sec - What We're Reading - StockBuz2024-03-29T05:14:56Zhttp://stockbuz.ning.com/articles/feed/tag/secWhen The SEC Investigates Market Failureshttp://stockbuz.ning.com/articles/when-the-sec-investigates-market-failures2016-01-01T18:47:50.000Z2016-01-01T18:47:50.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>This week, the SEC gave us a belated Christmas present.  But what does it actually portend?</p>
<p>The present in question is an 88-page "<a href="http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf" title="" target="_blank" class="external-link">Research Note</a>" from the SEC's Division of Trading and Markets titled "Equity Market Volatility on August 24, 2015." It's an innocuous-enough title, but for us market-structure wonks, it's kind of a big deal.</p>
<p>The conclusions of the piece are purely factual, and include dozens of pages of juicy charts and tables (be still my nerdy heart!). There's little or no conjecture, and there's absolutely no policy recommendations.</p>
<p>It outlines the facts of that fateful trading day, discussing what went wrong, and which classes of securities were affected. It's a gold mine for folks who want to dig in and understand what happens when things break, and, for any investor, it's worth reading at least the first six pages.</p>
<h3>Key Findings</h3>
<p>Here are the most interesting findings—not just because they're objectively interesting—but because they give you some insight into where the SEC may direct future policy:</p>
<ul>
<li><span style="line-height: 21.28px;">The SEC goes out of its way to point out that large and small equities—and large and small exchange-traded products—were almost equally affected. It hammers this point home repeatedly. To me, this signals that it is countering an internal (or external) argument that there's a "small-cap problem" when it comes to market structure, or that the liquidity haves/have-nots divide is the fundamental problem.</span></li>
<li><span style="line-height: 21.28px;">The SEC makes a clear point of highlighting that 60% of the limit-up-limit-down (LULD) halts came when securities were trading up from lows. The not-too-subtle implication is that they're going to revisit the symmetry of the system. This is a good thing. People really only care, in general, about downside volatility. Sure, people building models, shorting or managing risk in a sophisticated way care about overall volatility. Actual investors? Not so much.</span></li>
<li><span style="line-height: 21.28px;">While it highlights the <a href="http://www.factset.com/insight/2015/10/can-the-dutch-save-etf-trading#.VoP-LPkrJD8" title="" target="_blank" class="external-link">same issues</a> with the NYSE open and reopen process that I did in a recent blog, it makes a case study of the PowerShares QQQs, which, in tracking the Nasdaq 100, by definition includes no NYSE-listed securities. It points out that the Q's had just as big a discount problem in the heat of the open as did the iShares S&P 500 ETF.</span></li>
</ul>
<p>It concludes by saying the things it actually wants to keep researching, and show its hand pretty well here: It wants to focus on how the LULD process works (or doesn't), and it wants to readdress marketwide circuit breakers. It also says it's looking at Reg SHO and the short-sale restrictions, although from my analysis, I don't see this as a contributing factor (but hey, I've been wrong before).</p>
<h3>So What Does This All Mean?</h3>
<p>It's important to understand the SEC's actions in context, and in total. The SEC is not a singular entity that speaks as one voice with one set of tools. Each division has its own regulatory bailiwick, and its own penchant for action or inaction.</p>
<p>The Division of Trading and Markets is generally concerned with plumbing and exchange regulation, and what we see here is it coming into line with where the big action has been lately, the Division of Investment Management.</p>
<p>The Division of Investment Management oversees mutual funds and ETFs (among other things), and the agenda there going into 2016 is enormously clear. There are more than 600 pages of proposed rulemaking currently out for comment, all of it focused on one thing: risk.</p>
<p>One set of rules has been proposed for managing liquidity risk. Another set of rules has been proposed for managing derivatives (and thus leverage) risk. This all comes after a set of questions back in June where it started treading into Trading and Markets territory, asking about whether exchanges should have look-through responsibilities when it comes to exchange-traded products.</p>
<h3>Jumping On Risk Bandwagon</h3>
<p>This data dump from Trading and Markets reads to me like a "getting on the risk bandwagon" statement. In general, I'm all for this. The SEC's job is to keep the trains running on time, and days like August 24 and unintended exposures through poorly constructed products are absolutely the kinds of things it should be focused on.</p>
<p>My hope is that it takes its time and really listens, because there are dozens of unintended consequences already baked into its proposed rulemaking. That's bad enough when you're talking about the inner workings of mutual funds and ETFs; it's a bigger deal when we're talking about the inner workings of the markets themselves.</p>
<p>The moral of the story: 2016 is a year in which investors—and investment managers—will need to pay very close attention to what's happening in Washington.</p>
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<div>Courtesy of <a href="http://www.factset.com/insight/2015/12/key-findings-on-the-sec2019s-august-24-data-dump?referrer=E-mail&email=mrsbuz1@aol.com&domain=economics#.VoarnllFrcc" target="_blank">Factset</a></div>
</div>Investment Firm Director Snake In The Grasshttp://stockbuz.ning.com/articles/investment-firm-director-snake-in-the-grass2014-08-27T16:24:07.000Z2014-08-27T16:24:07.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Companies would expect their investment firm, especially management and Senior members, to not only dissuade insider trading, but to lead by example. Here's a complete failure.</p>
<p>Case in point Mr. Michael Anthony Dupre Lucarelli. The <span style="text-decoration: underline;">Director</span> of Market <strong>Intelligence</strong> at a Manhattan-based investor relations firm. Market Intelligence? Serious oxymoron going on there? Maybe not an oxymoron such as "honest politician" or "almost pregnant" but snake in the grass, no doubt (allegedly).</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290824?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290824?profile=original" width="300"></a>Today the SEC charged the "Director" of insider trading by more than a dozen clients. The charges were filed against Mr. Lucarelli alleging he garnered nearly $1 million in illicit profits.</p>
<p>An SEC investigation and ongoing forensic analysis of Lucarelli’s work computers uncovered that he repeatedly accessed clients’ draft press releases stored on his firm’s computer network prior to public announcements. The SEC alleges that Lucarelli, who had no legitimate work-related reason to access the draft press releases, routinely purchased stock or call options in advance of favorable news and sold short or bought put options ahead of unfavorable news.</p>
<p>Seriously? You're the Director of a firm and you front-run earnings expecting not to be caught? Get a grip slick. </p>
<p><span style="text-decoration: underline;">At the same time</span>, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Lucarelli. Talk about having a bad day! *lol*</p>
<p>“<em>Employees of investor relations firms have access to sensitive information about their clients, and exploiting that information for personal gain is not an option</em>,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. </p>
<p>According to the SEC’s complaint filed in federal court in Manhattan, Lucarelli traded in securities belonging to companies that his firm was advising in advance of announcing their <strong>earnings</strong> or other significant events such as a <strong>merger</strong> or <strong>clinical drug trial result</strong>. Lucarelli began taking a position in a client’s securities in the days immediately preceding the announcement, although in a few instances he began making his purchases weeks in advance. Lucarelli started divesting himself of his position immediately after the announcement in order to reap instant profits.</p>
<p>It's difficult enough for the individual investor to navigate the investment arena. When companies cannot even trust their advisers, it's time to hide the dangling carrot. Time for corporate America to stand up and examine their internal procedures and ramp up security. It's tough to blame the child when the cookie jar is right in front of them each day.</p>
<p>Read more on the charges at <a href="http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542757594#.U_4AWmMlexV" target="_blank">SEC.gov</a></p>
<p></p></div>Asset Managers vs SEC; Battle Heating Up Over Dodd Frankhttp://stockbuz.ning.com/articles/asset-managers-vs-sec-battle-heating-up-over-dodd-frank2014-05-31T16:24:12.000Z2014-05-31T16:24:12.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://www.salon.com/2014/05/29/shame_befalls_wall_street_cop_inside_an_infuriating_bureaucratic_turf_war"><img class="align-left" src="http://ts4.mm.bing.net/th?&id=HN.607994136074849660&w=300&h=300&c=0&pid=1.9&rs=0&p=0" /></a>The Securities and Exchange Commission has touched off a major bureaucratic scuffle with its fellow financial regulators by proposing to, in the words of one Democratic aide, “rip the heart out of Dodd-Frank.” The SEC, following the wishes of one of its Republican commissioners, has initiated a turf war over which agency gets to monitor a key corner of the financial system.</p>
<p>At issue are so-called asset managers, companies like BlackRock, Fidelity and Pimco, who manage investments on behalf of individuals and groups through mutual funds and other vehicles. Asset management firms collectively control an astonishing $53 trillion in investor funds.</p>
<p>Historically, the SEC has regulated asset managers. But under Dodd-Frank, the Financial Stability Oversight Council, a newly created super-regulator, can designate “systemically important financial institutions,” or SIFIs, and subject them to rules previously reserved for banks. An FSOC designation puts non-bank SIFIs under the supervision of the Federal Reserve, subjecting them to tougher standards, like having to carry more capital to cover against losses. This makes sense, because non-banks like AIG were major contributors to the crisis.</p>
<p>Two asset managers – BlackRock, which manages $3.8 trillion in funds, and Fidelity, which manages $1.9 trillion – came under <a href="http://www.reuters.com/article/2013/11/06/fsoc-review-idUSL2N0IR01R20131106">official FSOC review</a> last November, and the SEC has fought it virtually all the way.</p>
<p>Late last week, at a conference sponsored by the Investment Company Institute, the lobbying group for asset managers, SEC chairwoman Mary Jo White <a href="http://www.bloomberg.com/news/2014-05-22/sec-s-white-feels-blackrock-s-pain-over-systemic-label.html">echoed industry arguments</a>. White, who has a vote on the 10-member FSOC, claimed that asset managers represent a safe sector of the financial system, because they don’t place risk on their own balance sheets, instead merely managing funds for others. In addition, she argued that the SEC’s capital markets expertise makes them the right agency to oversee asset managers, not the traditional banking regulators who comprise a majority of the FSOC.</p>
<div style="opacity: 1;" class="toggle-group target hideOnInit" data-toggle-group="story-13686678">
<p>White has <a href="http://www.businessweek.com/news/2014-02-21/risks-from-asset-managers-to-get-more-sec-scrutiny-white-says">proposed new rules</a> for asset managers, including expanded stress testing and more transparency for their portfolios. But clearly, she wants to keep that turf, rather than turn over the biggest companies to FSOC. “It is enormously important for FSOC, before it takes any decision, to make certain it has the requisite expertise,” White said. “A lot of it has come and needs to come from the industry.” Notably, the SEC did not place White’s remarks on its <a href="http://www.sec.gov/News/Page/List/Page/1356125649549">website</a>.</p>
<p>Reformers might have less of a problem with the SEC handling asset managers if they showed any interest in stiffer oversight of the financial industry in recent years. The SEC has been <a href="http://www.reuters.com/article/2013/07/13/us-usa-sec-reforms-idUSBRE96B0XZ20130713">slow to write</a> Dodd-Frank rules, <a href="http://www.cnbc.com/id/100705830">punted</a> on rules for money markets, <a href="http://dealbreaker.com/2013/05/the-sec-will-keep-talking-about-credit-rating-agencies-until-everyone-stops-paying-attention/">completely undermined</a> proposed rules for credit rating agencies, <a href="http://dealbook.nytimes.com/2011/11/09/judge-in-citigroup-mortgage-settlement-criticizes-s-e-c-s-enforcement/?_php=true&_type=blogs&_r=0">let banks off the hook</a> for toxic securities designed prior to the financial crisis, and has been <a href="http://www.bankrate.com/financing/investing/departing-sec-lawyer-blasts-agency/">blasted as irresponsibly weak</a> by their own ex-lawyers. This episode furthers the impression that the SEC cares more about its friends at BlackRock and other Wall Street giants than about safety and stability for investors.</p>
<p>The turf battle goes back several months. Last September, the Treasury Department’s Office of Financial Research <a href="http://www.treasury.gov/initiatives/ofr/research/Documents/OFR_AMFS_FINAL.pdf">issued a report</a> called “Asset Management and Financial Stability.” Originally, this was to be a joint report between the OFR and the SEC. According to those with knowledge of the deliberations, the SEC wanted the report to say that any risks generated by asset managers were well addressed by current securities laws, prompting no need for additional rules. OFR would not go along with that, and the SEC decided to pull out of the report before the deadline, refusing even to provide their data.</p>
<p>The OFR report concluded that some asset management activities “could create vulnerabilities” to the financial system, if improperly designed. For example, asset managers may “reach for yield” by accumulating riskier assets to try to snag higher returns, creating bigger losses in the event of a sudden shock. In addition, the securities lending business, which involves temporarily transferring securities to investors so they can use them for things like short-selling, could lead to trouble if the lender doesn’t keep enough cash collateral to guard against a crisis. AIG, in fact, got in <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aoGjre8ctFFk">lots of trouble</a> with securities lending in 2008, and asset managers lost money as well. Finally, the failure of a large asset management firm could threaten the overall financial system, in the same way that other large firms with trillions in assets pose a risk.</p>
<p>In other words, OFR found sufficient reason for concern that poorly run asset managers could expose the system to danger. But the SEC, who refused to cooperate with the report, then <em>attacked</em> it, in a classic bait and switch. They claimed that OFR failed to collaborate with them, an assertion refuted by the Treasury Department, which released <a href="http://online.wsj.com/news/articles/SB10001424052702304908304579562014107181916">months of communication</a> between the two agencies, showing that the SEC received 15 drafts of the report before its release. The SEC also asked for public comment on the report from asset managers, who predictably savaged it.</p>
<p>“The SEC has really put the hammer down to try to protect its regulatory turf,” said Marcus Stanley of Americans for Financial Reform, a coalition of advocates for stronger regulations on Wall Street. “They’re saying it’s not legitimate for FSOC to look over into capital markets, not even to look at data.”</p>
<p>Daniel Gallagher, a Republican commissioner on the SEC, wrote in a <a href="http://www.sec.gov/comments/am-1/am1-52.pdf">letter</a> earlier this month that the OFR report was “fundamentally flawed,” particularly because of the absence of empirical data (which the SEC held back). He contended the report reflected a lack of understanding about asset managers, and that the SEC had capital markets regulation well in hand. You can see plenty of continuity between Gallagher’s letter and Mary Jo White’s position.</p>
<p>While financial reformers view the decision on whether individual asset managers should be designated as SIFIs as a legitimate debate, they see White’s alignment with Gallagher as a bigger problem. “This is an attack on the core of Dodd-Frank in a way that I’m not sure [White] realizes,” said one Senate Democratic aide, adding that SIFI designation was Title I of the financial reform law, a testament to its importance. “The heart of Dodd-Frank is the ability to regulate big firms that are systemically significant. This attack is ripping the heart out of it. Buying into Gallagher’s views of how the SEC should be run is extremely troubling.”</p>
<p>No asset manager has yet been designated, and any decision is months away. Top Treasury Department official Mary Miller believes the industry is “<a href="http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140519&id=17630903">overreacting</a>” to what has been done thus far. (White <a href="http://www.bloomberg.com/news/2014-05-22/sec-s-white-feels-blackrock-s-pain-over-systemic-label.html">pointedly disagreed</a> with that assessment last week.) But that hasn’t stopped asset managers from round-the-clock <a href="http://www.bloomberg.com/news/2013-11-05/blackrock-fidelity-face-initial-risk-study-by-u-s-regulators.html">lobbying</a> to get FSOC to back off, arguing that any new regulations would make mutual funds more expensive. Senators from both parties, prodded by the industry, <a href="http://www.reuters.com/article/2014/01/24/us-financial-regulation-asset-idUSBREA0N1LG20140124">criticized the OFR report</a> and the bid to tag asset managers as SIFIs back in January.</p>
<p>Asset managers may be completely innocuous. But the FSOC correctly allows regulators to scrutinize every aspect of the financial system. As we saw in the crisis, losses can migrate across the system to its linked counter-parties; you cannot really isolate one part as the “good” area that doesn’t require aggressive oversight. Walling off pieces of the system undermines the entire purpose of FSOC, and weakens an already weak financial reform law.</p>
<p>We have enough problems with financial regulation to have a turf war impede the few mechanisms we have to deter runaway risk. The SEC has covered itself in shame during the crisis years, and this preoccupation with jurisdiction shows that the black marks on their record haven’t gone away.</p>
</div>
</div>Daily Readshttp://stockbuz.ning.com/articles/daily-reads-102014-03-21T15:18:05.000Z2014-03-21T15:18:05.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><ul>
<li><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290543?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290420?profile=RESIZE_480x480" height="143" width="360"></a>The <a href="http://www.bloomberg.com/news/2014-03-20/sec-said-examining-hidden-electronic-bond-trading-prices.html" target="_blank">SEC is investigating</a> electronic bonds prices and why some are hidden from view. Are customers truly receiving "best price"?</li>
<li>Hands down the best explanation or deciphering I have seen on Fed policy, Yellen's statement and QE taper. (hat tip GT) <a href="http://www.crossingwallstreet.com/archives/2014/03/cws-market-review-march-21-2014.html" target="_blank">CWS Market Review</a></li>
<li>Marked weakness continues in biotech and technology names. Rotation into financials and oil&gas names? We think so.</li>
<li>With hopes for <a href="http://www.obgynnews.com/single-view/hopes-dashed-for-sgr-reform-the-policy-practice-podcast/693d75235372c37466b565f2bad0a797.html" target="_blank">SGR (Sustainable Growth Rate) reform</a> dashed, physicians prepare for a 24% pay cut effective April 1, 2014.</li>
<li>Bank stress tests are out and worst case scenario? A mere <a href="http://www.nationaljournal.com/economy/in-worst-case-scenario-fed-sees-501-billion-in-losses-at-nation-s-biggest-banks-20140320" target="_blank">$501 Billion</a> in losses to the Fed. What could go wrong? They can always file Bankruptcy like everyone else. *lol*</li>
<li>Take Yahoo, minus out it's stake in Alibaba and Yahoo Japan and what's left.............is worthless. <a href="http://www.ritholtz.com/blog/2014/03/when-markets-are-wrong/" target="_blank">Ritholtz</a> (click to enlarge image)</li>
<li>If you do NOT feel the biotech bubble has burst and you merely feel this is some profit taking and rotation into other sectors, here's a list of the biggest biotech losers to ponder buying the dip. <a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/03/20140321_bio4.png" target="_blank">(ZeroHedge image)</a></li>
</ul></div>