October 26, 2011   66 notes

U.S. SEC warns brokers over market access, sub-accounts in debut “risk alert”


By Stuart Gittleman and Brett Wolf NEW YORK, Sept. 30 (Thomson Reuters Accelus) – The U.S. Securities and Exchange Commission (SEC) issued an unexpected warning to broker-dealers to supervise trading by customers with direct market access, especially customers that trade using master- and sub-accounts. The notice came in the first in a continuing series of risk alerts the Office of Compliance Inspections and Examinations (OCIE) staff expects to issue. The staff did not say whether OCIE found related deficiencies, or at what level, in recent exams, or in reviewing the findings of recent exams by the Financial Industry Regulatory Authority (FINRA).  The new-style alert came as a surprise to many observers of securities industry regulation, who believed there were few firms with master/sub-account compliance issues. “It was a surprise to me. I knew regulators were examining for master/sub-accounts, I’m just not sure what precipitated the [issuance of this alert]. I assume someone is seeing something they’re uncomfortable with,” said Betty Santangelo, a partner with New York law firm Schulte Roth & Zabel. The issue first appeared on the radar of many anti-money laundering compliance officers in September 2010 after the SEC and Treasury’s Financial Crimes Enforcement Network took enforcement action against North Carolina-based broker-dealer Pinnacle Capital Markets LLC. FinCEN assessed a $50,000 civil money penalty against Pinnacle, alleging it failed to identify or verify the identities of the “vast majority” of its corporate customers’ omnibus accounts’ sub-account holders, even though the sub-account holders were Pinnacle’s customers for purposes of the customer identification rule. The sub-account holders were trading directly through the accounts. “Money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage are all potential risks associated with the master/sub-account trading model,” the SEC said in the alert. The Market Access Rule, 15c3-5 under the Securities Exchange Act of 1934, requires brokers to have controls and procedures to manage the financial, regulatory and other risks associated with providing a customer with market access. The alert said compliance with the rule, most of which became effective July 14, will be part of upcoming exams. “When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” said Carlo di Florio, the director of the OCIE. The alert warned that customers may open master accounts with a broker, then subdivide them for use by individual or groups of traders, sometimes to such an extent that the master account customer and the firm may not know who is trading in the sub-accounts. The potential risks of this model include money laundering, insider trading, market manipulation, account intrusions, unregistered brokerage activity, and excessive leverage and inadequate minimum equity for pattern day traders as defined by NASD rule 2520. “Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity, or in an attempt to avoid or minimize regulatory obligations and oversight,” di Florio said. Santangelo said she thought the SEC alert “sort of described master/sub-accounts in a negative way when they are used for many good purposes.” She added: “Obviously there is some form of this that concerns [regulators] and it’s good that we know that.” The alert suggested controls and procedures for limiting the risks associated with offering market access to customers, including those with master/sub-accounts, such as: Creating written descriptions of all controls and procedures for sub-account due diligence and monitoring, including a description of the review process, the frequency of reviews and the identity of those responsible for conducting them. Obtaining and maintaining the names of all traders authorized to use each master account, including all sub-accounts; verifying their identities using background checks, interviews and fingerprints if appropriate; and periodically checking their names through criminal and other databases, including the special designated nationals list of the Treasury Department Office of Foreign Assets Control. Establishing requirements that validate each trader’s identity, such as effective password management and IP address identification. Monitoring trading patterns throughout the accounts for indications of insider trading, market manipulation or other suspicious activity. Physically securing information of customer or client systems and technology. Logging and tracking incidents of attempted hacking or other unauthorized system penetration by outside parties. Determining that traders with access to the broker’s trading system and technology have received training in areas relevant to their activity, including market trading rules. Regularly reviewing the effectiveness of all controls and procedures around sub-account due diligence and monitoring. The alert said regulators have severely sanctioned firms and have piled on for egregious AML violations, noting the Pinnacle fines. The alert also noted that the SEC charged another broker, GLB Trading, and its former CCO over day trading within the master account of a customer, Tuco Trading, and fined Warrior Fund for acting as an unregistered broker for day traders. The alert said OCIE’s national exam program (NEP) will examine for compliance with the Market Access Rule by scrutinizing the broker’s system of risk management controls and supervisory procedures, and whether the firm is appropriately vetting the accounts with access to the broker’s market identifier, and trading system and technology. The NEP may require brokers to document their risk assessment process and how they support its conclusions, including evidence that persons associated with the master account are not themselves customers for purposes of Exchange Act rule 15c3-3. This may include partnership or shareholder agreements, or documentary evidence that the relationship between the customer and the sub-account traders is an employment or trading, rather than a customer, relationship. The alert also said OCIE will examine the so-called “blue sheets” required by rule 17a-25 for evidence of insider trading or market manipulation.

October 17, 2011   42 notes

UPDATE 1-Kingsway Financial settles law suits with US insurance dept


On April 1, 2010, the department had appealed to the Pennsylvania Supreme Court against Kingsway’s disposition of stakes.Kingsway also announced that LGIC Holdings has completed its previously announced acquisition of Walshire.LGIC Holdings is a joint venture between Kingsway, which owns 49 percent, and 51 percent owner Tawa plc.

October 17, 2011

Novelist Lauren Myracle out of award race after error


Myracle said she was later told that “Shine” had been included in error but would remain on the list “based on its merits.” The novel is the tale of the hate crime murder of a young gay teen in a small U.S. town.But on Friday, the National Book Foundation asked her to withdraw, “to preserve the integrity of the award and the judges’ work, and I have agreed to do so,” she said.Myracle added that she continued to support the remaining authors on the short-list for the young people’s literature prize.Her publisher at Amulet Books, Susan Van Meter, added; “We strongly encourage the NBF to review their procedures for transmitting award information between the judges and the staff and to authors and the public so that a painful error like this doesn’t happen again.”Myracle suggested that NBF make a donation to the Matthew Shepard Foundation “so that something positive might come of this error.” Shepard, 21, was attacked and killed in Wyoming in 1998, apparently because he was gay.The National Book Awards will be presented at a gala ceremony in New York on November 16.

October 12, 2011   20 notes

UPDATE 2-Wall St protesters target homes of top executives


* College students plan solidarity protests on Thursday (Recasts, adds details throughout)By Michelle NicholsNEW YORK, Oct 11 (Reuters) - Hundreds of anti-Wall Street protesters marched on the New York homes of wealthy executives on Tuesday, triggering one of their targets, billionaire hedge fund manager John Paulson, to defend his wealth.Around 500 people marched through Manhattan’s Upper East Side, passing the high-rise buildings where many of the executives live. Among them are Paulson, global media mogul Rupert Murdoch, JPMorgan Chase chief executive Jamie Dimon and David Koch, co-founder of energy firm Koch Industries.The protesters chanted “Banks got bailed out, we got sold out” and “Hey you billionaires, pay your fair share” and carried signs that read “Stop robbing from the middle class to pay the rich” and “We are the 99 percent,” a reference to the idea that the top 1 percent of Americans have too much.Mustafa Ibrahim, 23, an engineer marched on the “Billionaire’s Tour” during a visit to New York from Cairo, where he said he was arrested during a popular uprising this year which toppled Egyptian autocrat Hosni Mubarak.”It’s pretty much the same thing as Egypt,” Ibrahim said. “The problem is the rich keep getting richer and the poor are getting poorer.”Since Sept. 17 protesters have been camped out in a park in Lower Manhattan near Wall Street, rallying against bailouts for banks during the recession, which allowed them to earn huge profits while average Americans suffer high unemployment and job insecurity with little help.As protesters took their grievances to the homes of the rich, the Paulson & Co hedge fund defended its status.Paulson took home $5 billion in 2010, the hedge fund industry’s biggest ever paycheck, but this year one of his main funds has fallen 47 percent after he mistimed a call that the economy would recover strongly.”The top 1 percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state,” Paulson & Co said in a statement, adding that New York has the highest income taxes of any U.S. states.”Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow,” it said.The Occupy Wall Street movement is burgeoning ahead of planned global protests on Saturday. On Wednesday, the Service Employees International Union will march on New York City’s financial district for good jobs, while U.S. college students plan solidarity protests on Thursday on at least 56 campuses.According to Occupy Together, which has become an online hub for protest activity, the Occupy Wall Street movement has sparked rallies in more than 1,400 cities throughout the United States and around the world.ARRESTS IN BOSTON, WASHINGTON D.C.Goldman Sachs boss Lloyd Blankfein canceled a talk at New York’s Barnard College, and though the company — which received and repaid a big federal bailout during the financial crisis — said a scheduling conflict would keep him away, students from nearby Columbia University were planning to”Don’t look at the Arab spring, look here because things are going to boil over,” said protester Charles Evans, 62, as he marched on the “Billionaire’s Tour.”Fifth Avenue resident Lorna Goldberg, 57, said she was surprised to see the protesters near her home. “But I guess they’re getting their point across by coming here,” she added.Vice President Joe Biden, a Democrat, last week likened the growth of the protest movement to the grass-roots Tea Party, but the conservative group on Tuesday sought to distance itself from the protesters.The Tea Party Patriots said in a statement that its supporters were “not lawbreakers, they don’t hate the police, they don’t even litter.”