NASD has filed with the SEC a proposed rule change to the NASD Code of Arbitration Procedure ("Code") to reorganize and simplify the current rules governing customer disputes. The proposal divides the current Code into three separate procedural codes: the NASD Code of Arbitration Procedure for Customer Disputes; the NASD Code of Arbitration Procedure for Industry Disputes; and the NASD Code of Mediation Procedure. As the NASD notes in its SEC filing, “One of the most frequent criticisms of the current Code is that it is poorly organized. Parties, particularly infrequent users of the forum, have difficulty finding the rules they are looking for, because the rules are not presented in a logical order.” In addition to renumbering existing Code sections and reorganizing Code sections and subsections in a more coherent fashion, the proposed Code incorporates many of the provisions of the Discovery Guide, although the Document Production Lists will remain separate from the Code.
Lori Richards of SEC recently delivered a speech to a SIA conference for small brokerage firms. Good speech, good points, but one thing Lori said struck me as out of place:
I work in compliance, and I think compliance is very important. But recall the famous quote by Georges Clemenceau, the Prime Minister of France during World War I. He said: "War is too important to be left to the Generals." I feel the same way about compliance.
Compliance is too important to be left to the compliance professionals.
I think Lori's point is that the responsibility for maintaining compliance is too important to fall only on the shoulders of the compliance professionals -- that the whole firm must participate in the compliance effort. That's certainly a valid point. But Clemenceau's comment wasn't a lament about a failure by France to get behind what the generals were doing or concern over the burden that the generals were carrying in running a war. Rather, Clemenceau was stating that the costs of World War I were so high that generals should not and could not be permitted to run the war without oversight.
Lori's point is about about making sure that everyone in the firm is carrying their own weight in the compliance effort -- Clemenceau's point is about making sure that generals are not able to freeze out civilians from decision-making.
It's a nit-picky point, I know, but the ex-history major in me couldn't resist. Of course, it could also be that the SEC views the phrase "working in the compliance trenches" to be taken literally.
The WSJ reports (subscription required) on a proposal on "softing" issued by the Financial Services Authority, the UK regulator. "Softing" (known as "soft dollars" in the US) is the practice where money managers pay somewhat higher execution fees (called "paying up") and receive credits from the executing broker to obtain other services or products from the executing broker. Most commonly, the soft dollar credits are used to receive market analysis. In other words, the execution fee represent a "bundled price" because it ultimately pays for both execution and market research. There's a potential conflict here, though, because the purchased research may be used on a behalf of a customer other than the one whose execution fees effectively paid for such research.
The executive summary of the FSA proposal succinctly explains the inherent conflicts in soft dollar practices. The FSA expresses doubt that these issues could be resolved by additional disclosure and, consequently, proposes to prohibit soft dollars from purchasing market data or research (the proposal leaves open whether soft dollars should be permitted to be used for other services, computer software and hardware and custody). Regulators have long been troubled by the potential conflicts inherent in soft dollar practices. When Stephen Cutler, director of the SEC enforcement division, spoke recently regarding conflicts of interest, it is safe assumption that soft dollar practices were on his mind.
Many money managers operate in both the UK and the US so, if the FSA proposal is enacted, the "ripple effect" of these firms bringing their UK operations into compliance will mean that their US operations will change their soft dollar practices also. As the WSJ puts it, this means that the FSA rules "could change the way Wall Street firms operate more dramatically than Eliot Spitzer has."
It should be noted that this is still only a proposal at this point. Originally issued in April, the comment period on the proposal remains open until October 10th.
The always-entertaining Patrick Young on what might happen when Eurex US begins trading futures contracts that are look-alike to the CBOT's futures contracts:
A great many folk have made the point that they feel the difficulty for EUREX even with its US exchange moniker will be winning the hearts and minds of US traders to utilize a foreign owned platform. A justifiable point and one which I am sure many Chicago pit traders pondered as they drove home to the 'Burbs in their BMWs, Mercedes and Porsches last week after EUREX's Chicago press conference.
The SEC has posted a recent speech given by Mary Ann Gadziala, an associate director in the SEC's Office of Compliance Inspections and Examinations. While the speech does not delve deeply into the details of the SEC inspection process, it does provide a general overview of how the SEC approaches the process and what it is trying to accomplish through its inspections. Definitely worth reading if your firm is expecting to have SEC auditors arrive in the near future.