Below are news stories from the week that were easy to miss, but may have some lasting impact.
New Era, New SEC Chairman, New Focus?
The financial crisis may be largely finished at least in prosecutorial respects, as the statute of limitations is quickly running out on some of the allegations of malfeasance. Accordingly, there may be a new focus at the U.S. Securities and Exchange Commission (SEC). Mary Jo White, the new director of the SEC, declared at her Senate confirmation hearings that her first priority will be a careful look at high-frequency and automated trading. That’s probably wise since the high frequency trades (computerized trades that are generally held for only seconds, or fractions of a second) now account for approximately three-quarters of all equity trading in the U.S. Meanwhile the acting head of the Enforcement Division was recently quoted as citing the Commission’s intention to track accounting fraud in the securities industry. We are all anxious to put the economic crisis in our rear-view mirror. The SEC appears to have new coordinates in the GPS and a new driver.
Doubt the SEC’s New Focus? SEC Commissioner Says Let People Sue Advisors.
Speaking to Association of State Securities Regulators this week, SEC Commish Aguilar suggested that it was time to amend the Securities Exchange Act of 1934 and allow private civil action against a person who provides substantial assistance in violation of the Exchange Act. Firms often demand investors sign arbitration agreements that limit their rights to later sue their advisors in court. Freeing investors to sue directly (instead of the SEC doing it on their behalf) could free the agency to pursue other goals. Last year 71% of the regulator’s broker-dealer enforcement cases involved allegations of fraud under the ’34 Act. Times are a-changing at the SEC.
Final Evidence of SEC’s New Focus—The “Breaking of the Buck”
The SEC is expected to announce this week new mutual fund rules. The expectation is that the rules will require funds to mark their fund to market even if that means the funds will fall below par value—or “break the buck” in market parlance. This is a major change for the industry, and at least one fund manager general counsel has told me that it will be the end of the money market industry as we know it. While John Q. Public may not pay much attention to such developments, such a change will have serious repercussions for this $2.7 trillion-dollar industry. It would be quite a statement for Mary Jo White’s first month at the SEC.
Dear Regulators—Large Banks Need More Capital. Sincerely, Your Senators
It is said that politics makes strange bedfellows. The letter this week on U.S. Senate stationery from Senators Corker, Vitter, Collins, Brown and Warren (Senators from both sides of the aisle) demonstrated that. The letter addressed to the heads of the OCC, FDIC and the Federal Reserve Board asked that capital measures be simplified and a strong leverage ratio be instituted. The letter goes on to request that overly complicated capital rules not be imposed on smaller banks and that future big bank losses not be borne by taxpayers. While there is nothing shocking in the letter it does show bi-partisan support for simple, strong capital rules (including a leverage ratio)—unusual in many ways.
Judges Say No to Rubber-Stamping
It’s been 18 months since Federal Judge Jed Rakoff rejected the SEC’s $285 million settlement with Citicorp. His rationale was that the SEC didn’t explain how it came up with the number. But what was unusual was that the judge was asking questions at all. Such settlements by regulators were routinely rubber-stamped with the assumption that “regulators know best.” Since Rakoff’s ruling, a number of judges have followed suit. A judge rejected an SEC settlement with IBM, another judge rejected a Ponzi scheme settlement stating “I refuse to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him.” Two more settlements have been blocked in New York including a record-setting agreement between the SEC and SAC Capital Management. It is not clear where this trend takes us. Will regulators be forced to litigate because judges will not approve settlements? Will firms under investigation hesitate to negotiate settlements because they fear that judges won’t approve anyway? Judge Rakoff might receive a few cold shoulders when the regulators next visit the courthouse.