"The SEC Is Finally Doing It's Job?"

U.S. Securities and Exchange Commission SEC

Federal regulators on Wednesday adopted new rules designed to stem conflicts of interest and provide more transparency for Wall Street's credit-rating industry, widely faulted for its role in the subprime mortgage debacle and ensuing credit crisis.

The action by the five-member Securities and Exchange Commission was another government response touching on the global financial crisis set off by mortgage securities. The commissioners voted unanimously at a public meeting to adopt the new rules, most of which will take effect in about 60 days.

SEC Chairman Christopher Cox called adoption of the new rules "a significant and substantive action" that affects every aspect of the rating agency business and will give the investing public access to a trove of new information while promoting needed competition in the industry. After nearly a century of policing itself, the industry came under SEC oversight through a 2007 law.

But the SEC commissioners did not adopt a controversial proposal floated last spring to require ratings of complex securities, such as those underpinned by mortgages, student loans or auto loans, to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds. That proposal drew opposition from Wall Street.

European Union regulators, who last month put forward strict new rules for the rating agencies that would hold them liable for their opinions, also proposed a similar system of flagging complex securities. Cox said after the meeting that the proposal would be subject to further study by the SEC and public comment.

The three firms that dominate the $5 billion-a-year industry — Standard & Poor's, Moody's Investors Service and Fitch Ratings — have been widely criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.

The rating agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

Some critics, including investor advocates, say the SEC rules don't go far enough. They want new requirements to govern how the rating agencies are paid and to provide for the suspension of their licenses if they engage in unfair practices.

"Any steps they take to further reduce conflicts of interest are critical to reforming the industry," said Jeff Glenzer, managing director of the Association for Financial Professionals, a group representing finance officials at U.S. corporations that has been active on the issue.

Some recommendations the group made to the SEC, such as requiring strict separation at rating agencies between credit analysts and employees responsible for generating revenue, weren't adopted, Glenzer said.

The rating agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

Spokesmen for Fitch, Moody's and S&P on Wednesday said they supported the SEC's efforts, already have taken steps to increase transparency and will continue to make further enhancements in the future.

The U.S. Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d and commonly referred to as the 1934 Act). In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

The SEC is composed of five commissioners, of which no more than three can be from a single political party. Currently the SEC commissioners are chairman Christopher Cox (R), Kathleen L. Casey (R), Troy A. Paredes (R), Luis A. Aguilar (D) and Elisse B. Walter (D).

The SEC was established by the United States Congress in 1934 as an independent, non-partisan, quasi-judicial regulatory agency following years of depression caused by over production of goods, the introduction of consumer credit, and the Great Crash of 1929. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges. Currently, the SEC is responsible for administering seven major laws that govern the securities industry. They are: the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and most recently, the Credit Rating Agency Reform Act of 2006.

The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies found to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses which include a criminal violation.

Federal regulators on Tuesday accused four people of inflating the value of Bank of Montreal's trading portfolio to falsely enhance its financial results. One of the four pleaded guilty to related criminal charges and agreed to a civil settlement with the Securities and Exchange Commission.

The SEC announced its charges, brought in a civil lawsuit in federal court in New York, against David Lee, a former managing director of the bank's commodity derivatives group. Also charged were Edward O'Connor, president of commodities brokerage firm Optionable Inc., and that company's former chief executive Kevin Cassidy, and former broker Scott Connor.

Lee pleaded guilty to related criminal charges filed by the U.S. attorney in Manhattan and the Manhattan district attorney's office, and agreed to forfeit $4.4 million.

The SEC alleged in its suit that Lee fraudulently overvalued Bank of Montreal's portfolio of natural gas options by hundreds of millions of dollars by deliberately "mismarking" trading positions for which market prices were unavailable, making the options difficult to sell. Lee was said to have conspired with Cassidy, O'Connor and Connor to have their brokerage firm "rubber-stamp" the inflated values that he recorded.

After the scheme came to light, the Canadian bank had to restate its results by cutting its reported net income for the first quarter of fiscal 2007 by about $204 million U.S. dollars, or 68 percent, the SEC said.

The four "engaged in an elaborate scheme to overvalue illiquid assets held on the books of a publicly traded bank," SEC Enforcement Director Linda Thomsen said in a statement.

  After several years of "toxic assets" like sub-prime mortgages and credit default swaps, along with banks and companies "cooking their books" to appear profitable when they weren't, the SEC is finally beginning to do their job again. Investors in the US no longer have confidence in the advice given for and the handling of their investments, even in mutual funds and 401-ks. As I see it, the SEC has to lead the way in restoring investor confidence in the US stock market. The Obama Administration would do well in giving the SEC a long lease to regulate the wild unregulated market spawned by former Senator Phil Gramm under the Clinton Administration. Though I am a libertarian, I am not for absolute laissez faire economics or absolutely no government regulation of the market because the propensity for greed is too strong in human nature not to regulate banks and Wall Street. Let the SEC do it's job!

tags: sec  business  capitalism  deregulation  takebackamerica  free market  laissez faire economics  

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