September 13, 2011
i just read a bunch of comments from various people in the industry.
i see that many people want the effective date of this rule to begin september 2012 annual reports, rather than september 2011.
i think this is the problem.
some people in the securities industry do not understand that broker-dealers were ALWAYS supposed to have care and custody of their customers' assets. this is what the customers expected of their broker-dealers. cash customers never dreamed that their broker didn't have their stock. customers with margin accounts should also have segregated assets from brokerage assets.
further, audits were supposed to be performed previously. now that this involves REAL STOCK CERTIFICATES, some people appear to be upset and unable to figure out how to count these real stock certificates.
the accountants appear to be wanting to quantify it in terms of $. they are not $. they were bought at one price and this established the price that the customer of the brokerage paid for the stock. but the price of the stock varied over time, as trading occurred. however, if the broker owes the customer stock, maybe because the broker accepted an IOU for the stock, the latest price may not represent the price after the broker buys in some percentage of the float that is outstanding. further, neither that broker nor their auditor could predict how many shares that other broker must buy in order to produce shares for their customers. but if 20% of the float of a stock must be bought in, in order to produce shares that the cash customers own, this should have been done yesterday. of course, if 20% of the float must be bought in, the price for the dealer who is covering is probably higher than the previous day's last price. this is because the last price does not include any volume that should be bought in. the IOU's are debts to the investors of that stock, not just debts to the customer who is waiting for their shares. and their brokers, the clearinghouse, the shortselling brokers, and the shortseller are all endorsers of the IOU position. IOU's should never have been created because of non-settlement of any shares in a stock market transaction. and, their value can only be estimated when carried as an IOU. i will tell you that their value is not $0 and the last price for that stock is the beginning point for value.
brokers have always had the responsibility for care and custody of their customers' assets. brokers should have already segregated their customers assets. it is insufficient to count imaginary shares as real shares, if the customer owns those shares.
the netting system at the clearinghouse has been paper entries for many years. everyone knows what happens when inventories have not been done in a timely fashion. there has been no comparison of outstanding transactions to the # of shares outstanding either.
calculation of margin is important when measuring against the obligations of a broker. but customers' assets should not be used to fund shortselling. they should not be used to guarantee payment for other peoples' transactions. only brokers' assets should be used to fund shortselling. brokers do not have title to their customers' assets. they only have care and custody of their customers' assets.
further, correspondent brokers are customers of the american brokers. correspondent brokers must adhere to margins for customers of a broker, must settle within market deadlines a a customer. if a broker extends margin to a correspondent broker, it is because that broker has assessed the credit risk and creditworthiness of their customer. the american brokers are liable for the actions of their customers.
the stock market has been very unfair to the investors. while rules exist, the sell-side of the transaction has not preformed according to deadlines, has adopted many strategies in order to manipulate price.
if people do not like this rule, maybe we need to close the stock market for a few weeks and everyone go through an audit to count the shares that the investors have. this is an old rule, just fallen into disuse over time, for reasons unknown to me. surely, all these commenters are not intending to perpetuate any errors that might have existed for the last several years. there should be no IOU'S, as they should have been bought in as soon as they were proposed by the shortselling broker that didn't deliver stock. it was the fiduciary responsibility of the broker who was supposed to receive the shares for their customer.
i think the auditors could figure out procedures. i think the brokers can figure out how to provide care and custody of their customers' portfolios.
i think the SEC has a right to try to figure out whether brokers have enough stock for their customers. the SEC should be applauded for trying to do this before they make any more rules. the whole country would like to know the results of audits.
the investors have been bleeding for years. and investors don't want to invest if they are just handing their wallets to their broker or the shortsellers. wall street does not inspire confidence with the general public.