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November 3, 2015

Financial Reform Newsletter – November 3, 2015

SEC should immediately remove financial industry lawbreakers from the Equity Market Structure Advisory Committee and restructure it to serve the public interest: As the public outcry ignited by Michael Lewis’s terrific book Flash Boys, reached a fevered pitch, the Securities and Exchange Commission (SEC) claimed it created the Equity Market Structure Advisory Committee (Committee) earlier this year as a way to bring together experts to examine the many problems with our equity markets and ensure they’re functioning effectively for the American people. From the start, many were suspicious of the SEC’s motives and actions. 

It looked like the SEC, rather than doing something real to combat long-standing and well-known problems in the overly fragmented markets, was trying to do something that appeared real merely to take the heat off.  Adding fuel to the fire, the Committee was hand-picked by the SEC in a nonpublic, non-transparent process and was stacked with industry types who had huge, billion dollar interests in keeping the current system that is broken and enriching a few at the expense of the many.  Making matters worse, some very prominent, highly respected and unbiased market experts weren’t appointed to the Committee by the SEC Chair.

As if that wasn’t bad enough, the Committee has members who are affiliated with firms that have violated the very laws that the Committee is supposed to review, as detailed in this letter Better Markets recently sent to SEC Chair Mary Jo White

At least three firms represented on the Committee have either admitted or been implicated in very serious illegal conduct regarding dark pool and high frequency trading violations – the very issues the committee was supposedly created and designed to combat. Their continued presence on this committee calls into question the value and credibility of their meeting earlier this week at a time when the American people are questioning the fairness of our equity markets. You don’t have to believe the markets are “rigged” to see that there are serious problems with fragmentation, predatory conduct, and systemic instability.

 Firms — and people affiliated with them — that have recently committed egregious violations of the law have no place on the Committee. That’s why we’re demanding that the SEC immediately remove these lawbreakers and reconstitute the committee with a majority of members who will serve the public interest. It should also publicly explain how lawbreakers ended up on the committee in the first place. Finally, the SEC should take transparent steps to assure that future appointments to the committee actually align with its goal of protecting investors.

It’s unacceptable that an SEC committee that should be dedicated to the public interest appears to be just another insiders club dominated by Wall Street interests.

Per usual, we have received some silly criticism for our letter, predictably from industry shills or their allies.  Some have said, if you exclude lawbreakers, you can’t include anyone in finance.  Well, thankfully, that isn’t true.  There are plenty of people and firms in the finance industry who play by the rules, serve their clients and don’t break the law.  In fact, many applied to be on the Committee, but weren’t chosen.  Another criticism is that all the major finance firms have been accused at one time or another of breaking the law and most have settled some charges of some type.  That is irrelevant to what Better Markets is saying here:  if you have admitted to, settled or alleged with particularity to have committed egregious violations of the very laws that the Committee was ostensibly created to review and improve, that is a disqualifier in our view.  This also extends to affiliated persons.  Sure they may have some insights and value to add, but it shouldn’t be as a Committee member.  If they have something uniquely valuable to add (and they might, i.e., how to clean up after such violations or even how to avoid them in the first place), then the Committee should invite them to make a presentation, answer questions or otherwise submit the information.

We also aren’t saying that industry, including in particular industry participants engaged in HFT and algo trading, shouldn’t be on the Committee.  Of course, they should, but they shouldn’t be the majority of the Committee or dominate it.  The tricky balancing act is to get their input, expertise and insights without enabling their self-interest and bias to unduly influence the analysis and conclusions.  The goal is to avoid conflicts of interest as well as the appearance of conflicts of interest, which is destroying public faith in our markets and those who are supposed to be regulating them in the public interest. 

Momentum grows in support of the Department of Labor’s best interest fiduciary duty rule: There were several important milestones last week in the fight to finalize the Department of Labor’s (DOL) best interest fiduciary rule, building on the momentum in support of this proposal. In a vote in the House of Representatives, the Wagner bill – which would stop the DOL from moving forward with its rule –  lost significant support since it was last considered two years ago. While 30 Democrats supported this legislation two years ago, just two did last week, with two Republicans also voting against it. 

First, hardworking Americans struggling to save for retirement have waited long enough for their best interests to be first and protected over their brokers’ bonuses, and the DOL should finalize this balanced proposal without any delay or interference from Wall Street or its allies in Congress. Further consideration of this bill by Congress would also be a pointless exercise since President Obama will veto any bill that puts Wall Street’s special interests before the security of millions of Americans saving for retirement.

Second, we applauded Sec. Hillary Clinton for announcing her unequivocal support for this key proposal, and stood up to attempts by Wall Street and its allies in Washington to kill the rule. Her support is just the latest sign of the growing support for this common sense proposal to finally end the outdated 40-year old loopholes that are costing Americans saving for retirement tens of billions of dollars every year, money that belongs in their retirement accounts, not brokers’ pockets. All Presidential candidates should support the DOL’s best interest rule to finally give hardworking Americans a much greater ability to retire with dignity and security.

Third, if there’s anyone who doesn’t believe that these conflicts of interest are real and egregious and hurting Americans saving for retirement, then they should read Sen. Warren’s latest report:  “Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry.”  It details“kickbacks” in annuity sales, among other egregious practices.  These are just some of the unacceptable practices that too many in the industry engage in today.  Importantly, not only does this hurt people saving for retirement, it also hurts the many advisers serving their clients and acting in their best interests because it creates an unlevel playing field where those taking advantage of the loophole compete unfairly against those who are doing the right thing.

Stay informed: go to to learn more about this issue. And stay engaged: follow us on Twitter and Facebook for the latest news.

  Better Markets Senior Fellow Robert Jenkins to keynote upcoming Finance Watch conference: Better Markets Senior Fellow Robert Jenkins – one of the most articulate and forceful advocates for strong, sensible regulation of the financial industry – will be giving the keynote address at Finance Watch’s upcoming conference, “Confidence, ethics, and incentives in the financial sector.” You can learn more about this conference and register here. You can also read more about Mr. Jenkins’ work here, and learn more about the great work that Finance Watch is doing to help make finance serve society by visiting their website.  


Better Markets in the News:

Resurrecting Glass-Steagall: Project Syndicate by Simon Johnson 10/29/2015

Bill to Stop DOL Fiduciary Rule Passes House: Think Advisor by Melanie Waddell 10/27/2015

Inside the Secretive Circle That Rules a $14 Trillion Market: Bloomberg by Nabila Ahmed 10/26/2015

Dennis Kelleher MarketWatch interview with Chuck Jaffe on the SEC’s EMSAC meeting: Moneylife 10/27/2015

News You Don’t Want to Miss:

Carl Icahn calls for break-up of AIG: Financial Times by Alistair Gray and Stephen Foley 10/28/2015

Clinton Backs Obama Rule to Ban Financial Advisers from Scamming Their Own Clients: Think Progress by Bryce Covert 10/27/2015

SEC Takes Tougher Stance on Enforcement in J.P. Morgan Case: Wall Street Journal by Aruna Viswanatha and Emily Glazer 10/27/2015

Hillary Clinton on Colbert: I would let the big banks fail: CNN by Dan Merica 10/27/2015

Top Defendant Testifies in First Libor Criminal Trial in U.S.: New York Times by Randall Smith 10/27/2015



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