Naked shorting’s crux: BD failure to deliver

Regarding “SEC seen shy on naked shorting” (April 23), [Dan] Jamieson does a good job of explaining “naked short selling” and the intention of Regulation SHO.
However, he neglects to describe how this problem was created.
In fact, if investors don’t understand this root cause, they will continue to chase red herrings like “the grandfather clause” and to blame amorphous entities such as “hedge funds” until the damage is so far beyond the ability of the broker-dealer community to make restitution that it will take an act of Congress to repair.
I am a former manager of depository trust and clearing corporations in San Francisco and New York. I was also senior adviser on a capital markets project to create trade clearing and settlement in Russia.
The most important element of the “naked shorting” problem is that broker-dealers are allowed to fail to deliver shares at settlement.
An economist at the Securities and Exchange Commission went so far as to write a paper describing how settlement failures can be used as “investment strategies.” But this notion should be obviously absurd to every investor.
If an individual investor buys or sells shares, the retail broker won’t tolerate any failure of delivery, either of shares or of money. So why, then, are the broker-dealers allowed to fail delivery of shares for weeks, months and in some cases even years?
The answer is simple: because they are the owners of the central clearing and settlement organization in the United States, the one company that provides settlement services for virtually every trade in every security — Depository Trust and Clearing Corp. in New York. Although DTCC was given the authority by Congress (when clearing agencies were created) to “facilitate the prompt and accurate settlement of securities transactions,” it says that it can’t fulfill that purpose and the SEC collaborates with it in this charade.
Mr. Jamieson fails to mention only that this double talk is at the root of the problem.
When a broker-dealer knows that it won’t be required to deliver shares at settlement, not only does it have no need to borrow shares, it doesn’t even need to declare a sale as short.
This, as Texas attorney John O’Quinn said recently in an interview with Bloomberg television, “is just stealing; that’s all it is.”
While I am glad to see that you are carrying some news on this subject, I am disappointed that you are misleading your readers into believing that one regulation is going to make it all better. The quote from [attorney Peter] Chepacavage, “Another catastrophic event like 9/11 could induce naked shorters to take advantage of a panicked market,” is simply wrong.
According to the Federal Reserve Bank of New York, we don’t have to wait for an event at that level to see a trillion dollars in settlement failures on any given day.
It happened post-9/11 and again in 2003 and in 2005.
Regardless of any amendments made to SEC Regulation SHO, until something is done to strictly enforce settlement, this problem will persist. Ignoring the source of the problem is no way to find a solution.
Worse yet, it holds the danger of lulling investors into inaction.
Like a frog in a pot of water on the stove, they won’t know they are still in trouble until it is too late.
Susanne Trimbath
Chief executive
STP Advisory Services LLC
Santa Monica, Calif.

Editor’s note: The writer is co-author of “Beyond Junk Bonds: Expanding High Yield Markets” (Oxford 2003), a review of the post-Drexel Burnham Lambert world of non-investment-grade-bond markets.

Advisers have obligation to be best they can be
Your May 7 article concerning TD Ameritrade’s new service agreement for advisers highlights a growing problem in our profession.
My initial reaction to the service agreement was that of indifference.
Clearly, it wasn’t one of the great legal documents of our time, but the firestorm that followed was ridiculous — though not unexpected. Like most other matters, it found its appropriate resolution — a postponement until a collaborative committee of advisers and TDA management can hash out the differences.
I am greatly troubled, though, by the vast number of advisers who fail to see the reality of what is in front of them. At our firm, our business is all about the relationship — between the client and us.
We conduct our business with honesty and integrity. We always try to do right by the client, first and foremost.
We accept responsibility for what we do. If something goes wrong, we step up and try to make it right. If we can’t, then we accept the consequences of our actions and move on.
Regarding the USA Patriot Act and other such laws, advisers need to adhere to best practices, end of discussion.
Custodians execute trades and provide some back-office support. They really do very little and rarely interact directly with the client.
When custodians falter, then they should accept the blame and rectify the situation. While the written word is important, the spirit of any agreement carries equal weight.
Hopefully, the next agreement will combine the two. But in fairness, why should any custodian be responsible for the sins advisers commit?
For it is the adviser who is usually the sinner.
It seems like the bottom 25% of our profession are always griping, grabbing us from behind and trying to pull us down to their level. It is our obligation to be the best we can be, no excuses.
Perhaps now is the time to start thinning the herd.
Jim McGurren, CPA
Dartmouth Advisory Services Inc.
Garden City, N.Y.

Blurring of roles is disturbing trend
I think there is some misinformation in your April 30 report on the Donald Sowa arbitration, “High-profile adviser loses 314G arbitration claim.” [Attorney] Andrew Stoltmann uses the terms “broker” and “adviser” interchangeably — as though the roles of both jobs are somehow the same. This is not the law, nor the way in which most arbitrators see things.
Having arbitrated cases for both claimants and respondents for 30 years, I find the blurring of the role of a broker in a non-discretionary account with a full-blown adviser who does have the duty to asset allocate disturbing, to say the least.
Claimants’ attorneys for years have been glossing over this fact. Your article does nothing to help the reading public, whether in the industry or not. A broker does not get paid to advise on allocation; an adviser typically does get a fee for this. Lumping the two together and assigning “brokers” with this role causes nothing but mischief.
Whatever else can be said about the Sowa arb, if the arb panel found liability, they did so not because he acted as a broker — “rookie” or otherwise.
David Genelly
Attorney
Vanasco Genelly & Miller
Chicago

‘Adviser’ shouldn’t be used lightly
“Just 43% of investors said they understood their adviser’s fee structure ‘completely’ or ‘fairly well,’ according to a survey by Boston-based State Street Corp.’s investment management arm, and Knowledge@Wharton, an online business journal at the University of Pennsylvania’s Wharton School of Business in Philadelphia.”
This is an ongoing pet peeve of mine. When you say “adviser,” do you mean all in the financial services industry — to include stockbrokers and insurance agents (who are not advisers) or do you really mean “advisers”?
As a registered investment adviser, my fees are about as clear as they can be — as described in my engagement agreement. My clients know exactly what they are paying me. I find it hard to believe that any RIA clients would say that they do not understand what their adviser’s fee is.
Tim Murray, CFP
Murray Financial Inc.
Chantilly, Va.

Give Congress incentive to fix Social Security
Great Monday Morning [“Say on pay bill for executives is unnecessary,” May 7].
I think the movement to bring in board members not brought in by management would also help.
As for your last thought, why don’t we scrap Congress’ medical and pension system, and have them join Medicare and Social Security like the rest of us? Then they might actually try to fix those problems.
John Van
Chief operating officer
Partner Capital Group LLC
Nashville, Tenn.

Related Topics: Letters To The Editor