SEC Bans Naked Access by Unregistered Entitites
November 8, 2010
The Securities and Exchange Commission Wednesday unanimously voted to ban 'naked access' to stock markets by unregistered entities.
By 5-0 vote, the federal regulator ordered brokers to apply risk controls to any orders initiated by customers who are borrowing a broker's market participation identification code. The controls on financial exposure and on compliance with regulations must be executed before sending in each order.
The vote came in an open meeting Wednesday, 10 months after the ban was proposed by the SEC. The ban is designed to prevent "fat-finger" or other mistaken orders generated by humans or mathematically-driven systems that could disrupt markets.
Such risks were highlighted by the May 6 Flash Crash, when the Dow Jones Industrial Average lost more than 600 points in a matter of minutes. The trigger, according to findings by staff of the SEC and Commodity Futures Trading Commission, was an attempt by a large market player-an authorized one-to place 75,000 contracts in E-mini futures, worth $4.1 billion, in a short period of time. Independent research from Instinet and other parties challenge whether that was a large enough amount of trading in a highly liquid instrument to disrupt markets. But it reinforced the need to supervise trades of all types, particularly those that did not go through risk controls before entering one of the nation's proliferating number of exchanges and venues for trading stocks and derivatives.
Naked access accounts for about 38% of U.S. equities trading, according to Aite Group.
DOL 401(k) Fee Disclosure Includes Indirect Providers
The Department of Labor's new 401(k) fee disclosure requirements that take effect Jan. 1, 2012 go far beyond disclosing mutual fund expense ratios to cover every nook and cranny of expenses in plans, right down to indirect service providers, speakers said at the FundForum USA 2010 conference here Monday.
Plans must reveal compensation of $5,000 or more they pay to direct service providers on Schedule C of Form 5500, which is the annual report that plans file with DOL, said Jessica Flores, managing partner with Fiduciary Compliance Center. For indirect service providers earning $1,000 or more, plans may either report the figure or provide the formula they use to calculate compensation-but they must report the compensation, Flores said. "The new DOL requirements go far above disclosing an expense ratio to cover all direct and indirect compensation [paid out] by the plan to service providers, affiliates and subcontractors. It's very different from just the expense ratio," Flores said. "It applies to revenue sharing, securities lending, brokerage transactions, spreads on structured investment vehicles, spreads on GICs in stable-value funds, soft dollars, finder's fees, 12b-1s, and wrap fees."
Quote of the Week
"If the current government is not able to come together and address the serious short- and long-term economic problems facing the country, these problems will almost certainly escalate.â€
- Robert C. Doll
Chief Equity Strategist for Fundamental Equities