July 25, 2011
Release No. 34-64676; File No. S7-23-11
broker dealer reports
it is too bad that this rule is not on the front webpage of the SEC. you will get fewer comments hiding it on the page of proposed rules. yet this is a major rule.
brokers should keep custody and control of their customers' investments. these investments should not be used to increase the brokers' margin so that their shortselling customers can short stock.
the audits should be filed annually. the brokers should have their auditors attest to procedures to maintain this custody and control and the brokers should be required to file reports quarterly.
any IOU's for their customers' holdings should have been bought in as a duty to their customers. using IOU's in place of customer assets is unethical, immoral, and illegal.
the brokers should be doing business only with licensed clearinghouses and should communicate their actual margin to the clearinghouse on a daily basis. even if shares are borrowed, the margin should be decreased because lending should not replace ownership of stock. shortsellers short the price down and so any calculation is probably at a minimum price.
brokers should not count the total of their customers with margin accounts in their possession. customers with margin accounts have an ownership share in that property and broker only have the remaining shares. further, customers that have margin accounts may have cash in their margin accounts, indicating that they may have 100% ownership of the shares. brokers should not be allowed to lend even the shares in margin accounts if the customers have sufficient resources. margins should be calculated from the brokers' resources such as cash, brokers' corporate investments, shares in excess of margin, and less any loans, failure to deliver, and current shortselling. IOU's such as debt/equity swaps are loans. these should be subtracted from any margin. this accounting change should be done NOW.
i am quite concerned about the aspect of brokers acting as clearinghouses. clearinghouses should have additional resources set aside to mitigate any possible shortselling broker failing to deliver. clearinghouses should follow due dates for all transactions. brokers' customers have agreements and customers who are choosing a broker do not know the financial standing of their broker because of their agreements with correspondent brokers, clearinghouses, and clearing for others. further, they don't know who has been giving and accepting debt/equity swaps in place of shares. it is very obvious to me that those "guarantees" do not follow the duedates of the stock market. this is a big problem when an investor wants to choose a broker. this was a conspiracy in the stock market, and i don't know whether any broker is not tainted with it. in fact, i think the chances of any broker surviving the crisis to be small. but these were illegal actions.
if the amount of shares shorted in the market is approximately 50%, there is no way that these many shares can be borrowed, without involving the shares of the longs. further, you could only conclude that shortselling is primarily driving this stock market. you cannot have an economy that is predicated on shortselling. the only thing you can conclude is that there is fraud in the marketplace.
how will brokers file a compliance report over this last year? they will have to identify the material weaknesses over this past year, when brokers didn't buy in debt/equity swaps, didn't segregate their customers' assets. in my opinion, brokers should start working on their compliance NOW, before the end of the year. this is the problem with the SEC deadlines: 1) the SEC moves deadlines, 2) the SEC weakens rules, 3) the SEC allows brokers' appeals in spite of fraud.
this material non-compliance is a debt to their customers, to the investors. any brokers that cite "deficiencies" should not be allowed to continue business. how can you have a financial market where the brokers do not have a duty to safeguard the assets of their customers? absolutely, the investors should have access to reports that indicate that they do not have control and custody of the customers' assets.
absolutely, the auditor or chief financial officer of the brokerage should notify the SEC immediately if there is material weakness in the care and custody of the brokers' customers' assets. the SEC may have to act immediately. the auditor does not have to finish the report before notifying the SEC of such material weakness.
in my opinion, the SEC is being very generous in giving the brokers until december 2011 to implement this. after all, this is fraud. the shortselling brokers think that if they delay SEC rules, they win. the SEC has a responsibility to the investing public and cannot delay this rule. brokers would be wise to cure their material weakness immediately, as a buy-in suddenly on the part of many brokers or major brokers would cause them to go out of business. what happens when brokers go out of business? do they mail the investors their stock certificates? do they communicate and ask the investors where they want them to be mailed?
brokers that clear transactions for others should stop clearing transactions unless they can meet requirements for being a clearinghouse. brokers that clear transactions for themselves only should be allowed to do so if they meet required deadlines for their transactions. they are required to fix transactions that have erroneous information in them within one day. they should promptly settle transactions. they should maintain their margins. their compliance officer should check those margins twice daily and immediately report noncompliance to the chief financial officer. in addition, because they are clearing transactions, they should have an independent auditor sign off on the daily margin calculation. also, because they clear transactions for themselves, they should be able to identify their inventory for stock symbols on an immediate basis, so that they can address any shortcoming in any particular symbol. it would be necessary to buy in or borrow shares when any particular stock is deficient.
the SEC should be allowed access to auditors working papers for all brokers.
if the brokers do not want to implement these rules because of cost, they should be reminded that they have abrogated their duty to the public, duty to their customers in allowing this situation to exist in the first place. if brokers who clear do not like the increased cost, they can decide to clear their transactions through licensed clearinghouses. by clearing for other brokers, they are assuming liability in the event of a broker failing. in this case, they are liable for the trades of such a broker.
in addition, brokers that clear transactions cannot count the trades in their margins nor in their customers' accounts, as long as the trade is not settled. in addition, options to purchase shares are not shares because they depend on another party to produce the shares.
brokers should not be allowed to frequently change locations of the securities in order to avoid these regulations. since brokers have to prove care and custody of their customers' assets, they must also publicly disclose WHERE those assets are being held. further, any holding areas for the securities of a broker must segregate these assets from that entities' assets, as if they were a customer of the holding entity.
brokers reports and the holding reports of other entities must match as of a certain date/time. should you require an auditor of the other entity sign this? who should sign this report for the other entity?
brokers who agree to hold securities/balances for other brokers have an additional obligation to segregate those balances from their brokerage balances. in my opinion, this is a separate business from being a broker. it is possible that the SEC should require entities that are holding securities to be separately licensed. there is a care and control issue here.
the broker-dealer should be required to disclose the name of any third party sending trade confirmations. this will facilitate anyone helping a broker unwind operations, will help with the SEC making sure that deadlines are being met.
i think it is fine that my broker sends me electronic notification that a trade has occurred. i can look up on my account for any trade.
since this is a restatement of an existing rule, brokers should file the form custody within 17 business days.
the broker should file with the SIPC directly. the SIPC may have to unwind the business of the broker and these reports would facilitate that.
as for the costs, this is the cost of the broker bizzaro world of finance. what do you think they cost investors? i would say that the cost to investors have been far greater than the cost to the brokers. the cost of broker fraud has been born by the public, by investors and this cost has been huge. anyone with one quarter of accounting should have been able to identify that this was a cost to the economy and to investors in general. if the brokers had attended to their responsibilities to their customers, this would not have happened. instead, they viewed investors as stupid rubes who had to follow the rules, while everyone else did not.
worse, the information was hidden from the public and minimized, presented as untrue. this was a lie. shortselling and its impact has been hidden from the public and the government. worse, the SEC cannot even answer basic questions about deadlines, rule implementation.