So fraud and deception is rampant in the securities industry, and the best solution is an overbroad, ambiguous ban on free speech?
Life of Illusion – Joe Walsh
BuySide: Please Resume Your Chit-Chat
Courtesy StockJockey
Securities regulators have done a lot of stupid things over the past year, but the SEC’s temporary ban on short selling financial stocks was probably the biggest. SEC chairman Chris Cox called it the biggest mistake of his tenure and the unintended consequences to Hedgistan, combined with the downfall of Lehman Brothers, unleashed a 1-2 punch that decimated the gang that probably deserved a medal, as opposed to the enema they received.
My take is that Hank Paulson (after being goaded by brokerage CEOs) strong-armed Cox into the move; intimidation seems to be a big part of Paulson’s management style. Bernanke does not seems to stand up to him either and will finally crawl out from under his desk as Paulson leaves town in two weeks.
But one of the more asinine proposals regulators have been floating is to restrict communication between money managers. Dan Loeb of Third Point LLC is never one to back down from a scrap, and penned a response to regulators who were seeking to blame shorts for talking amongst themselves and driving down the stocks of brokers:
Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors. Our outside counsel has examined this matter thoroughly and assured us that our position is consistent with the securities laws and that we have not violated any law in connection with these communications.
Now an industry group is rallying behind Loeb and the BuySide. Great news, but what took so long?
Hedge Fund Industry Opposes FINRA Rule on Circulation of Rumors – by Jim, at Jim Hamilton’s World of Securities Regulation
The hedge fund industry is concerned that a proposed FINRA rule designed to prevent the intentional circulation of rumors for the purpose of manipulating the market will interfere with the beneficial free flow of investment ideas. In a letter to FINRA, the Managed Funds Association said that proposed Rule 2030 would impair the ability of money managers to receive and investigate the validity of market information and have a negative impact on the overall efficiency of the marketplace. The MFA urged FINRA to revise proposed Rule 2030 to focus on compliance with existing anti-manipulation rules and require member firms to adopt policies for handling rumors, bolstered by surveillance.
The proposed rule would prohibit FINRA members from circulating rumors concerning any security if the member knows or has reasonable grounds for believing that the rumor is false or misleading or would improperly influence the market price of such security. The rule would also require a member to promptly report to FINRA any circumstance which reasonably would lead the member to believe that any such rumor might have been circulated.
The MFA believes that a rule focused on the circulation of unsubstantiated information is both overbroad and impractical, especially since the modes of communication have changed and continue to change so dramatically. It would undermine the legitimate search for information. In addition, the MFA is concerned that the arbitrary application of the rule could make seemingly legitimate communications a violation. Moreover, Rule 2030 fails to distinguish between the legitimate circulation of unsubstantiated information and the intentional circulation of false information for the purpose of manipulating the market.
It also lacks clear standards in determining a violation and is ambiguous as to the meaning of reasonable grounds for believing and improperly influence the market price. As drafted, said the MFA, Rule 2030 would capture legitimate and beneficial market activity.
In addition, the MFA is concerned that Rule 2030’s self-reporting requirement, which turns on a reasonable belief that rumors might have been circulated, is also broad and imprecise. The rule would cause FINRA members to over-report rather than risk being second guessed with the benefit of hindsight.
The MFA suggested that a better approach would be for FINRA to require member firms to adopt policies and conduct surveillance and training concerning the circulation of rumors. An effective compliance program addressing rumors could include written guidelines, active training of employees, and continued monitoring of a firm’s communications and trading. The MFA recommended following the example of the UK FSA’s Notice on Rumors, which discusses best practices and common elements, including the definition of a rumor, prohibitions on creating rumors; and trading based on rumors.
Mary Schapiro’s first order of business might be to extend an olive branch to Hedgistan which, along with Main Street, has suffered the most from the unintended consequences of her predecessors’ actions.
And then she could press the insider trading case forward involving John Mack and Pequot. Mack shot himself in the foot pressing regulators to clamp down on the financial shorts – he instantly became one of the most hated men on Wall Street and ruined his prime brokerage business to boot.
Mack’s decision to escalate Morgan Stanley’s leverage ratios in an effort to keep up with the Joneses was a disaster — in hindsight, Phil Purcell, who lost out to Mack in a power struggle, might have run the firm more conservatively and kept the bankers in check. Too bad for Morgan Stanley (MS-NYSE) shareholders.
But, given the lousy chart, Mack should lose his job at the very least. Around here he is considered a war criminal, and I am not done kicking him around just yet.
Sources: Hedge Fund Industry Opposes FINRA Rule on Circulation of Rumors; also at Hedge fund industry opposes US rule on circulation of rumours
Previously: Dan Loeb vs the SEC: It’s a Religious War
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