The Derivative Project is a non-partisan investor advocacy organization that seeks to ensure the long-term growth and stability of the U.S. economy through equitable enforcement, for both individuals and corporations, of financial laws and regulations.
Since 2000, with the Commodity Modernization Act, Congress has put the profit model of Wall Street over sustainable economic growth for that of the common good.
We are bringing Americans together, online, to highlight the issues we see as problematic between Wall Street, Congress and our regulators, based on our experience in banking, derivatives and the securities markets.
The Derivative Project submitted a request on behalf of retirement investors to SEC Chair Mary Shapiro and the SEC Investor Advisory Committee to mandate that retirement service providers move retirement cash from money market mutual funds to FDIC sweep options to increase returns and eliminate unnecessary risk to retirement investors.
Further, The Derivative Project requested the SEC mandate that retirement service providers provide retirement investors with online access to FDIC insured CD's and Treasury Direct, without additional fees.
The Derivative Project FDIC Sweep Option proposal sent to the SEC's Investor Advisory Committee on September 26, 2012 for discussion at their next scheduled meeting, September 28, 2012 is available at the Blog. thederivativeproject.com.
Peregrine Financial Group files for bankruptcy and close to $200 million in customers' segregated funds are missing.
The Peregrine losses follow the loss of farmers' segregated funds at MF Global last October, 2011. Many of the M.F. Global funds have still not been recaptured for the farmers. The farmers were not speculating in the futures markets, they were hedging their crops, a normal, conservative and necessary cost of doing business.
The collapse of Peregrine and the CEO Russell Wasendorf's admitted fraud, raises critical questions of all our securities and commodities regulators-- from the SEC, to FINRA, to CFTC to National Future Association (NFA) and their conflicts of interest in self-regulation.
What is a respectful distance from the firms they are regulating? What is the role of lobbyists and how can one ensure cost-effective, prudent regulation to maintain confidence in our global capital markets? Confidence in commodity markets, over-the-counter derivative markets and our equity markets is at an all-time low.
Dramatic, sweeping change in our regulatory structures is the only option to restore the integrity of these markets. Regulators must provide individuals and corporations access to smooth-functionning markets to allow safe and efficient investing for retirement and hedging in the futures markets that allows our nations farmers to efficiently and cost-effectively lock in future prices. These markets must ensure cash and futures prices converge in a normal manner, without excessive speculation. Segregated funds are sacrosanct. What should be the future role of FCM's, given the fraud in the commodity markets?
A Brief Highlight of Just a Few Red Flags Our Regulators Overlooked with Peregrine:
I. The SEC approved Peregrine Financial Capital Inc's ADV 3/30/12 as a SEC registered investment adviser, while the following was disclosed on the ADV by Peregrine Capital Advisors: (from Peregrine Capital's ADV) E. Has any self-regulatory organization or commodities exchange ever: (1)found you or any advisory affiliate to have made a false statement or omission?YES (2)found you or any advisory affiliate to have been involved in a violation of its rules (other than a violation designated as a "minor rule violation" under a plan approved by the SEC)?YES (3)found you or any advisory affiliate to have been the cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted?YES (4) disciplined you or any advisory affiliate by expelling or suspending you or the advisory affiliate from membership, barring or suspending you or the advisory affiliate from association with other members, or otherwise restricting your or the advisory affiliate's activities?YES 2) Are you or any advisory affiliate now the subject of any civil proceeding that could result in a "yes" answer to any part of Item 11.H.(1)? YES II. The CFTC approved a review of Future Commission Merchants (FCM's) in January 2012, in response to the loss of farmers' segregated funds at MF Global in October 2011.
As disclosed in their January 2012 Press Release, the CFTC did not verify with Peregrine's bank, U.S. Bank, what balances were in Peregrine's segregated accounts at U.S. Bank. (This is normal operating procedure for the extension of credit to any corporate entity. One contacts the Bank, by telephone, to verify balances, on a routine basis, unless a direct feed has been established of daily balances. One never relies on "monthly" bank statements, but relies on real-time spot checks with the bank to ensure balances are there on any given date.)
III. FINRA was also involved. There was a pending lawsuit by a Peregrine Executive, Neil Aslin, against FINRA where the subject was PFG's refusal to have their telephone calls taped, required due to a previous disciplinary proceeding and sanction.
IV.NFAfined PFG, less than 5 months ago, for over $700 million for a potential link to their foreign exchange broker services provided to Trevor Cook, who committed a multi-million fraud in Minnesota. Here is the Minneapolis FBI Bureau report of the Cook Fraud and Cook's $38 million foreign exchange losses at Peregrine from 2006 - 2009.
"In February PFGBest, which had acted as Cook's broker, was fined $700,000 by the NFA for failing to notice the scheme. The company was subsequently sued for $48 million by the receiver rounding up the assets from Cook's scheme." From the Huffington Post, July 9, 2012.
An analysis of Peregrine's aggressive retail FX marketing campaign, from 2006 to present and Trevor Cook's significant FX trading losses (and other Peregrine clients) is a case study for future regulatory reform in retail FX markets and appropriate role of individuals and firms in FX retail and OTC FX markets.
One stance that the SEC and other regulatory bodies could have taken to protect investors was to recommend that investors pay attention to the dangers of doing business with firms with pending civil suits, numerous regulatory breaches and to defer investments until the suits are resolved and disciplinary breaches fully understood.
Disciplinary actions and civil suits against firms should be highlighted for every investor, not buried in back pages of an ADV.
The Derivative Project Submits Petition for Rule Making to the SEC to offer retirement savers needed protection from inexperienced Wall Street salespersons acting as "trusted and professional retirement advisers" and protection from the brokerage industry's self-regulatory body, FINRA, whose lack of enforcement of current securities laws is harming all American retirement investors.
In this Petition, The Derivative Project requests that the SEC and Congress restore the original Congressional Intent of the Investment Advisers Act of 1940 by restoring the dichotomy between salesperson and investment adviser.
We are highlighting these issues for the average voter to ask any potential 2012 candidate to ensure any newly elected official is commited to act for the common good, not in the best interest of Wall Street's profit model, if it harms Main Street and long-term sustainable economic growth.
Please visit us at www.Blog.thederivativeproject.com for regular updates on the questions below or click the Blog Tab on this page. Please send any comments and ideas to email@example.com.
What are the key issues for every American to address with any candidate running in the 2012 election:
Are you in favor of a fiduciary standard, currently proposed by the Department of Labor, for IRA's (Individual Retirement Accounts)?
Are you in favor of changing the current regulatory model of the securities and futures industries and revamp the SEC to end self-regulation of the securities/futures markets by FINRA or NFA?
Are you in favor of banning Wrap Accounts for dually registered investment advisers and stockbrokers?
Are you in favor of appointing an SEC Advocate, who currently does not work for Wall Street, as mandated by Dodd Frank, that reports to Congress, to shift the balance of power from Wall Street to Main Street and exposes the significant conflicts of interest between the regulators and Wall Street?
Are you in favor of banning mandatory arbitration in the securities industry and allowing a private right of action for every retirement account?
Are you in favor of position limits on Wall Street's commodities trading?
The Derivative Project was created in March 2008 to alert mainstream Americans to the potential collapse of their retirement savings from unregulated counter party credit risk in over-the-counter derivatives. How did we know the equity markets would collapse? We had traded over-the-counter derivatives in the early 1980's and knew the risks to the financial system of unchecked counter party credit risk and excessive, non- collateralized speculative positions. Derivatives are mathematically complex to many. Unchecked counter-party credit risk is basic, as is non-collateralized speculative positions, without capital to back up the positions, given normal market movements. These basics were ignored by Wall Street to optimize their personal profits to the detriment and destruction of main street and the global economy.
The Derivative Project's Simple Story was a speech delivered in early 2010 to a small group that wanted to understand causes of the financial crisis from a counter party credit risk analyst. It highlighted a major issue is the lack of candid reporting on Congress who allowed Wall Street's interests to be placed over that of the common good.
Our first action in early 2010 was to request individuals propose Corporate Resolutions to prevent their Church, synagogue, non-profit or any entity to refuse to deal with major banks dealing in speculative derivatives. One mutual fund, the Appleseed Fund, issued a press release that indicated they would stop investing in the six major banks trading in derivatives, "Too Big to Fail Banks."
Here are The Derivative Project's most recent recommendations (December 2011) to the Senate Banking Committee and House Financial Services Committee on the implementation of Dodd - Frank, (August 2011). Please visit our Blog tab for more detail:
The SEC should immediately fund the Office of Investor Advocate as mandated by Dodd-Frank with a non-partisan Advocate, with hands-on experience in (1) commercial account and retail account hedging and OTC derivatives at a major U.S. Bank and (2) former SEC registered investment adviser and broker-dealer---to keep Congress informed of the realities of the capital markets for retail retirement investors.
New standards of training, education and professionalism for any SEC registered investment adviser providing advice to any type of qualified retirement account, (including IRA's) developed in conjunction with the SEC Advocate.
Brokers would be prohibited from providing investment advice to a qualified retirement plan. They would have to have met the new mandatory curriculum for professionals to advise retirement accounts and register as a SEC registered investment adviser.
A fiduciary standard, as specified in the Investment Advisoes Act of 1940, would be mandatory for any investment advisor providing investment advice to a qualified retirement account, including IRA's.
Congress would allow the right of private action under the Investment Advisers Act of 1940 for any qualified retirement account when there are breaches of this law.
An end to mandatory arbitration in all retail retirement accounts.
Further, The Derivative Project supports, without the simple changes outlined above:
Congress giving individual retirement investors the right of private action to enforce the Investment Advisors Act of 1940 for any fiduciary breach by a registered investment advisor towards any type of retirement plan. An individual investor is bound by mandatory arbitration by a dually-registered broker and investment advisor, which must be run through FINRA, but Congress has not yet given FINRA the authority to enforce breaches under the Investment Adviser Act of 1940. Therefore, the legal rights of an individual investor are comprised by Wall Street and Congress, allowing the investor no access in the U.S. Court system for breach of fiduciary duty.
Elimination of the SRO, FINRA, as arbitrer/enforcer of securities laws.
The ban of naked credit default swaps and movement of all credit default swaps to a regulated futures exchange in the form of a futures contract.
Ban on use of taxpayer dollars to monitor systemic risk, by regulatory agencies. Congress must pass a speculation tax to recoup taxpayer losses from the 2008 financial crisis and limit the use of taxpayer funds for future bailouts and for systemic risk risk monitoring.
How To Prevent Another Financial Crisis and Collapse of Retirement Savings
Commence a long overdue civil and criminal investigation to reverse the taxpayer payments of over $50 billion to U.S. and international banks for collateral calls for AIG over-the-counter derivative contracts, that were entered into fraudulently between AIG and other counter parties, including Goldman Sachs. Fine Goldman Sachs and then Secretary Henry Paulson for misrepresenting that AIG would collapse without the collateral call payments to Goldman Sachs. Goldman Sachs could have totally prevented the "crisis" with AIG by not demanding immediate delivery of the collateral by the U.S. taxpayer and sought an unwinding of the contracts.
Revamping of FINRA and SEC and elimination of FINRA as Securities Law Enforcer
SEC should monitor Investment Advisers, not the SRO FINRA
Congress must pass a law enabling a right of private action for individual retirement investors for breach of fiduciary duty under the Investment Advisors Act of 1940.
July 15, 2010 Congress passed "The Financial Reform Bill," Dodd-Frank. It does not go far enough and allows for the potential for another financial crisis, that threatens a sustainable economic recovery and another potential financial crisis that portends extreme volatility in the stock market and a sluggish recovery.
History of Regulatory Gaps and Ambiguity in our Nation's Court of Laws Concerning Securities Laws
Dodd/Frank creates ambiguities that will limit its enforcement in a court of law. This is a pattern. Most fiduciary breaches under the Investment Advisers Act of 1940 are not enforceable in a court of law, since Congress has yet to give any regulatory body the ability to enforce this law.
As The Derivative Project's Simple Story shows, there was a day when commercial banks operated in the community's best interest and a research analyst would put a "sell" on a Goldman Sachs or an AIG, for not operating in the community's best interest. Now that the research analysts have forgotten about rating companies on something other than the "profit model" (ignoring all ethics, morals and societal values) it is up to you to make those choices.
Change is up to you, "the ball is in your court."
Ask your Congressional representatives to give a regulatory body immediate enforcement authority to enforce securities laws, such as The Investment Advisors Act of 1940.
Ask your Congressional representatives to launch a civil and criminal investigation on the "taking" of U.S. taxpayer funds to pay AIG collateral payments when there were several reasonable alternatives to this unconstitutional use of Taxpayer funds based on a material conflict of interest of then Secretary Henry Paulson who failed to represent to Congress all viable alternatives to the use of taxpayer dollars, including those that did not benefit Wall Street and Mr. Paulson.
Ask your Congressional representatives to eliminate a "self -regulating organization (SRO), FINRA, as the primary enforcer of securities laws. Bring in a neutral body to enforce securities laws if one must go to arbitration over the court system.
Ask your employer to give you an option to invest your 401k/403B in an American economy sustainable value fund, like the Appleseed Fund. Here is the link to the Appleseed Fund's Press Release limiting investments in the top five derivative banks.
Ask your employer for the option to invest in Exchange Traded Funds and Treasury Direct bills, notes and bonds on a direct basis, without paying Wall Street for money markets funds whose model is no longer adding value, given the current realities of short-term credit markets.
Ask your Congressional representatives to insist any SEC registered investment advisor to a qualified retirement plan pass a rigorous professional exam and has a minimum of five years of commercial banking and over-the-counter derivatives experience to ensure your retirement funds are advised solely by "trained advisors", not the current poorly-trained FINRA "licensed" registered investment advisor.
In sum, Congress did not say "no" to Wall Street's rogue speculation and will allow it to continue, without insisting commercial banks shun a singular focus on speculative trading and profits and instead focusing on finding and putting loans into the key small and large companies that will provide sustainable value for our economy and restore our society to a healthy employment rate.
Congress has done nothing to rein in the "snake oil" salesmen culture of Wall Street, whether it be in betting the farm in derivatives or allowing "supposed Wall Street fiduciaries" to sell your employer on fee-laden equity mutual funds and "self-serving investment advice."
Almost every mutual fund manager sat idly by, during the financial crisis of 2007-2009, allowing American's retirement assets to decline by trillions of dollars. How many employers were offered cutting edge investment options to protect you from this collapse? These options were out there.
These losses in your retirement accounts were completely avoidable. These managers make more money if you are in equities, pure and simple and if changes in the funds are minimal and the less thought, the less expenses incurred by the fund. All their investment advice is self-serving, conflicted and based on "greed". Congress has never insisted that the SEC enforce the ERISA concept of fiduciary. There are pending Dodd Frank rule changes that will dramatically affect your safety and growth of your retirement savings.
There are "fiduciary" laws to protect you or your retirement assets from free fall and corruption, but the brokerage industry's self regulatory organization, FINRA, will not enforce these laws. You know this from the Bernie Madoff Ponzi scheme and there are many other comparable scandals that are less publicized. Congress has shown from the recent legislation that they are always going to choose Wall Street's interests over your interests.
Further thoughts on Limiting Derivative Trading Excess, because it is not in our society's best interest
Derivatives have been used for many years as conservative hedging
vehicles on both regulated exchanges and over-the-counter markets.They are valuable for effecting
transactions to protect losses in normal business transactions. They are valuable tools for farmers to hedge their future sale of grains or for our exporters to hedge their future exports in yen.
However, credit default swap contracts
caused our financial systems to teeter on the brink of collapse because major
institutions bet the farm without regard to managing counter-party credit risk. They destroyed over $2 trillion dollars in American's retirement savings and unemployment is still close to 9%.
Five major banks are responsible for 96% of all these transactions in credit default swaps. They take the profits, we bail them out. This is not a free-market capitalist system.
Congress has chosen that we spend millions of dollars to babysit the side bets of these major banks, so they can continue their rogue speculation.
Congress and the Executive Branch are still succumbing to the strangle hold of these five major banks. There is no pending legislation to prevent this from happening again. We have no choice, but to take action. Change is in your hands if you do want:
Our society to be built on fundamental principles of ethics, morals and fair trade for your children and their children.
Our tax dollars, in a country that is plagued with large budget and trade deficits, to not go to babysitting trillions of dollars of side bets by these five major banks to manage the systemic risk they create but to investment in our country's infrastructure, new jobs and a stronger education system.
The Derivative Project has been advocating for these changes in Washington D.C. since March 2008.
We appreciate any support you can provide.
The Derivative Project Team
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