Articles Posted in Dodd-Frank

SEC Wants To Extend Temporary Rule Letting Dually-Registered Advisers Get Principal Trading Consent

For the third time in four years, The Securities and Exchange Commission wants to extend a temporary rule that makes it easier for investment advisers that are also registered as brokers to sell from the proprietary accounts of their firms. The regulator issued for comment its proposal that would move the interim’s rule expiration date to the end of 2016 instead of the end of 2014.

Under the temporary rule, dually registered advisers can either get verbal consent for principal trades on a transaction basis or give written prospective disclosure and authorization, in addition to yearly reports to the clients. With principal trades, a brokerage firm uses its own securities in the transaction.

At a recent event hosted by the Americans for Financial Reform (AFR) and the Roosevelt Institute, US Senator Elizabeth Warren (D-Mass) called on the Obama Administration to break up Wall Street’s biggest banks. She also chastised regulators for not dealing with financial institutions that cannot fail because they are just “too big.” This means that because they are so integral to the economy, if the banks are ever in financial trouble, the US government would inevitably have to step in like it did during the 2008 economic crisis so that the entire financial system doesn’t fall apart.

During her speech, Warren spoke about the Dodd-Frank Wall Street Reform and Consumer Protection Act, observing that three years after its enactment it the hasn’t solved this “too big to fail” dilemma. She pointed out that clearly not much has changed between then and now, observing that the four biggest banks (Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) are 30% bigger than they were five years ago. She also noted that the five largest institutions hold over half of the bank assets in the US.

Warren wants to know when the government was going to start ensuring that large Wall Street institutions can’t take the economy down again while leaving taxpayers to foot the bill. She believes her 21st Century Glass Steagall Act could solve this “too big to fail” problem, while making turning these dismantled, smaller banks into institutions that are no longer too big to run, regulate, pursue, or prosecute.

The Securities and Exchange Commission has put out its request for information to help it decide whether to impose a uniform standard of care on both investment advisers and broker-dealers that give advice to retail customers. The comment period ends 120 days after the data request, which was issued on March 1, is published in the Federal Register.

Responding to the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, the SEC conducted a study on the effectiveness of the current standards for investment advisers and brokers. Following its examination, Commission staff recommended that the regulator take part in rulemaking to establish a uniform fiduciary standard for those that provide customized retail investments. However, last year, after then-SEC Chairman Mary Schapiro announced that the agency was putting together a request for information so it could decide whether to follow this recommendation, the initiative had to be delayed due to a lack of support from other commissioners.

Now, in this latest request request, the Commission was quick to stress that it has yet to decide whether such a rulemaking needs to happen or what one would entail. It also asked for data regarding others areas impacting both investment advisers and brokers that could benefit from harmonization, including business conduct rules, licensing advertising, registration, and books and records.

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

The U.S. District Court for the Southern District of New York has ruled that a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amendment to Section 806 of the Sarbanes-Oxley Act of 2002 must be applied retroactively to clarify congressional intent. The amendment specifies that public company subsidiary employees, and not just parent company employees, are protected under the whistleblower statute. The court, however, did not reach merits of the plaintiff’s claim regarding his firing and told the parties to turn in a joint letter about what steps will need to happen to get the matter ready for trial.

The lawsuit, Leshinsky v. Telvent GIT SA, involves whistleblower claims made by plaintiff Phillip Leshinsky. He contends that Telvent GIT SA (TLVT), Telvent Caseta Inc., Telvent Farradyne Inc., and a number of individuals wrongly fired him while violating Sarbanes-Oxley’s whistleblower provisions. Leshinsky, who was employed by nonpublic subsidiaries of the publicly traded Telvent GIT, contends that he was let go when he expressed opposition to using allegedly fraudulent information to secure a contract with the New York Metropolitan Transit Authority. His claims pertain to a period prior to the 2010 Dodd-Frank amendment.

The court noted that while before the Dodd-Frank amendment, Sarbanes-Oxley only protected employees who worked for publicly traded companies from retaliation when they blew the whistle, the 2010 revision does apply retroactively “as a clarification of the statute.” Leshinsky is therefore covered under Section 806.

Speaking at the Council on Foreign Relations on May 2, Federal Reserve Governor Daniel K. Tarullo said he did not think that federal agencies would complete their rulemaking duties that are mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act until next year. He also said that full implementation of these rules would take even more time. Tarullo is in charge of overseeing efforts by the Fed to draft and execute these regulatory reforms.

He said that the process of completing the rules is a complicated one and challenges have inevitably arisen. To finish rulemaking duties sooner would likely have resulted in “inconsistencies and open questions” that would have inevitably led to “another round of changes.” Tarullo also spoke about how the complexities of certain US regulations have posed added challenges. For example, regulatory reforms must conform to the Basel Committee on Banking Supervision’s Basel III framework.

Tarullo also said that “instability” from the shadow banking system warrants a need for more regulatory reforms. He warned of new forms of shadow banking that could be lurking on the horizon especially if greater regulation of the large financial firms leads to elements of the shadow banking system going into “largely unregulated markets.”

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