NYSE Euronext Rate Administration Limited, a subsidiary of NYSE Euronext (“NYX”), announced that it has been appointed as the new administrator of LIBOR.  Pending approval by the Financial Conduct Authority, the transition from the current administration, BBA LIBOR Ltd., a subsidiary of BBA, is expected to be completed in early 2014.

See:  NYSE Euronext Press Release.

New York Attorney General Eric Schneiderman announced that publisher Thomson Reuters has agreed to discontinue the practice of providing high-frequency traders with certain consumer survey results prior to the release of that information to other subscribers. The announcement was, according to the release issued by the Attorney General, prompted by an ongoing investigation into whether or not the University of Michigan’s consumer survey results, released to high-frequency traders two seconds earlier than other Thomson Reuters subscribers, provided an unfair advantage, causing market distortion. 

Lofchie Comment:  Linked below, there is a thoughtful and funny article from Dealbreaker criticizing the actions of the Attorney General as an infringement upon freedom of the press.  Beyond the points made in the Dealbreaker article, additional issues for consideration include:

First, there seems to be a general impression among financial regulators that “information” is a public asset, and that it is improper for the possessor of information to profit from the use of that public asset at the expense of another person who does not have the same information.  This impression does not seem to be correct, nor, if it were correct, would it seem to be good public policy.  Gathering information and putting that information into an usable form is expensive.  If financial regulators create a rule of law that prohibits making a profit from having better information, they eliminate the economic incentive to gather information.  From a societal standpoint, this is a bad result.  By way of analogy, the reason that society has rules awarding patents is that there is a general (even if not unanimous) consensus that society as a whole benefits when private individuals are able to derive some profit from the production of intellectual property.  In the financial markets, private individuals pay for information so that they can make more informed investment decisions, a result that should benefit society as a whole.  Conversely, any financial regulatory system that drains information of any economic value is going to create less information. 

Second, one of the odder aspects of this case is that the Attorney General is not arguing that the information at issue is in the public domain.  Rather, he states that it is “unfair” for some Thomson subscribers to receive the information before others, but he does not suggest that it is unfair for Thomson subscribers to receive the information before the public generally. 

Third, one of the points made by the Dealbreaker article is how open-ended the law is (the law in this case being the Martin Act), and how great is the power of government actors to “enforce” laws on the basis of ambiguous or, in this case, novel interpretations.  This is a concern that numerous commentators have raised with regard to Dodd-Frank and the rules under it.  For example, in the CFTC/SEC release defining the term “swap,” regulators assert hundreds of times that they will determine, based on (undescribed) facts and circumstances, whether a financial transaction constitutes a swap.  Under those “rules” of interpretation, market participants have no way of knowing how to comply with the law.

Fourth, this particular case has implications for broker-dealers who distribute information.  It raises a question as to the extent to which a business can treat any of its customers differently.

See: Attorney General Press Release.
See also: New York Attorney General Will Supervise When and How News Organization Can Report News (Dealbreaker Article).

The GAO examined the costs of the rule requiring investment advisers that have custody of client assets to submit to annual surprise examinations by public accountants. In addition, the study found that the SEC rule requiring a qualified custodian who is a related person to obtain an internal control report also produced varied costs across custodians based on their size and services. Finally, the GAO examined the exception which the SEC offers from surprise examinations for investment advisers deemed to be “operationally independent” from their clients, and the associated costs with that exception. 

Lofchie Comment:  The GAO Report really does focus on analyzing the costs of the surprise examination rule and does not attempt to analyze whether the rule’s benefits exceed its costs.  That said, the Report includes some discussion from the SEC to the effect that the rule has been successful in detecting custody violations by investment advisers and will likely deter fraud.

See: Full GAO Report.
See also: GAO Report Highlights.

SIFMA released its response to a data request by the SEC to help inform the agency’s cost-benefit analysis of a uniform fiduciary standard for broker-dealers and investment advisers under Dodd-Frank Section 913. For the first time, the industry provided estimates on the cost of complying with a uniform fiduciary standard.  In its letter, SIFMA:

• Stated its support for a uniform fiduciary standard of conduct, though it also stated that such a uniform standard must take account of the fact that broker-dealers provide a different service to customers than to investment advisers (e.g., broker-dealers generally provide discrete (in time) nondiscretionary advice, while investment advisers often provide ongoing discretionary advice);
• Raised concerns about potential rulemaking by the Department of Labor to expansively redefine “fiduciary” under the Employee Retirement Income Security Act (“ERISA”); and
• Provided estimates as to the cost of implementing a fiduciary standard for broker-dealers.

Lofchie Comment:  “Fiduciary” is one of those standards – like fair – that no one wants to oppose, even though no one knows what it means in practice.  The SIFMA letter deals with this definitional problem by conceding immediately that broker-dealers should be subject to a “fiduciary” standard (whatever that is), and then moving on to the more important and substantive discussion of just what that means in practice.  

The SEC is in a somewhat difficult place on this issue because it always has been willing to be honest and to acknowlege that the higher the “fiduciary” standard it imposes, the more the SEC will both raise costs to investors and force smaller investors out of the brokerage system, since there is no way for brokers to recoup the increased costs of serving those smaller investors.  

There are many substantive questions:  (i) what should be the obligation that a broker-dealer has in servicing its customers who pay commissions;

Whatever rules are eventually adopted (and it would seem that more rulemaking is inevitable), the SEC should conduct a study of how these will affect retail investors, and whether smaller investors, in particular, were helped by the new rules or were priced out of the market.

See: Full SIFMA letter.

The MSRB stated its support for the establishment of requirements relating to key systems of SCI entities that are critical to the maintenance of fair and orderly securities markets. But the MSRB also believes that there are a number of elements within proposed Regulation SCI that should be clarified or modified. Further, the MSRB believes that the scope of SCI systems subject to Regulation SCI should be more narrowly tailored or, in the alternative, that the implementation of proposed Regulation SCI should be staged in multiple phases depending on the type of SCI system and related SCI security system. Moreover, the MSRB believes that the processes envisioned under proposed Regulation SCI should be streamlined and that a broader and more flexible set of standards for the purposes of certain safe harbors be adopted.

To that end, the MSRB offered comments, observations, and implementation timeframes on the following rules:

See: MSRB Comment Letter S7-01-13.

The SEC issued a no-action letter laying out certain conditions that must be met in order to allow Foreign Options Markets to familiarize registered broker-dealers and large financial institutions with their markets and the options traded on those markets without registering under Section 6 of the Exchange Act as a national securities exchange. The required conditions with which the Foreign Options Markets must comply include requirements that the Foreign Options Markets maintain:

• a website updated in English, instead of filing an options disclosure document.
• their most recently published annual report, in English, to respond to requests for the report from Eligible Broker-Dealer/Eligible Institutions.

Lofchie Comment:  This is a positive regulatory development in that it eliminates the need for individual options exchanges to prepare their own versions of an “options disclosure document” and to obtain their own no-action letters, processes that were relatively expensive and that did not seem to provide any meaningful benefit to investors.   It is unlikely that institutional investors read the options disclosure documents or appreciated being protected from investing in certain options markets.

All U.S. broker-dealers involved in the sale of foreign options should review their compliance procedures to conform them to the requirements of the new letter.

See:  SEC Foreign Market No-Action Letter.