More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Following the computer mishap that spewed orders through stock exchanges on Wednesday and led to a $440 million loss at market maker Knight Capital Group, the SEC is speeding efforts to require exchanges and other market centers to ensure the "capacity and integrity of their systems."
Securities and Excnage Commission Chairwoman Mary Schapiro said in a statement on Thursday that she has directed SEC staff to convene a roundtable in the coming weeks to discuss “further steps that can be taken to address these critical issues.”
The apparent trading error by Knight Capital Group on Wednesday “reflects the type of event that can raise concerns for investors about our nation’s equity markets—markets that I believe are the most resilient, efficient and robust in the world,” Schapiro said.
While Wednesday’s event was “unacceptable,” Schapiro said, “I would note that several of the measures we instituted following the flash crash helped to limit its impact. Recently adopted circuit breakers halted trading on individual stocks that experienced significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken, giving the marketplace certainty.”
Existing rules also “make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly,” Schapiro continued. “And, naturally, we will consider whether such compliance measures were followed in this case.”
Bloomberg reported Monday that Knight Capital had received a $400 million cash infusion through the sale of convertible securities after trading losses spurred by the software failure “drove the market maker to the brink of bankruptcy.”
Investors agreed to buy preferred stock that will be convertible into about 267 million common shares, Bloomberg reported the company as saying. Getco, an automated trading firm, Blackstone Group, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., and the investment banks and Stephens and Jefferies Group are investing.