trade ahead of research or pending orders. But you can provide the research to your clients before it becomes public but not to selective clients. [entire post]

Tags: finra, front-running, research
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