U.S. SEC, in tactical shift, casts suspicious eye on peers
Sept 27 |
Sept 27 (Reuters) - A shift in how the U.S. Securities and Exchange Commission investigates possible violations related to complex products could lead to brokerages being targeted because of problems at their competitors, an agency official said on Thursday.
"If we have reason to believe that a company might be doing something improper, we will ... look at its peers and see if they are engaging in similar misconduct," said Reid Muoio, deputy chief of the SEC's Structured and New Products Unit, in remarks to an industry conference in New York.
The tactic marks a more "holistic" approach to investigations at the SEC, which historically limited the scope of many investigations to tips it received about specific problems at individual companies, Muoio said at a forum about complex products sponsored by the Securities Industry and Financial Markets Association.
"Typically you would get a tip and run it into the ground," Muoio said.
The broad investigations approach was adopted by the SEC's structured products staff after the unit, part of the agency's enforcement division, was launched in 2010. But as improper practices involving complex products sales to investors becomes a gr ow ing concern, mo re brokerage firms and others involved in packaging and selling of such investments could find themselves under scrutiny.
Complex products, which include everything from leveraged and inverse exchange-traded funds to certain mortgage-backed securities, typically offer high returns, but are often pegged to the performance of an underlying security or index that could decline in value.
Complex products in the retail investment sector are now a "moderate to high risk area," Muoio t old reporters after his remarks. At the same time, risks for institutional investors have decreased significantly since many of the most complex troublesome securities, including certain mortgage-backed securities, were withdrawn from the market following the financial crisis in 2008 and 2009, Muoio said.
Institutional investors that survived the crisis are also now more risk averse, Muoio said.
When an issue arises with complex products, investigations now need to be broad given the SEC unit's obligation to police the structured products sector. He said that could also include getting information from or examining companies involved in structuring, distributing and buying the securities.
"We try to get some sort of understanding by looking vertically across the market," M uoio t old reporters.
The Financial Industry Regulatory Authority, Wall Street's self-regulator, is also looking at potential conflicts of interest and financial incentives stemming from sales of complex securities by major brokerages, the head of the Wall Street regulator said earlier at the forum on Thursday.
FINRA is looking "very closely" at the effects of incentive compensation, such as commissions, that might motivate brokers to sell certain complex securities, said FINRA Chief Executive Officer Richard Ketchum.
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