SEC Adopts New Rule Preventing Unfiltered Market Access
The Securities and Exchange Commission today voted unanimously to adopt a new rule to require brokers and dealers to have risk controls in place before providing their customers with access to the market.
The new rule focuses on a practice in which broker-dealers hand their customer a special pass to access the markets called a market participant identifier. The customer then gains direct access to the applicable exchange or alternative trading system (ATS), also known as "sponsored access."
The rule approved today prohibits broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or ATS. It also requires brokers with market access - including those who sponsor customers' access to an exchange or ATS - to put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.
"I have previously likened unfiltered access to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," said SEC Chairman Mary L. Schapiro. "This rule requires that broker-dealers not only remain in the car, but also maintain control of it so we can all be assured the rules of the road will be observed before the car is ever put into drive."
Through sponsored access - especially "unfiltered" or "naked" sponsored access arrangements - there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in "unfiltered" access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.
The new rule is part of a larger effort by the SEC to help ensure that the markets are fair, transparent and efficient. Among other rules recently proposed by the Commission:
The new rule will be effective 60 days from the date of its publication in the Federal Register. Once effective, broker-dealers subject to the rule will have six months to comply with the requirements. (Press Rel. 2010-210; Rel. 34-63241)
SEC Publishes Request for Comment on President's Working Group Report on Money Market Fund Reform Options
The Securities and Exchange Commission today published a request for public comment on the options discussed in the President's Working Group on Financial Markets report on possible money market fund reforms.
As contemplated by the President's Working Group report, the SEC is requesting public comment on the options described in the report, including the effectiveness of the options in mitigating any systemic risk or susceptibility to runs associated with money market funds, as well as their potential impact on money market fund investors, fund managers, issuers of short-term debt, and other stakeholders. Comments received will assist the SEC and the Financial Stability Oversight Council in their further analysis.
The public comment period will remain open for 60 days following publication of the comment request in the Federal Register. (Press Rel. 2010-211)
SEC Proposes New Rule to Prevent Fraud in Connection With Security-Based Swaps
The Securities and Exchange Commission today voted unanimously to propose a new rule to help prevent fraud, manipulation, and deception in connection with security-based swaps.
The rule is proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposal would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities. And it also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap.
"The proposed rule would be an important means to ensure that the security-based swap market operates with integrity, and that the SEC has the ability to respond through enforcement to a range of potentially fraudulent conduct," said SEC Chairman Mary L. Schapiro.
The SEC's rule proposal recognizes that security-based swaps are unlike other securities because they are typically characterized by ongoing payments or deliveries between the parties throughout the life of the swap. Therefore, it's possible that one party may engage in misconduct to trigger, avoid, or affect the value of such ongoing payments. Such fraud may occur separately from the sale, purchase, or offering.
The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also explicitly to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps. The rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries.
SEC Proposes New Whistleblower Program Under Dodd-Frank Act
The Securities and Exchange Commission today voted unanimously to propose a whistleblower program to reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.
The SEC's proposed rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act maps out a simple, straightforward procedure for would-be whistleblowers to provide critical information to the agency. It conveys how would-be whistleblowers can qualify for an award through a transparent process that provides them a meaningful opportunity to assert their claim to an award.
To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.
"We get thousands of tips every year, yet very few of these tips come from those closest to an ongoing fraud," said SEC Chairman Mary L. Schapiro. "Whistleblowers can be a source of valuable firsthand information that may otherwise not come to light. These high-quality leads can be crucial to protecting investors and recovering ill-gotten gains from wrongdoers."
The proposed rule reflects the consideration of a number of potentially competing interests, and balances the need to encourage whistleblowers to come forward without promoting unintended consequences.
Closed Meeting - Wednesday, November 10, 2010 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Wednesday, November 10, 2010, will be: institution and settlement of injunctive actions; institution and settlement of administrative proceedings; an adjudicatory matter; consideration of amici participation; and other matters relating to enforcement proceedings.
At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.
In the Matter of Joseph D. Bonanno
On November 2, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions (Order) against Joseph D. Bonanno. The Order finds that on April 22, 2010, in United States v. Joseph D. Bonanno, Case No. 5:09-CR-170 (N.D. Ohio), Bonanno was convicted of wire fraud, aggravated identity theft, false statements, and false statements in application for a passport. The order finds that Bonanno, using the alias Timothy Hyde, was the president and owner of Hyde Financial Investments LLC, an investment adviser in Canton, Ohio registered with the Commission, and that Bonanno was a registered representative of at least two registered broker-dealers: Cadaret, Grant & Co. and AXA Advisors, LLC.
Based on the above, the Order bars Bonanno from association with any broker, dealer or investment adviser. Bonanno consented to the issuance of the Order without admitting or denying any of the findings therein, except he admitted that he pled guilty to the criminal charges and was sentenced to 3½ years in prison, 3 years of supervised release, and a $500 fine.
The Commission acknowledges the assistance of the United States Attorney's Office for the Northern District of Ohio and the Ohio Division of Securities in the investigation of this matter. (Rels. 34-63232; IA-3101; File No. 3-14105)
In the Matter of Spence-Lingo & Co., Ltd.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registration by Default (Default Order) in Spence-Lingo & Co., Ltd., Admin. Proc. No. 3-14083. The Order Instituting Proceedings alleged that Respondent was a corporation with a class of securities registered with the Securities and Exchange Commission, which had repeatedly failed to file required periodic reports. The Default Order finds these allegations to be true and revokes the registration of each class of registered securities of Spence-Lingo & Co., Ltd., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-63233; File No. 3-14083)
Commission Revokes Registration of Securities of Excelsior-Henderson Motorcycle Manufacturing Co. for Failure to Make Required Periodic Filings
On November 3, 2010, the Commission revoked the registration of each class of registered securities of Excelsior-Henderson Motorcycle Manufacturing Co. (Excelsior-Henderson Motorcycle) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, Excelsior-Henderson Motorcycle consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Excelsior-Henderson Motorcycle finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of Excelsior-Henderson Motorcycle's securities pursuant to Section 12(j) of the Exchange Act. This order settled the proceedings brought against Excelsior-Henderson Motorcycle in In the Matter of Electrosound Group, Inc., et al., Administrative Proceeding File No. 3-14092.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Electrosound Group, Inc., et al., Administrative Proceeding File No. 3-14092, Exchange Act Release No. 63131, October 19, 2010. (Rel. 34-63234; File No. 3-14092)
Permanent Injunctions Entered Against Defendants Cohmad Securities Corp., Maurice J. Cohn, Marcia B. Cohn, and Robert M. Jaffe
The Commission announced that on November 2, 2010, in its Madoff-related action, SEC v. Cohmad Securities Corp., et al., the Honorable Louis L. Stanton entered partial judgments on consent permanently enjoining defendants Robert M. Jaffe, Maurice J. Cohn, Marcia B. Cohn and Cohmad Securities Corp. (Cohmad), from future violations of certain provisions of the federal securities laws, including, in the case of Jaffe, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act), and in the case of Cohmad and the Cohns, Section 17(a)(2) of the Securities Act of 1933 (Securities Act).
The amended complaint, filed on November 1, 2010, alleges the defendants made material misrepresentations and omissions by referring hundreds of investors to Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities Corporation LLC (BMIS), while the defendants were aware of and failed to disclose facts that should have raised serious questions about the propriety of the Madoff investment. The investors referred to BMIS by the Defendants provided BMIS with more than one billion dollars. In consenting to partial judgments, each defendant neither admitted nor denied the allegations of the amended complaint, except that solely for purposes of the Court's later determination of monetary relief, the allegations of the amended complaint are accepted as and deemed true by the Court. Under the terms of the respective partial judgments:
Each partial judgment provides that the issue of disgorgement, prejudgment interest and civil penalty relief against the defendants will be decided at a later time.
The Commission filed its original complaint against the defendants on June 22, 2009. On February 1, 2010, Judge Stanton dismissed certain of the Commission's claims against defendants, including the claims against all defendants under Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act, and the claims against the Cohns under Section 15(b)(7) of the Exchange Act and Rule 15b7-1 thereunder. In issuing that decision, Judge Stanton granted the Commission leave to replead its claims in an amended complaint.
For more information see prior litigation release nos. 21095 and 21718. [SEC v. Cohmad Securities Corp., et al., Civil Action No. 09-CV-5680 (LLS) (S.D.N.Y.)] (LR-21722)
Judgment of Permanent Injunction and Other Relief Entered Against Defendant Gary A. Reys
On October 26, 2010, the Honorable Ricardo S. Martinez, United States District Court Judge for the Western District of Washington, entered judgment of permanent injunction and other relief against Defendant Gary A. Reys. The final judgment enjoins Reys, the former CEO of Seattle-area stem cell research company CellCyte Genetics Corp., from violating Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and rules 10b-5, 12b-20, 13a-11, and 13a-13 promulgated thereunder. In addition to the injunctive relief, the final judgment orders Reys to pay $50,000 in civil penalties and bars him from serving as an officer or director of a public company for five years. Reys consented to the entry of the judgment without admitting or denying the allegations in the complaint.
On September 8, 2009, the Commission filed its complaint against Reys alleging that he violated the antifraud and reporting provisions of the federal securities laws by, among other things, causing the company to issue false and misleading statements concerning its purported stem cell technology. [SEC v. Gary A. Reys, Civil Action No. 09-cv-1262 RSM (W.D. Wa.)] (LR-21723)
INVESTMENT COMPANY ACT RELEASES
Claymore Exchange-Traded Fund Trust, et al.
An order has been issued on an application filed by Claymore Exchange-Traded Fund Trust, et al., for an order to amend an existing order (Prior Order) that permits: (a) series of an open-end management investment company to issue shares of limited redeemability; (b) secondary market transactions in shares of the series to occur at negotiated prices; (c) dealers to sell such shares to secondary market purchasers unaccompanied by a prospectus when prospectus delivery is not required by the Securities Act of 1933; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of aggregations of the series' shares' (e) under certain circumstances, certain series to pay redemption proceeds more than seven days after the tender of shares; and (f) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire shares. The amended order would: (a) permit certain series to track equity and/or fixed income securities indexes that are created, compiled, sponsored, or maintained by an index provider that is an affiliated person, or an affiliated person of an affiliated person, of the series; (b) delete the relief granted from section 24(d) of the Act and revise various disclosure requirements in the applications for the Prior Order (Prior Applications); (c) modify the 80%/90% investment requirement in the Prior Applications; (d) revise the discussion of depositary receipts in the Prior Applications; and (e) permit the personnel of Guggenheim Funds Investment Advisors, LLC (Adviser) or any sub-adviser who are responsible for the designation and dissemination of the securities to be used for creations or redemptions to also select securities for purchase or sale by actively-managed accounts of the Adviser or any sub-adviser. (Rel. IC-29494 - November 2)
Approval of Proposed Rule ChangeThe Commission has approved a proposed rule change (SR-OCC-2010-14) filed by The Options Clearing Corporation under Section 19(b)(1) of the Exchange Act to expand the forms of collateral eligible for incorporation in the System for Theoretical Analysis and Numerical Simulations risk management methodology. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63217)
Immediate Effectiveness of Proposed Rule Changes
The Options Clearing Corporation filed a proposed rule change (SR-OCC-2010-15) under Section 19(b)(1) of the Exchange Act, which became effective upon filing, to revise OCC's By-Laws and Rules to accommodate index futures that are settled in a non-U.S. currency. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63222)
A proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2010-054) to extend the operational date of SR-FINRA-2009-065 has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63223)
A proposed rule change filed by the EDGX Exchange (SR-EDGX-2010-16) relating to amendments to the EDGX Exchange Fee Schedule has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63226)
A proposed rule change filed by the EDGA Exchange (SR-EDGA-2010-17) relating to amendments to the EDGA Exchange Fee Schedule has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63227)
A proposed rule change filed by NYSE Amex (SR-NYSEAmex-2010-102) increasing the maximum order size accepted by floor broker systems from 25,000,000 shares to 99,000,000 shares has become immediately effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63228)
A proposed rule change filed by the New York Stock Exchange (SR-NYSE-2010-71) increasing the maximum order size accepted by floor broker systems from 25,000,000 shares to 99,000,000 shares has become immediately effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 1. (Rel. 34-63229)
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