SEC plan could substantially alter B-Ds' calculation of net capital

SEC plan could substantially alter B-Ds' calculation of net capital
Proposal would eliminate need to rely on credit ratings provided by S&P, Moody's, et. al; 'much more difficult to police'
MAY 06, 2011
The U.S. Securities and Exchange Commission is seeking comment on a rule that would let broker- dealers use internal assessments instead of outside ratings in gauging credit risk for meeting net capital requirements. SEC commissioners voted 5-0 today to propose a measure that would strip references to credit ratings from standards that determine how much liquidity broker-dealers must maintain to cover their obligations. The proposal is part of a Dodd-Frank Act requirement to replace ratings in federal regulations with an “appropriate” standard for gauging risk. (Click on the following link to see a list of B-Ds with the most -- and least -- net excess capital). Dodd-Frank, the regulatory overhaul enacted in July, sought to ban references to credit ratings after lawmakers faulted inflated grades from firms such as Moody's Corp. and McGraw-Hill Cos.' Standard & Poor's unit for fueling the housing bubble before the 2008 credit crisis. “Dodd-Frank has given us a mandate to change our rules so that we no longer rely on ratings as a proxy for credit standing,” SEC Chairman Mary Schapiro said in prepared remarks before the vote. “We are seeking not the simplest alternative but instead are trying to provide tailored responses that reflect the underlying purpose of each rule, and we are conscious of potential costs to market participants.” Today's proposal would revise provisions of the Securities Exchange Act of 1934 affecting how broker-dealers may reduce the value deducted from less-risky assets such as commercial paper, preferred stocks and nonconvertible debt when figuring their net capital. “Each firm with proprietary positions in these instruments would need to look at a variety of factors, and they would need to have and document procedures for doing so,” Schapiro said. Letting brokers use their own assessments could pose a different type of risk than that posed by credit ratings, SEC Commissioner Luis Aguilar said in prepared remarks. “The proposed subjective standard will be much more difficult to police than the current objective standard that references credit ratings,” Aguilar, a Democrat, said before voting to release the measure for comment. “It does not appear that we have been able to identify an appropriate substitute for credit ratings.” --Bloomberg News--

Latest News

Federal judge dismisses Eltek manipulation lawsuit against Morgan Stanley Smith Barney
Federal judge dismisses Eltek manipulation lawsuit against Morgan Stanley Smith Barney

Nine-month electronic trading freeze and share lending program at the center of dismissed claim.

RIA wrap: Dynamic strikes South Carolina deal to reach $7B AUM milestone
RIA wrap: Dynamic strikes South Carolina deal to reach $7B AUM milestone

Meanwhile, Rossby Financial's leadership buildout rolls on with a new COO appointment as Balefire Wealth welcomes a distinguished retirement specialist to its national network.

Rethinking diversification amid a concentrated S&P 500
Rethinking diversification amid a concentrated S&P 500

With a smaller group of companies driving stock market performance, advisors must work more intentionally to manage concentration risks within client portfolios.

Merrill pays second settlement to former Miami Dolphins player, client of ex-broker
Merrill pays second settlement to former Miami Dolphins player, client of ex-broker

Professional athletes are often targets of scam artists and are particularly vulnerable to fraud.

Schwab touts AI as its biggest growth lever at investor day
Schwab touts AI as its biggest growth lever at investor day

The brokerage giant tells Wall Street it will use artificial intelligence to reach clients it has never been able to serve — and turn the technology's perceived threat into a competitive edge.

SPONSORED Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management

SPONSORED Durability over scale: What actually defines a great advisory firm

Growth may get the headlines, but in my experience, longevity is earned through structure, culture, and discipline