Articles Posted in Stockbroker Regulation

A number of watchdog groups want Senate Banking Committee Chairman Chris Dodd (D-Conn.) to support an amendment to the financial regulatory reform bill that he is sponsoring. The bill lets the Securities and Exchange Commission and the Commodity Futures Trading Commission set up bounty programs for whistleblowers that approach them with information about financial fraud. However, if the government doesn’t act on these tips, the bill has two key provisions that prevent whistleblowers and the public from ever finding out. Leahy’s amendment would eliminate the provisions while protecting the identities of whistleblowers.

In a letter to Senator Dodd, the groups said that such limits on public access are “poison pill secrecy measures” that would not only prevent the public and whistleblowers from ever knowing whether the tips were pursued, but also would keep the latter from proving they are whistleblowers if they were ever retaliated against. The groups said that such secrecy would allow regulators to avoid being held accountable if they failed to act on any whistleblower tips.

The watchdog groups that support the amendment include Public Citizen, OMB Watch, the Project on Government Oversight, Citizens for Responsibility and Ethics in Washington, OpenTheGovernment.org, Government Accountability Project, Common Cause, Progressive States Network, Consumer Action, National Community Reinvestment Coalition, Americans for Financial Reform, and the National Fair Housing Alliance.

Related Web Resources:
S.3217 – Restoring American Financial Stability Act of 2010, OpenCongress.com
Read the groups’ letter to Senator Dodd (PDF)
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The NASD imposed a $200,000 fine against EKN Financial Services Inc. and levied sanctions against the firm’s CEO, President, Head Trader and Financial and Operations Principal for improper short selling in connection with three unregistered PIPE securities offerings. As part of the settlement, EKN was also suspended for six months from engaging in transactions in PIPES.

“This action represents NASD’s continued commitment to ensuring that those firms and individuals who engage in improper activity involving PIPE trading will be held accountable,” said the NASD’s Head of Enforcement. “Suspending the firm for six months from future PIPE deals illustrates the seriousness with which we view these violations.”

A PIPE is a private offering in which accredited investors agree to purchase restricted, unregistered securities of public companies. The companies agree, in turn, to file a resale registration statement so that investors can resell the shares to the public. Only after the PIPE shares registration is approved by the Securities and Exchange Commission (SEC) are investors free to sell them on the open market.

Last week, a securities law journal published a study illustrating how securities regulators went “soft” last year. According to the study, NYSE and NASD fined securities companies and individuals $111 million in 2006, which was lower than the $184 million in collective fines that their two regulatory units issued in 2005. Regulators only issued 19 actions of $1 million or greater. There were 25 such actions the year prior.

The report cited a similar decrease in penalties at the SEC. Penalties issued in 2005 were $1.5 billion. Penalties went down to $974 million in 2006.

Barbara Roper, Consumer Federation of America’s Director of Communications, says, however, that public-company managements and brokerage firms actually outdid themselves in their handling of research-analyst conflict, accounting scandals, and mutual fund-trading scandals.

“There are two things I worry about: Clients dying and the government putting me out of business,” said a Merrill Lynch rep who says he gets about 80% of his revenue from B-shares shares and fee-based business. Apparently, the safety of his clients’ assets must be down the list.

Meanwhile, regulators are currently engaged in a crackdown on brokers who shove clients into B-shares when the breakpoints of A-shares are much more appropriate, and those who use wrap accounts then ignore their clients. Hundreds of millions of mutual fund load refunds have been ordered. It has been discoverd that some clients have paid $5,000 to $20,000 per transaction while ignored in fee-based accounts at major firms.

Loss of the fees “would make me wonder whether I should stay in business,” said Curtis Mohr, a Pasco, Wash., broker affiliated with Royal Alliance Associates Inc. Good riddance!

It seems that Wall Street has convinced state and federal regulators, as well as Congress and Presidential candidates, that the regulatory bar must be lowered if we are to compete in the international securities market (or perhaps Wall Street’s donations have affected the judgment of these politicians). Yet, studies continue to show that most investors prize a company’s behavior over rich returns.

After the crash of 1929, and for over 70 years, our securities markets have been regulated by a network of federal and state securities laws. During that period, U.S. financial markets have thrived and becme the envy of the world. Conventional wisdom is that investors want to feel safe in investment waters – as shark free as possible. Yet, those on Wall Street, many of whom have proven themselves to be sharks, lobby regulators and lawmakers to attempt to win a “race to the bottom” in worldwide financial regulation.

Yet a recent study found, for example, that two-thirds of investors say they would sell their shares of a company that engages unethical but legal behavior-even if that behavior brought in higher returns. These results were found through poll research performed by Opinion Research Corp. for Pepperdine University’s Graziadio School of Business and Management.