Escape From Wall Street

Another example of the problems with the ill-conceived, and hastily enacted SOX Legislation - How Congress put Hong Kong and London in a position to surpass New York as a financial capital

Merger Bashing

Damn the facts, full speed ahead. The opposition to the merger of the NYSE and NASD enforcement divisions continues. The St. Lousi Post-Dispatch has a post bashing the merger as being good for bad brokers, and bad for customers.

Calling the NASD and NYSE regulators "Deputy Dog meets Scooby Doo", "hapless", "inadequate" and a case of the fox guarding the hen house, the article demonstrates a complete lack of understanding of the securities regulatory process, or a refusal to acknowledge the process.

The post is consumed with the concept that two overlaping regulators with duplicate rules is better than one consolidated regulator, with the same level of staffing, and one set of rules.

They do mention, in passing, that Joseph Borg, the President of the NASAA, and one of the toughest state regulators in the country, gave the merger his "blessing" but then promply ignore that fact.

The reality is that we will all have to wait and see the actual proposal before bashing it, or praising it. At first glance, a consolidated regulatory agency will be more efficient, and have more funds at its disposal, which should be a benefit to the industry and the investing public.

Broker Overtime Quandry

The whole controversy over broker overtime has always been a bit of an enigma. Stock brokers are professionals, and certainly do not want to be considered hourly wage earners. Yet here they are, taking millions of dollars, collectively, from the wirehouses, through settlements of class actions because they were not paid overtime. In fact, that is the underlying legal theory - brokers are not professionals.

Before anyone jumps on me, I understand the legal issue, I don't understand the political, or public relations issue. It is not good for brokers. And does anyone have a handle on how much money the average class member received in these class actions?

What is even more puzzling is the fact that the Department of Labor is having a tough time with the legal issue. In this month's issue of Registered Rep, Halah Touryalai has a story reporting that the DOL issued an eight-page letter in responding to the SIA inquiry as to whether registered reps are, in fact, entitled to overtime pay.

According to the article, registered reps are not covered by Fair Labor Standards Act of 1938 under the “administrative exemption" and thus are not entitled to overtime. However, in the same letter the DOL indicates in a footnote that if a rep’s “primary duty is selling investments to clients” then he “will not qualify for the administrative exemption.”

Confused? Apparently so is every one else. Merrill Lynch just announced this week that it is the latest firm to pay money to settle an overtime lawsuit.

Both stories are at the Brokers Legal Center at SECLaw.com

Opposition to NASD-NYSE Merger Looms

Not everyone is happy with the proposed merger of the NASD and NYSE regulatory areas. Registered Rep has an article on a brewing dispute, as a group of small brokerage firms are urging a "no" vote on the merger.

SEC to Consider New Rules Affecting Hedge Funds

The SEC's Sunshine Act Meeting Notice (linked above) confirms that the Commission is going to consider changing the definition of accredited investor (which will have the effect of reducing the number of individuals who can invest in hedge funds, adn to add a new fraud rule to the Investment Advisers Act of 1940.

The relevant parts of the notice:

The Commission will consider whether to propose a new rule under the Securities Act of 1933 to revise the criteria for natural persons to be considered 'accredited investors' for purposes of investing in certain privately offered investment vehicles.

The Commission will consider whether to propose a new rule under the Investment Advisers Act of 1940 to prohibit advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds.

NASD and NYSE Merger Announced

With an end to the speculation, the NASD and NYSE hanve announced that their requlatory arms will merge.

Mary Shapiro of the NASD will become the head of the new entity, will combine the member regulation, arbitration and enforcement units of the two entities.

The merger is expected to be effective in the second quarter of 2007 and is anticipated to save tens of millions of dollars.

Not to mention the saved time and energy in no longer dealing with two sets of rules, regulations and regulatory strategy.

Accredited Investor Change in the Works?

On of the alleged reasons for hedge fund registration was the SEC's allegation that small investors were getting into hedge funds. Of course, such an event is impossible if existing rules and regulations were enforced, since the small investor does not meet the financial requirements to invest in a hedge fund.

Assuming that we want the SEC to have such parental control over investors, my suggestion was to raise financial definition of an accredited investor. Without accredited investors, a fund cannot charge a performance fee. So, instead of $1 million or $200,000, make it $2 million or $500,000, that would keep any small investor out of the funds.

That may be coming. Commissioner Cox spoke about exactly that, and rule proposals will be made in December.

Cox Favors Regulatory Merger

This must be one of the talking points for the week. Mary Shapiro is in Boca Raton talking about rule harmony, and Christopher Cox is on the same theme - at the same conference.

Shapiro Seeks Rule Harmony

With the varied web of securities rules and regulations, it is good to see a regulator talking about "rule harmony." There are simply too many rules, too many overlaping rules, and sometimes even conflicting rules.

It remains to be seen if such harmony can really take place, with regulators competing for rule space, but at least we appear to be moving in the right direction.

...we have met with the industry and the New York Stock Exchange to harmonize the rulebooks of both self-regulatory organizations and we will begin to propose harmonizing rule amendments, on a rolling basis, beginning with our next Board meeting in December

Regulatory McCarthyism

I thought I was being a bit harsh when I called the attempt at hedge fund regulation "Bureacuracy withhout Benefit." Jonathan Macey, a professor at Yale Law School labels the attempts "Regulatory McCarthyism" in this op-ed piece in today's Wall Street Journal.

You will need a subscription to read the piece, and while the title is a bit over the top, the professor is right when he takes on the new justification for hedge fund regulation - "systemic risk" to the markets and our economy.