LPS5,
Maybe at this point another subject would be refreshing, and I for one would appreciate your take on something of a regulatory nature.
There is apparently a move underway by the SROs, specifically NYSE and NASD (and possibly some related entities??) to impose restrictions on cash accounts based on what are, to my mind at least, new (and flawed) interpretations of the rules. My understanding of the state of the industry up until now is that there have been a couple of different interpretations of what transactions are permitted in cash accounts, with more conservative brokers limiting spending of account equity to "once per day" and more liberal brokers placing no restrictions on the number of transactions as long as one does not violate the free-riding rules of Reg T, incorporated by reference in NYSE 431 and NASD 2520 (margin requirements). The words from 2520 are:
Free-Riding in Cash Accounts Prohibited
No member shall permit a customer (other than a broker/dealer or a
“designated account”) to make a practice, directly or indirectly, of effecting transactions
in a cash account where the cost of securities purchased is met by the
sale of the same securities. No member shall permit a customer to make a
practice of selling securities with them in a cash account which are to be received
against payment from another broker/dealer where such securities were
purchased and are not yet paid for. A member transferring an account which is
subject to a Regulation T 90-day freeze to another member firm shall inform the
receiving member of such 90-day freeze.
The provisions of Section 220.8(c) of Regulation T dictate the prohibitions
and exceptions against customers’ free-riding. Members may apply to the Association
in writing for waiver of a 90-day freeze not exempted by Regulation T.
What is emerging is that the SROs are telling brokers that even what the conservative brokers are doing is in violation of the rules, saying that their interpretation is that daytrading in a cash account is prohibited, and that the proceeds of a sale in a cash account cannot be used to make another purchase for three days because of T + 3 settlement. The way it sounds, as filtered to me by the broker's rep I have talked to is that this more restrictive interpretation is related to the new daytrading rules with the SROs saying in effect that no one is going to be permitted to circumvent the new rules by using a cash account to daytrade.
This is in direct contradiction of the Federal Reserve opinion about what its own Regulation T has to say on the issue of using proceeds.
federalreserve.gov
One does not have to be a legal expert to recognize that there are some inconsistencies here. In the first place, the NYSE and NASD rule changes that were approved by the SEC have redefined daytrading to be, in their own words:
The term "daytrading" means the purchasing
and selling or the selling and purchasing of the
same security on the same day in a margin account
except for:
a. a long security position held overnight and
sold the next day prior to any new purchase of
the same security, or
b. a short security position held overnight and
purchased the next day prior to any new sale
of the same security.
The text of the proposals are here
sec.gov
sec.gov
and the approval order from the Federal Register, which contains a lot of supporting analysis and discussion related to the unique risks of trading in a leveraged account is here:
nasdr.com
You can read through these documents in their entirely and you will find not one single word about the application of any of the rules about how many times you can trade without being branded a pattern daytrader, account size requirements and the like to a cash account. And by their own definition, "daytrading in a cash account" is a logical contradiction because daytrading is an activity explicitly related to margin accounts.
Now based on the historical fact that the new daytrading rules had to go through a process of SEC review, industry comments and all of that it seems likely to me that a substantive change in policy regarding cash accounts should be subject to the same sort of review process. So the question is, who regulates the regulators? Can the SROs really do this sort of "Oh by the way, we explicitly excluded cash accounts from the discussion and approval process regarding daytrading rules, but now we are going to apply what we want to them too"? And where does one go to complain about what might be perceived (certainly is by me as you can tell) as an unjustified broadening of the scope of a rule to cover areas that were explicitly excluded during the approval process in a way that is contradictory to the rules established by another regulatory body?
Dan |
