BLOG.THEDERIVATIVEPROJECT.COM

Do Most Americans Want Deregulation? Finally, House Democrats Push for Honest Debate

The Derivative Project — Mon, 17 Jun 2013 10:33:04 GMT

"The least we could do is have an honest debate on these issues. Why don’t we have this debate in front of the American people? We may lose, but at least we’ll have educated people as to what we’re talking about."

---Congresswoman Waters, in a June 12, 2013 Press Release concerning a Proposed Bill to deregulate the very financial instruments that have thrown the global economy into the depths of high unemployment and slow economic growth.

We congratulate Congresswoman Waters on taking a lead on the most basic issue concerning the whys of the 2008-2009 financial crisis:

(1) Americans were not properly informed on the issues and so could not vote their congressional representatives in or out when they voted in ways that harm society overall, since public debate and press coverage of it never occurred.

(2) Counter party credit risk and excessive leverage lacked transparency and adequate collateral postings

(3) Congressman Waters summarizes the issue in plain English for every American to understand in June 12, 2013 Press Release below:

"This country has been through a terrible financial crisis. Part of the reason is that we allowed our banks and financial institutions to place unregulated bets on the mortgage markets. Remember AIG? What did AIG do? It made a really big bet that the mortgage market would go up. And it lost. And the taxpayer was put in the position of having to bail it out.

The Dodd-Frank Act enabled us to put a stop to that kind of betting going on, hidden from the rest of us, finally dragging that activity out into the sunlight. The CFTC and the SEC are finally putting in place rules of the road to prevent any one institution from threatening our livelihood again. But this bill wants to drag some of that activity back into the shadows, allowing banks and others once again to enter into transactions without even our regulators being able to see them."

For Immediate Release House Financial Services Committee

June 12, 2013

Majority of Democrats Join Waters in Opposition to Derivatives Deregulation

WASHINGTON, D.C. – Congresswoman Maxine Waters, Ranking Member of the House Financial Services Committee, made the following statement today on the floor of the U.S. House of Representatives. Ranking Member Waters opposed the passage of H.R. 1256, the Swap Jurisdiction Certainty Act, under closed rule. Ranking Member Waters led the debate noting that H.R. 1256 handcuffs our regulators reach overseas, and instead forces the U.S. taxpayer to rely on foreign regulators to protect them from institutions that bet the house. By bringing H.R. 1256 up under a closed rule, the Republican Majority refused to allow any amendments on the bill, and limited debate and understanding of a bill that has broad implications for everyday Americans. The bill passed the House of Representatives with a majority of Democrats voting against it. The complete text of her floor statement follows.

As prepared for delivery:

I’d like to try to clear up some of the misunderstandings of what this bill is about. The more we debate it, the better members understand the impact of this bill on our economy.

This country has been through a terrible financial crisis. Part of the reason is that we allowed our banks and financial institutions to place unregulated bets on the mortgage markets. Remember AIG? What did AIG do? It made a really big bet that the mortgage market would go up. And it lost. And the taxpayer was put in the position of having to bail it out.

You may say that this bill just concerns the limits on how far U.S. law goes. So why is it so important that the CFTC and SEC have discretion over the rules on cross-border derivatives? Because the exposure that a foreign branch or subsidiary a U.S. institution takes in foreign markets comes back home to the U.S. Moreover, U.S. banks and corporations may find that those they do business with have much more hidden exposure because of foreign transactions. This bill says that we will have to rely on the foreign regulators to protect us.

To put it simply, this bill could delay implementation of the Wall Street Reform Act’s derivatives provisions by months, if not years, and preserve the kind of opacity in our markets that led to taxpayers bailing-out AIG just five short years ago.

For example, while Europe has made considerable progress on its swaps clearing and reporting rules, Europe’s framework for implementing trading and internal business conduct standards have been caught up in delays. It is unclear at this point how strong those requirements ultimately will be. This bill increases the incentives for other jurisdictions to avoid making the tough decisions to put in a strong financial framework.

I am very disappointed and worried that this bill has been brought to the floor under a closed rule, as have more than one-third of the bills so far this Congress. I believe there are important issues concerning the structure of this bill, particularly the bill’s presumption that the rules of the nine largest foreign markets will be broadly equivalent to our own. The bill would require the SEC and CFTC to act in order to allow US rules to apply to transactions, even though the risks of the transactions will ultimately be imported back into the United States. My amendment would have reversed this presumption, directing the SEC and CFTC to jointly consider the regulatory framework of these countries to provide appropriate exemptions when jurisdictions have derivatives rules that are truly broadly equivalent to our own.

A closed rule prevents us from considering these issues. There is no reason that we should automatically grant ability to enter into these transactions without rules. We should allow the CFTC and the SEC to do their work so we know who is doing what. We should allow derivatives rules to go into effect without further challenge. We have a responsibility to protect our country from the consequences of easily evaded rules, which this bill will create.

The least we could do is have an honest debate on these issues. Why don’t we have this debate in front of the American people? We may lose, but at least we’ll have educated people as to what we’re talking about.

For all these reasons, I urge a “NO” vote.

Thank you Mr. Chairman, and I reserve the balance of my time.

_________End of Press Release

SEC Chairman White Thinks a Law Degree is What is Needed to Protect Retirement Savers

The Derivative Project — Fri, 17 May 2013 18:36:06 GMT

In just one month since taking office, new SEC Chairman Mary Jo White has shown her true colors: an overriding allegiance to the demands of Wall Street over the life savings of retail retirement investors.

Let's remind Chairman White over $2 trillion dollars of American's retirement savings were needlessly lost in the 2008-2009 financial crisis. The Dodd Frank Bill enacted in 2010 required the establishment of an Office to handle the overwhelming issues of retail retirement savers who in their IRA's and 401K's have no access to a legal due process when their retirement savings have been taken, when Federal securities laws have been breached.

What are Chair White's Decisions To Date?

Ignore the need for massive reform of the investment advice system, its regulatory oversight structure and keep it status quo. The fact that there is now over $4 trillion dollars in IRA's and the SEC does not make protecting retail retirement savers a top priority is cause for significant concern.

The SEC's Number 1 priority will be to increase exams of investment advisers, as defined in her Speech before Congress on May 7, 2013, not bring about fundamental changes that must include:

The right of private action for every IRA saver, where Federal Securities laws have been broken

An immediate ban to mandatory arbitration for every retail retirement account as Congress has requested the SEC consider

An immediate ban to wrap accounts that violate the Investment Advisers Act of 1940, by allowing a blurring of the roles of salesperson and adviser

To continue status quo and just spend more money on investigating all the rogue advisors, SEC Chair White, ignores the simple fact that billions in taxpayer dollars could be saved by revamping the flawed investment advice industry and its current regulatory processes. Despite Congress' (Senator Franken's (D-MN) plea, as described in this AdvisorOne article link, for structural change and a ban to mandatory arbitration, SEC Chair White doesn't even reference it as a top priority for consideration.

What is Needed to Protect Retirement Investors?

Where were all the SEC attorneys at the SEC during Madoff, Stanford, the financial crisis, and now an unprecdented growth of investment adviser enforcement actions? Chairman White, doubling down on a failed regulatory process is a complete waste of taxpayer dollars. Hiring more attorneys is not the solution. A new model, a new enforcement model is mandatory, along with a complete reexamination of the Investment Advisers Act of 1940's failure to protect the trillions of dollars in retirement nest eggs.

The issues are significant, yet received no mention in Chairman White's Top Priorities:

Target Date Funds that lost and are losing billions of dollars in retirement savers' nest eggs
Money market funds that carry systemic risk that may explode when interest rates move up
Retail retirement investors lack of access to markets during flash crashes
A "fiduciary" model that is fleecing retirement nest eggs by billions of dollars in worthless fees
Structured products, with derivatives, that not even the Advisor understands
A ban on Wrap accounts that breach the Investment Advisers Act of 1940
No Legal Due Process for IRA investors

Chairman White Mandates a True Dodd-Frank Investor Advocate Must Be an Attorney

Can an attorney advocate for what he does not understand first-hand? A true advocate can only be a retail retirement investor, who understands the limitations of the current regulatory process and the inside of the financial services industry that caused the 2008 crisis and the whys behind it.

To solidify the financial services industry control of the right to transparency for retail retirement accounts and the right to a legal due process, Chairman White immediately eliminated all bona-fide Investor Advocates who were being considered for the Dodd-Frank Office of Investor Advocate, under Chairman Shapiro's administration and sent them letters last week that they were no longer eligible for the position, despite the former SEC Chairman finding them eligible.

Chairman White believes the only eligible applicant to represent individual investors is another attorney, a Washington Insider. Chairman White has now officially shown her hand. There can be no real transparency at the SEC, any retail retirement investor, will continue to have their life savings at risk.

Chairman White officially threw out the bona-fide retail retirement investor advocates, who have industry experience, day-to-day retail retirement investing experience, first-hand retail retirement experience in FINRA arbitrations, professionally-trained in all aspects of global capital markets, and fashioned a new job description and replaced the old job description requiring a law degree to be eligible to apply for the investor advocate position, outlined in a new job description that will ensure the SEC can place a "Washington Insider attorney" in this advocate position.

Remember Congress passed the Dodd-Frank Act in July 2010. Since then the SEC has run the application process twice. SEC Chair White is starting the application process for the third time, since they just can't quite figure out how to legally eliminate those that truly qualify, but Wall Street doesn't want employed by the SEC.

The first time a Washington Insider, a former SEC attorney, who also is currently a Vice President of a asset management firm and is a SEC registered investment advisor, was on the short list. The Derivative Project alerted the SEC that an "Investor Advocate" should not also be employed by a Wall Street firm, as it was most certainly a conflict of interest. The fact that the SEC could not appoint an "insider" caused them to start the process all over, waiting over two years, with the hope that perhaps these "gad-flies" would find another cause.

The second time, a bona-fide retail retirement investor advocate was on the short list. The financial services industry prohibited the SEC from making this appointment, as rumored in this media report:

Here is a summary from a September 2012 Time article, Amid Public Backlash, Bankers Maintain Influence in Washington. Annette Nazareth, a former SEC Commissioner who is now a securities lawyer for Davis Polk, according to a Freedom of Information Report by Bloomberg, influenced SEC Chairman Shapiro. Nazareth's communication with the agency was extensive, "Nazareth's messages asked for meetings, offered her firm's products and opined on the debate in Congress. She...wrote that the prospect of a consumer finance protection agency made her "feel ill" and that she'd asked SIFMA, the Wall Street trade group to "trash" a proposal for a investor advocacy office at the SEC."

Congress mandated this new Office and Congress has re-appropriated the funds to establish the Office. One can only conclude that Ms. Nazareth is also lobbying for her husband's Wall Street firm. According to this Bloomberg article Nazareth is married to former Federal Reserve Board Vice Chairman Roger Ferguson Jr., now chief executive officer of TIAA-CREF, the manager of retirement funds for employees of nonprofits. Some e-mails refer to a party they host during the December holidays, where regulators and lawyers mingle.

Now, the third time, the SEC has made it clear, it will not hire some "advocate" who actually understands the financial services industry and the needs of retail retirement investors and what bona-fide, structural changes are necessary. The SEC will defer to Inside the Belt-way and go with an "approved" advocate attorney who will not push the envelope too far...just a little protesting to satisfy those in Congress that wanted the new "Office of Investor Advocate."

Oh, what a waste of taxpayer money. Take cover retirement investors. Time to take control of your savings. Bona fide investor advocates have the structural changes coming soon to help you protect your retirement nest eggs, since the regulators have failed you, once again.

Why the Debate on Fiduciary Duty is Meaningless without End to Mandatory Arbitration

The Derivative Project — Mon, 22 Apr 2013 00:51:28 GMT

Congress, the Department of Labor and the SEC are all fiercely debating if a stockbroker should act in the best interest of a retirement saver. Based on current contract agreements an individual retirement investor signs when he opens up an IRA, any claims for losses in their IRA are subject to mandatory arbitration. Therefore the fiduciary debate is rendered meaningless. Why?

FINRA designs the rules, enforces the rules and is also "judge and jury" through their FINRA mandatory arbitration panels. Further, if the individual retirement investor is subjected to a breach of fiduciary duty in their IRA by an SEC registered investment advisor, who is also registered with FINRA, (a "dual registrant" as the vast majority of financial advisors are today) FINRA will state in the arbitration, "Congress has not yet given us the authority to enforce fiduciary breaches under the Investment Advisors Act of 1940." The claim will be thrown out, giving the IRA investor absolutely no legal recourse.

The retail retirement investor then goes to the SEC for recourse, but the individual retirement investor has no "private right of action" and the SEC will not seek damages on behalf of the little IRA investor who has lost money in their retirement account due to a breach of fiduciary duty.

In 2010, the Dodd Frank Act instructed the SEC to look at ending mandatory arbitration. Have they? Absolutely not. What has happened since Dodd Frank was enacted?

As SEC Commissioner Aguilar reported last week in a speech to The Regulatory Compliance Association on April 18, 2013:

Number of enforcement actions brought by state regulators involving investment adviser firms nearly doubled from the prior year — to 399 in 2011

"Despite the increased complexity, or perhaps because of it, more and more Americans are entrusting their savings and retirement assets to the investment advisory industry. There’s good news and bad news to this growth. The good news is that investors generally trust investment advisers. In fact, a 2012 survey found that investors trust their financial advisor more than their primary doctor or accountant. The bad news is that the growth in size and complexity has resulted in more opportunities for mischief. The evidence of that bad news can be found in some grim statistics — for example, in fiscal year 2012, the SEC brought 147 investment adviser-related cases. This is roughly 20% of all enforcement cases, and accounted for the largest category of enforcement cases during that fiscal year. In addition, the number of enforcement actions brought by state regulators involving investment adviser firms nearly doubled from the prior year — to 399 in 2011 — and accounted for 15% of all enforcement actions brought by state regulators."

Commission Aguilar politely calls this "mischief". Retirement savers might call this fraud, breach of fiduciary and a significant loss of their life savings. What Commissioner Aguilar is not telling you is how many thousands of cases are escaping detection due to FINRA mandatory arbitration panels and their "secret hearings" where no results may be released.

However, Commissioner Aguilar also took the critical step of coming out in favor of ending Mandatory Arbitration on April 16, 2013, described in this Reuters article.

Commissioner Aguilar stated:

"He is concerned that more investment advisory firms are requiring customers to sign similar agreements as well - a maneuver that forces investors to sign away their right to sue before they even know about the nature of a dispute."

Further, the right to continue mandatory arbitration and ban class action law suits, is championed by Charles Schwab. They had a lot to lose if the truth about their Private Client Service and breach of fiduciary duty during the 2008-2009 financial crisis ever hit the courts, where they breached their fiduciary duty causing loses to millions of Americans about to retire. The arbitration was struck down by a conflicted panel, headed by a former stockbroker, and could not be moved to the Federal Courts. An Executive of Schwab sat on the Board of FINRA at the time of the 2010 arbitration claim. The SEC refused to look at it since they will never re-examine the decision of FINRA arbitrators.

In essence, the subject of a 2010 FINRA arbitration for breach of fiduciary duty against Charles Schwab Private Client was thrown out by a three- member FINRA arbitration panel since Schwab's broker acted as both broker and RIA (registered investment adviser). The FINRA arbitrators stated there was no private right of action and FINRA arbitrators had no authority to enforce a breach of fiduciary duty under the Investment Advisers Act of 1940 for a dual registrant.

Charles Schwab Private Client continues these practices today that are in direct conflict with the Investment Advisers Act of 1940.

With the appointment of Mary Jo White as the new SEC Chairman and her strong legal background, time is long overdue to offer some basic protection for individual retirement savers and the ability to exercise their constitutional right to a legal due process, when laws have been broken.

Reuters reported on February 26, 2013 on Schwab's moves to limit class action lawsuits, where the Massachusetts Commonwealth Secretary Galvin:

"Called on Schwab to repudiate the class-action ban. It is likely to be adopted industrywide, he said in statement, giving "every rogue broker-dealer the green light to steal from their customers in small-dollar amounts."

If mandatory arbitration is not ended, if class action lawsuits to expose breach of fiduciary duty against retirement accounts are not allowed, as the role of dual registrants increases and retirement savings grow, the fleecing of American's life savings will continue. The breaches will be forever hidden in the oh so very secret mandatory arbitration panels, staffed with arbitrators who serve on behalf of the financial services industry, not the small retirement saver.

Why the DOJ Must Counter Sue AIG Now

The Derivative Project — Sat, 16 Mar 2013 20:48:14 GMT

Reuters reported this week that AIG's suit against the Federal government will receive class action status.

Department of Justice, you now have no choice but to protect the U.S. taxpayer. AIG's credit default swaps were entered into fraudulently, since they knowingly entered into them without the financial capacity to make good on them. This is financial contract law 101. The time is now for our countersuit. AIG's suit contends this was a "backdoor bailout" of Wall Street banks". Yes it was. However, AIG knows very well, these contracts were entered into fraudulently. All parties are complicit in this fraud. How can we prevent it from happening again?

January 8, 2013: The Department of Justice and the U.S. Taxpayer v AIG, The Derivative Project Blog Post for background.

Why Must the DOJ Take Action Now

While we are wasting taxpayer dollars defending this most frivolous suit, derivative dealers are lobbying Congress to weaken Dodd Frank reforms to end public bailouts and lessen the amount of collateral they must post, putting greater risk on the U.S. taxpayer. They want the chance to do this all one more time. It is just too lucrative to not try again.

The House Agriculture Committee held hearings on potentially weakening reforms to prevent this from happening again, last week. Congressman Collin Peterson (D-MN) has been a leader in Congress in standing up for the U.S. taxpayer to end the bailouts and systemic risk. He was the driver behind the initial push to introduce derivatives legislation to protect the U.S. taxpayer, beginning in 2009 with his introduction of the Derivatives Transparency Act of 2009, the predecessor to the Dodd-Frank bill.

Here is his response last week on the proposed bills to weaken Dodd-Frank:

"However, Ranking Member Collin Peterson (D-Minn.) suggested patience with the Commodity Futures Trading Commission (CFTC) and cautioned changing the law. Peterson said that his frequent talks with Chairman Gensler of the CFTC assure him that many of the bills the Committee considered are not necessary.

“The CFTC is going to get this right,” he said. “To date, most of the final rules coming out of the Commission have bipartisan support and are addressing the concerns that stakeholders have expressed to both us and the Commission.”

“The sad part of this exercise is that we may find out later it wasn’t even necessary,” Peterson added. “What is potentially even sadder is that even if we do find that any of these bills are necessary, they have no future. The majority of Senate Republicans and their leadership have dedicated themselves to the repeal of Dodd-Frank.”

Americans for Financial Reform testified on the most egregious attempts by derivative dealers to ensure Congress weaken the rules to allow them to post less collateral and still be entitled to public bailouts.

The only way to end public bailouts and abuse of entering into speculative contracts without sufficient collateral is by taking action against this most obvious type of fraud.

The Department of Justice Protected AIG - Now AIG "Bites the Hand that Feed Them"

The Derivative Project first approached the Department of Justice in April 2010, on filing fraud charges against AIG for entering into financial contracts without the financial capacity to make good on the speculative contracts if the market were to move against them.

Read the past history here from The Derivative Project Blog archives. Scroll to July 24, 2010 and April 6, 2010 for the correspondence between The Derivative Project and the Department of Justice. The Department of Justice simply told The Derivative Project, "What AIG did was not illegal, it was just stupid." Their response to our letter shows the Department of Justice did not even give us the courtesy to read our letter. It was that dismissive.

U.S. taxpayers will no longer tolerate the "stupidity defense". We seek a straight-forward legal response as to why the Department of Justice deems these contracts were not fraudulent. Without that, this type of fraud will simply continue.

AIG's executives were enriched with millions upon millions of dollars by knowingly entering into speculative contracts without the financial capacity to make good on them. We all know that is very smart.

Regulatory Capture and the Critical Role of "Poverty Stricken" Consumer Advocates

The Derivative Project — Sat, 23 Feb 2013 23:52:48 GMT

The Project on Government Oversight (POGO) held a debate on their excellent recent report on the revolving door, "Dangerous Liaisons" at the SEC last week, in New York City.

At this Debate, Susan Antilla, journalist and columnist for Bloomberg, Highlighted Plight of "poverty stricken consumer advocates."

“If you look at the rulemaking information that the SEC puts on its website, particularly if you look at the Dodd-Frank Act, you’ll see the preponderance of the meetings that the SEC has is with the industry or the Financial Services Roundtable or fill-in-the-blank with the bank’s name,” she said.

“Every once in a while you’ll see some poor, literally poverty-stricken consumer advocate in there too,” Antilla added, “but I can promise you, they are not at the cocktail parties with the SEC alumni and the current SEC people. You can just look at those filings and you’ll see there’s no [consumer] voice.”

Poverty-Stricken by Choice - The Positives

The Derivative Project is an investor advocate, "poverty stricken" by choice. We do not want to be beholden to any other group or entity that would cause a conflict that would comprise the objective and outcome for the advocacy work.

The positive is that we seek to advance an Agenda that is in the best interest of the individual retirement investor, who lost over $2 trillion dollars in the most recent financial crisis, without conflict.

Poverty-Stricken by Choice - The Negatives

Big money and main stream media fund today's public "investor advocates." Currently, all the "consumer advocates' work for Wall Streeet, such as Barbara Roper of the Consumer Federation of America and Mercer Bullard, Fund Democracy. There is a reason Fund Democracy has disappeared from the internet, but is still the "go-to" for main stream media when they seek comment from a "consumer advocate." Ms. Roper has worked hand-in-hand with Mr. Bullard for many years as representatives for "investors". They have done excellent work on disclosures on 401k fees in mutual funds, however, on the most critical issues, they represent Wall Street.

For example, they worked hand-in-hand with the SEC to:

Appoint a Wall Street employee for the Dodd-Frank congressional mandated SEC Investor Advocate position.

Present congressional testimony on money market mutual fund reform that benefited Wall Street, without disclosing their critical conflicts of interest with Wall Street.

Refuse to bring to light the most crucial retail investor protection issue, enforcement of the breaches of the Investment Advisers Act of 1940 by Wall Street today, that is harming and causing significant losses to retail retirement investors.

Wall Street was All Set to Have the New Dodd Frank Advocate be A SEC Employee

"Lawmakers insisted on legislating the committee partly in response to the $65 billion Bernie Madoff investment fraud scheme, which was flagged to the SEC's attention several times over the years by a whistleblower. The tips were ignored by SEC employees, in part because of Madoff’s clout on Wall Street."

As the Center for Public Integrity reported in November 2010, Mr. Bullard was rumored as the SEC's choice for the Dodd Frank required Investor Advocate. Mr. Bullard, in 2010, worked for a Wall Street firm, which was not disclosed to the public. The fact that Mr. Bullard was a Wall Street employee was not referenced in The Center for Public Integrity's article on Mr. Bullard. Why?

The November 16, 2010 article states, "As the Securities and Exchange Commission considers who will lead a new office giving Main Street investors a bigger megaphone within the agency, the short list is said to include Mercer Bullard, a University of Mississippi law professor and head of a shareholder advocacy group."

Here is Mr. Bullard's SEC investment adviser registration, updated February 2009, as taken from the SEC website:

"MERCER EATON BULLARD (CRD# 5640236)

The report summary provides an overview of the Investment Adviser Representative's professional background and conduct. The information contained in this report has been provided by the Investment Adviser Representative, investment adviser and/or securities firms, and/or securities regulators as part of the states' investment adviser registration and licensing process. The information contained in this report was last updated by the Investment Adviser Representative, a previous employing firm, or a securities regulator on 02/17/2009."

The "Investor Advocate" Testifies before Congress without Disclosing he is employed by Wall Street

Mr. Bullard, "Investor Advocate" testified before Congress on " Enhancing Investor Protection and  money market reform, as an "investor advocate" on March 11, 2009, without disclosing his conflict to Congress, as an SEC Investment Adviser representative. He and his firm would potentially receive income from money market mutual funds. This conflict should have been disclosed to Congress and for U.S. citizen's reviewing the intent of this Congressional testimony.

The SEC Investor Advocate Cannot Be a Wall Street Employee

Following The Center for Public Integrity's report on November 16, 2010, The Derivative Project went to Washington on December 3, 2010 and successfully put a stop to a Wall Street employee being appointed to the newly created Dodd Frank SEC Investor Advocate position.

However, The Derivative Project's meeting, Agenda and materials presented to three SEC Commissioners on December 3, 2010 and SEC Chairman Mary Shapiro's Deputy Chief of Staff were not disclosed per their rules and regulation. It was conveniently "lost" and not posted on the SEC website. One can review the list of meetings on the SEC Advocate role in 2010, at the link above.

SEC and Investor Advocates Refusal to Prosecute Investment Advisers Act of 1940 Violations

When The Derivative Project asked the SEC to post our December 3, 2010 meeting materials, as required, they refused, but posted a August 26, 2011 a telephone call and Memorandum that specifically addresses the request that they reflect the subject matter of The Derivative Project meeting on December 3, 2010. Here are the Materials from Dec 3, 2010 Meeting that the SEC refuses to acknowledge and post with three SEC Commissioners and Chairwoman Shapiro's Deputy Chief of Staff.

The most critical piece of these materials and discussion The Derivative Project had on December 3, 2010 with now SEC Chairman Elise Walter and her staff, dealt with how the SEC (on Page 5 and 6 of this report) is on how the SEC is currently not enforcing violations of the Investment Advisers Act of 1940 for small retail retirement investors. This is a most critical issue that the current SEC Chair and Commissioners do not want airing in public. In sum, they are allowing Wall Street to violate the Investment Advisers Act of 1940 on a daily basis.

The SEC is preventing the public from hearing the voices of the "poverty-stricken" advocates, who also have a story to tell about needed investor protection and violations of existing securities laws. The SEC could not appoint a Wall Street employee as the new Investor Advocate, so there is no SEC Investor Advocate. It is just that simple. This is indeed regulatory capture.

Big Money sets The Agenda for Wall Street at the SEC

In 2010, three SEC Commissioners, Aguilar, Walter and Paredes and Chair Shapiro's Deputy Chief of Staff, all believed they could dismiss and not disclose our written materials and testimony to them to benefit individual investors. Why?

We did not have any big guns or money behind us to push our advocacy Agenda to the public or recourse to take action if they just ignored us and refused to print our investor advocate requests on their website, as required per SEC regulation. We are not invited to the "SEC alumni cocktail parties" Ms. Antilla refers to. We are not part of the Washington-NY axis. Our proposals will protect retirement investors, but will directly impact Wall Street's profits. The SEC has chosen Wall Street's profits over the protection and life-savings of American retirement investors. They are allowing Wall Street to break current securities laws, as outlined in The Derivative Project Petition for Rule making filed at the SEC on April 3, 2012.

Our legal arguments are lacking the polish perhaps that more money could buy from legal experts, but they does not mean they are not valid legal arguments. We have offered the SEC tapes from bogus FINRA arbitrations as evidence, but they refuse to listen to the tapes and to investigate.

We filed a Petition for Rule Making per SEC protocol on April 3, 2012 and have tried on numerous occasions to present our rationale for this rule change to protect investors to the SEC's Division of Investment Management and issues with FINRA and investor access to bona fide constitutional rights for due process that are being breached by the SEC and Wall Street. They refuse to discuss and address our retail retirement investor protection concerns.

Staff of the SEC Division of Investment Management refuses to even return our calls or meet with us to understand our position on why this change is so critical to individual retirement investors. We have reviewed who the Division of Investment Management is willing to meet with. Ms. Antilla is correct, it is clear they will only meet with representatives from Wall Street or "consumer advocates" that are hand-picked and groomed by Wall Street or are employees of Wall Street firms. This is indeed regulatory capture.

Captive SEC Investor Advisory Committee

Further, Dodd Frank required a new SEC Investor Advisory Committee to help the individual investor. This new committee is comprised of all members hand-picked and affiliated with Wall Street, who have absolutely no experience in day-to-day global capital markets. They refused to allow on this committee the perspective of a truly independent voice, such as The Derivative Project, experienced in global capital markets or an active retail retirement investor, who:

Understands real losses during the May 6, 2010 flash crash where brokerage firms, such as Charles Schwab, allowed retail investors to sell and take losses, but prohibited retail investors from buying at the low that day. The SEC refuses to deal with critical retail investor issues.

Understands real losses from corporate bond spreads that lack transparency

Understands systemic risk that OTC derivatives could pose, from direct experience trading them and managing counter-party credit risk for an international bank.

Understands from commercial banking experience what potential systemic risks money market funds may pose and how lack of transparency in money market funds is still harming the individual investor.

Understands how constitutional rights are being breached through the Wall Street kangaroo court, FINRA, that controls all individual investor complaints of breach of securities' laws.

In sum, the Agenda at the SEC is controlled by Wall Street. The investor advocates work for Wall Street. One need look no further than the composition of the Dodd Frank required SEC Investor Advisory Committee composition. Barbara Roper, who is the sole "consumer advocate" on the SEC Investor Advisory Committee openly supported the appointment of Mercer Bullard as the SEC Investor Advocate and would not return phone calls to The Derivative Project on the subject of needed additions to individual investor protections concerns. As the November 16, 2010 Center for Public Integrity's article on the SEC Investor Advocate position stated:

"Barbara Roper, a financial services expert with the Consumer Federation of America, said in an e-mail that Bullard’s qualifications “would be hard to beat.” (TDP Note: Yes, he works for Wall Street--what could be more convenient?)

One needs a large budget and money to have access to taxpayer-paid SEC staff

Susan Antilla is indeed correct. If one is a "poverty-stricken" consumer advocate, you will not be allowed to meet with SEC staff, it is just that simple. Wall Street's hand-picked "Consumer Advocates" will not return your phone calls to discuss increased investor protection. They control the Agenda on what the individual investor requires. Money buys access and controls the Agenda for Wall Street.

The Results of a "Poverty-Stricken" Advocate's Meeting with the SEC

We were finally able to schedule a meeting with SEC Commissioner Aguilar on our Petition for Rule Change on July 19, 2012. We spent money for hotel and airfare and taxis to come to Washington D.C. to discuss the rationale for our Petition for Rule Change. We also tried to meet simultaneously with the Division of Investment Management, to minimize costs, but they refused to meet with us, with no explanation.

Yes, we are aware most lobbyists would find it "quaint" perhaps laughable, that our budget is so small that airfare and taxi costs actually matter. What does matter is that our budget is tiny, but our ideas are independent and do present needed systemic change, that are worthy of public debate. Because we are "poverty stricken" we do not have access to meetings with taxpayer-paid SEC staff or access to debate on bona-fide, material investor protection issues with SEC Commissioners.

On July 19th, the Commissioner and his Chief Legal Counsel showed up twenty minutes late for our meeting, gave us but a minute to discuss our Petition for rule change, and simply stated they had not read it and therefore could not discuss it. It was a complete waste of time and taxpayer- money for all parties. Further, the SEC Commissioner then posted on the SEC website the implication that they had a conversation about this petition for rule change which is not the case. They would not comment on it, its pros and cons, and would not discuss it.

"Rachel Barkow, a professor at NYU Law School, said the problem is not the revolving door per se, but rather the idea that “regulators are really on the same team or focused in the same way as the entities they’re supposed to be regulating. I think that’s a valid concern.”

This statement sums up the issue. In sum, the attorneys at the SEC have been and are working hand-in-hand with Wall Street, the Judicial system, the Executive Branch and the Department of Labor. They are prohibiting valid strategies to prevent a potential reoccurrence of the systemic issues that caused the unconscionable loss of over $2 trillion dollars in American's retirement savings to air publicly. Why? It would impact Wall Street's profit model.

Simple regulatory changes can prevent the scope of these losses from happening again.

Thus, the issues are far more systemic than a "revolving door at the SEC". POGO's report is excellent, but only hints at the far greater issue. The issue is a broad-based legal or judicial system regulatory capture that has permitted an entire industry to block an individual investor's access to the Judicial system. It is embedded in the nature of our securities' laws and in the essence of ERISA protection for IRA's. In sum, this "regulatory capture" is not only at the SEC, it is at Congress, the Executive Branch and within our Judicial system.

Securities' laws are being breached and broken on a daily basis and the individual retirement investor has no access to the courts to plead their case. There is no "private right of action". Class action lawsuits are prohibited for individual retirement accounts, which now represent a segment with more assets (over $4 trillion) than in 401k's.

There are significant investor protection loop-holes in ERISA for IRA's that Wall Street is fighting to ensure they remain. Both Democrats and Republicans in Congress support Wall Street on their intent to save their phenomenal loophole in ERISA IRA legislation. The Derivative Project's congressional representatives, Senator Klobuchar and Senator Franken refuse to meet on these most critical issues. They, too, are captured by Wall Street and are afraid to take a stand, as they would not want to become "poverty stricken" when reelection time comes.

The revolving door at the SEC is just a small part of the "regulatory capture." The scope of this capture is indeed beyond the imagination of what most American's envision of our democracy and the "balance of powers" engrained in our souls from fourth grade social studies.

The Impact of Washington Ignoring "Poverty-Stricken" Advocates

Here is a Worksheet from Congressforkids,net, that requires a long-over due correction for our nation's children. Congress for Kids needs to add a box on their Worksheet that presents the issue of "regulatory capture" where money now is power. Money has eliminated our nation's constitutional intent that no single branch will become too powerful. Money now controls all three branches.

Checks and Balances Game
http://www.sheppardsoftware.com/usa_game/government/
checks_and_balances.htm
The U.S. Government is made of three equally powerful parts: the Executive, Legislative, and Judicial branches. Each branch has some authority over the other two, ensuring that no single branch becomes too powerful.

They Doth Protest Too Much: FSOC, Don't Be Bullied By Federated's Threat of Subversion

The Derivative Project — Tue, 12 Feb 2013 01:24:58 GMT

Reader Note: This is a repost of a February 1, 2013 The Derivative Project Blog Post that was inadvertently deleted.

Federated Investors, the third largest money market mutual fund company has a lot to lose if the FSOC follows through on their proposals to limit systemic risk that money market funds now pose.

"Federated is one of the largest investment management firms in the United States and the third largest manager of money market funds, managing $285 billion in money market fund assets and $380 billion in total assets as of December 31, 2012."

This systemic risk, now posed by money market mutual funds, could potentially require another bailout by U.S. taxpayers.

For background purposes, here is an excellent article by The Economist, "The SEC's Dereliction of Duty", which summarizes the issues posed by the current money market mutual fund industry.

The Economist wrote last September,

"The U.S. Securities and Exchange Commission is supposed to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” It is odd, then, that the regulatory body decided last week to preserve one of the most egregious loopholes in the entire financial system. Money market mutual funds were effectively declared “Too Big to Fail” by the authorities in 2008 yet remain wholly unregulated. They are the rotten core of the shadow banking system—providing ridiculously cheap leverage to speculators courtesy of the American taxpayer. Money market funds were created to get around bad regulations."

Federated Threatens the FSOC with Subversion through Public Comment Process

Federated FSOC Money Market Comment to Financial Stability Oversight Council: Federated Investors implies the FSOC is "seeking public assistance in making a case for its recommendations." Federated accuses the FSOC of "subverting the public comment process."

"The Council’s failure to comply with these requirements has also subverted the public comment process. Rather than presenting a case supporting the proposed recommendations for public scrutiny, the Release seeks public assistance in making a case for its recommendations. These failures to comply with the requirements of Section 120 should prevent the Council from making any recommendations to the Commission based on the Release."

If one reads all the comments at the FSOC website, 90 percent of all comments are from Wall Street firms that have money markets, lobbying firms for Wall Street, and/or financial advisors that work for Wall Street, breaching their fiduciary duty by putting their interests over their clients.

Money Market Reform is a Classic Money and Banking Issue

The most instructive of comments for the average investor at the FSOC website is by a Money and Banking Professor at Ohio State, Professor McCulloch. He describes his background as:

"Professor Economics and Finance at Ohio State University, and hold a PhD from the University of Chicago. I have taught Money and Banking for 39 years, during which time I have closely followed developments in banking. I am an expert on the Term Structure of Interest Rates, Financial Intermediation, Deposit Insurance, and the heavy-tailed Stable Probability Distributions that realistically quantify financial risks. "

We do not know Professor J. Huston McCulloch, other than through this comment at the FSOC. What is known, the reform of money market funds is a critical piece to restoring our financial system to one that most easily facilitates capital formation, lending and liquidity that serves the best interest of society overall. It is a classic 'money and banking" issue for the decade.

Professor McCulloch clearly responds to each question posed by the FSOC. This is the level of rational, intelligent discussion the public needs to make a determination of the most appropriate role of lending, saving, "shadow banking" and the nature of true reforms to stabilize our financial system. Society needs more Professors, such as Professor McCulloch, to speak rationally and in plain English, on the structure and underpinnings of our current financial system and what is in society's best interest.

Interestingly, most commercial banks now also have significant investments and profits derived from money market mutual funds, which is why one is not hearing from the traditional commercial banking sector. They are guaranteeing the securitized "junk" and taking their fees on the "junk" being stuffed into the money market funds. Traditional commercial banking is conflicted as to the role of money market mutual funds. Even though traditional commercial bankers know "shadow" banking does not make a stable financial system, they cannot abandon their significant short term profits to seek true reform that will benefit society overall.

As a retail investor, I can attest that the current structure of money market funds does not provide the transparency needed to make informed investing decisions. Baby steps were made in transparency, but they are not enough. Every Wall Street firm leads the investor to believe their money market funds are as same as bank deposits.

Further, there is a viable option to the Federated type money market mutual fund for the average investor in this interest rate environment: FDIC insured sweep options that provide the same liquidity, increased yield and less risk for the average investor.

FSOC, please do not be bullied by Wall Street. The average investor needs your protection.

"Dangerous Liaisons": How They are Harming the Retail Investor

The Derivative Project — Tue, 12 Feb 2013 00:44:37 GMT

The Project on Government Oversight, "POGO" released a report today, "Dangerous Liaisons: The SEC Revolving Door". The report states: "A revolving door blurs the lines between one of the nation’s most important regulatory agencies and the interests it regulates.

Former employees of the Securities and Exchange Commission (SEC) routinely help corporations try to influence SEC rulemaking, counter the agency’s investigations of suspected wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals, and win exemptions from federal law."

"POGO’s in-depth analysis of the SEC’s revolving door found many examples of where the line between regulator and industry was blurred. For example, several former SEC staffers were part of the successful lobbying effort last year to block tightening of regulations for money market funds, one of the top priorities of former SEC Chairman Mary Schapiro."

In sum, critical money market reform was blocked by this incestuous relationship between Wall Street and former SEC employees.

In sum, retirement investors lost over $2 trillion dollars in retirement savings and Dodd Frank mandated a new SEC Investor Advocate be appointed to represent the interests of the average retail investor. Wall Street has blocked this appointment, now delayed for over three years.

Here is The Derivative Project's report on Wall Street's blocking of the new SEC Investor Advocate Office, mandated by Dodd Frank law, enacted in July 2010. It is now 2013. It is a result of what POGO describes in their report, "regulatory capture."

As The Derivative Project reported last December, Wall Street's influence on our regulatory agencies necessitates a truly independent appointment for SEC Chairman to right the imbalance of power that has stalled our economic growth through an unnecessary financial crisis, caused by greed, regulatory capture and lack of private action in the securities industry.

December 8, 2012 - President Obama's Most Critical Appointment to Restore Sustainable Economic Growth

The Derivative Project wrote in this December 8, 2012 Blog Post:

"Wall Street Blocked the Dodd Frank Mandated Office of the SEC Investor Advocate"

Appoint the SEC Investor Advocate mandated by Dodd Frank in 2010. Wall Street has prevented this. Why? They are afraid of debate. They are afraid of competition. They are afraid of the democratic process of allowing everyone to have a voice to allow honest debate and compromise.

If there is any doubt as to why the SEC has not followed the law established by Congress' Dodd-Frank law, ask President Obama why did a former SEC Commissioner stonewall Chairwoman Shapiro's appointment of an SEC Investor Advocate? Here is a summary from a September 2012 NY Times article, Amid Public Backlash, Bankers Maintain Influence in Washington.

Annette Nazareth, a former SEC Commissioner who is now a securities lawyer for Davis Polk, according to a Freedom of Information Report by Bloomberg, influenced SEC Chairman Shapiro. Nazareth's communication with the agency was extensive, "Nazareth's messages asked for meetings, offered her firm's products and opined on the debate in Congress. She...wrote that the prospect of a consumer finance protection agency made her "feel ill" and that she'd asked SIFMA, the Wall Street trade group to "trash" a proposal for a investor advocacy office at the SEC."

Congress mandated this new Office and Congress has re-appropriated the funds to establish the Office. One can only conclude that Ms. Nazareth is also lobbying for her husband's Wall Street firm. According to this Bloomberg article Nazareth is married to former Federal Reserve Board Vice Chairman Roger Ferguson Jr., now chief executive officer of TIAA-CREF, the manager of retirement funds for employees of nonprofits. Some e-mails refer to a party they host during the December holidays, where regulators and lawyers mingle."

Here are The Derivative Project's previous posts on regulatory capture, the SEC and Wall Street. It is a significant factor in limiting a return to sustainable economic growth.

September 25, 2010: The Theme This Week Has Been Regulatory Capture

October 1, 2010: FCIC, Show the American People That Regulatory Capture Has Ended

September 26, 2012: The Derivative Project wrote to the SEC and New Dodd Frank SEC Advisory Committee on Regulatory Capture and Money Markets. This "Advisory Committee", supposedly representing individual investors, refused to discuss pros and cons of this reform for individual investors. Why?

October 3, 2012: Wall Street's Investor Advocate Misrepresents Money Market Reform

"In sum, retail investor advocates work for Wall Street and are the "mouth pieces" in the media and Congress for retail investors. This goes beyond "regulatory capture."

February 1, 2013: They Doth Protest Too Much: FSOC, Don't Be Bullied By Federated's Threat of Subversion

Congress, please consider this concept of regulatory capture and the February 13, 2013 Project On Government Oversight's report on regulatory capture, when examining the appointment of President Obama's appointment for the SEC Ms. Mary Jo White. Based on POGO's analysis and based on the damage to the economy in the 2008-2009 financial crisis, must Congress take critical steps to ensure there is separation of power and influence, and appoint a new SEC Chairman with no previous work experience and ties to Wall Street?

If not, why not?

Investors, Who Should You Believe About Money Market Reform: Wall Street or Economists and Commercial Banks

The Derivative Project — Thu, 31 Jan 2013 03:40:54 GMT

Wall Street vs Commercial Banks

There is a war going on out there and most investors have no idea, yet Wall Street is insisting they know what is best for every investor. No surprise, what is in the "investor's best interest" is in Wall Street's best interest. Has your financial advisor warned you about the systemic risks that money market mutual funds pose? Has your advisor suggested you move your cash to an FDIC insured sweep option that creates the exact same liquidity and advantages of a traditional money market fund? Did your financial advisor warn you about the potential collapse of the financial system due to trillions of dollars of non-collateralized credit default swaps? Of course not. Wall Street operates in the best interest of Wall Street, not the investor.

The SEC and the Financial Stability Oversight Council Believe Money Market Mutual Funds carry systemic risks.

What should your "financial advisor" insist you do, given the concerns that these funds pose systemic risk?

Move your money, in the short term, until these risks are controlled, to FDIC sweep option type money market funds, that carry FDIC insurance. These funds still provide the same liquidity, the same return or better, with less risk. Instead, your "trusted advisor" is submitting comments on money market reform to the Financial Stability Oversight Council that purport to be representing the individual investor. These advisors are conflicted and they are simply stating in their comments what is in their best interest and their employer's.

Many of these advisors are fiduciaries and are being paid a fee to advise you. This is a breach of the Investment Adviser's Act of 1940. These advisors are placing their interests over your best interests. In this environment, the individual investor earns more money, with less risk, with the identical cash liquidity advantages, in an FDIC insured money market sweep account.

Are SEC Registered Financial Advisers breaching their fiduciary duty by recommending non-FCIC insured money market funds, that carry systemic risk, since they are not in the investors' best interest?

Currently, non-FDIC insured money market accounts are not in the best interest of investors, but are in the best interest of mutual fund companies. SEC registered investment advisers are conflicted in recommending non-FDIC money market funds to individual investors.

Here is a link to the Financial Stability Oversight Council's (FSOC) website (Input fsoc-2012-0003) where one may read the comments from a few "financial advisors". There was not one personal financial advisor that expressed any concern about the systemic risk posed by money market mutual funds. Every advisor simply stated investors love this product. Why change it?

Most investors would appreciate a more in-depth analysis of the pros and cons of a product that many economists and bankers believe pose systemic risk. As one SEC Registered Investment Advisor wrote to the FSOC:

" MMFs have paid individual investors an extra $240 billion in yield over what they would have earned in comparable bank products."

Yes, but that is not the case now and beside the point. It bears no relevance to the issue on which the Financial Stability Oversight Council is seeking public comment. Further, currently, money market mutual funds present a drain on investor savings, through "voluntary recapture" programs such as Charles Schwab's and present significant systemic risk, while there are safer alternatives with comparable returns for investors.

Here is the Federal Reserve Bank of Dallas' comment to the FSOC, in light of this "financial advisor's" comment.

"There is additional evidence and analysis that supports the need for the FSOC proposed recommendations addressing vulnerabilities in the mutual fund industry. A forthcoming article, “The Money Market Meltdown of the Great Depression,” by John V. Duca, in the Journal of Money, Credit, and Banking (to be published in the March/April 2013 issue) demonstrates that the plunge in commercial paper market volume seen during the Great Recession is not a one-time event in the U.S. An even larger inflation-adjusted decline occurred in the Great Depression. In addition, it was because of extraordinary policy actions (particularly by the Federal Reserve) that more damage to the commercial paper market in 2008 and 2009 was avoided. This point is demonstrated in not another related article by John V. Duca, “Did the Fed’s Commercial Paper Funding Facility Prevent a Great Depression Style Money Market Meltdown?” forthcoming in the Journal of Financial Stability. For these reasons, there is a compelling need for the money market mutual fund industry to be reformed along the lines suggested by the recommendations proposed by the FSOC.

The Systemic Risk Council vs Wall Street

Here is a line up of the individuals that believe money market funds pose systemic risks to our economy, members of The Systemic Risk Council:

Chair: Sheila Bair

The Pew Charitable Trusts, Former FDIC Chair

Ricardo Delfin

Executive Director to the Chairman & Special Advisor

Senior Advisor: Paul Volcker

Former Federal Reserve Chair

Members:

Brooksley Born

Former U.S. Commodity Futures Trading Commission Chair

Bill Bradley

Former U.S. Senator (D-NJ)

William Donaldson

Former U.S. SEC Chair

Harvey Goldschmid

Columbia Law School, Former U.S. SEC Commissioner

Jeremy Grantham

Co-founder & Chief Investment Strategist, Grantham Mayo Van Otterloo (GMO)

Chuck Hagel

Distinguished Professor, Georgetown University, Former U.S. Senator (R-NE)

Richard Herring

The Wharton School, University of Pennsylvania

Simon Johnson

Massachusetts Institute of Technology Sloan School of Management

Hugh F. Johnston

Exec. VP & CFO, PepsiCo

Ira Millstein

Legal Counsel to SRC, Chair, Columbia Law School, Center for Global Markets and Corporate Ownership

Maureen O’Hara

Cornell University Johnson School of Management

Paul O’Neill

Former CEO, Alcoa, Former U.S. Treasury Secretary

John Rogers

CFA, President and CEO, CFA Institute

Chester Spatt

Tepper School of Business, Carnegie Mellon University, Former U.S. SEC Chief Economist

Here is the Systemic Risk Council's statement on the risks posed by money market mutual funds:

"The Systemic Risk Council (SRC) is writing to commend and support the FSOC for seeking public comment on proposals to reform money market funds. It has been more than four years of study since taxpayers were forced to guarantee money market funds and the structural risks remain. We believe strong reform – namely strong capital or a floating NAV – is essential to protecting the financial markets from the systemic risks posed by money market funds. Never again should policymakers be forced to choose between a financial meltdown or a taxpayer bailout of money market funds."

Please note that none of these individuals currently have strong ties to Wall Street and many are trained economists and academics that are experts on the core structure of U.S. financial markets and the role of "money and banking" historically and in today's global capital markets, to ensure a stable financial system.

Who is Speaking for Investors on Money Market Reform?

To speak for investors, Wall Street created a phony investor advocate, The Consumer Federation of America, that purports to be speaking for the average American investor. The Consumer Federation of America is the spokesperson for Wall Street to ensure Wall Street is free to carry on their agenda, despite harm to the individual investor. This is clear in the Consumer Federation's support of Wall Street's reluctance to put in the necessary changes to prevent future taxpayer bailouts, since these changes would cut into Wall Street's profits.

Here is Wall Street's (Investment Company Institute) website, Preserve Money Markets, For Investors, For America. Remember, the Investment Company Institute is Wall Street.

The Derivative Project submitted to the SEC Advisory Committee, which represents individual investors, a request for comment by each member of the SEC Investor Advisory Committee at their next regularly scheduled meeting, September 28, 2012 on money market reform. The Derivative Project intended to publish members of the SEC Investor Advisory committee's responses to the proposed reform to educate individual investors on the pros and cons of money market reform.

This Committee, intended to protect individual investors, refused to address the subject of risks posed by money market mutual funds at their September meeting. The Derivative Project again submitted a request to the SEC's Investor Advisory Committee to discuss the pros and cons of money market reform at their January meeting. The Consumer Federation of America, the individual investor's representative, sits on this committee and did not bring the issue forward, thus deeming it an issue that individual investors should not be concerned with.

One member of the SEC Investor Advisory Committee asked SEC Chair Elise Walter, "How should we be discussing the concerns brought up in the comments for our committee to address at each meeting?" The SEC responded, "We do not have any policy to address any comments submitted to the SEC Investor Advisory Committee by individual investors." In sum, what individual investors are concerned with is not an issue for the SEC. The SEC simply addresses what Wall Street is concerned with. Based on the SEC Investor Advisory Committee's reluctance to discuss and inform individual investors on a critical structural reform, Congress might want to investigate if this Committee should be disbanded to save taxpayer dollars, since it clearly is in no way representing individual investors.

So, individual investors, do you put your trust in Wall Street, after the 2008-2009 financial crisis or would you want the Federal Reserve Bank of Dallas and the Systemic Risk Council to have a say in what "systemic" risk is posed by money market mutual funds and how it should be managed?

What is Self-Dealing in a Qualified Plan?

The Derivative Project — Sat, 12 Jan 2013 20:23:15 GMT

The IRS is very tough on individuals that "self-deal" in an IRA. In sum, you cannot buy a Condo in Lake Tahoe, place it in your IRA, and then use it for your own ski vacations.

"Anything that smacks of self-interest or occurs between parties in interest has the potential to be considered a prohibited transaction."

Retirement investors in 401k's and IRA's or SEP's have a base level of protection by ERISA standards.

Here are some ERISA standards to protect investors:

Trustees must administer the plan for the exclusive benefit of plan participants and their beneficiaries.

Trustees must act in accordance with the standard of care established under ERISA, that is, the skill, prudence and diligence . . . that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims

Trustees must diversify plan investments in order to minimize the risk of large losses (unless it is clearly prudent not to do so).

Trustees must not permit the plan to engage in the "prohibited transactions" described in ERISA, which include, subject to specific statutory and administrative exemptions, any sale, exchange or transfer of assets, goods of services between the plan and any "party in interest" (employer, employee, fiduciary, persons providing services to the plan and related parties).

The recent Ameriprise Employee Suit on Ameriprise Self-Dealing in their qualified retirement plan, as reported by the Star Tribune last November, begs the question is this also self-dealing? Should the Internal Revenue Service/Department of Labor be investigating Ameriprise for "self-dealing" placing their interests over the plan participants if they chose to place the Ameriprise employees' retirement savings into mutual funds that paid Ameriprise greater fees, at the expense of the Ameriprise employees? Was this a "prohibited transaction" under IRS/ERISA rules?

For that matter, is it self-dealing for mutual fund companies to place retirement funds in money market funds that are not in the retirement saver's best interest, if there are other safer, more cost effective alternatives that the Fund company could have provided the retirement saver?

Money market mutual funds that cause losses to retirement savers in qualified plans, when they are other alternatives, albeit less profitable to the mutual fund company, sure smacks of self-dealing to the lay person. Charles Schwab's intent to capture fees in the future through "voluntary recapture" from retirement savers sure smacks of self-dealing in qualified plans.

It has been reported ING's money market funds and Federated's cause actual losses to retirement savers, this smacks of "self-dealing" and putting their profit model over the best interest of the qualified plan saver. This is clearly not "prudent" when there exist other viable options, such as FDIC sweep accounts.

The Derivative Project submitted this Letter on Money Market Reform and "Self-Dealing"" to the SEC Investment Advisory Committee and Financial Stability Oversight Council today.

The Department of Justice and The U.S. Taxpayer v AIG

The Derivative Project — Tue, 08 Jan 2013 20:03:02 GMT

U.S. taxpayers had forgotten about, or never really understood, (due to the misrepresentative reporting on the fraud perpetuated by AIG) how they were duped. Taxpayers, here is another opportunity to see justice served for all the economic hardships following the 2008 financial crisis. It is not to "get even" it is simply to ensure this type of fraud never happens again, which is why there exists a legal system, to protect society's best interests.

The Department of Justice has another opportunity to examine the fraudulent contracts entered into by AIG in the pending suit described in a January 7, article in the New York Times, reprinted at CNBC today.

Maurice Greenberg, a major AIG shareholder and AIG's former chief executive, filed suit in 2011, on behalf of fellow AIG shareholders. According to the New York Times article, he has asked AIG's Board to join the suit," a move that could nudge the government into settlement talks." He raises a very valid point in his suit.

However, the only settlement talks the U.S. government can enter into, on behalf of U.S, taxpayers, is by filing criminal charges against AIG and its Board of Directors for financial contract fraud, a step that should have been taken in 2007, prior to the financial crisis.

What is Mr. Greenberg's Suit and How Does it Benefit U.S. Taxpayers?

According to the New York Times, the Board of AIG will meet tomorrow to consider joining a $25 billion shareholder lawsuit against the government. Starr International, Mr. Greenberg's company, will have 45 minutes to present its case before the AIG Board. Here is what is at issue, according to Mr. Greenberg:

"The government, Starr argues, used billions of dollars from A.I.G. to settle credit-default swaps the insurer had with banks like Goldman Sachs. The deal, according to the lawsuit, empowered the government to carry out a "backdoor bailout" of Wall Street.

Starr argued that the actions violated the Fifth Amendment. "The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency," the Starr complaint says."

The Department of Justice, on Behalf of Every U.S. Taxpayer, must Commence Criminal Prosecution Against AIG's Board and Executives for Entering into Fraudulent Financial Contracts

From 2006 to 2008, AIG entered into financial contracts, credit default swap contracts, without the capital to back-up these contracts, in the event the market moved against them.

The Federal Reserve bank was wrong, as Mr. Greenberg contends, they never should have used taxpayer funds to bail out AIG's counter parties, principally commercial banks and investment banks. The contracts were entered into fraudulently, by AIG, and they should have been rendered void, since they were entered into fraudulently, which is the basis of U.S. Contract law. Mr. Greenberg is 100 percent correct. These contracts should never have been honored and it was indeed a "back door bailout of Wall Street" and other U.S. and foreign commercial banks.

AIG's financial contracts were 100 percent speculative in nature. AIG's Financial Products unit made a bet on a sector of the market. The market moved against them. To keep AIG out of bankruptcy, the Federal Reserve took taxpayer dollars to payoff AIG's counter parties, Goldman Sachs, Deutsche Bank, Societe Generale, etc.

AIG represented to its counter parties, Goldman, Deutsche Bank, Societe Generale, etc. that it had the capital to back up the financial contracts. It did not, and it did so knowingly. That is fraudulent misrepresentation.

What AIG did is absolutely no different that what J P Morgan did in the infamous London Whale speculative bet. The only difference is J.P. Morgan had the capital to back-up their trading losses, AIG did not. If J.P. Morgan, Deutsche Bank, U.S. Bank or any hedge fund enters into financial contracts without the capital to back up these contracts, given normal market movement, that is fraud. Banks want to continue proprietary trading, thus it is imperative that AIG case be reviewed and prosecuted to prevent future contract fraud in the OTC derivative markets.

Why is this issue so critical to every U.S. taxpayer? The over-the-counter derivative market, post Dodd- Frank, in many cases, is still an honor system. Commercial banks and other end users in the foreign exchange derivative market, will continue to be on an "honor system," to minimize end user costs. Daily collateral postings, on a regulated exchange, will not be required. If the Department of Justice continues to allow the "stupidity defense", if they do not prosecute for AIG's financial contract fraud, precedent has been set and of course, it will continue.

In plain English, AIG bet the house, a bet on the markets and they did not have enough capital to honor their bets. That is by definition, fraud.

Once again, every farmer knows they must mark to market their hedges of wheat or corn on the grain exchange, futures exchanges, if the market moves against them. The difference in the OTC derivative markets is it has been the honor system. Commercial banks have self-adminstered how much counter party credit risk is appropriate and they have also informed their counter parties what is and is not prudent exposure. Insurance companies have been party to the OTC derivative markets for decades and have entered into these type of derivative trades for decades.

Advocates of AIG and those recipient of U.S. taxpayer dollars on these failed bets, made without adequate capital, have quietly obscured the truth, the contracts were fraudulent.

The Department of Justice told The Derivative Project and sent an inappropriate letter to The Derivative Project, ignoring our request for taxpayer protection, that what AIG did was "stupid" "but it was not illegal, " in 2010.

Apparent shills for Wall Street, such as Barry Riholtz, Washington Post columnist, and Asset Management firm principal, continue to spread the misinformation that AIG's losses happened since they were an insurance company and these contracts were not being monitored for adequate capital and it was not against current insurance company regulations. This is a shocking pronouncement, not based on fact, but a story that the Department of Justice apparently bought.

Mr. Riholtz wrote in the Washington Post, Credit Default Swaps are Insurance Products: It is Time we Regulated Them as Such, March 10, 2012. He states: "The biggest underwriter of default swaps was AIG, the world's largest insurer. Without that reserve-requirement limitation, it was free to underwrite as many swaps as it could print. And that was just what it did: AIG's Financial Products unit underwrote more that $3 trillion worth of derivatives, with precisely zero dollars reserved for paying any potential claim." Finally, he states, "Credit-default swaps are insurance products. It is well past time we regulated them as such."

"Without the reserve requirement limitation, it was free to underwrite as many swaps as it could print."

Does this mean every insurance company is now preparing to enter into trillions of dollars of currency swaps, on a speculative basis, since they have no reserve requirements? It is advisable, it is incredibly lucrative, if your firm can get away with it, as AIG did. It is no-recourse speculation without any capital; you win if the markets go up or down on your speculative bets.

Credit default swap contracts, are simply straightforward financial contracts, designed by the International Swaps Dealer Association (ISDA) and have been used for decades in OTC derivative markets for interest rate swaps and currency swaps.

All derivative contracts are "like insurance". A farmer is taking out "insurance" on his future crop revenues through entering into future contracts on his sale/delivery of his corn crop in the next 6 months.

Insurance companies have entered into "swap contracts" for decades, including interest rate swaps and foreign exchange, currency swaps. If an entity takes one side to an interest rate swap, such as entering into a floating to fixed contract, without an underlying position, it is speculating on the direction of interest rates. The executive in charge of AIGFP, Mr. Cassano, was trained in interest rate swaps. He was fully aware of the nature of the financial contracts, interest rate or credit default swap, and what collateral was necessary and prudent.

Speculating without an "insurable interest" happens all the time. It is done on a futures exchange or on a proprietary trading desk of a commercial bank, who has the capital to back up the trade.

If one were to follow Mr. Riholtz's logic, every derivative contract would be regulated by the insurance industry. Mr. Rihotlz is simply justifying why the fraud was never prosecuted on behalf of the commercial banks and AIG, who entered into these contracts fraudulently. Of course, Mr. Cassano knew what he was doing was illegal. ISDA trains everyone in counterparty credit risk and the basics of the ISDA financial contract agreements for OTC derivative instruments.

Conclusion, Department of Justice

U.S. taxpayers want you to do "discovery" during the AIG v US Government lawsuit. Then we want you to countersue AIG for entering into financial contracts fraudulently. File criminal charges against the officers and directors of AIG for fraud. Make all AIG's counter parties return the collateral they received under these fraudulent financial contracts. Use the proceeds to shore up Social Security for all those that lost their life savings when they were about to retire and stop the nonsensical talks about ending entitlements for those in need to balance budgets and end deficits, caused by AIG and other reckless parties to the 2008 financial crisis.

Hindsight is now perfect. AIG knows Wall Street didn't deserve these payments. Their contracts were entered into fraudulently. They did not have the capital to back them up. It is not stupidity, as you told us, Department of Justice. It was one smart scam and a good explanation to back it up. "We did not know we could not speculate trillions of dollars without the capital to do so."

Fundamental U.S. contract law prohibits entering into a financial contract without adequate capital to honor that contract. If a homeowner misrepresents to the bank, in a financial contract, such as a mortgage, they have the capital to back up that financial contract, but they knowingly do not, that is fraud, a criminal offense. You can be darn sure if the bank loses it money because the homeowner misrepresented his financial position to the bank, criminal charges would be filed against that individual. That is how the legal system deters fraud.

Department of Justice, the U.S. taxpayer has the same right to law enforcement to deter future criminal activity, as any bank would take against them. The chance this type of fraud will continue to harm society overall is too great, if allowed to escape prosecution.

Ameriprise vs Ameriprise: Even Wall Street Knows the Rot...Is that Why Potential Treasury Secretary Pick Chenault Sold It?

The Derivative Project — Sat, 29 Dec 2012 18:26:36 GMT

Ameriprise employees are suing Ameriprise over breach of fiduciary duty for putting their retirement savings into more expensive funds, packaged by Ameriprise. Yes, that is self-dealing and a breach of fiduciary duty. That is what every retirement investor is faced with in every 401k account today. That is what every IRA investor is faced with every day with conflicted advice from snake oil salesmen purporting to be "trusted financial advisors" providing self-serving conflicted advice.

According to Investment News, "Attorneys for the financial services firm and lawyers representing a group of Ameriprise retirement plan participants are due to meet in federal court in Minnesota on Jan. 7 for an initial pre-trial conference.

A court filing dated Dec. 21 laid the groundwork for what looks like a busy year of litigation for both groups, starting with the January conference and culminating in a trial date as early as Dec. 9, 2013 — as proposed by the plaintiffs — or July 31, 2014, per the recommendation of Ameriprise attorneys."

Ameriprise and Ken Chenault

Ken Chenault, current CEO of American Express, has been asked, according to news sources to consider being Obama's next Treasury Secretary, replacing Timothy Geithner. This very well may be an excellent choice. Mr. Chenault had the wisdom to sell Ameriprise when he saw the abject failure of a company that abused its employees with wage and labor issues unheard of in the year 2000, allowed massive pay discrimination based on sex and had a business model that preyed on the savings of the middle class through sales of numerous products and services that breached and continue to breach fiduciary duty and securities laws.

In 2001, Mr. Chenault became CEO of American Express, faced with a decision of resolving an outstanding lawsuit that was clearly tarnishing the image of the American Express brand and its history of being one of the best workplaces in the United States.

American Express Financial Advisors, women advisors, filed a class action law suit against American Express for equal pay in 1999. At this point American Express Financial Advisors was a wholly-owned subsidiary of American Express.

American Express, that same year that Chenualt became CEO, agreed to the largest pre-suit settlement in a class action law suit. They also agreed to unprecedented injunctive relief. The women advisors gave the bulk of their settlement money to pay for advancing the careers of future woman financial advisors at American Express Financial Advisors. American Express agreed to be monitored by the courts and make these changes over a several year period. American Express sold American Express Financial Advisors in 2005, under Mr. Chenault's watch.

One would like to believe that Mr. Chenault saw American Express Financial Advisors and its business model as a profit model detrimental to society overall and the common good. Through his agreement for unprecedented injunctive relief for future employees, one would like to believe Mr Chenault knows the difference between right and wrong, has an ethical backbone and will stand up to the manipulation and unethical breaches by not only the flawed financial advice and retirement industry, but to the larger issues that are comprising our nation's growth in the long-term.

As Treasury Secretary, Mr. Chenault would need to reform the entire short-term money market industry, a house of cards, presenting systemic risk through non-tranpsarent loans, guarantees and questionable underlying credits. This is a herculean task and one that the Wall Street firms do no want to let go lightly.

As Treasury Secretary, Mr. Chenault would need to address the role of the Federal Reserve and two big to fail banks and their ongoing fight to continue the excessive positions in OTC derivatives in the shadow markets and proprietary trading, without collateral.

Ameriprise vs Ameriprise sums up the rot that Wall Street has created touching all of us everyday, laid bare by the 2008 financial crisis.

Mr. Chenault saw the flawed business model in American Express Financial Financial Advisors was incompatible with the ethics of American Express' workplace and society overall. Can President Obama put in place a Treasury Secretary who can balance a powerful financial services lobby with what matters most for the common good?

Lessons from 2012 Show Congress a Clear 2013 Road to Sustainable Economic Growth for the Middle Class

The Derivative Project — Sat, 29 Dec 2012 01:41:22 GMT

Hindsight provides a perfect vision for the future. Here is our vision for a sustainable economic recovery for 2013 for middle class retirement savings.

Paramount to each of these points is a request for a renewed focus by Congress on the big picture that values society overall, over an obsolete Wall Street profit model that is hindering sustainable economic development in the U.S.

Impact of Transparency in OTC Derivative Markets and Understanding of Role of CDS Contracts by Wider Population

The Derivative Project posted this Blog Post, May 2012, on the most ridiculous role of the International Swaps Dealers Association willingness to payout on a technical default of US debt on outstanding credit default swap contracts. One can note during the current shenanigans on the "fiscal cliff", speculation on credit default swap contracts on US debt is now a mute point. It was simply a way for CDS traders to make a buck to the detriment of society overall.

A larger share of the public is now understanding the stupidity of speculating on sovereign debt. Credit default swap contracts belong on regulated exchanges, along with its speculation in such. U.S. taxpayers should not pay a cent to monitor systemic risk resulting from credit default swap OTC contracts where there is not adequate day to day collateral postings as markets move. Speculation, with daily mark to market belongs on regulated exchanges with well established position limits to prevent market distortions for end users, such as farmers hedging wheat crops, that require a normal convergence between cash and futures prices.

Congressional Action: All speculative credit default swap contracts must trade on regulated exchanges, with daily mark to market collateral postings. Customized OTC credit default swap contracts were and are a sham and are not a necessary end user hedge. Speculative limits on commodities are requisite for smooth functioning markets and should be closely monitored in mutual funds and ETF's or pump and dump schemes are too easy for hedge funds to manipulate markets with today's computerized trading.

Further, it is now evident with ICE's purchase of the NYSE, the money to be made is in derivatives, not traditional equities. An understanding and appropriate safeguards on postition limits, volumes and role of derivatives in "pump and dump" schemes is paramount to maintain market integrity.

Self-Regulation in the Securities and Futures Industry is an Abject Failure

The Derivative Project posted this Blog Post, "Retail FX Has Largest Ponzi Scheme in History: What SIFMA Did a Few Days Later." The SEC, FINRA and NFA (National Futures Association) were all complicit in the major Peregrine fraud, as were CNBC, PBS and other media outlets that allowed a platform for the fraud to gain "credibility" and a sales platform to lure innocent victims of a fraudulent scheme. A simple review of all the NFA claims by investors in years preceding the fraud shows the abject failure of self-regulation by all three regulators, NFA, FINRA and the SEC. See Blog Post above.

Congressional Action: A private right of action is the only resolution for futures and all securities complaints by investors. Congress, hold a hearing with retail investors who have been harmed by FINRA's kangaroo court. You have a duty to understand why this is indeed an obstruction of justice. It is a clear breach of every American's constitutional rights for equal justice and right to a court hearing. All arbitration must be voluntary. Self-regulation has proven to be a failure from Bernie Madoff to Alan Stanford to Peregrine Capital to MF Global. It is not just investors, our nation's farmers' livelihoods are impacted, through this rogue and reckless attitude of regulators towards Wall Street shenanigans.

The "Financial Advice" Model for Retail Retirement Savers is Obsolete and A Sham

The largest profit center for Wall Street, in terms of a steady dependable income stream, is IRA's, a market now larger than 401K's. According to a 2012 Investment Company Institute report over $4.7 trillion are invested in mutual funds through IRA and defined contribution plans. According to the ICI report:

"The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, in conjunction with the important role that mutual funds play in these plans, explains some of households’ increased reliance on investment companies during the past two decades. At year-end 2011, 9 percent of household financial assets was invested in 401(k) and other DC retirement plans, up from 7 percent in 1991. Mutual funds managed 55 percent of the assets in these plans in 2011, up from 13 percent in 1991 (Figure 1.4). IRAs made up 10 percent of household financial assets, and mutual funds managed 45 percent of IRA assets in 2011. Additionally, mutual funds managed $982 billion in variable annuities outside of retirement accounts, as well as $4 trillion of assets in taxable household accounts." Further,

"From 1997 to 2011, fund industry employment in the United States grew 39 percent from 114,000 workers to 159,000 workers (Figure 1.12). Based on results of an ICI biennial survey, employment peaked in 2007 at 168,000." Further,

"In 2011, distribution and sales force personnel together accounted for 24 percent of the workforce. Employees in these areas may be involved in marketing, product development and design, or investor communications and may include sales support staff, registered representatives, and supermarket representatives." Further,

"IRA assets, with $4.9 trillion at year-end 2011, accounted for 27 percent of U.S. retirement assets. Mutual fund assets held in IRAs were $2.2 trillion at year-end 2011, down slightly from year-end 2010 (Figure 7.12). Assets managed by mutual funds were the largest component of IRA assets, followed by securities held through brokerage accounts ($1.8 trillion at year-end 2011). The mutual fund industry’s share of the IRA market was 45 percent at year-end 2011, compared with 46 percent at year-end 2010." Further,

"At year-end 2011, mutual funds accounted for $4.7 trillion, or 26 percent, of the $17.9 trillion U.S. retirement market. The $4.7 trillion in mutual fund retirement assets represented 40 percent of all mutual fund assets at year-end 2011."

The outcome, Americans cannot save for retirement when they are losing over 30 percent of their savings to unnecessary fess. IRA and 401K administrative fees, marketing fees (sometimes called 12-b1 fees), investment management fees and trading costs are combined a drain on a viable retirement for most everybody. Mutual funds have been rendered obsolete thorough the greed of their creators. There is a better model to assist Americans in growing their retirement savings, particularly when there is talk of limiting Social Security annual increases. A new retirement savings model must supplement this potential loss in Social Security income.

The "advice" industry that developed with the advent of 401k plans and IRA's is a sham and must be reconstructed.

Congressional Action: Dodd Frank required a new SEC Office of the Investor Advocate. As The Derivative Project described in this Blog Post, "President Obama's Most Critical Appointment to Restore Economic Growth", Wall Street blocked appointment of the SEC Advocate for retail investors. Why? Wall Street does not want their profit model train for useless fees on American's retirement savings to end. They do no want the average American to understand how their savings is going directly to Wall Street's pockets, without returning any value to the saver. The SEC must balance the needs and requests of the retail retirement saver for a new paradigm of retirement investing, with the overwhelming force of a Wall Street lobby that represents a small sector of society and does not represent the common good.

Restore the Dichotomy between Sales person and Investment Adviser as Mandated by the Investment Advisers Act of 1940

The Derivative Project submitted this April 3, 2012 request for Rule Change to the SEC as the most viable option to a proposal for a fiduciary standard for a stock broker. A stockbroker is a salesperson whose goal is to sell, not to provide fiduciary advice. It is that simple. They cannot do both.

Insist that the SEC restore the dichotomy, under the Investment Advisers Act of 1940, between salesperson and investment adviser, so retail retirement investors are receiving bona fide "advice", not from snake oil sales men, but bona fide "pension consultants", CFA's; in short a retail investor is entitled to the same level of "investment advice" as that provided to a sovereign wealth fund or university endowment. (Excluding the type of investment advice that Goldman Sachs gave Libya's sovereign wealth fund - see below.) In sum, Congress must eliminate "shoddy advice" to Americans trying to save for their retirement. Even if their savings are not yet a large amount, they deserve the same quality of professional advice. Wall Street says if the Department of Labor insists on an ERISA fiduciary standard for stock brokers they will no longer be able to provide advice to IRA investors. This would indeed be progress for IRA savers.

What is the Wall Street Profit Model for Retail Retirement Savings?

Garner as many assets under management and charge excessive fees for administration and asset management with no competition. Wall Street has created a government controlled monopoly, that Congress, the Department of Labor and the SEC and FINRA will not interfere with. This must come to an abrupt end.

Individuals have no right to private action and cannot go to the Federal Courts when Wall Street has broken the law in their IRA account. Wall Street decides what is right and wrong for a retail investors' IRA, through mandatory arbitration, so the egregious law breaking never sees the light of day. This must end.

Performance is Irrelevant - Wall Street Gets Paid if they Have Gains or Losses

Reference The Derivative Project's Blog Post, "President Obama's Most Critical Appointment to Restore Sustainable Economic Growth."

Wall Street is free to charge excessive fees and lose retail retirement savings in poorly managed funds and still retain their fees. There is no competition. TIAA-CREF sits on the Advisory Board of the Department of Labor. For one non-profit, who offered its employees a TIAA-CREF mutual fund option, a retirement investor lost double the index for TIAA -CREF's retirement investments in a TIAA-CREF International fund. In this instance, the international index lost 12 percent and TIAA-Cref's fund lost 25 percent. Yet, the investor is stuck in the plan and has no alternative. There is no-recourse or consequence to TIAA-CREF for delivering such poor results. They still get their investment management fee, despite abysmal investment management performance.

"Voluntary Recapture" or the perfect example of why the retail investor will never get ahead

Charles Schwab's money market "voluntary recapture" program for its administrative fees in money market funds takes the cake in hubris.

Here is an excerpt from Schwab's SWIXX prospectus: "Voluntary Expense Waiver/Reimbursement":

"In addition to the contractual expense limitation agreements noted above, Schwab and the investment adviser also may waive and/or reimburse expenses to the extent necessary to maintain a positive net yield for the fund. Schwab and the investment adviser may recapture from the fund any of these expenses or fees they have waived and/or reimbursed until the third anniversary of the end of the fiscal year in which such waiver and/or reimbursement occurs, subject to certain limitations. The reimbursement payments by the fund to Schwab and/or the investment adviser are considered “non-routine expenses” and are not subject to any net operating expense limitations in effect at the time of such payment. This recapture could negatively affect the fund’s future yield. There were no prior year amounts recaptured. "

Here are The Derivative Project's comments to the SEC on systemic risk in mutual funds and inappropriate role of "voluntary recapture" programs.

Congressional Action: Mandate the Department of Labor and the SEC ban mutual fund companies "voluntary recapture" programs for administrative fees for any retail retirement account money market fund. Mandate the Department of Labor and the SEC review costs and benefits to retail retirement investors of investment advisers receiving only performance based fees for retirement savings vehicles. If the Investment Adviser's mutual fund loses more than the comparable index, that IA loses his total annual investment management fee from the retail retirement investor.

Mandate that all retirement savings be placed in FDIC insured money market sweep accounts, until the money market mutual fund industry eliminates the shadow lending that prohibits the retail investor from seeing what they are investing in. Contrary to reports from certain SEC Commissioners that assets in money market mutual funds are now transparent, we can attest that is false. FDIC sweep accounts pay a higher return and the fees are less. It is currently a breach of fiduciary duty for any 401k provider to not put clients savings in FDIC money market mutual funds due to the known systemic risks in non-insured money market mutual funds. The Department of Labor must take a role in this determination.

The Role of Momentum Trading in Distorting Smooth Functioning Markets

Momentum trading has distorted fundamental analysis, the backbone of all equity markets. It is a form of front running and pump and dump. The most egregious example is occurring right now with Apple Stock. Here is a view from the Financial Times in a December 20, 2012 article,

"Time to Stop Addiction to Momentum Trading": Hedge Funds Need to Go Back to Investing Basics.

“But after the disaster of 2008”, momentum trading and “amateur economics” came to rule. “Managers paid increasing attention to the ‘big picture’. Risk on, risk off – adjusting exposure – [has] become an almost daily practice.” In other words, portfolio churning based on market timing has replaced any focus on fundamentals."

This article does not go far enough. Momentum trading is a breach of U.S. securities laws of front running, of pump and dump, in the case of Apple now, dump and pump. The hedge funds have predicted a technical drop of Apple from 702 to 460. They are selling Apple, along with media reports to "justify" the momentum, buying call options, and then will pump it back up over 700 after January earnings, 2013. It is just that obvious, based on Apple's underlying fundamentals, earnings projections, products, and cash position. Apple's move in 2012 was not based on a tech frenzy, "irrational exuberance" such as during the tech bubbleas many media reports are touting. Apple's stock movement was based on earnings, product delivery and sound fundamentals, not irrational exuberance, like the Facebook IPO debacle.

Congressional Action: The Senate and the SEC must immediately authorize independent investigations of the 'combined media' reports on Apple stock, option trades, volumes, hedge funds' purchases and sales and option positions from February 2012 to January 2013. What are future limits that must be placed on media companies and hedge funds and others that perpetuate this dump and pump schemes that are distorting equity markets and making it treacherous for individual retirement investors to hold high-quality American company stock for long-term development of their portfolio and the U.S. economy?

2012 Postscript

Finally, Congress, it would be great if you could ask two questions and find rational answers for us all in 2013:

Why did Goldman sell call options on Banks, that invested heavily in Bernie Madoff's portfolios, to Libya's sovereign wealth fund? This was a winning trade for Goldman. What did Goldman know about Mr. Madoff's ponzi scheme?

Dissecting the Goldman and Libya Trades: How They Impact Your 401k

Why did Warren Buffett sell or write long-term puts on the S&P index for Deutsche Bank, that exposes Berkshire Hathaway to incredible risks until 2018? What did Mr. Buffett know about Deustsche Bank's financial condition at this point? How do his views tie in with the Whistleblower's claims on Deutsche Bank's alleged misrepresentative accounting practices?

U.S. Taxpayers Need the Untold Story: Deustche Bank, Mr. Buffett and Mr. Khumazi

The answers to these two questions will help solve the concept of fiduciary, trust and what really happened to cause the 2008 financial crisis. Without understanding history, it is difficult to chart our future course.