December 5, 2011
When I listen attentively to average investors and consumers address concerns with the economy, retirement or the markets, sooner rather than later they raise the issues of trust, risk and security. Simply put, they are less than optimistic that businesses, accounting firms or regulators have the ability—and many question the simple desire—to protect customer funds. They see firms engaged in highly complex risky, unethical and sometimes even illegal activities that result in not only exposure, but staggering financial losses. Many of them opt to reduce their exposure themselves by pulling their money out of the market. A fellow emailed me last night that because nearly all of his money was at MF Global and he doesn't have access to it, that his family is currently living on his kids' college fund. Stories like those aren't isolated. We, all of the Commissioners, get those not infrequently.
Protecting consumer funds is a national economic priority and I am hopeful that we will agree today to take at least one action to address some of the challenges.
First, as I have spoken about many times in the last month, about the need to do regular and robust deep data dives to ensure customer money is where it is supposed to be 100 percent of the time. We have the authority, the knowhow and desire to do that, and provided we have the resources from Congress, it will be done.
Second, we can and should ban internal repurchasing transfer agreements. This use of customer funds between affiliates within the same broker dealer company is laden with risk and has the potential to facilitate nefarious activities. These types of internal repos are not allowed in Europe, and were not allowed in the US market prior to 2005. The world won't come crashing to a halt if they are banned. When I asked one former banker why, then, they are needed now, he said the rationale was at the core about raising broker/dealer profits. I'm for profit, bully for profit, but not by jeopardizing customer funds through the use of their money, customer money, in questionable overnight loans.
Third, we must use the laws we have, fully enforcing them and appropriately imposing the maximum level of fines to provide the highest level of deterrent against misuse of customer funds. If those who hold customer money believe the fine so minimal that it is worth the risk of misusing these funds, there isn't enough of an incentive to stop untoward things from happening.
Fourth, I hope Congress will consider allowing for the establishment of an insurance fund to make up any shortfalls to customers should a firm become insolvent or go into bankruptcy. This exists in the securities world with Securities Investor Protection Corporation. It exists in the banking world with the Federal Deposit Insurance Corporation. It is time it exists in the futures world. This "belt and suspenders" approach would provide an added level of customer protection in the event that further resources are needed to make customers whole. Simply put, if a broker dealer goes insolvent or into bankruptcy and the customer funds have vanished, this insurance would provide a needed backstop. If the regulatory and enforcement belt breaks, customers don't lose their pants.
Today is an important step toward minimizing that risk for customers.
Last Updated: December 6, 2011