Government Accountability Office (GAO) Response To Deep Capture
April 8th, 2009
by Patrick Byrne
Lest someone claim that I am but a DC-hostile, fed-fighting small “l” libertarian, let me be the first to say: Much respect goes to the GAO for their response to a Deep Capture story.
Readers of Deep Capture may have noticed that, while I may not be on the best of terms with some federal institutions (e.g., the SEC), I have sought to be respectful to individuals serving the public in whatever capacity, and especially, to those institutions which appear to me to be part of the solution and not part of the problem. For example, recently I wrote of the Congressional Research Service, “The CRS is one of the most respected institutions in Washington, DC, and its output is universally considered non-partisan, objective, and thorough” (”It Only Hurts When I Laugh“ tiny.cc ). And in June of 2008, in an essay (”So You Say You Want a Revolution?“ tiny.cc ) now linked to dozens of times through this site, I wrote of the GAO:
"Another place you can turn is the United States Government Accountability Office. The GAO is probably the most respectable group in DC (setting aside the military). When Congress needs a non-partisan, no-bullshit answer to any question, they turn to the GAO. Write Chuck Young at youngc1@gao.gov and let him know about your interest in naked short selling and the general issues raised in DeepCapture.com."
Notwithstanding such general warm sentiments Deep Capture feels towards the GAO, a recent GAO publication (”Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing Agencies“ tiny.cc ) disappointed my Deep Capture colleague, Mark Mitchell, enough for him to write a fairly scathing analysis of it (”Our Watchdogs and the Financial Scandal of the Century“ tiny.cc ).
Today the GAO’s Orice Williams (”Director, Financial Markets and Community Investment, US GAO”) have responded to Mark Mitchell’s story, to the great credit of the GAO and Ms. Williams herself. Because one can fairly read her intent to be one of public response (Ms. Williams has, in fact, posted this in the comments on Mark’s story), out of courtesy to Ms. Williams and respect for her organization I am reproducing her response here, in full, so that it not be lost among the comments of others.
———- Forwarded message ———-
From: Orice M Williams
Date: Wed, Apr 8, 2009 at 4:12 PM
Subject: Mr. Mitchell,
To: mitch0033@gmail.com
Mr. Mitchell,
On March 26, 2009, GAO issued a correspondence entitled Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing Agencies. It was an interim product of an ongoing study on Regulation SHO and not, as mistakenly stated in the article, a report on the findings of an “investigation.” The March 2009 correspondence was issued as an interim product to provide Congress and the public with a descriptive overview of how U.S. clearing agencies settle and clear equities securities trades and how SEC oversees the clearing and settlement systems of these agencies through its examination process. Therefore, the information provided was descriptive and not intended to evaluate SEC’s oversight of clearing agencies or to provide detailed information on examination findings. Further, as is the case with all GAO reports, the March 2009 correspondence provided an introduction that explained why GAO did this work. In this case, as noted in the letter, GAO did this work because of the importance of an effective clearance and settlement process. This is our standard reporting format and is neither strange nor uncommon. GAO’s final report on Regulation SHO and SEC’s efforts to address failures to deliver and naked short selling will be issued in May 2009.
I have posted this information as a response to your article. However, I also wanted to bring it to your attention.
Regards,
Orice
Orice M. Williams
Director Financial Markets and Community Investment
US GAO
If I know Mark, he may have something to write in reply. The publication of this GAO letter is required, I believe, by those very principles of journalistic integrity which Deep Capture was established to illustrate and defend.
And to Ms. Williams I say: Much respect indeed.
deepcapture.com
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I think the following comments by Tom Vallarino (NIPC) to the above essay are worth posting here:
tommytoyz Says:
April 8th, 2009 at 6:00 pm
The GOA report starts like this:
Subject: Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing
Agencies
——————————————-
So I hope the 1st issue in their final report will be to describe that settlement failures are only possible because the SEC fails to oversee the clearing agencies - which are all SROs - and failed to implement 17a of the SEA of 1934.
Under Sections 19(g) and 19(h) of the Securities Exchange Act of 1934, an SRO is required to,
1) comply with the provisions of the Securities Exchange Act, the rules and regulations promulgated thereunder, and its own rules (collectively, the “Governing Rules”); and
2) to enforce that its members, and persons associated with its members, comply with the Governing Rules.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
tommytoyz Says:
April 8th, 2009 at 10:23 pm
Dear MR. Young:
On FEB 26, 2009, the GAO published a summary letter which includes a description of the SEC’s efforts to ensure the reliability and efficiency of the clearance and settlement system through its examination program for clearing agencies. I am disappointed by how the report paints an inaccurate picture of this, because it omits critical key information.
While the GAO summary letter does accurately describe the legal framework of the clearance and settlement system and the SEC’s authority and efforts to ensure reliability and efficiency, the letter omits what the SEC has failed to do. No investigation is needed to determine these omissions as most are clearly obvious to even a casual observer.
- Settlement failures are occurring
- Settlement failures happen because the SEC is not enforcing settlement rules
- Settlement failures happen because the SROs are not enforcing settlement rules
- Settlement failures continue to happen because the SEC does no compel the SROs to enforce settlement rules
- There are no exemptions or legal excuses for causing settlement failures, regardless of reason
- Settlement failures are possible because settlement and clearing are divorced and not linked
- 17A of the Securities Exchange Act of 1934 mandates the linking of clearance and settlement
- The SEC has not made any rules to ensure that clearance and settlement are linked
- The SROs have not made any rules to ensure that clearance and settlement are linked
- The SEC does not even know why settlement failures occur because it does not obtain or maintain that data. Speculating on reasons just that on the part of the SEC, is pure speculation.
- REG SHO does not enforce settlement rules, it only seeks to mitigate their number and duration after the settlement violations have already occurred.
Thus, in my opinion, the report should make these distinction to the reader, lest the reader be misled into thinking that the theoretical description is in fact the actual way clearance and settlement functions in this country. Claiming to describe a road without mentioning the large boulders, potholes, misplaced signs and other hazards would be a misleading description of the road.
Attached is an audit request recently sent to the SEC’s Office of Inspector General, which explains these things in detail. I would be happy to talk with any of the GAOs staff or provide any documentation I may have to support the information contained here or in the audit request and to assist the the GAO in any way I can.
Sincerely,
Thomas Vallarino - President, National Investor Protection Coalition |
