The Securities and Exchange Commission is looking at “several areas of high risk” in the securities industry, according to a senior SEC official.
They include broker-dealer due diligence, net-capital levels at broker-dealers and “dark pools” of liquidity, said Julius Leiman-Carbia, associate director in charge of the National Broker-Dealer Examination Program in the SEC's Office of Compliance Inspections and Examinations.
A dark pool is a source of liquidity that is nondisplayed — that is, it doesn't publicly disseminate quotes, according to PriceWaterhouseCoopers LLC.
Trading volume of U.S. stocks through dark pools has increased in recent years.
“We're looking at due diligence,” Mr. Leiman-Carbia said during a panel discussion last Monday at the annual meeting of the Financial Industry Regulatory Authority Inc. in Washington.
He said that he questions whether brokers truly understand all the products that they are selling.
The SEC also is focusing on “the division between the investment adviser and broker-dealer sides” of firms that are dually registered, including “what types of controls are in place when money is [placed with] the investment adviser,” Mr. Leiman-Carbia said.
He said that he wonders if there is a good reason for this to be done, other than the firm can make money this way, he said.
The SEC also is looking at firms' levels of net capital, which each broker-dealer must maintain in order to stay open for business.
And the SEC also is trying to pinpoint investor fraud, Mr. Leiman-Carbia said.
Indeed, the SEC is looking at the country as a whole to identify particular areas where fraud is prevalent, he said. One benefit would be to locate regions where senior citizens are defrauded.
bkelly@investmentnews.com
