Post by jannikki on Nov 12, 2005 10:10:13 GMT -4
SEC Denies responsibility for Trade Settlement Enforcement - September 17, 2004
By Dave Patch
It has been a long and arduous task trying to get the SEC to take responsibility for securities fraud associated with “Naked Shorting”. From one form of denial to another the SEC has relinquished all responsibility to enforce the settlement of our securities. SEC’s media relations spokesman John Heine claims settlement failures are not securities law violations but in fact contract law violations. According to Mr. Heine “the SEC is not in the enforcement of contract law”. Actually the SEC is rarely in the enforcement of anything.
Trade Settlement failures is a violation of Securities Law if you assume that the SEC is responsible for enforcing the Securities Act of 1934.
In the General Rules and Regulations Promulgated by the Securities act of 1934 comes Rule 15c6-1. Rule 15c6-1 addresses the Settlement Cycle for all trades executed. This rule states that no Broker-Dealer may enter into a contract for the sale of a security whereby the payment for that security and the delivery of that security is greater than 3 business days. The only exemption to this comes when a written agreement between both parties has been entered into. www.law.uc.edu/CCL/34ActRls/rule15c6-1.html
Today the SEC and NASD have agreed that trade settlement failures are not only harmful to the markets, but also admit that in some cases the settlement failures will exceed the entire public floats of companies. For this to be the case, Broker-Dealers are not meeting the guidelines of Rule 15c6-1. Broker-Dealers are entering into contracts for trades that exceed 3 business days and yet the SEC refuses to enforce the rules. Ameritrade recently told one client that if they wanted physical delivery of shares it would take 4 – 6 months and they would be restricted from selling during that timeframe. Mr. Heine claims it is not the SEC’s job to address these violations. If not the SEC’s whose is it?
I went deeper into my research and began to look up Client agreements between an investor and their broker-dealer. I found that much of the issue we speak of as investors hinges on the word settlement. The SEC claims that settlement simply refers to a share showing up electronically into your account. It is not, however, what investors think of as the meaning of settlement nor is it what we have written into our client agreements. To most settlement is the actual transfer of ownership of a security and all rights that go with it.
Let’s review how settlement is defined:
Section 17A of the Securities Act of 1934: Establish a system …”prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership”
SEC Regarding Trade plus 3 Settlement: “Investors must settle their security transactions in three business days…. When you sell a security, you must deliver to your brokerage firm your securities certificate no later than three business days after the sale.”
NASD Glossary: Settlement: “The conclusion of a securities transaction; a broker/dealer buying securities pays for them; a selling broker delivers the securities to the buyer's broker.”
ETRADE Agreement: Settlement Date. The day on which a transaction is to be completed. On this day, buyers are to pay for their purchases and sellers are to deliver their securities. Generally, for equity transactions, settlement date is three (3) days after a trade executes, for options trades settlement date is the day after the trade executes, and settlement for mutual funds can vary depending on the particular fund family.
But what about the “Book-Entry” settlement? The SEC has denied the abusive nature of the issue by claiming shareholders are not harmed due to “Book-Entry” settlement whereby our Broker will put shares into our account prior to them actually receiving transfer of ownership from the seller. Unfortunately, there is no publication I could find that justifies this position.
The SEC defines “Book-Entry” Settlement here: "Street Name" Registration — The security is registered in the name of your brokerage firm on the issuer's books, and your brokerage firm holds the security for you in "book-entry" form. "Book-entry" simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.”
You can’t own something until you take delivery.
How harmful is unsettled trades?
The SEC publication to Investors: “Unsettled trades pose risks to our financial markets, especially when market prices plunge and trading volumes soar. The longer the period from trade execution to settlement, the greater the risk that securities firms and investors hit by sizable losses would be unable to pay for their transactions”. To these words Mr. Heine states: “No Question the language is correct”. www.sec.gov/investor/pubs/tplus3.htm
So with the harm that unsettled trades can have to our financial markets, why is it the SEC refuses to step in and address the issue? Who is responsible for enforcing rule 15c6-1? If trades are not being settled, and brokers are entering into these contracts knowing that these trades will not settle in 3 days, who is responsible for enforcing actions against the brokers for entering the contracts or breaking the contracts without written approval of the clients? The Industry has the information; all the client has is a false account statement that claims trades settle when they haven’t. The Industry is now fighting hard to insure that the pending lawsuits do not go into discovery where they would have to open their books for investors to finally see the realities of what is happening.
To seek these and other answers I once again asked Mr. Heine for answers and once again I got the SEC duck. No Comment!
I had asked the SEC in a written request for specifics on what circumstances the SEC would see as justification for trades failing the 3 day settlement period. In the request I asked what the SEC felt were reasonable causes for settlement failures and what would be a natural timeline for those trades to then settle. Mr. Heine initially stated that the question was unanswerable and later suggested I speak with investor relations. Mr. Heine was smart, he was not about to give up on the secrets only the SEC is allowed to know and understand. Even the NASD proposed a maximum limit of 10 days to settle trades but the SEC denied that proposal for unknown reasons. The NASD proposal now lies dormant in the halls of the SEC’s Division of Market Regulation.
The bottom line is simple. The SEC is negligent in performing duties that support the best interests of all investors.
Trade settlement failures are a violation of securities laws and are a breach of securities agreements between the SEC and the broker-dealers, the broker-dealers to each other, and the broker-dealer to the client. There is no written agreement for an alternate settlement date between parties. The Brokers act in a “good-ole-boy” network where they forgive each other’s sins at the safety of our investments and the financial markets. The SEC in turn looks the other way in violation of enforcement of the Securities Act of 1934.
The SEC’s doubletalk and confusion on this issue is clear. The SEC does not want to enforce trade settlements. Years ago the SEC initiated actions to move from T+5 to T+3 and now they have a concept release to go to T+0. These are wasted and costly efforts if the SEC won’t stand up with a backbone and enforce the rules. It is time the SEC accounts for their actions.
It is now time Congress steps out and takes hold of this situation.
By Dave Patch
It has been a long and arduous task trying to get the SEC to take responsibility for securities fraud associated with “Naked Shorting”. From one form of denial to another the SEC has relinquished all responsibility to enforce the settlement of our securities. SEC’s media relations spokesman John Heine claims settlement failures are not securities law violations but in fact contract law violations. According to Mr. Heine “the SEC is not in the enforcement of contract law”. Actually the SEC is rarely in the enforcement of anything.
Trade Settlement failures is a violation of Securities Law if you assume that the SEC is responsible for enforcing the Securities Act of 1934.
In the General Rules and Regulations Promulgated by the Securities act of 1934 comes Rule 15c6-1. Rule 15c6-1 addresses the Settlement Cycle for all trades executed. This rule states that no Broker-Dealer may enter into a contract for the sale of a security whereby the payment for that security and the delivery of that security is greater than 3 business days. The only exemption to this comes when a written agreement between both parties has been entered into. www.law.uc.edu/CCL/34ActRls/rule15c6-1.html
Today the SEC and NASD have agreed that trade settlement failures are not only harmful to the markets, but also admit that in some cases the settlement failures will exceed the entire public floats of companies. For this to be the case, Broker-Dealers are not meeting the guidelines of Rule 15c6-1. Broker-Dealers are entering into contracts for trades that exceed 3 business days and yet the SEC refuses to enforce the rules. Ameritrade recently told one client that if they wanted physical delivery of shares it would take 4 – 6 months and they would be restricted from selling during that timeframe. Mr. Heine claims it is not the SEC’s job to address these violations. If not the SEC’s whose is it?
I went deeper into my research and began to look up Client agreements between an investor and their broker-dealer. I found that much of the issue we speak of as investors hinges on the word settlement. The SEC claims that settlement simply refers to a share showing up electronically into your account. It is not, however, what investors think of as the meaning of settlement nor is it what we have written into our client agreements. To most settlement is the actual transfer of ownership of a security and all rights that go with it.
Let’s review how settlement is defined:
Section 17A of the Securities Act of 1934: Establish a system …”prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership”
SEC Regarding Trade plus 3 Settlement: “Investors must settle their security transactions in three business days…. When you sell a security, you must deliver to your brokerage firm your securities certificate no later than three business days after the sale.”
NASD Glossary: Settlement: “The conclusion of a securities transaction; a broker/dealer buying securities pays for them; a selling broker delivers the securities to the buyer's broker.”
ETRADE Agreement: Settlement Date. The day on which a transaction is to be completed. On this day, buyers are to pay for their purchases and sellers are to deliver their securities. Generally, for equity transactions, settlement date is three (3) days after a trade executes, for options trades settlement date is the day after the trade executes, and settlement for mutual funds can vary depending on the particular fund family.
But what about the “Book-Entry” settlement? The SEC has denied the abusive nature of the issue by claiming shareholders are not harmed due to “Book-Entry” settlement whereby our Broker will put shares into our account prior to them actually receiving transfer of ownership from the seller. Unfortunately, there is no publication I could find that justifies this position.
The SEC defines “Book-Entry” Settlement here: "Street Name" Registration — The security is registered in the name of your brokerage firm on the issuer's books, and your brokerage firm holds the security for you in "book-entry" form. "Book-entry" simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.”
You can’t own something until you take delivery.
How harmful is unsettled trades?
The SEC publication to Investors: “Unsettled trades pose risks to our financial markets, especially when market prices plunge and trading volumes soar. The longer the period from trade execution to settlement, the greater the risk that securities firms and investors hit by sizable losses would be unable to pay for their transactions”. To these words Mr. Heine states: “No Question the language is correct”. www.sec.gov/investor/pubs/tplus3.htm
So with the harm that unsettled trades can have to our financial markets, why is it the SEC refuses to step in and address the issue? Who is responsible for enforcing rule 15c6-1? If trades are not being settled, and brokers are entering into these contracts knowing that these trades will not settle in 3 days, who is responsible for enforcing actions against the brokers for entering the contracts or breaking the contracts without written approval of the clients? The Industry has the information; all the client has is a false account statement that claims trades settle when they haven’t. The Industry is now fighting hard to insure that the pending lawsuits do not go into discovery where they would have to open their books for investors to finally see the realities of what is happening.
To seek these and other answers I once again asked Mr. Heine for answers and once again I got the SEC duck. No Comment!
I had asked the SEC in a written request for specifics on what circumstances the SEC would see as justification for trades failing the 3 day settlement period. In the request I asked what the SEC felt were reasonable causes for settlement failures and what would be a natural timeline for those trades to then settle. Mr. Heine initially stated that the question was unanswerable and later suggested I speak with investor relations. Mr. Heine was smart, he was not about to give up on the secrets only the SEC is allowed to know and understand. Even the NASD proposed a maximum limit of 10 days to settle trades but the SEC denied that proposal for unknown reasons. The NASD proposal now lies dormant in the halls of the SEC’s Division of Market Regulation.
The bottom line is simple. The SEC is negligent in performing duties that support the best interests of all investors.
Trade settlement failures are a violation of securities laws and are a breach of securities agreements between the SEC and the broker-dealers, the broker-dealers to each other, and the broker-dealer to the client. There is no written agreement for an alternate settlement date between parties. The Brokers act in a “good-ole-boy” network where they forgive each other’s sins at the safety of our investments and the financial markets. The SEC in turn looks the other way in violation of enforcement of the Securities Act of 1934.
The SEC’s doubletalk and confusion on this issue is clear. The SEC does not want to enforce trade settlements. Years ago the SEC initiated actions to move from T+5 to T+3 and now they have a concept release to go to T+0. These are wasted and costly efforts if the SEC won’t stand up with a backbone and enforce the rules. It is time the SEC accounts for their actions.
It is now time Congress steps out and takes hold of this situation.