May 21, 2008
Securities and Exchange Commission May 21, 2008
100F Street NE
Reference File No. S7-08-08 – Rule 10b-21
The end date of the official comment period to this rule proposal has now since passed and as has been the experience with so many other such proposals submitted for public comment while the general public has submitted their input on record the members of the industry have not.
The fact that this has been a recurring tactic of industry members should be of concern to the Commission. The Commission due to the lack of member response can delay rule changes while awaiting their inputs. This provides the members the upper hand in controlling the independence of the agency. The only other alternative would be that the members have not submitted comment for the public due to the more private audience they are provided. This option is more likely especially when you consider that members of the industry have publicly disclosed that they are in communication with the Commission on this and other similar short sale reforms before the public for comment.
Is this again a case where the real conversations and decisions are being made in meetings rooms where the general public is being excluded? If so, does that not defeat the spirit of the public comment guidelines in federal rulemaking?
Have the members protected their reputations in dealing with sensitive issues like investor protection vs. corporate profits by voicing their opinions privately?
We are already aware that the brainchild of the grandfather clause was the Securities Industry and Financial Markets Association (SIFMA). This confirmation comes from one who witnessed the communications and the directing. Consider then that it was the industry members who proposed, and later received, the grandfather clause and yet discussion surrounding such a major change to the rule was never presented for public comment.
The grandfather clause was eventually pointed out to be a loophole used to circumvent the settlement problem and was later removed by the Commission under the evidence of abuse. Clearly the inception of this clause put the publics interests at risk while the members profited from its inclusion.
More recently, and appearing at a SIFMA Conference earlier this spring Jonathan E. Breckenridge, VP, Securities Division Compliance, Goldman Sachs stated
The one thing to keep in mind in respect to brokers, what were really all concerned about is, one of things were concerned about I should say, is the possibility of aiding and abetting a client. As participants in the market we see a lot of this at the clearing firm, you see it come through your books and records. To the extent that we need to be aware of the problem and not having done anything about it there is exposure to aiding and abetting, hopefully with just the SEC and not the private plaintiffs bar, but thats still to be seen to know what this rule is going to look like in the final.
To the extent that we need to be aware of the problem and not having done anything about it there is exposure to aiding and abetting
Seeing it and not having done anything about it? A statement such as this, coming from a senior compliance officer in a major Wall Street firm is a major enforceable act. Wall Street is set up under the honor system of self-regulation with the SROs and SEC performing menial audits while allowing these firms to regulate themselves. Any firm that simply witnesses and does nothing about it violates more than simply the spirit of the self-regulatory system, by looking the other way they are in fact an extension of the crime itself.
How the SEC does not understand this and take appropriate actions against such myopic thinking is beyond me.
In response to this admission by Breckenridge, Anand K. Ramtahal, VP, FINRA stated:
Weve been out there and weve seen some types of practices for example where a broker dealer, all of its proprietary trades were coded as market maker trades, so all of those trades went through the system while the broker obviously continued to fail and did not close out a 13-day old fail in Threshold securities.
And while FINRA auditing has exposed that such problems exist, enforcement history has provided that the violators are given compliance violation fines and not the more severe manipulation fines associated with a calculated decision to violate the rules. Never has the consideration on how such activities move the markets been taken. How does any firm fail to properly mark all of their proprietary trades and have any rational person believe that these were simple human error?
With the liquidity that the hedge fund industry has created, the public must carefully question the value of this exemption altogether.
For more on the SIFMA Conference and this panel discussion of Regulation SHO I would refer you to
Bottom Line here Mr. Chairman, your teams policies and actions are ineffective. The Commission has played nice with the members for far too long and the results are clear. Members are being accused in private of potential aiding and abetting but to the public nothing is seen being done about it. The self-regulatory system stinks and is out of control. There is no integrity amongst thieves and yet this agency you Chair believes it can work. History continues to prove otherwise.
I conclude with this Mr. Chairman, where is the decision on the Options Market Making exemption? Where is the expedience of the Commission to put the rights of abused investors above the rights of member firms stealing profits? I believe you have no answer because you have lost control of the people.