National Securities Clearing May Expand Enforcement Role-WEDB's days are numbered.
WASHINGTON -- National Securities Clearing Corp. could assume a
new role in flagging signs of securities fraud as part of the latest regulatory effort to clamp down on small-stock abuses. Under a plan being discussed by the securities industry and the U.S. Securities and Exchange Commission, the NSCC would receive information from clearing firms and would pass on suspicious activity to regulators.
The NSCC ultimately settles all stock and bond trades by individual investors. It monitors clearing firms, which process trades on behalf of small brokerages, known as "introducing firms."
Clearing firms have been under scrutiny by the SEC after the collapse of
New York brokerage A.R. Baron & Co., which specialized in tiny, thinly
traded stocks known as microcaps. The SEC is investigating the role of
Bear Stearns Cos., A.R. Baron's clearing broker. A Bear Stearns
spokeswoman said: "A substantial period of time has passed, the SEC's
investigation continues, and we still maintain we have done nothing wrong."
The plan being discussed falls short of what some state securities regulators want because it doesn't place direct responsibility on clearing firms. Instead, it would increase the amount of information clearing firms give to the NSCC, which, using enhanced processing and monitoringe quipment, would then sift for signs of stock fraud, such as a high incidence of rescinded trades or frequent requests for payment extensions that could signal unauthorized trading.
The NSCC would then alert either the SEC or the regulatory arm of the National Association of Securities Dealers. Exact triggers for alerting regulators haven't been agreed upon.
"We're optimistic about the NSCC system as part of a comprehensive approach to address concerns about clearing arrangements while trying protect the ability of introducing and clearing firms to operate in a rational regulatory environment," said Stuart Kaswell, general counsel of the Securities Industry Association, which is coordinating the discussions.
An SEC spokesman declined to comment. A spokesman for the NSCC said only that the corporation maintains a "regular dialogue" with the SEC. The NSCC, based in New York, is owned jointly by the New York Stock Exchange, the NASD, which owns the Nasdaq Stock Market, and the American Stock Exchange.
SEC Chairman Arthur Levitt identified clearing-firm obligations as a priority of his second term, which begins this month. But, he has also he would resist SEC rulemaking to impose greater responsibilities on clearing firms and instead urge them to "do the right thing." Clearing firms have objected to any suggestion they assume responsibility -- and potential liability -- for more direct supervision of clients.
The new plan is being proposed as an additional step to Big Board and NASD proposals that would oblige clearing firms to pass on customer complaints they receive about introducing firms to both the introducing firm and the appropriate regulator. Those proposals are pending SEC approval.
Some state regulators say a stronger weapon than the proposed measures may be needed. "I'd like to see more direct policing by clearing firms," said Bradley Skolnik, Indiana's securities commissioner. "They shouldn't be able to turn a blind eye to this kind of activity."
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