Earlier this week, the Securities and Exchange Commission (SEC) announced that it has fined US$300,000 and issued a cease-and-desist order to UBS Global Asset Management (GAM) for not following fair valuation procedures in three of its mutual funds (check out the full SEC order against UBS on the regulator’s website here). The infractions took place in June 2008 and involved 48 of the firm’s 54 fixed income securities valuations (non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, to be exact) during that month. The SEC deemed that all but six of the 54 securities were valued in excess of … Continue Reading →

Via a recent Securities Technology Monitor article by Peter Chapman, “SEC Strengthens Market Structure Crimes Unit,” we became aware that this is first time a large regulatory agency has recognized the need to employ former industry (non-lawyer) trading specialists as field investigators to sniff out potential trading abuses by various securities markets participants. The SEC ended up hiring five individuals for this Market Abuse Unit, out of a total of 55 staff members, within its Division of Enforcement, which employs between 1,300 and 1,400 people. The five range from quant analysts to a trading strategist  to securities operations. We are … Continue Reading →

The Securities and Exchange Commission is in late-stage talks with Citibank to settle civil charges related to a billion-dollar subprime mortgage-backed collateralized debt obligation (CDO) deal — Class V Funding III — for US$200 million. At the heart of the suit is the claim that Citibank held short subprime mortgage positions and could therefore profit at the expense of CDO holders. Additionally, the SEC is investigating Mizuho Financial Group and Magnetar Capital LLC, both collateral managers of other mortgage-backed CDO deals. Last year, Goldman Sachs Group settled with the SEC for US$550 million relating to its underwriting of Abacus 2007-AC1, … Continue Reading →

A funny thing happened when major rating agency Standard & Poor’s (S&P) downgraded U.S. debt in early August of this year: The U.S. Treasury market rallied as global fixed income participants recognized that U.S. creditworthiness is as close to the mythical “risk-free” moniker as can be, at least in the real world. Shortly thereafter, another funny thing happened: While the SEC was already investigating the S&P relating to its rating of mortgage-backed securities, this aspect of the SEC’s involvement relating to CRAs received added press when the S&P downgrade came about. The occurrences are funny in the sense that regulators … Continue Reading →

This Friday — August 12, 2011 — the Dodd-Frank whistleblower provisions take effect. Introducing financial inducements into prospective informants’ complex, emotionally fraught decision process may subtly alter compliance departments’ relationships with employees and regulators. Importantly, the rules do not require employees to follow their firms’ internal compliance procedures before advising the Securities and Exchange Commission (SEC) about possible securities law violations. If internal reporting were mandatory, individuals in possession of what the SEC calls “quality tips” might well choose to remain silent for a variety of reasons. They might, for instance, mistrust the compliance managers’ confidentiality, doubt their effectiveness, or … Continue Reading →

Taxes, entitlements, and the national debt limit are not the only controversial topics in Washington this summer. The Securities and Exchange Commission’s proposal to apply a uniform fiduciary standard to investment advisers and broker-dealers alike has created a ruckus in the retail investment industry. The Securities Industry and Financial Markets Association (SIFMA) and the National Association of Insurance and Financial Advisers (NAIFA) are lobbying vigorously against the SEC proposal.* What’s behind this brouhaha?  We are not qualified to offer legal advice, but here is a layman’s account. As with so many other regulatory issues these days, the debate originated with the Dodd-Frank … Continue Reading →

Dodd-Frank has opened a door to U.S. banks to offer retail currency trading (aka FX or Forex) as of July 22, 2011, but is about to close that same door to U.S. securities firms. Although theoretically securities firms will still be able to offer FX, the Securities and Exchange Commission is not likely to pass retail FX rules by the July 15 deadline to prevent its registrants from being shut out of FX, a lucrative business with significant growth potential. Some firms affected by this likely SEC inaction include Charles Schwab, T.D. Ameritrade, E*Trade, and Interactive Brokers. As of July 16, only … Continue Reading →

The SEC has set its sights on Stifel Financial Corp. with regard to the sale of collateralized debt obligations (CDOs) backed by subprime mortgages to five Wisconsin school districts. At issue is the suitability of Stifel’s marketing of such investments to local-level public entities. Five years ago, CDOs were the rage in the fixed income markets. Underwriters and issuers constructed many of them through the purchase of subprime mortgages. Four years ago, investors paid little attention to credit risk. The school districts no doubt felt that the CDOs they purchased were safe (most likely they bought the triple-A rated tranches). … Continue Reading →

The Securities and Exchange Commission (SEC) is coming to the rescue of the investment community; it is considering leveling civil fraud charges against credit rating agencies (CRAs) — in particular Standard & Poor’s (S&P) and Moody’s — in relation to their roles in facilitating the 2008 and 2009 financial collapse via mortgage securities’ ratings. This is reminiscent of an old Honeymooner’s episode in which Ed Norton tries to convince his buddy (Ralph Kramden) that he has his best interest at heart: “Who took you to the hospital and took care of you when you got hit in the head with … Continue Reading →

The subprime mortgage debacle highlighted the role that credit rating agencies played in subprime lending. Of particular focus was the role of Nationally Recognized Statistical Rating Organizations (NRSROs), an SEC-sanctioned designation. Over time, the capital markets took the SEC designation to mean that an NRSRO had the government’s seal of approval and was somehow better equipped to assess creditworthiness of bond issues than non-NRSRO credit-rating firms. Of the 10 NRSROs, the “Big Three” — Moody’s, S&P, and Fitch — are the best known. During the first five to six years of the second millennium, the Big Three viewed asset-backed and … Continue Reading →