How Have Brokers, Custodians and Some Exchanges Decided to Compete with their Clients for Investment Returns?
Location: Blogs Bud Burrell - Front and Center
Posted by: bburrell 3/20/2006 9:36 AM
In the original concept of our brokerage, exchange, custody and settlement systems, there was never any confusion about whose assets were the basis of their activities as agents. The assets were those of the clients, who came to the broker and related parties necessary to the transaction to act as an "honest agent" in the purchase and sale of securities. Today, this entire relationship is blurred by conflicts of interest, and outright conversion of assets.
Today, numerous elements of conflict contaminate the system at a level never imagined thirty-five years ago. Originally, brokerages provided banking services to its clients in exchange for very fair costs, banks were completely separate from the brokerage function, and the DTCC was a very limited factor nationally and globally in clearance and settlement of trades. Proprietary trading was limited, and if a broker acted as principal in a trade with a customer, this had to be disclosed, both on the trade ticket and on the trade confirmation sent to the client. The largest element of proprietary trading was in true risk-less, mostly convertible arbitrage, then options arbitrage, and of course, in the trading of OTC securities.
Today, the Glass-Stegall Act is gone, and all of the walls between brokerage and banking that came into being as a result of the 1929 Bear Raid and subsequent economic collapse have been intentionally taken down. Indeed, brokers are now rarely custodians of their clients' securities, and the same is true of banks. Custody has been given over predominantly to DTCC. After first being introduced as a completely objective custodian of securities, DTCC has morphed itself into the actual "nominal" owner of securities put in its custody, and it is now engaged in using the value of these client's securities to engage in banking functions. Was this ever intended by those who supported formation of DTCC? I think not.
What has this meant to all of us? The issues of "enlightened" conflicts of interests are now rife. Today, brokerages, venture firms, merchant banks, banks, and more all seek to get their "taste" of the clients' investments assets at every turn, and they have found a way to do this without the client ever doing a transaction, other than depositing their securities in the system. Numerous parasitical activities have sprung up, which depend in every turn on the actual value of securities owned by clients held in the central custodian. Arbitrage funds, Hedge Funds, PIPE deals, and more have come to depend on those long term buy and hold assets, and their transaction volume has given them the leverage to both demand and exact preferential treatment over the long term investor.
Where is the absolute trap in all this? Counterfeiting of all forms of securities is now the norm. As it relates to voting rights, proxies have become radically more plentiful than registered outstanding shares. In light of the fact that companies have had their securities sold without the filing of a registration statement, or even the informed consent of those companies officers, directors and shareholders, their property rights under the 5th Amendment have been turned into a sham. Where will this lead?
I fear a total implosion of our economic system. In their single minded arrogance and with a vision blinded by greed, these parties are threatening the very existence of the element without which they would all disappear, the long term buy and hold investor. We have already seen a major flight to hard assets with the boom in the Real Estate Market, Gold, etc. The fact that the responsible parties have to use any defense at all against full, fair and open disclosure hints at the tip of a very ugly black iceberg.
I know that many companies have chosen not to go to the public arena. I have seen major companies leave this country in the face of the regulatory hypocrisy. The AICPA has advised its members not to become CFO's, etc., of public companies.
Capital formation processes have turned to a bias of favoring an arbitrage based economy. What is the inherent problem with this? If no one owns securities, there is nothing to arbitrage.
If these parties choose to wipe out the public company arena, what happens to investment banking, merchant banking, venture, arbitrage and hedge fund activities, and other fees? They will be gone.
Our capitalist system has shown incredible resiliency post 9/11. It has shown it can take incredible abuse, outright criminal actions and more and still come back. We cannot allow those abusers unlimited access to our system, however. They kill optimism, and they steal from others, many times with the help of our own Government.
Systemic corruption must be addressed, even while knowing it will never be stamped out entirely. We face global challenges of unprecedented character, and we must protect our system with a ruthless vigilance. If not, this small microcosm of the American people will fall under the sword. And when it happens, they, like the Mandarins in China, will never stop believing they will survive till the last of them fall.
If there is nothing to hide, what is the problem with fair and full disclosure? Why must certain elements be given a competitive advantage over the core investor? These questions will be the ultimate death of the manipulators.
I say good riddance to bad rubbish.
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