WALL STREET FRAUDSTERS

Thursday, April 18, 2013

SEC COMMISSIONER AGUILAR SPEAKS ON EFFORTS TO WEAKEN INVESTOR PROTECTIONS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Outmanned and Outgunned: Fighting on Behalf of Investors Despite Efforts to Weaken Investor Protections

by
Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission
North American Securities Administrators Association, Annual NASAA/SEC 19(d) Conference
Washington, D.C.
April 16, 2013

Good morning. Thank you for inviting me to deliver the opening remarks of today’s North American Securities Administrators Association ("NASAA") and the U.S. Securities and Exchange Commission’s ("SEC") 19(d) Conference. Before I begin, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.

This Annual Conference is an important opportunity for representatives of NASAA and the SEC to come together to discuss how best to accomplish our common goal of protecting investors. These annual conferences provide an opportunity to increase collaboration, communication, and cooperation for the benefit of investors, and to promote fair and orderly markets. I have been honored to have served as the SEC’s liaison to NASAA for the past four years. I know and appreciate NASAA’s mission of protecting main street investors and the critical role that state securities regulators play in the enforcement of the securities laws. You are often the first to receive complaints from investors and identify the latest scams devised to steal from investors.

I want to take this opportunity to highlight some of the recent achievements of NASAA’s members. According to the latest statistics, as of October 2012:
¹
^{State securities regulators conducted 6,121 investigations;

The states reported filing more than 2,600 administrative, civil, and criminal enforcement actions involving nearly 3,700 respondents and defendants;

The states reported criminal actions that resulted in 1,662 years of incarceration, which is a 47% increase over the previous year;

The states imposed more than $2.2 billion in investor restitution orders and levied fines or penalties and collected costs in excess of $290 million; and

A total of nearly 2,800 licenses were withdrawn due to state action, and 774 licenses were denied, revoked, suspended, or conditioned.}
^{These statistics are impressive – particularly given the lack of resources faced by many state securities regulators.}
²^{Just as the SEC has struggled without adequate resources, state regulators have had to deal with the challenges of doing more with less.}

^{And, as NASAA knows well, in meeting our challenges, we also need to be a voice for pro-investor legislation and rulemaking. Today, I want to focus my remarks on (1) certain efforts that I believe have weakened investor protection; and (2) legislative and rulemaking initiatives that I believe are critical to strengthening investor protection. In particular, I would like to highlight the importance of:

Listening to the voices of investors and regulators – with a particular focus on the recent SEC proposal to allow heretofore private offerings to be mass-marketed;

Moving forward to implement rulemaking that would disqualify felons and other bad actors from Rule 506 offerings;

Strengthening private remedies for victims of fraud; and

Prohibiting or limiting pre-dispute mandatory arbitration.

Efforts to Weaken Investor Protection

As many of you know, the Jumpstart Our Business Startups Act (the "JOBS Act") requires the SEC to amend Rule 506}
³^{to eliminate a ban on the general advertising of private securities offerings.}⁴^{Companies using the Rule 506 exemption can raise an unlimited amount of money without registering the offering with the SEC, as long as they meet certain standards.}⁵^{Rule 506 has allowed many legitimate companies to raise money and prosper. At the same time, however, the Rule 506 exemption has resulted in significant fraudulent activities. Reports from state and federal securities regulators have shown that Rule 506 offerings are frequently the subject of enforcement investigations and actions.}⁶^{In fact, just in 2011, state regulators and the SEC, collectively, filed more than 324 enforcement actions related specifically to Rule 506 offerings.}⁷

^{The removal of the ban on "general solicitation" has resulted in widespread fear that offerings mass-marketed under Rule 506 will expose investors to even greater risk of fraud and abuse.}
⁸^{Yet, to my profound disappointment, when the removal of the ban was proposed by the Commission, a majority of the SEC’s Commissioners proactively excluded from discussion many of the practical and cost-effective suggestions made by investors and other regulators, including comments from NASAA, that could serve to reduce the anticipated harm to investors.}

^{The Commission received comments, both before and after the proposal, urging that we consider various amendments, alternatives, and recommendations to better align the mass-marketing provisions with investor protection.}
⁹^{Yet, in a departure from the Commission’s standard practice of allowing proposals to include a fulsome discussion of reasonable alternatives, the proposing release did not request comment on any of those recommendations and, contrary to the Commission staff’s own guidance for economic analysis, the proposing release did not consider whether including any of the recommendations would be a reasonable alternative to the approach in the proposed rule.}¹⁰^{In addition, some may argue that under the Administrative Procedures Act this failure may prevent the Commission from even considering any of those suggestions unless there is a re-proposal.}¹¹^{In all my time at the Commission, I’ve never seen a more aggressive effort to exclude pro-investor initiatives.}

^{Because of the decision to ignore the recommendations by investors and other regulators, I consider the Commission’s proposal to be fatally flawed. I was left with no choice but to vote "no" on the proposal. In my view, the only viable alternative is for it to be re-proposed so that we can provide for a fulsome discussion of how best to allow general solicitation under Rule 506 while, at the same time, considering the needs of investors. To me, it is clear that Congress did not expect the SEC to ignore investor protection issues. Instead of enacting a self-implementing provision to allow general solicitations, Congress gave the SEC the obligation to determine how best to do so. A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues. To say that I was disappointed in the Commission’s action would be an understatement.

Disqualifying Felons and Other Bad Actors from Rule 506 Offerings

I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called "bad actors" from utilizing Rule 506 (the "Bad Actor Rule").}
¹²^{It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify "bad actors" from 506 offerings,}¹³^{and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:}

^{[t]he Commission should work swiftly to impose the "bad actor" disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.}
¹⁴

^{The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.

Strengthening Private Remedies for Victims of Fraud

In light of the SEC’s actions to shut out investors’ voices, and in unduly delaying the adoption of investor-friendly rulemaking, it is now more important than ever that defrauded investors have the ability to seek redress against those who participate in defrauding them. Unfortunately, a series of Supreme Court cases has restricted aiding and abetting liability in private actions.}
¹⁵^{I agree with NASAA’s request that Congress amend the Securities Exchange Act of 1934 ("Exchange Act") to allow for a private civil action against a person that provides substantial assistance in violation of the Exchange Act.}¹⁶^{In 2009, former Senator Arlen Specter introduced legislation that would have amended the Exchange Act so that any person who "knowingly or recklessly provides substantial assistance to another person would be subject to liability in a private action to the same extent as the person to whom such assistance is provided."}¹⁷^{I join with NASAA in calling on Congress to reintroduce this legislation.}

^{Congress has long recognized the importance of private actions under the federal securities laws. In the Private Securities Litigation Reform Act of 1995, or PSLRA, Congress reaffirmed that "[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs."}
¹⁸

^{Private actions give fraud victims the ability to recover their losses. It is unrealistic to expect that state regulators or the SEC will have the resources to police all securities frauds or go after every fraudster. Investors should have the ability to protect themselves.}
¹⁹

^{Pre-Dispute Mandatory Arbitration Weakens Investor Protection}
^{Investors also should have the unencumbered right to seek redress in all available forums. This is why I want to spend a few moments discussing pre-dispute mandatory arbitration provisions. Currently, almost all customer agreements with brokerage firms include an arbitration clause requiring customers to arbitrate their claims in an arbitration forum}
²⁰^{– and they’re now popping-up in the investment advisory industry.}²¹^{By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest. The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.}

^{Today, I do not intend to discuss the merits of whether arbitration is a better or worse system than going through the federal and state court systems, except to note that the relative merits and benefits of the arbitration processes are still the subject of debates in the industry.}
²²^{Arbitration may be a viable option after a dispute arises and both parties knowingly agree to go into arbitration. However, my main concern with pre-dispute mandatory arbitration is the denial of investor choice; investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers.}

^{A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.}
²³^{A client’s right to bring private actions under the Exchange Act is meaningful, and the client should not be required to waive – prematurely – their legal rights, including their rights to bring an action in federal or state court. Let me give you some statistics. In fiscal year 2012, the SEC brought 147 investment adviser-related cases.}²⁴^{This is roughly 20% of all enforcement cases, and accounted for the largest category of enforcement cases during that fiscal year.}²⁵^{Of these enforcement cases, approximately 88 out of 147 cases, or 60%, involved allegations of fraud under the Exchange Act.}²⁶

^{Similarly, in fiscal year 2012, the SEC brought 134 broker-dealer cases.}
²⁷^{This is about 18% of all enforcement cases, and accounted for the second largest category of enforcement cases during that fiscal year.}²⁸^{Out of these 134 broker-dealer enforcement cases, roughly 95 cases, or 71%, involved allegations of fraud under the Exchange Act.}²⁹

^{In many of these cases, clients may be able to pursue claims against their advisers and brokers for fraud. However, if the clients had signed a pre-dispute mandatory arbitration agreement at the inception of the relationship, the clients’ ability to pursue claims through the judicial process is extinguished. My point is simply this: by providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws.

The concerns about mandatory pre-dispute arbitration are not new. For example, in April 2007, U.S. Representative Barney Frank, then the Chairman of the House Committee on Financial Services, sent a letter to the SEC Chairman to share his concerns that mandatory arbitration imposed limits on investor rights and required investors to "risk losing their rights under federal securities laws in order to invest in our public markets."³⁰^{It is, therefore, not surprising that during the legislative process that resulted in the passage of the Dodd-Frank Act,}³¹^{members of Congress voiced their concerns about mandatory pre-dispute arbitration and noted the concerns that they were "unfair to the investors."}³²

^{In passing the Dodd-Frank Act, Congress recognized the need to protect investors from abusive practices in the financial services industry.}
³³^{As many of you know, Section 921(a) of the Dodd-Frank Act authorizes the Commission to prohibit or restrict mandatory pre-dispute arbitration provision in customer agreements, if such rules are in the public interest and protect investors.}³⁴^{The authority covers broker-dealers and investment advisers.}³⁵^{I believe the Commission needs to be proactive in this important area. We need to support investor choice.}

^{Conclusion

Before I end my remarks, I want to highlight an additional pro-investor initiative that is long overdue. As this group knows well, the Dodd-Frank Act reinforced the Commission’s need to be more focused on investor advocacy issues by mandating that the SEC establish an Office of the Investor Advocate.}
³⁶^{Yet, as of today, almost three years after Dodd-Frank became law, the Commission still has not created the Office of the Investor Advocate. I hope this is one of the first matters addressed by the new SEC Chairman.}

^{The results of a recent survey reported in March 2013 show that, by an overwhelming margin, 84% of Americans want the federal government to play an active role in protecting investors.}
³⁷^{As my remarks have shown, the Commission’s leadership can do more to respond to the needs of investors.}

^{The recognition that the Commission’s leadership can do a better job in addressing the needs of investors, however, does not in any way distract from the hard work and the commitment of the SEC staff to fulfill the SEC’s mission of protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. They are among the finest individuals I’ve had the privilege of working with every day.

In closing, I want to commend the SEC staff and NASAA members for all your efforts in enforcing the federal and state securities laws and for working to preserve the integrity of our financial markets. I think that the partnership between NASAA and the SEC has been, and can continue to be, a powerful force to protect investors.

As the SEC’s NASAA liaison, I am also aware of the benefits of cooperation between the SEC and NASAA. For example, during the past two years, approximately 2,400 investment advisers made a smooth transition to state regulation as a result of the Dodd-Frank Act,}
³⁸^{which expanded state authority over mid-sized investment advisers to those with up to $100 million in assets.}³⁹^{This is a testament to the cooperation by the staffs of the SEC and state securities regulators.}

^{I know that the Commission can count on NASAA’s support to work together on behalf of investors. I am honored to be working with you to protect investors. Though we may be outmanned and outgunned as state and federal securities regulators, I know that the people in this room have the resolve and commitment to fight on behalf of investors every single day.

Thank you for the opportunity to speak with you today.}
¹^{See, NASAA Enforcement Report (Oct. 2012), available at}^{http://www.nasaa.org/wp-content/uploads/2011/08/2012-Enforcement-Report-on-2011-Data1.pdf}^.

²^{See, e.g., U.S. Gov’t Accountability Office, GAO-13-110, National Strategy Needed To Effectively Combat Elder Financial Exploitation, p. 20 (Nov. 15, 2012) ("For example, in one California county officials reported that due to budget cuts, they had lost many positions that involved educating the public about elder financial exploitation."), available at}^{http://www.gao.gov/assets/660/650074.pdf}^{; Russell Grantham, Investment Fraud; Georgia braces for fraud workload, The Atlanta Journal-Constitution (May 8, 2011, at 1D) ("[Georgia] last year folded its securities division into two other departments to cut costs. And it has cut its securities supervision budget by half since 2008, to roughly $1 million."); John Wasik, Why are states taking over SEC’s duties?, Ventura County Star(Oct. 5, 2003, at D03) ("Congress needs to restore powers and share funding and resources with the states so that they can continue to supervise financial services in an era of massive state budget cuts."); Thomas S. Mulligan, Markets; State Securities Staff Could Face Cutbacks; Plan By Department of Corporations Would Cut Unit Combating Fraud Against Small Investors, Los Angeles Times (May 9, 2003, at Business, Part 3, Business Desk, p. 1) (Due to state budget-cutting in California, "[t]he Department of Corporations’ 13 investigators would lose their jobs; they include veterans who worked on such high-profile cases as the 1989 collapse of Charles H. Keating Jr.’s Lincoln Savings & Loan. The department's investigators typically work on lower-profile frauds, such as pyramid schemes, phony limited partnerships and other scams whose victims tend to be elderly.").}

³^{Rule 506 is one of three exemptive rules for limited offerings under Regulation D. Rule 506 is by far the most widely used Regulation D exemption, accounting for an estimated 90% to 95% of all Regulation D offerings and the overwhelming majority of capital raised in transactions under Regulation D. Staff of the SEC’s Division of Risk, Strategy, and Financial Innovation estimate that, for 2009, 2010, and 2011, approximately $581 billion, $902 billion, and $909 billion, respectively, was raised in transactions claiming the Rule 506 exemption, in each case representing more than 99% of funds raised under Regulation D for the period. See, Vlad Ivanov and Scott Baugess, Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption (Feb. 2012), available at}^{http://www.sec.gov/info/smallbus/acsec/acsec103111_analysis-reg-d-offering.pdf}^{. Rule 506 permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors, so long as there was no general solicitation, and appropriate resale limitations were imposed.}

⁴^{Section 201(a)(1) of the JOBS Act directs the Commission to amend Rule 506 of Regulation D under the Securities Act of 1933 to provide that the prohibition against general solicitation or general advertising shall not apply to offerings under Rule 506 provided that all purchasers of the securities are accredited investors}

⁵^{17 CFR 230.506. If an investor is an accredited investor then under the "certain standards" of Rule 506 there is no limit on the number of purchasers, no requirement that individuals receive any information, and no conditions or restrictions relating to the status of the issuer. In fact, the only requirement other than the prohibition on general solicitation is that the issuers take reasonable care to assure that purchasers are not underwriters. Rule 506 provides a requirement to file a Form D within 15 days after the first sale; however, this requirement is not a condition to the exemption.}

⁶^{Supra, Note 1.}

⁷^{See, SEC File No. S-7-07-12, comment letter from NASAA (Oct. 3, 2012) (The year 2011 are the latest statistics available), available at}^{http://www.sec.gov/comments/s7-07-12/s70712-92.pdf}^{; Year-by-Year SEC Enforcement Statistics (The SEC brought 89 and 124 enforcement actions related to securities offering fraud in 2011 and 2012, respectively), available at}^{http://www.sec.gov/news/newsroom/images/enfstats.pdf}^{; and Recommendations of the Investors Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing Investor Protection, Capital Formation and Market Integrity (In 2011, state regulators brought 200 enforcement actions related to 506 offerings, 250 actions were brought in 2010, and 175 actions in 2009), available at}^{http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-general-solicitation-advertising-recommendations.pdf}^.

^{In fact, several state securities regulators have published statistics that highlight investor harm as a result of certain Rule 506 offerings.

In Virginia, regulators took enforcement actions in 24 offerings in 2010 and 2011, which resulted in $12 million in losses to Virginia investors. See, comment letter from the State Corporation Commission, Division of Securities and Retail Franchising of the Commonwealth of Virginia (Oct. 4, 2012), available at}^{http://www.sec.gov/comments/s7-07-12/s70712-102.pdf}^.

^{In Montana, investors have lost more than $100 million in fraudulent Rule 506 offerings in the last four years. See, comment letter from the Commissioner of Securities and Insurance, State of Montana (Oct. 4, 2012), available at}^{http://www.sec.gov/comments/s7-07-12/s70712-116.pdf}^.

^{In South Carolina, fraudulent Rule 506 offerings are the number one complaint received by the attorney general’s office, and those complaints have more than doubled in the last two years. See, comment letter by the Securities Commissioner of the State of South Carolina (Oct. 5, 2012), available at}^{http://www.sec.gov/comments/s7-07-12/s70712-151.pdf}^.

⁸^{See, comment letter from Fund Democracy, Consumer Federation of America, Americans for Financial Reform, AFSCME, AFL-CIO, International Brotherhood of Teamsters, U.S. PIRG, Public Citizen, Consumer Action, SAFER (The Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform), Consumer Assistance Council, Inc., Florida Consumer Action Network, Consumer Federation of the Southeast, Dēmos, Chicago Consumer Coalition, Consumers for Auto Reliability and Safety, CA REINVESTment Coalition, Center for California Homeowner Association Law, Cumberland Countians for Peace & Justice and Network for Environmental & Economic Responsibility, Virginia Citizens Consumer Council, Lynn E. Turner (Former SEC Chief Accountant), James D. Cox (Brainerd Currie Professor of Law, Duke Law School), Joseph V. Carcello (Ernst & Young Professor, Director of Research – Corporate Governance Center, University of Tennessee), J. Robert Brown, Jr. (Chauncey Wilson Memorial Research Professor of Law, Director, Corporate and Commercial Law Program, University of Denver Sturm College of Law), Jane B. Adams (Former SEC Acting Chief Accountant), Gaylen Hansen (Audit Prtner, EKS&H) and Bevis Longstreth (Former SEC Commissioner) (Aug. 15, 2012), available at}^{http://www.sec.gov/comments/jobs-title-ii/jobstitleii-59.pdf}^.

⁹^{For example, several commenters recommended that the Commission condition the availability of the proposed exemption on the filing of Form D, in advance of any general solicitation, and suggested modestly amending Form D to require some additional information. See, SEC Release No. 33-9354 (the "Proposing Release"), note 28, available at}^{http://www.sec.gov/rules/proposed/2012/33-9354.pdf}^{. Other commenters suggested that the Commission’s proposal address the content and manner of advertising and solicitations used in offerings conducted under the proposed exemption. See, the Proposing Release, note 31.}

¹⁰^{See, Staff Current Guidance on Economic Analysis in SEC Rulemakings, (March 16, 2012), available at}^{http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf}

¹¹^{The Commission approved the proposal by a vote of 4 to 1. Commissioner Luis Aguilar dissented from the Commission’s action stating, "I cannot support today’s proposal, because it presents a framework that is not balanced and that fails to address the acknowledged increased vulnerability of investors. In fact, there is no consideration of any of the commenters’ proposals that would have decreased investor vulnerability." Commissioner Luis A. Aguilar, Statement at SEC Open Meeting (Aug. 29, 2012), available at}^{https://www.sec.gov/news/speech/2012/spch082912laa.htm}^.

¹²^{Dodd-Frank Act, § 926, 124 Stat. 1376, 1851 (Jul, 21, 2010) (to be codified at 15 U.S.C. 77d note). (Section 926 of the Dodd-Frank Act requires the Commission to adopt rules to disqualify certain securities offerings from the safe harbor provided by Rule 506 for exemption from registration under Section 4(a)(2) (formerly Section 4(2)) of the Securities Act of 1933.)}

¹³^{See, Securities and Exchange Commission Release No. 33-9211, Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings (May 25, 2011), available at}^{http://www.sec.gov/rules/proposed/2011/33-9211.pdf}^.

¹⁴^{See, Investor Advocates Press SEC to Finish Bad Actor Rule, Thomson Reuters, Sarah N. Lynch (Dec. 6, 2012), available at}^{http://newsandinsight.thomsonreuters.com/Legal/News/2012/12_-_December/Investor_advocates_press_SEC_to_finish__bad_actor__rule/}^.

¹⁵^{See, e.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (clarified that Section 10(b) of the Exchange Act and Rule 10b-5 do not create an implied private cause of action for aiding and abetting liability); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (reaffirmed Central Bank); Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (same).}

¹⁶^{See, NASAA Legislative Agenda for the 113th Congress (Mar. 5, 2013), available at}^{http://www.nasaa.org/wp-content/uploads/2011/08/NASAA-Legislative-Agenda-113th-Congress_FINAL1.pdf}^.

¹⁷^{The legislation would have amended Section 20 of the Exchange Act. See, S. 1551 (111th): Liability for Aiding and Abetting Securities Violations of 2009 (Jun. 30, 2009), available at}^{http://www.govtrack.us/congress/bills/111/s1551}^{. See also, H.R. 5042 (111th): Liability for Aiding and Abetting Securities Violations of 2010 (Apr. 15, 2010), available at}^{http://www.govtrack.us/congress/bills/111/hr5042/text}^.

¹⁸^{Securities Litigation Reform Act, Conference Report, H.R. 104-369, 104th Cong., 1st Sess. (Nov. 28, 1995), p. 31, available at}^{http://www.gpo.gov/fdsys/pkg/CRPT-104hrpt369/pdf/CRPT-104hrpt369.pdf}^.

¹⁹^{Although the SEC recovered $140 million for investors defrauded by Enron, investors recovered more than $7 billion in private suits. See, Thomas C. Pearson, Enron’s Banks Escape Liability (2010), available at}^{http://www.bus.lsu.edu/accounting/faculty/lcrumbley/jfia/Articles/FullText/2010v2n1a5.pdf}^.

²⁰^{According to the U.S. Supreme Court, customers who sign pre-dispute arbitration agreements with their brokers may be compelled to arbitrate claims arising under the Exchange Act, and these agreements are binding with respect to investors’ claims under the Securities Act of 1933 and state laws. See, Shearson/American Express, Inc. v. McMahon, 482 U.S. 222 (1987); Rodriquez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985). "The standard arbitration agreement covers all disputes arising under federal law, state law, and [Self-Regulatory Organization] rules." See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. 80 n. 378 (Jan. 2011), available at}^{http://www.sec.gov/news/studies/2011/913studyfinal.pdf}^{. Most arbitrations in the securities industry are conducted through the Financial Industry Regulatory Authority (or "FINRA"), which is the largest dispute resolution forum in the securities industry. See, FINRA, Arbitration and Mediation, available at}^{http://www.finra.org/ArbitrationAndMediation/}^.

²¹^{See, e.g., Massachusetts Securities Division, Report on Massachusetts Investment Advisers’ Use of Mandatory Pre-Dispute Arbitration Clauses in Investment Advisory Contracts, p. 2 (Feb. 11, 2013), available at}^{http://www.sec.state.ma.us/sct/sctarbitration/Report%20on%20MA%20IAs'%20Use%20of%20MPDACs.pdf}^{. ("The Division has received 370 returned surveys as of February 11, 2013, representing 52.11% of all state-registered investment advisers located in Massachusetts. Of those 370 responses, 87.3% (323) of investment advisers indicated that they use standardized written contracts pertaining to their investment advisory services … Of the 323 investment advisory firms that indicated they had written contracts, nearly half confirmed that those contracts contained a mandatory pre-dispute arbitration clause.")}

²²^{See, e.g., Jill I. Gross & Barbara Black, When Perceptions Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration, 2008 J. Disp. Resol. 349, 400 (2008) ("We then present our findings, including our primary conclusions that (1) investors have a far more negative perception of securities arbitration than all other participants, (2) investors have a strong negative perception of the bias of arbitrators, and (3) investors lack knowledge of the securities arbitration process… Simply put, even if the system meets objective standards of fairness, a mandatory system that is not perceived as doing so cannot maintain the confidence of its users and, in the long run, may not be sustainable. As a result, customers' negative perceptions are changing the realities of the current system of securities arbitration and require a re-thinking by policy-makers."); Jennifer J. Johnson & Edward Brunet, Arbitration of Shareholder Claims: Why Change is Not Always a Measure of Progress, Lewis & Clark Law School Legal Studies Research Paper No. 2008-11, p. 5 ("We find numerous problems with arbitration of shareholder claims and conclude that arbitration is not an attractive alternative to litigation), available at}^{http://SSRN.com/abstract=1112826}^{; Comment letter from Richard M. Layne to the SEC (Aug. 25, 2010) (providing reasons why arbitrations may be unfair and favors the brokerage industry), available at}^{http://www.sec.gov/comments/df-title-ix/pre-dispute-arbitration/predisputearbitration-9.pdf}^{; Comment letter from Melinda Steuer to the SEC (Aug. 18, 2010) (same), available at}^{http://www.sec.gov/comments/df-title-ix/pre-dispute-arbitration/predisputearbitration-5.htm}^.

²³^{For advisory clients, this is an indispensable right, especially in light of the U.S. Supreme Court case stating that advisory clients generally do not have a private right of action for monetary relief against their investment adviser under the Investment Advisers Act of 1940 ("Advisers Act"). See, Transamerica Mortgage Advisors, Inc. et al. v. Lewis, 444 U.S. 11, 24 (1979). Advisory clients may have limited private rights of action to void an investment adviser’s contract and obtain restitution of the fees paid to the adviser. See, Section 215 of the Advisers Act; id. at 24, n. 14. An advisory client, however, may file private claims for fraud against an investment adviser under the Exchange Act. See, e.g., Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1970); Laird v. Integrated Resources, Inc., 897 F.2d 826 (5th Cir. 1990); Carl v. Galuska, 785 F. Supp. 1283 (N.D.Ill. 1992); and Levine v. Futransky, 636 F. Supp. 899 (N.D.Ill. 1986).}

²⁴^{U.S. Securities and Exchange Commission, Fiscal Year 2012 Agency Financial Report, Management’s Discussion and Analysis, p. 16 (FY 2012), available at}^{http://www.sec.gov/about/secpar/secafr2012.pdf#2012review}^.

²⁵^{Id.; U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, p. 3 (Fiscal 2012), available at}^{http://www.sec.gov/about/secstats2012.pdf}^.

²⁶^{U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, pp. 3, 11-14 (Fiscal 2012), available at}^{http://www.sec.gov/about/secstats2012.pdf}^.

²⁷^{Id., at 3.}

²⁸^Id.

²⁹^Id.

³⁰^{Letter from Rep. Barney Frank, Chairman of the House Committee on Financial Services, to SEC Chairman Christopher Cox, dated April 25, 2007 (showing great concerns that "the Commission and its staff may begin permitting public companies to impose mandatory arbitration requirements on their shareholders through the registration process."), available at}^{http://democrats.financialservices.house.gov/press110/press2042507.shtml}^{. Similarly, in May 2007, Senators Patrick Leahy and Russell Feingold sent a letter to the SEC Chairman to share their concerns about mandatory arbitration clauses, stating, "[t]he SEC’s mission is, first and foremost, to protect investors, and simply relying on investors’ ability to exercise informed choice when no choice is actually offered is clearly insufficient." Letter from Sen. Patrick Leahy, Chairman of the Senate Committee on the Judiciary, and Sen. Russell D. Feingold, to SEC Chairman Christopher Cox (May 4, 2007), available at}^{http://www.judiciary.senate.gov/resources/documents/upload/05-04-07-Leahy-Feingold-to-Cox.pdf}^.

³¹^{Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), Pub. L. No. 111-203, 124 Stat. 1376 (2010), available at}^{http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf}^.

³²^{Report of the Senate Committee on Banking, Housing, and Urban Affairs on S. 3217, S.Rep. No. 111-176, at 110 ("There have been concerns over the past several years that mandatory pre-dispute arbitration is unfair to the investors."), available at}^{http://www.banking.senate.gov/public/_files/Comittee_Report_S_Rept_111_176.pdf}^.

³³^{See, supra Note 33.}

³⁴^{See, Section 921(b) of the Dodd-Frank Act, which added Section 205(f) of the Advisers Act, provides that "The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’}

^{Similarly, Section 921(a) of the Dodd-Frank Act, which added Section 15(o) of the Exchange Act, provides that "The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors."

The Dodd-Frank Act also required the Commission to conduct a study to evaluate, among other things, the legal and regulatory standards of care and any shortcomings in the standards in the protection of investment advisory clients. See, Section 913 of Title IX of the Dodd-Frank Act. The staff completed this study more than two years ago. See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. i (Jan. 2011), available at}
^{http://www.sec.gov/news/studies/2011/913studyfinal.pdf}^{. That study covered pre-dispute mandatory arbitration agreements in many respects, but the staff did not offer any recommendations. See, id., at pp. 43-46, 80-83, 133-135.}

³⁵^{See, Dodd-Frank Act, § 921.}

³⁶^{See, Dodd-Frank Act, § 915.}

³⁷^{See, The Financial Planning Coalition Survey (Mar. 8, 2013), available at}^{http://www.financialplanningcoalition.com/docs/assets/59D91618-0B2F-4937-04E99C3E324A05E9/FinancialPlanningCoalitionMarch2013SurveyOmnibusToplineResults.pdf}^.

³⁸^{Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Pub. L. 111-203, § 410 (2010).}

³⁹^{See, Dodd-Frank Act, § 410, and Give States Oversight and Examination Authority Over RIAs Managing $1 Billion Or Less To Solve The RIA Regulatory Authority Mess" (Feb. 26, 2013) (quoting NASAA Spokesman Bob Webster).}}

FORMER BROKERAGE EMPLOYEE CHARGED IN UNAUTHROIZED STOCK TRADING SCHEME

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., April 15, 2013 — The Securities and Exchange Commission charged a former employee at a Connecticut-based brokerage firm with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC's charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

"Miller's scheme was deliberate, brazen, and ultimately ill-conceived," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit. "This is a wake-up call to the brokerage industry that the unchecked conduct of even a single individual in a position of trust can pose grave risks to a firm and potentially to the markets and investors."

According to the SEC's complaint filed in federal court in Connecticut, Miller entered purchase orders for 1.625 million shares of Apple stock on Oct. 25, 2012, with the company's earnings announcement expected later that day. His plan was to share in the customer's profit from selling the shares if Apple's stock price increased. Alternatively, if Apple's stock price decreased, Miller planned to claim that he inadvertently misinterpreted the size of the customer's order, and Rochdale would then take responsibility for the unauthorized purchase and suffer the losses.

According to the SEC's complaint, Apple's stock price decreased after Apple's earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm's available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.

The SEC's complaint charges Miller with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.

The SEC's investigation, which is continuing, has been conducted by Eric A. Forni, David H. London, and Michele T. Perillo of the Market Abuse Unit in the Boston Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut, Federal Bureau of Investigation, and Financial Industry Regulatory Authority (FINRA).

Wednesday, April 17, 2013

SEC CHARGES TORONTO INVESTMENT BANKER WITH INSIDER TRADING

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged an investment banker in Toronto with insider trading by using information that he obtained through his job of pitching investment ideas to the Canada Pension Plan Investment Board (CPPIB).

The SEC alleges that Richard Bruce Moore, who worked at the Canadian Imperial Bank of Commerce (CIBC), was attempting to obtain a role in a pending acquisition when he learned facts that allowed him to conclude that U.K.-based engineering and manufacturing company Tomkins plc was the CPPIB’s target. Moore misappropriated the information by purchasing Tomkins American Depositary Receipts (ADRs), which trade on the New York Stock Exchange, during the weeks leading up to the acquisition. After the acquisition offer was announced, the closing price of Tomkins ADRs rose 27 percent, and Moore made more than $163,000 in illicit profits.

Moore has agreed to settle the SEC’s charges by paying more than $340,000. The Ontario Securities Commission today announced a related action against Moore for insider trading in Tomkins common stock.

"Moore spent approximately one-third of his total net worth on purchases of Tomkins securities based on information he learned in the course of his employment," said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. "In today’s interconnected markets, the cooperative relationships among securities regulators mean that those who choose to engage in international insider trading should expect to face consequences across the globe."

According to the SEC’s complaint filed in federal court in Manhattan, the CPPIB was one of Moore’s top clients at CIBC in 2010. His primary contact was a CPPIB managing director who was responsible for taking public companies private. Through Moore’s interactions with the CPPIB, he learned that the Board was working on a large transaction in the United Kingdom. He pieced together nonpublic information to conclude that the Board was going to make an offer to acquire Tomkins.

The SEC alleges that Moore used an account in the Channel Islands to purchase 51,350 Tomkins ADRs on the New York Stock Exchange on June 28, 2010. He also purchased a large number of Tomkins common shares on the London Stock Exchange. The CPPIB and a Canadian private equity firm announced the acquisition offer for Tomkins on July 19, 2010.

The SEC’s complaint charges Moore with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In the settlement, which is subject to court approval, Moore agreed to pay $163,293 in disgorgement, $14,905 in prejudgment interest, and a $163,293 penalty. Moore also agreed to an SEC order that will bar him from the securities industry or participating in a penny stock offering.

The SEC’s investigation was conducted by David Frohlich and Matthew L. Skidmore. The SEC appreciates the cooperation and assistance of the Ontario Securities Commission, Jersey Financial Services Commission, and Financial Industry Regulatory Authority.

Tuesday, April 16, 2013

Inter Reef, Ltd. dba Profitable Sunrise, Melland Company S.R.O., Color Shock S.R.O., Solutions Company S.R.O. and Fortuna-K S.R.O.

CFTC COMMISSIONER BART CHILTON'S SPEECH AT WASHINTON UNIVERSITY IN ST. LOUIS

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

"Kaleidoscopes"

Speech of Commissioner Bart Chilton at Washington University in St. Louis, St. Louis, MO
April 15, 2013
Introduction

How do you do Wash U? Thanks to President (James) Bullard and Professor (Christopher) Waller for the invitation to be with you today. I’m sure each of you knows this, but what lucky folks you are to have the benefit of spending some time with these "smartest of the smart" economists. I’m envious.

Kaleidoscopes

My last time here was October 17th, 2000 for the presidential debate between Vice President Gore and Governor Bush. I was with my boss, and am honored to say my friend, Dan Glickman, who was the U.S. Secretary of Agriculture. After the debate, Secretary Glickman and a few dozen surrogates for each campaign went into the "spin room" and gave their perspective on the debate. We all watched the same debate, but as you might know, the views on what took place were dramatically different.

When I was a kid, I adored looking through those kaleidoscope tubes. The small bits of glass with myriad reflections gave you such different perspectives. Spin the end of the tube and it would change; even though you were focused on the same object—kinda similar to that Wash U spin room. So today, like kaleidoscopes, let’s look at the futures markets from a few different perspectives. After my comments, I'd like your MBA-based subjective, introspective, perspectives...umm...respectively. Cool? Cool.

Futures—The Baseline

Okay. Okay. First, I know you all are MBA-bound prodigies, but let’s get a baseline from which to work. These futures markets are steeped in a hell of a history. Hell of a history, I say. They were started for producers and processors—farmers and ranchers, millers and feedlots—and most importantly from my perspective, for consumers.

People were hungry for ways to hedge their risk and get a fair price at harvest time and in lean times. At harvest, the markets would flood with produce; grain would rot with over-supply; and producers would suffer the consequences. Then, in the winter, grain was scarce, and millers couldn’t afford it. That wasn’t working for anyone—not so much. Markets needed a fair price at harvest and the rest of the year. Consumers were gouged at certain times when supplies were scarce. The costs incurred were passed to the ultimate purchasers—households and families. Producers, processors, and consumers were weary of the volatility. So, in 1848—just five years before Wash U started—25 guys got together above a feed store on Water Street in Chicago and started what would become the Chicago Board of Trade. In addition to grain merchants and a banker, that assembly included some unexpected folks: a bookseller, a druggist, a hardware dealer and a tanner, among others. Guess what? It worked by helping even out prices. What this commodity consortium created still impacts us today—even if we’ve never been near a farm or a mill. All right, that’s the baseline.

Futures Today—You Better You Bet

Fast forward to today. We still have commercials who hedge their risk (farmers and processors, etc.) and speculators who continue to bet they can make money from a futures contract by selling it later if prices change. One thing that is different, however, is that the markets have expanded well beyond the ag commodities to energy, metals and financial products.

What they started back in Chicago was not only good, it was fantastico. Then, markets got even better. Today, 165 years later, we want these markets to be even better. "You better, you better, you bet." (It's "The Who" and President Bullard, Professor Waller and I know it. If you're too young to know it, Google or Bing it...whatever. "You Better You Bet," or the Alaska version: You better, you better, you betcha.

The question is: Are these derivative markets better? Wanna bet they’re better? You bet? In truth, the answer is definitely debatable. That’s because it depends upon your…perspective, my new-found kaleidoscope comrades.

There’s a lot of fresh liquidity—more liquidity, more volume, bigger markets. Bigger should be better? Bigger, more liquid markets should equal closer bid-ask spreads and better pricing. You guys are smart. You learned that years ago…you! One might bet that consumers should benefit, too, right? That should be better.

Betcha can hold that thought—bigger is better.

Bigger is Better?

Has anyone seen that series of AT&T commercials with Beck Bennett and the kids? He’s that super funny comic, sort of our present-day Art Linkletter or Bill Cosby when it comes to interviewing children. (Again, Google, Bing and Yahoo are your friends). Anywho, Beck is the interviewer in a focus-group-like setting with kids. He asks them, "What’s better: bigger or smaller?" The kids yell out, "bigger" before the next question, which is, "Which would you rather have, a big tree house or a small tree house?" They, of course, all want a bigger tree house…you betcha they do. One explains, "If it’s big enough you can have a disco," while another comments that a small tree house wouldn’t have room for a flat screen TV. "Bigger is better," is the tag line on the commercial.

Perhaps the AT&T marketing gurus are too young to remember what the Department of Justice said about that bigger is better stuff, although AT&T is something like the second largest company in the States and 14th largest in the world. I guess they know what they are doing. Anyway, Ma Bell remembers. Bing it baby, or Bing Baby Bells, whatever. The point: Kids think bigger is better.

We Want More

There’s another one of those commercials where Beck asks "Who thinks more is better than less?" A little girl explains, if we like it, "…we want more, we want more." "It’s not complicated," goes the tag line.

Well, if your perspective is that of a six or eight-year-old, all of that may make a lot of sense. Bigger is better. More is better. When it comes to futures markets and you wonder if bigger markets with lots of liquidity and more traders are better, your gut reaction maybe to say, "No duh Sherlock."

However, it actually is more complicated than that. Admittedly, if one looks at it from the exchange kaleidoscope perspective, exchanges make money from bigger volume, more traders. You might not even care about the price of anything. Bigger is better. More is more. You like it. You like it. You la la like it. You want more.

But, what about those Chi-town thought leaders back in the day—in 1848? What about consumers? Is more always better? Is bigger always better? Sometimes, is more, less?

Massive Passives and 2008

Let me give you one scenario, which happens to be based upon, well…fact. At least it is based upon fact from my and many other peoples’ kaleidoscope perspectives. In three short years, between 2005 and 2008, we saw over $200 billion come into U.S. futures markets. That’s a whole lotta liquidity—200B. That’s more volume. Gotta be better, right? Well, there was something different about these playas, that is: the speculators that gave the green. These speculators were new to the markets—the likes of pension funds. There’s nothing wrong with pension funds. (In fact, a lot of people like pension funds so much, they are still pretty peeved that theirs was cut in half due to the economic collapse). But that’s another tale too tough to tell—too tender to the touch tonight, perhaps another time.

In addition to pension funds, this $200 billion that came into our futures markets included exchange traded funds (ETFs). There’s nothing wrong with ETFs. The problem is: they, all these new speculators—the pension funds, ETFs, index funds and some others—had a different trading strategy. They had a different perspective than previous speculators. And, they deserved their own moniker—their own name.

I call these new speculators Massive Passives: voila! Here’s why. They are ginormous—so they are massive. And, they have a fairly price-insensitive trading strategy—so they are passive—Massive Passives. They don’t get in or out of markets based upon the crop year or the harvest. They don’t, by and large, make decisions about a drought, a cold winter or the summer driving season. Their bet is many years out. They invest like people who invest in the stock markets. People who invest there often park their money and leave it for years. A lot of our parents did, or do, just that. Many stock market investors do it today.

Sonny Boy, Girly Sue, let me explain investing to you.

As a stock holder, when we get older,

you’ll remember this chat about stock this and stock that.

You’ll recall I said with a grin that these shares of…AT&T or something akin, will be worth something then.

We’re gonna hang onto these bad boys.

Someday, when then arrives, we’ll be rich.

It will change our lives. That’s how wealth derives.

High fives!

I’m pretty sure that’s exactly how the conversations went down. And, that’s sort of how the Massive Passives have operated. You see, they wanted to diversify their portfolios beyond stocks and bonds and get into futures. And the futures industry said, "Sure, come one come all. Bigger is better. We want more. We want more." So, the Massive Passives brought the buckaroos and parked them—like a stock—in a bunch of futures—ags, metals, financials, and energy. They call this bigger is better moolah movement the "financialization of futures."

Here’s the troublesome part. Too much one-way wagering—like Massive Passive long speculation—can influence prices. Let me give you an example: crude oil. We know crude and related energy commodities impact so much of our economy because they are used to produce and transport so many things. At the beginning of 2008, a barrel of crude was in the $90s. By the time summer rolled around, it had vaulted to over $140, creating the highest ever gasoline prices in our nation’s history—$4.10 a gallon. The thing is: Even though prices change radically, not much changed in the way of supply and demand. Folks searched for some volatility causation. But, what we found was the big influx of Massive Passive dough. Then by December, as the entire economy was collapsing, even the Massive Passives weren’t so price insensitive. They got out of the market. Prices plunged to the $30s. Again, this took place without much in the way of any supply demand relationship.

You don’t have to take my word for it. A perspective from a top notch researcher at Goldman Sachs—one of the largest speculators on earth—said long speculation in markets does impact price. He even quantified it. Even expert researcher Luciana Juvenal at the Federal Reserve Bank of St. Louis came to similar conclusions. Researchers at Rice, MIT (Massachusetts Institute of Technology) and a plethora of other places say comparable things. There’s good and plenty of evidence—reputable and reliable substantiation—documenting what many of us simply know: Excessive speculation can help push prices around, and businesses and consumers can suffer.

Position Limits

How do we ensure that these 165-year-old markets keep working properly under these circumstances? Well, Congress and President Obama told us to put in place what are called speculative position limits as part of the financial reform law in 2010. They would limit the size that traders may control in a given market. So far, however, they’re not in place. That is due to the biggest speculators on the planet and their litigation efforts. My bet and I’d betcha, is this: The efforts to stop position limits will eventually fail. Congress told us, in no uncertain terms, to get it done. I intend to see that we do that—you betcha.

A Cheetah Taped to Grandma

There’s one more AT&T commercial you may recollect. This is the one where Beck asks the kids if faster or slower is better. They all like fast, of course. Then he asks, what’s fast? One kid says, "My mom’s car and a cheetah." Then the kids are asked, "What’s slow?" to which a young boy says, "My Grandmother is slow; I bet she would like it if she was fast." Beck proposes, "Maybe give her some turbo boosters?" But, the boy suggests, "Tape a cheetah to her back." Beck says, "Hmm, seems like you’ve thought about this before." The tag line for the spot is: "It’s not complicated. Faster is better."

Well, just like my perspective that bigger and more isn’t always better, and that more can be less, I’m not so sure that faster is always better in trading. If we look at another key change to markets from back in the day, there’s also a lot of gee whiz, crazy cool, lightning-fa fa fast technology. There are algorithms that mine newsfeeds. They quantify, analyze, calculate and compute things most people would never ever dream. And, they do it quicker than a blink of an eye.

These speed demons are called high-frequency traders (HFTs), although a few years ago I thought they, too, needed a more descriptive name. I came up with Cheetahs. The fastest land animals, not like a Boston card cheater.

The problem with fast in this regard is this: I speak with commercial market participants regularly who suggest the cheetahs are taking advantage of markets. They know the cheetahs are sort of like the new middlemen. And, they are out there 24-7-365 trying to scoop up micro-dollars in milliseconds.

Lots of commercial hedgers try to trade fast, but they have explained their circumstances. Say you are merging onto a freeway. You are ready to get on, ready to trade. Just before merging, five or six cheetahs zoom zoom past like they are in the fast lane and jump in the market ahead of you at a certain price. If you’re a little slow, you can still get on the highway but not at the price you intended.

A study late last year, which was conducted in conjunction with the CFTC, said in essence that cheetah trading imposes quantifiable costs on small investors. Aggressive cheetahs make a lot of money, and they make their biggest paydays when they trade with small, traditional traders. This could end up pushing smaller, non-cheetah traders out of markets. From most perspectives I can think of, that sort of fast isn’t better.

To be clear, I’m not proposing we get rid of neato, gee whiz technology in markets or we make the cheetahs an endangered species. They have some real attributes—you bet—like speed, smarts and portability. But, we need only to go back to May 6th 2010, when the Flash Crash occurred. The Dow Jones lost almost a thousand points in a matter of minutes. Cheetahs played a part in the entire damaging debacle, and as some of us recall: life in the fast lane can surely make you lose your mind, and a mind is a terrible thing to waste.

Today, we have no rules or regulation to deal with the cheetahs. I’m not suggesting slow is better than fast, I’m just saying we need to look at these things from a few perspectives. We shouldn’t just accept that all is good with speed.

Conclusion

The questions that folks should ask are these: Are markets performing as they should? Are they, in particular, benefiting consumers? What, if anything needs to be done?

We all have our own cool-colored, multi-faceted Kaleidoscope opinions based upon our proficiencies and experiences. That’s an enormous value we have individually, but it also benefits our schools, businesses, our communities and government institutions. Learning about these diverse perspectives makes us better. That’s why I want to hear what you think.

I appreciate your attention and really value the opportunity to be with you at Wash U. You betcha, I do.

Thanks.

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