MSRB Publishes 2015 Annual Report

The MSRB published the organization’s 2015 Annual Report. The Report highlighted MSRB’s ongoing efforts on investor protection, improved disclosure and new regulatory standards for municipal advisors. The Annual Report also reviewed the organization’s finances for the fiscal year and outlined an agenda for 2016.

The MSRB stated that it will continue to improve on the progress made to date, and in 2016 will:

  • enhance the availability of more robust pricing information for municipal securities investors;
  • work toward better disclosures of bank loans and alternative financings by municipal securities issuers;
  • create the first professional qualifying examination for municipal advisors; and
  • add objective, noncommercial resources on municipal market topics to the online MSRB Education Center.

Future initiatives include (i) shortening the settlement cycle to T plus 2,(ii) minimizing technological vulnerabilities in its trade reporting system, (iii) improving issuer disclosure practices and (iv) implementing regulatory standards for municipal advisors.

SEC Tells Investors to Resolve to Be Smarter

The SEC Office of Investor Education and Advocacy offered ten tips for investors. The tips are intended to help them make informed investing decisions and avoid common scams in 2016.

The SEC’s bulletin listed the following ten investment tips:

  • always check the background of an investment professional – doing so is easy and free;
  • promises of high returns with little or no risk are classic warning signs of fraud;
  • be careful when using social media as an investment tool;
  • ignoring fees associated with buying, owning and selling an investment product can be costly;
  • be alert to affinity fraud;
  • any offer or sale of securities must be registered with the SEC or exempt from registration – otherwise, it is illegal;
  • diversification can help reduce the overall risk of an investment portfolio;
  • active trading and other common investing behaviors actually undermine performance;
  • unbiased resources are available to help individuals make informed investing decisions; and
  • contact the SEC Office of Investor Education and Advocacy online for answers to any questions about investments, investment accounts or financial professionals.

FINRA Announces 2016 Regulatory Priorities

This year, FINRA will focus its regulatory efforts on the broad categories of supervision, risk management and controls, and liquidity in the new year. In a 2016 Regulatory and Examination Priorities Letter, FINRA stated that it will also concentrate on “firm culture, conflicts of interest and ethics, and the significant role each of these plays in the way a firm conducts its business.” FINRA emphasized that that these priorities include (i) sales practices, (ii) financial and operational controls, and (iii) market integrity.

FINRA highlighted its approach to these priorities:

  • Culture, Conflicts of Interest and Ethics: A firm’s culture is both an input to and a product of its supervisory system. It affects the firm’s approach to identifying and managing conflicts of interest, and ensuring the ethical treatment of customers.
  • Supervision, Risk Management and Controls: FINRA will focus on four areas: (i) management of conflicts of interest, (ii) technology, (iii) outsourcing and (iv) anti-money laundering.
  • Liquidity: FINRA will review the adequacy of firms’ contingency funding plans in light of their business models (FINRA Regulatory Notice 15-33).

Regarding other areas of regulatory focus, FINRA stated:

  • Suitability and Concentration: FINRA will assess whether registered representatives that sell fixed-income, complex and alternative products are considering certain factors adequately, such as credit risk, duration and leverage.
  • Financial and Operational Controls: FINRA will monitor firms’ policies and controls concerning (i) market-maker net capital exemptions, (ii) exchange-traded funds, (iii) fixed-income prime brokerages, (iv) internal audit frameworks, (v) onboarding clients and correspondents, and (vi) the transmittal of customer funds.
  • Market Integrity: FINRA will review firms’ (i) compliance with Rule 603(c) (“Distribution, Consolidation and Display of Information with Respect to Quotations for and Transactions in NMS Stocks”) of Regulation NMS (“Regulation of National Market System”) (FINRA Regulatory Notice 15-52),(ii) compliance “report cards” derived from FINRA’s cross-market equity manipulation surveillance program, (iii) fixed-income order handling, markups and related controls, (iv) compliance with Regulation SHO (“Regulation of Short Sales”), (v) cross-market and cross-product manipulation, and (vi) audit trail integrity.

As to its overall approach to firm culture, FINRA Chair and CEO Richard Ketchum said: “Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices. Firms with a strong ethical culture and senior leaders who set the right tone, lead by example, and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”

Professor Steve Hanke discusses the Federal interest rate increase

Steve Hanke, Johns Hopkins Professor of Applied Economics and a CFS Special Counselor, discusses the Federal Reserve’s announcement of the first interest rate increase in ten years.

Professor Hanke emphasizes the relative importance of the broad money supply, which includes that supplied by the private banking system, as measured by the CFS Divisia report of December 16, 2015.  CFS Divisia M4 grew by 4.6% in November 2015 on a year-over-year basis versus 3.4% in October or 2.1% for 2014, a statistic Hanke cited as indicating a “healthy” but “modest” economic growth.

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SEC Commissioner Aguilar Offers ”Helpful Tips” to Future SEC Commissioners

In a public statement, SEC Commissioner Luis A. Aguilar provided “a set of principles, thoughts, and ideas” that he hoped “future Commissioners, and their counsels, may find useful.” His statement follows the November 16 announcement of his departure from the SEC at the end of December.

Commissioner Aguilar’s “high-level roadmap” included the following recommendations:

  • Personal Staff. Commissioner Aguilar stressed that choosing the right counsels “may be one of the most important decisions [that one can] make as a Commissioner.” He urged future Commissioners to consider their counsels to be their alter egos.
  • Internal Procedures. Commissioner Aguilar emphasized that future Commissioners must familiarize themselves with the Reorganization Plan No. 10 of 1950, which provides that the SEC Chair “alone determines the Commission’s agenda, as well as the content of the recommendations [they] will be asked to vote on.” He also urged future Commissioners to “understand the substantive rules and procedural processes at the SEC, e.g., how rulemakings work, how enforcement recommendations work, how seriatim votes work, etc.”
  • The Role of a Commissioner. Commissioner Aguilar noted that being a Commissioner requires a “fresh perspective.” He urged future Commissioners to stay well informed, be “proactive” in reaching out to other federal or state regulatory agencies, remain “open” to various viewpoints, dig into “so-called precedents” and “practice healthy skepticism.”

In closing, Commissioner Aguilar called on future Commissioners to do their “homework.” “The American people cannot afford to have you ‘wing it,'” he said.

Five Things to Watch for as the Federal Reserve Makes its Rate Hike Decision

Reporter James Puzzanghera interviewed CFS President Lawrence Goodman for an article published in today’s Los Angeles Times.

In “Five things to watch for as the Federal Reserve makes its rate hike decision”, Mr. Puzzanghera discusses the potential outcomes of today’s decision by Central bank policymakers. At 11:00am Pacific Time (2:00pm Eastern Time), the Fed will announce if the time has come for an increase, nearly a decade after the last increase in the benchmark federal funds rate.

While some experts do not believe a rise in interest rates would be constructive, others argue removing the questions about when the Fed would raise the rate would do more for financial stability, particularly in the long-term, than holding steady. “It’s this deep uncertainty surrounding the conduct of monetary policy that is exacerbating swings in financial markets,” said Lawrence Goodman, a former Treasury official who is president of the Center for Financial Stability think tank.

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First Try at European Money Union Didn’t Work Either

Author Reunka Rayasam interviewed CFS Advisory Board member Charles Goodhart, emeritus professor at the London School of Economics and formerly a member of the Bank of England’s monetary policy committee, for a recent article in Reuters.

In “First try at European money union didn’t work either” Ms. Rayasam, using history as a guide, questions if politics could be the stumbling block as Greece and it’s eruo zone lenders finalize details of its third bailout package.  Professor Goodhart believes that “Currency and money are much more interconnected with political control than most people think.”

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House Hearing Challenges Dodd-Frank’s Success on Its Fifth Anniversary

The House Financial Services Committee (“FSC”) held a hearing titled “The Dodd-Frank Act Five Years Later: Are We More Prosperous?” The hearing examined the Dodd-Frank Act’s implementation, operation and general legislative impact on economic prosperity over the past five years. The following witnesses testified:

See: Webcast of Hearing; Chair Hensarling’s Opening Statement; FSC Press Release; FSC Memorandum.