Post by jannikki on Oct 2, 2006 19:04:19 GMT -4
How Wrongful Dissemination of Information Harms the Public – October 2, 2006
David Patch
The Securities and Exchange Commission, as we know, is responsible for the regulation of our capital markets. As part of that responsibility the SEC audits the dissemination of information submitted to the public by public companies and validates the accuracy of such information. At times, the SEC will bring enforcement cases against such companies when the information disseminated to the public is deemed inaccurate or misleading and where the public may inaccurately respond to such data.
So who does the public go to when the dissemination of inaccurate or misleading statements originates from within the Securities and Exchange Commission?
Consider that recently, in preparation to a proposal to alter the guidelines of Regulation SHO, the SEC conducted an analysis of the performance of the existing law in preparing the public for change. The SEC referenced this analysis in their proposal and later followed the analysis up with some additional insight.
With Regulation SHO being tasked with reducing the level of settlement failures in the system, the SEC presented to the general public that:
“The average daily aggregate fails to deliver declined by 34.0% after the effective date of Regulation SHO.” (SHO period of January 3, 2005 – March 31, 2006)
To most of the general population this implies that over the period of 15 months, the average number of fails in the system had been reduced by 34%. But the SEC was using creative accounting to come up with this summation. Instead of monitoring performance over time the SEC calculated average using standards not typically recognized by leading economists. The SEC calculated performance by averaging a period of 7 months to a period of 15 months. The methods used were the only possible methods to claim success and thus the SEC was doing the equivalent of “cooking the books” to use their terms.
According to data obtained under the Freedom of Information Act, the average daily aggregate fails to deliver for the month of March 2006 was13% higher than it was for the month of January 2005 when regulation SHO first became law. In addition, comparing the average daily level of fails for March of 2006 to that of December 2004, the last month leading into SHO, the level of improvement is only 8% and not the 34% presented by the Commission. The numbers look better that reality considering that the way the FOIA data was accumulated as the December 2004 average contains the AMEX securities which are not included in the March 2006 data set.
The SEC also stated in their proposal that:
“The average daily number of securities with aggregate fails of at least 10,000 shares declined by 6.5% after the effective date of Regulation SHO.”
Again, according to the data provided under a FOIA request, the aggregate monthly average of securities with aggregate fails of at least 10,000 shares increased 1% for the month of March 2006 as compared to January 2005. On January 3, 2005 the number of companies identified with 10,000 shares or more in fails was reportedly 2438 companies while that number to close out March of 2006 was 2442 companies.
In the chart below, try your best to identify the performance cited by the SEC. The data that compiles this chart comes straight from the NSCC through the SEC.
So with this discrepancy in numbers, I contacted the SEC and spoke to John Heine of the Media Office. My first question to Heine; What is the SEC’s position on the clear and accurate dissemination of information to the public? Heine’s response “the SEC is a big supporter of accurate information.” I then followed up with; what does the SEC think should take place if it is identified that such publicly disseminated information is not accurate? Heine’s response “Corrections would be appropriate.”
So I finally asked; why has the SEC not addressed the misleading information disseminated to the public in their proposal to Regulation SHO? If the public is interpreting the data wrong, should it not be corrected? Based on the data and the verbiage, the SEC was misleading the public.
Heine was suddenly quiet disagreeing with me that the SEC’s information was inaccurate and requested time to evaluate the data. When I read him the raw data submitted under the FOIA request Heine contended that is my data and not necessarily that used by the SEC despite the fact that my data came from the SEC. For the record, Heine and the SEC have had copies of my analysis for weeks and a comment memo by former under secretary of Commerce Dr. Robert Shapro on this rule proposal supported my arguments on the inaccuracies in the SEC analysis.
So how then does all this harm the investing public?
Consider that there are few comment memos published by members of the industry regarding the proposal changes, one from market maker Knight Securities and the other by the Securities Industry Association (SIA). The SIA being the single largest lobby firm that represents Wall Street members. Their voice and their power is that of all of Wall Street.
In his introductory remarks Ira Hammerman, SIA Senior VP and General Counsel contends, “The SIA agrees with the Commission’s statements in the Proposing Release that, by and large, the Rule is having its intended effect [reduce settlement failures] without imposing undue impacts on the market. “
Hammerman follows on to justify such an argument by stating the SIA believes that, “in light of the very positive figures cited in Appendix A, and the overall extremely small universe of securities for which settlement failures represent a problem, the Commission should take care to not impose additional requirements in the Rule that could have unintended consequences.” In other words, SHO is working so leave it alone.
Unfortunately the analysis cited in Appendix A of the comment memo is exactly that analysis presented to the public by the SEC in their proposal.
If the SEC’s analysis is flawed or inaccurate, the total basis for argument in the SIA’s comment memo is then baseless in foundation. Thus, the dissemination of inaccurate data has directly impacted the SIA’s ability to accurately comment on the issue at hand.
If the “positive figures” cited were in fact negative, the SIA would be more compelled to look more closely at the issue of settlement failures instead of dismissing it so handedly and requesting the SEC take no steps to reign in settlement abuses..
Similarly Leonard Amoruso, Senior Managing Director and Chief Financial Officer of Knight Securities stated “We believe that the empirical data now available shows that this proposal is not necessary - see, Memorandum from the Commission's Office of Economic Analysis.” But what if the foundation to such empirical data is flawed?
Amoruso cited another discussion point in the data submitted by the SEC, one in which the SEC claimed that 99.2% of the “original” grandfathered fails of January 7, 2005 had been closed out by March 31, 2006.
That would be a positive step in reforms if not for the fact that the SEC and other regulators had conducted audits of how these grandfathered fails were being closed out and identified that the industry was improperly closing out the more profitable grandfathered fails and delegating a grandfather exemption to newer, less profitable fails. The SEC and NASD issued notices to the members in March 2006 to re-affirm the requirements in closing out failed trades. The notices specifically highlighted that the older fails could not be closed out “in exchange’ for newer fails.
The fact that this data point is thus biased due to regulatory compliance issues again misleads the public and members of the industry over the true performance of Regulation SHO.
If, for example 60% of the 99% “covered” are fails associated with new fails being exchanged for “grandfathered fails” than the 99% yield would only be 39%. The SEC, although they published a notice to members on this issue in March of 2006 citing the recognized problem, never identified to what extent the members violated the underlying guidelines of the grandfather clause. How many of today’s existing fails remain those exchanged and newly aged fails?
Bottom Line: if the underlying analysis to a reform is presented to be inaccurate, shouldn’t the SEC have the integrity to correct the analysis so that the investing public and public commenter have the opportunity to judge performance based on the true merits of the program? If an investor can only judge the true value of a company based on public filings, shouldn’t an investor have equal access to accurate information when it comes to rule making changes?
Not according to the SEC.
While public companies are scrutinized over every word published in an SEC filing or a public press release, the agency itself expects to be held to a lower standard of accuracy. In this case the SEC cooked the books to make this failed regulation appear successful and only those close enough to the situation are wise enough to se through the smoke.
In the end the ultimate victim to this is the process itself. The value of an open public comment, where all investors can freely and openly address a proposal, is violated when the agency seeking comment is biased to the point making such public comments meaningless.
In this case the SEC must restrict their use of the public comments made by Knight Securities and the SIA due to the basic foundation being based on flawed data.
The SEC has been accused over the years of setting different standards to the outside world than those standards held internally. Maybe it’s time the SEC begins to clean house internally before venturing out and abusing the investing public.
www.investigatethesec.com/20061002.htm
David Patch
The Securities and Exchange Commission, as we know, is responsible for the regulation of our capital markets. As part of that responsibility the SEC audits the dissemination of information submitted to the public by public companies and validates the accuracy of such information. At times, the SEC will bring enforcement cases against such companies when the information disseminated to the public is deemed inaccurate or misleading and where the public may inaccurately respond to such data.
So who does the public go to when the dissemination of inaccurate or misleading statements originates from within the Securities and Exchange Commission?
Consider that recently, in preparation to a proposal to alter the guidelines of Regulation SHO, the SEC conducted an analysis of the performance of the existing law in preparing the public for change. The SEC referenced this analysis in their proposal and later followed the analysis up with some additional insight.
With Regulation SHO being tasked with reducing the level of settlement failures in the system, the SEC presented to the general public that:
“The average daily aggregate fails to deliver declined by 34.0% after the effective date of Regulation SHO.” (SHO period of January 3, 2005 – March 31, 2006)
To most of the general population this implies that over the period of 15 months, the average number of fails in the system had been reduced by 34%. But the SEC was using creative accounting to come up with this summation. Instead of monitoring performance over time the SEC calculated average using standards not typically recognized by leading economists. The SEC calculated performance by averaging a period of 7 months to a period of 15 months. The methods used were the only possible methods to claim success and thus the SEC was doing the equivalent of “cooking the books” to use their terms.
According to data obtained under the Freedom of Information Act, the average daily aggregate fails to deliver for the month of March 2006 was13% higher than it was for the month of January 2005 when regulation SHO first became law. In addition, comparing the average daily level of fails for March of 2006 to that of December 2004, the last month leading into SHO, the level of improvement is only 8% and not the 34% presented by the Commission. The numbers look better that reality considering that the way the FOIA data was accumulated as the December 2004 average contains the AMEX securities which are not included in the March 2006 data set.
The SEC also stated in their proposal that:
“The average daily number of securities with aggregate fails of at least 10,000 shares declined by 6.5% after the effective date of Regulation SHO.”
Again, according to the data provided under a FOIA request, the aggregate monthly average of securities with aggregate fails of at least 10,000 shares increased 1% for the month of March 2006 as compared to January 2005. On January 3, 2005 the number of companies identified with 10,000 shares or more in fails was reportedly 2438 companies while that number to close out March of 2006 was 2442 companies.
In the chart below, try your best to identify the performance cited by the SEC. The data that compiles this chart comes straight from the NSCC through the SEC.
So with this discrepancy in numbers, I contacted the SEC and spoke to John Heine of the Media Office. My first question to Heine; What is the SEC’s position on the clear and accurate dissemination of information to the public? Heine’s response “the SEC is a big supporter of accurate information.” I then followed up with; what does the SEC think should take place if it is identified that such publicly disseminated information is not accurate? Heine’s response “Corrections would be appropriate.”
So I finally asked; why has the SEC not addressed the misleading information disseminated to the public in their proposal to Regulation SHO? If the public is interpreting the data wrong, should it not be corrected? Based on the data and the verbiage, the SEC was misleading the public.
Heine was suddenly quiet disagreeing with me that the SEC’s information was inaccurate and requested time to evaluate the data. When I read him the raw data submitted under the FOIA request Heine contended that is my data and not necessarily that used by the SEC despite the fact that my data came from the SEC. For the record, Heine and the SEC have had copies of my analysis for weeks and a comment memo by former under secretary of Commerce Dr. Robert Shapro on this rule proposal supported my arguments on the inaccuracies in the SEC analysis.
So how then does all this harm the investing public?
Consider that there are few comment memos published by members of the industry regarding the proposal changes, one from market maker Knight Securities and the other by the Securities Industry Association (SIA). The SIA being the single largest lobby firm that represents Wall Street members. Their voice and their power is that of all of Wall Street.
In his introductory remarks Ira Hammerman, SIA Senior VP and General Counsel contends, “The SIA agrees with the Commission’s statements in the Proposing Release that, by and large, the Rule is having its intended effect [reduce settlement failures] without imposing undue impacts on the market. “
Hammerman follows on to justify such an argument by stating the SIA believes that, “in light of the very positive figures cited in Appendix A, and the overall extremely small universe of securities for which settlement failures represent a problem, the Commission should take care to not impose additional requirements in the Rule that could have unintended consequences.” In other words, SHO is working so leave it alone.
Unfortunately the analysis cited in Appendix A of the comment memo is exactly that analysis presented to the public by the SEC in their proposal.
If the SEC’s analysis is flawed or inaccurate, the total basis for argument in the SIA’s comment memo is then baseless in foundation. Thus, the dissemination of inaccurate data has directly impacted the SIA’s ability to accurately comment on the issue at hand.
If the “positive figures” cited were in fact negative, the SIA would be more compelled to look more closely at the issue of settlement failures instead of dismissing it so handedly and requesting the SEC take no steps to reign in settlement abuses..
Similarly Leonard Amoruso, Senior Managing Director and Chief Financial Officer of Knight Securities stated “We believe that the empirical data now available shows that this proposal is not necessary - see, Memorandum from the Commission's Office of Economic Analysis.” But what if the foundation to such empirical data is flawed?
Amoruso cited another discussion point in the data submitted by the SEC, one in which the SEC claimed that 99.2% of the “original” grandfathered fails of January 7, 2005 had been closed out by March 31, 2006.
That would be a positive step in reforms if not for the fact that the SEC and other regulators had conducted audits of how these grandfathered fails were being closed out and identified that the industry was improperly closing out the more profitable grandfathered fails and delegating a grandfather exemption to newer, less profitable fails. The SEC and NASD issued notices to the members in March 2006 to re-affirm the requirements in closing out failed trades. The notices specifically highlighted that the older fails could not be closed out “in exchange’ for newer fails.
The fact that this data point is thus biased due to regulatory compliance issues again misleads the public and members of the industry over the true performance of Regulation SHO.
If, for example 60% of the 99% “covered” are fails associated with new fails being exchanged for “grandfathered fails” than the 99% yield would only be 39%. The SEC, although they published a notice to members on this issue in March of 2006 citing the recognized problem, never identified to what extent the members violated the underlying guidelines of the grandfather clause. How many of today’s existing fails remain those exchanged and newly aged fails?
Bottom Line: if the underlying analysis to a reform is presented to be inaccurate, shouldn’t the SEC have the integrity to correct the analysis so that the investing public and public commenter have the opportunity to judge performance based on the true merits of the program? If an investor can only judge the true value of a company based on public filings, shouldn’t an investor have equal access to accurate information when it comes to rule making changes?
Not according to the SEC.
While public companies are scrutinized over every word published in an SEC filing or a public press release, the agency itself expects to be held to a lower standard of accuracy. In this case the SEC cooked the books to make this failed regulation appear successful and only those close enough to the situation are wise enough to se through the smoke.
In the end the ultimate victim to this is the process itself. The value of an open public comment, where all investors can freely and openly address a proposal, is violated when the agency seeking comment is biased to the point making such public comments meaningless.
In this case the SEC must restrict their use of the public comments made by Knight Securities and the SIA due to the basic foundation being based on flawed data.
The SEC has been accused over the years of setting different standards to the outside world than those standards held internally. Maybe it’s time the SEC begins to clean house internally before venturing out and abusing the investing public.
www.investigatethesec.com/20061002.htm