Before you get too excited, the current display of regulatory vigor is almost certainly motivated by a desire to protect turf rather than new-found solicitude for investors’ welfare.
Bloomberg reports that the Financial Industry Regulator Authority will start on-site inspections of 40 brokerage firms regarding their participation in the auction rate securities meltdown. Wow! Action!
Not really. We have seen this movie before. New York attorney general, using the Maritn Act, goes after a financial firm miscreant. Financial regulator, asleep at the switch during the bad behavior and indifferent to pleas of victims, wakes up, bellows that it is none of the AG’s business and he should leave, and then makes half-hearted efforts to look Responsible and In Charge. NY AG presses onward unless he is somehow leashed and collared.
The difference from the standard script is that the regulator in question appears to be mounting a vigorous response. But that may be necessary to appear credible given the number of investors affected and the delay in making any kind of move.
U.S. regulators will start on-site inspections next week of about 40 brokerages involved in sales of auction-rate securities, stepping up a nationwide inquiry into whether the firms failed to warn clients the market was collapsing, a person familiar with the matter said.
The Financial Industry Regulator Authority, which regulates almost 5,100 brokerages, wrote to the firms this month seeking detailed records, said the person, who reviewed the letters. New York Attorney General Andrew Cuomo said yesterday he had subpoenaed firms including Fidelity Investments, Charles Schwab Corp. and Oppenheimer Holdings Inc. in a parallel probe…
Finra’s sweep focuses on firms that haven’t yet settled regulatory probes and have the largest client holdings of auction- rate debt, the person said. That includes national, regional and boutique firms, as well as brokerages affiliated with banks or insurers.
The Washington-based watchdog is examining whether the companies conducted due diligence on the products, ensured that brokers understood them and explained risks to customers. Investigators are scrutinizing the firms’ communications with banks that ran the auctions, following up on signs that brokerages placed bids to help support the sales.
The regulator is demanding spreadsheets on bids submitted for the products and clients’ holdings, the person said. It wants copies of training and marketing materials and is seeking the firms’ risk analyses and the results of internal investigations.
Perhaps having a better read on the state of play, the Wall Street Journal’s piece on the auction-rate securities investigations mentions both NY AG Andrew Cuomo’s efforts and FIRA’s (as did Bloomberg) but gives Cuomo’s more prominence and column inches:
The New York attorney general’s office turned up the heat Wednesday on financial firms that sold auction-rate securities and haven’t settled with regulators.
Attorney General Andrew Cuomo’s office is stepping up its probe of three banks: Bank of America Corp., Goldman Sachs Group Inc. and Deutsche Bank AG, which underwrote and sold the securities, issued by municipalities and others. The market collapsed in February when Wall Street firms stopped supporting it with their own bids, leaving customers unable to cash out.
Meanwhile, Mr. Cuomo’s office also cast doubt on protests from brokers like Fidelity Investments and Oppenheimer & Co., which asserted recently that as merely sellers of these securities and not dealers in the auctions themselves, they were unaware of the market’s problems and shouldn’t be forced to buy back billions of dollars of securities from their clients.
In the widened probe targeting the three firms, Mr. Cuomo’s office has been gathering more documents, conducting witness interviews and assigning more lawyers to investigate the companies’ auction-rate operations. Settlement discussions with the firms and with other regulators investigating these firms have also ramped up, people in the office say.
A two paragraph mention of FIRA comes after five more paragraphs on the New York initiative.