Will new SEC rules overkill?

The Securities Exchange Commission has introduced some new rules to curb a repeat of the type of wrongful practice that seems to have prevailed in the NSB purchase of shares in the Finance Company. It must be stated at the outset that rules for public institutions should be rigorous because they are owned by the public and deal in public funds. The NSB is one such institution and so is the EPF. But Rules alone cannot enforce that the public interest is secured. In any case securing the public interest is, we feel, not a matter for the SEC but for the Ministry or supervisory body which is in charge of the institution. In the case of the NSB and the EPF it is the Ministry of Finance and the Central Bank. It would seem that the NSB has disregarded the controls imposed by the very law under which it operates. We think that the SEC must stick to its turf and apply Rules uniformly to all market participants whether they belong to the public or private sectors.

The new SEC Rules are being opposed by the broker firms. What the SEC has to do is to prevent the creation of false markets, market rigging and insider trading among other things. So, the SEC has laid down that block trades cannot be traded at a price higher than 20% of the prevailing market price. We do not think that price control is the appropriate measure. There is a minimum size for a block trade laid down by the Stock Exchange. But these block trades are the products of negotiation and has little to do with the prevailing market prices.

Should negotiated trades be subject to limitations? We would say they should be done after trading hours and merely announced on the floor after trading has closed. If the public institutions ignore the public interest and act in a way that is favorable to the counter party instead of their own institution, there is no remedy that the SEC can provide. If the parties do not act in their own interest, and if one party colludes with the other party to rob a public institution, there is nothing that the SEC can do to prevent it. That is a matter more for the Bribery & Corruption Commission and cannot be regulated by any Rules of the SEC.
But if employees or Directors of broker firms have traded in such shares shortly before them, they should be investigated to determine whether they had access to such price sensitive information. This investigation should be done as a matter of routine so that individual broker firm employees or Directors will be faced with an inquiry to prove that they did not have access to prior information of the trades. Such trades should expose the Broker employee or Broker Director to automatic investigation. In fact, the SEC can insist that any trades in such a block trade, if carried out by a broker -employee or Director within one month before the trade, should be called upon to report it after the trade has been done.

This rule should apply not only to the two broker firms involved in the trade but to all broker firm employees since it is possible for the particular broker firm employees or directors to leak the information to other broker firms employees or directors. But to ban all trading by broker firm employees and directors is going too far. Broker’s right to trade or hold the shares is as much a fundamental right as for any other citizen. We, therefore, think what is important is close monitoring of broker firm employee trading rather than an outright prohibition. Broker firm employees and directors can easily get round this prohibition by dealing through proxy accounts of brothers, sisters, girl friends, etc. So, instead of driving broker trading underground it is better to regulate it through disclosure followed by investigation to determine whether they had inside information.

It is also necessary to treat such violations by broker employees as misdemeanors which draw penalties rather than criminal prosecutions. What is required is to fine such broker employees three times the profit gained or loss prevented by insider trading. Any broker employee or director who conveys information to third parties, which is unpublished price sensitive information, should be prohibited from doing so and wire tapping is the method used in USA to detect such malpractice. The SEC should guard against overkill. Market malpractices should be curbed but they cannot be entirely eliminated and the baby should not be thrown out with the bath water. Trading by Broker employees and directors are very much a part of the Stock market and they should not be shut out but controlled.
http://www.nation.lk/edition/opinion/item/6438-will-new-sec-rules-overkill?.html