SEC PROPOSES CRACKDOWN ON NAKED ACCESS TO EXCHANGES

The following information was recently released on the SEC government web site. It is in regards to brokers allowing certain customers direct access to the exchanges without going through a broker/dealer.
Broker/dealers are subject to certain regulations when using the exchanges which customers do not have to follow. Unfiltered trades lead to trades which may be improper which can cause instability in the market.

“Washington, D.C., Jan. 13, 2010 — The Securities and Exchange Commission today voted unanimously to propose a new rule that would effectively prohibit broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or alternative trading system (ATS).
The SEC's proposed rule would require brokers with market access, including those who sponsor customers' access to an exchange, to put in place risk management controls and supervisory procedures. Among other things, the procedures would help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.

"Unfiltered access is similar to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," said SEC Chairman Mary L. Schapiro. "Today's proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive."

Broker-dealers use a 'special pass' known as their market participant identifier (MPID) to electronically access an exchange or ATS and place an order for a customer. Broker-dealers are subject to the federal securities laws as well as the rules of the self-regulatory organizations that regulate their operation.

However, those laws and rules do not apply to a non-broker-dealer customer who a broker-dealer provides with their MPID in order to individually gain access to an exchange or ATS. Under this arrangement known as "direct market access" or "sponsored access," the customer can sometimes place an order that flows directly into the markets without first passing through the broker-dealer's systems and without being pre-screened by the broker-dealer in any manner. This type of direct market access arrangement is known as "unfiltered" access and "naked" access. A recent report estimated that naked access accounts for 38 percent of the daily volume for equities traded in the U.S. markets.

Through sponsored access, especially "unfiltered" or "naked" sponsored access arrangements, there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. In particular, there is an increased likelihood that customers will enter erroneous orders as a result of computer malfunction or human error, fail to comply with various regulatory requirements, or breach a credit or capital limit.

The SEC's proposed rule would require broker-dealers to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks related to its market access, including access on behalf of sponsored customers.

Broker-dealers would be required to:
Create financial risk management controls reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.
Create regulatory risk management controls reasonably designed to ensure compliance with all regulatory requirements applicable in connection with market access.
Have financial and regulatory risk management controls applied automatically on a pre-trade basis before orders route to an exchange or ATS.
Maintain risk management controls and supervisory procedures under the direct and exclusive control of the broker-dealer with market access.
Establish, document and maintain a system for regularly reviewing the effectiveness of its risk management controls and for promptly addressing any issues.

The SEC today also approved a new Nasdaq rule that requires broker-dealers offering sponsored access to Nasdaq to establish certain controls over the financial and regulatory risks of that activity. The proposed Commission rule would extend beyond the new Nasdaq rule in several respects. For example, the Commission's proposal would require the broker-dealer to automatically apply its controls on a pre-trade basis, and to retain exclusive control over those controls without delegation of this critical function to the customer or another third party. The Commission's proposal also would require broker-dealers to establish a supervisory system, including an annual CEO certification, to assure the ongoing effectiveness of its controls In addition, the Commission's proposed risk management controls would apply market-wide, whenever a broker-dealer directly accesses any exchange or ATS.”

THE SEC STOPS FRAUD IN BEVERLY HILLS

The following article was released by the SEC on January 11, 2010. It is in regards to a fraud scheme in Beverly Hills which targeted the Iranian Americans community.

“Washington, D.C., Jan. 11, 2010 — The Securities and Exchange Commission today announced that it has charged Beverly Hills, Calif.-based NewPoint Financial Services, Inc. and its co-owners and controller for conducting an unregistered offering fraud aimed at Iranian-Americans in the Los Angeles area. The SEC obtained an emergency court order to freeze their assets and preserve remaining funds that were collected from investors.
The SEC’s complaint, filed in U.S. District Court for the Central District of California, alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting New Point on a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and misled more than 100 investors into purchasing more than $20 million worth of debentures that they falsely told them were low-risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, government bonds, or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). The SEC alleges that most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

“They lured victims with false promises of investment safety while secretly enriching themselves and diverting investor funds for their personal use,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint further alleges that investor funds were used to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009. Since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint, saying that their money is safe and that they are guaranteed to get the entirety of their investment back. According to the SEC’s complaint, NewPoint lacks sufficient funds to make all investors whole, and John Farahi has been paying back some investors on a selective basis while failing to return money to other investors asking for a return of their investment.

The SEC has obtained a court order (1) freezing the assets of NewPoint, the Farahis, and Triple “J”; (2) appointing a temporary receiver over NewPoint and Triple “J”; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple “J”; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of the registration and antifraud violations of the federal securities laws. The SEC also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple “J.” A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for Jan. 15, 2010, at 10:00 a.m.”

CALIFORNIA TELECOM CO. CHARGED WITH BRIBERY

On Dec. 31, 2009, the SEC charged UTStarcom, with corrupton charges. The following was found on the SEC Governmental page. It seems that UTStarcom had a very lavish and intricate scheme for bribing officials in Asia. The Department of Justice was also involved with this case. The following is an exerpt from the SEC web page:

"Washington, D.C., Dec. 31, 2009 — The Securities and Exchange Commission today charged Alameda, Calif.-based telecommunications company UTStarcom, Inc. with violations of the Foreign Corrupt Practices Act (FCPA) for authorizing millions of dollars in unlawful payments to foreign government officials in Asia.

UTStarcom agreed to settle the SEC's charges and pay a $1.5 million penalty among other remedies. In a related criminal case, the U.S. Department of Justice announced today that UTStarcom agreed to pay an additional $1.5 million fine.

"UTStarcom spent millions of dollars on illegal bribes to win and keep customers in Asia," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office. "It is important for corporate America to recognize that resorting to these methods of boosting profits contributes to a culture of corruption that cannot be condoned under U.S. law."

The SEC's complaint, filed in the U.S. District Court for the Northern District of California, alleges that UTStarcom's wholly-owned subsidiary in China paid nearly $7 million between 2002 and 2007 for hundreds of overseas trips by employees of Chinese government-controlled telecommunications companies that were customers of UTStarcom, purportedly to provide customer training. In reality, the trips were entirely or primarily for sightseeing.

The SEC further alleges that UTStarcom provided lavish gifts and all-expenses paid executive training programs in the U.S. for existing and potential foreign government customers in China and Thailand. UTStarcom also purported to hire individuals affiliated with foreign government customers to work in the U.S. and provided them with work visas, when in reality the individuals did no work for UTStarcom. According to the SEC's complaint, UTStarcom also made improper payments to sham consultants in China and Mongolia while knowing that they would pay bribes to foreign government officials.

The SEC's complaint charges UTStarcom with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. UTStarcom agreed, without admitting or denying the charges, to the entry of a permanent injunction against FCPA violations and to provide the SEC with annual FCPA compliance reports and certifications for four years, in addition to paying the $1.5 million penalty.

The SEC acknowledges the assistance of the Department of Justice during the investigation."

SEC GETS TOUGH ON WALL STREET FRAUDSTERS

Following is the speech by the new Securities and Exchange Commission Chairman, Mary Schapiro. She wants to get tough on Wall Street. She will have a lot law makers who are in the pocket of Wall Street who, will fight her at every turn. An edited copy of her speech is included in this blog because unlike most Washington speeches, her speech is not too boring and is full of needed information. Because this is a speech to SEC employees, part of this speech was removed to better highlight the changes she wants to make to at least get some justice (revenge) for Americans who are being so devastated by trillionaires on Wall Street and their government stooges. This speech was lifted from the SEC web site where the speech can be read in its entirety:

Speech by SEC Chairman:
Address to Practising Law Institute's "SEC Speaks in 2009" Program
by
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
February 6, 2009

I have been back at the Commission for less than two weeks, after a nearly 15-year hiatus. I am extremely proud to return to the agency that I know is so important to investors and our economy.

We must take our cues from the current environment. Trillions of dollars of wealth have been lost. Our economy is in recession. And investor confidence has been badly shaken. Middle-class families who were relying on that nest egg to send a son or daughter to college or for a secure retirement now don't know where to turn.

It is precisely during times like these that we need the SEC as the "investor's advocate." An SEC with the staff, the will, and the resources necessary to move with great urgency to:bring transparency and accountability to all corners of the marketplace,vigorously prosecute those who have broken the law and cheated investors, andmodernize our country's regulatory system to match the realities of today's global, interdependent markets.

As the current market crisis has unfolded, the SEC, along with the entire regulatory structure, has been put under a microscope. This crisis has exposed weaknesses and gaps in the regulatory system and areas where the SEC particularly must re-commit its resources and talents in order to restore investor confidence. We must help to restore that lost confidence — that is our challenge.

Success in this endeavor demands that we as an organization engage in serious self-evaluation. That means taking an honest look at everything we are doing and how we do it. I know there is so much being done right, but there is also much that can be done better. I learned long ago that one of the SEC's greatest strengths has been its ability to adapt to change, while never forgetting that it is the American people we are here to serve.

The challenges we face are historic. But they're not insurmountable. It will take determination, hard work, toughness, and above all, an unrelenting will to stand up for investors.

But make no mistake. Regulation is a two-way street. The "regulated" need not wait for a regulator's reforms, though they will come. At a time when investors are appalled at the ways of Wall Street, it is there that change must begin. A strong and reinvigorated SEC will be on the beat like never before to catch wrongdoers. But there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place. The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world.

There is much we can do to accelerate that process, including giving shareholders a greater say on who serves on corporate boards, and how company executives are paid.

There is much to be accomplished, but this morning I'm here to describe how we will approach the challenges we face, and the actions we've already taken.

At my confirmation hearing, I emphasized the need for the SEC to move with the sense of urgency that investors demand — to be willing and able to move quickly, precisely, and decisively to take actions that will restore investor trust and confidence in our financial markets.

Investors are looking to the SEC to protect them. To do that well, we have to act swiftly to respond to market events, and that means we must be willing to change the way we do business.

Those who break the law and take advantage of investors need to know that they will face an unrelenting law enforcement agency in the SEC — an agency that will pursue them until the full force of the law is the sure, certain, and sole reward for their wrongdoing. No one should be heard credibly to question whether enforcement is a priority at the SEC. It is, and always will remain, a foundation of our mission.

As the first SEC Chairman, Joseph Kennedy, told the nation 75 years ago in explaining the agency's role, "The Commission will make war without quarter on any who sell securities by fraud or misrepresentation."

As a first, but significant, step in empowering our Enforcement staff, I am this week taking action to end the Commission's two-year "penalty pilot" experiment, which had required the Enforcement staff to obtain a special set of approvals from the Commission in cases involving civil monetary penalties for public companies as punishment for securities fraud.

In speaking to our Enforcement staff, I've been told that these special procedures have introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed.

At a time when the SEC needs to be deterring corporate wrongdoing, the "penalty pilot" sends the wrong message. The action I am taking to end the penalty pilot is designed to expedite the Commission's enforcement efforts to ensure that justice is swiftly served to those public companies who commit serious acts of securities fraud.

Another immediate change I am putting in place to bolster the SEC's enforcement program is to provide for more rapid approval of formal orders of investigation — the permission slips given out by the Commission that allow SEC staff to use the power of subpoenas to compel witness testimony and the production of documents. When I was a Commissioner, formal orders were routinely reviewed and approved within a couple of days by written approval of the Commission or by "duty officer" — a single Commissioner acting promptly and on behalf of the entire Commission.

Today, however, many formal orders of investigation are made subject to full review at a meeting of all five Commissioners, necessitating that they be placed on the calendar sometimes weeks in advance. In investigations that require use of subpoena power, time is always of the essence, and every additional day of delay can be costly. To ensure that subpoena power is available to SEC staff when needed, I've given direction for the agency to return to the prior policy of timely approval of formal orders by seriatim approval or where appropriate, by a single Commissioner acting as duty officer.

In addition to these immediate actions, I have also spent much of my first week and a half on the job in meetings with my fellow Commissioners and the agency's senior staff to discuss other ways in which we can reinvigorate the SEC's enforcement program, including improving the handling of tips and whistleblower complaints and focusing on areas where investors are most at risk. And I anticipate that we'll be making further improvements in the coming weeks and months to ensure swift and vigorous enforcement.

In deciding upon regulatory priorities, it is vital that the SEC re-engage with the people we serve: investors. The investor community — from the largest pension fund to the family who has saved in their 401(k) or 529 plan — needs to feel that they have someone on their side — that they can go to the SEC to seek redress, or to have their opinions heard.

To that end, we will form an Investor Advisory Committee to ensure that the Commission hears first hand about the issues most concerning to investors.

The crisis facing our capital markets will require aggressive and timely action to restore investor trust and confidence. To this end, allow me to highlight a few of the initiatives that I hope to pursue as priorities:

Improving the quality of credit ratings by addressing the inherent conflicts of interest credit rating agencies face as a result of their compensation models and limiting the impact of credit ratings on capital requirements of regulated financial institutions.

Reducing systemic risk to investors and markets by promoting — and regulating appropriately — centralized clearinghouses for credit default swaps.

Strengthening risk-based oversight of broker-dealers and investment advisers.

Improving the quality of audits for nonpublic broker-dealers and promoting the safe and sound custody of customer assets by any broker-dealer or investment adviser.

Seventy-five years after the SEC was founded, the Commission finds itself in a situation where, once again, it must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.

The American people want and expect us to update the regulatory system that has failed them — and to prevent the kinds of abuses that have contributed to the economic crisis we now face.

Even as we pursue these regulatory priorities, the SEC will also be working closely with Congress to ensure that legislative restructuring of our financial regulatory system will preserve and strengthen our commitment to transparency, accountability, disclosure, and most of all, investor protection.

I am under no illusion that this will be an easy job. There is a lot of work to be done — quickly and diligently — in the months ahead. I look forward to this challenge, to helping the millions of investors who rely on strong markets and a strong economy, and to working with the professionals at the SEC.

The above speech sounds like we will have a great improvment in the confidnece the American people feel for their government.




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