SEC warns B-Ds to do their homework

Commission looking into due diligence performed by brokerages; do you understand what you're selling?

May 21, 2012 @ 3:37 pm

By Bruce Kelly

The Securities and Exchange is looking at “several areas of high risk” in the securities industry, according to a senior SEC official.

They include broker-dealer due diligence, net capital levels at broker-dealers and “dark pools” of liquidity, said Julius Leiman-Carbia, associate director in charge of the National Broker-Dealer Examination Program in the SEC's Office of Compliance Inspections and Examinations.

A dark pool is a source of liquidity that is nondisplayed — that is, it does not publicly disseminate quotes, according to PriceWaterhouseCoopers LLC. Trading volume of U.S. stocks through dark pools has increased in recent years.

“We're looking at due diligence,” Mr. Leiman-Carbia said in a panel discussion Monday afternoon at the annual meeting of the Financial Industry Regulatory Authority Inc. in Washington. He said he wonders if brokers truly understand all the products that they are selling.

The SEC is also focusing on “the division between the investment adviser and broker-dealer sides” of firms that are dually registered, including “what types of controls are in place when money is [placed with] the investment adviser,” he said. Is there a good reason why it's there, other than the firm can make money this way, he asked.

The SEC is also looking at firms' levels of net capital, which each broker-dealer must maintain in order to stay open for business.

And the commission also is trying to pinpoint investor fraud, Mr. Leiman-Carbia said. Indeed, the SEC is looking at the country as a whole to identify particular areas where fraud is prevalent, he said. One benefit would be to locate regions where senior citizens are defrauded.


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