Broker-Dealers vs Investment Advisers

The non-profit research group, the RAND Corporation, put out a technical report last month about the increasingly blurred line, particularly since the 1990s, between broker-dealers and investment advisers. The full study can be found here, while a much shorter summary is here.

Some highlights:

• about half of the over 10,000 investment advisory firms in 2006 had fewer than 10 employees.
• the number of brokerage firms declined about 10% to just over 5,000.
• the number of firms on both lists was around 550.
• over 72% of clients surveyed were "very satisfied" with the services they received from these firms, with the most desired qualities being trustworthiness, attentiveness, and accessibility.
• over 45% of clients found their professional through a family or friend referral.
• however, client confusion as to the difference between investment advisers and broker-dealers and what services they perform was commonplace.

SEC Looks Hard at "Free Lunch" Seminars by Firms Seeking Business

The SEC is scrutinizing advertising seminars put on by firms seeking investors. Often targeting the elderly, these free-lunch seminars are being investigated as improper sales ploys. The SEC put out a whitepaper last year, discussing it's focus on this topic, which can be found here.

Moves Toward Regulating Death Bonds

Washington is the 24th state to propose legislation regulating so-called "death bonds," which are pools of life insurance settlements packaged up as investments. The Seattle P-I raises the issues involved here.

Credit Default Swaps Markets May Face Challenge

The NY Times had an article about the market for credit default swaps, noting that it's now twice the size of the entire U.S. stock market. That market is $45.5 trillion now, having grown from $900B in seven years, and it compares with a $21.9 trillion stock market. Credit default swaps are, in a nutshell, insurance policies against default by corporations on their debts. They are largely unregulated, and some analysts worry that if companies start defaulting on bonds due to a poor economy, the financial markets could be in for some big trouble. Worse yet, according to this article, the swaps are often sold, meaning it may be harder to locate the party who has to pay on the swap if it's called upon.

Mortgage Insurers Starting to Take a Hit

According to the WSJ, the major mortgage insurers have started to post losses, as a result of increased mortgage forclosures. Industry leader MGIC Investment Corp. posted a $1.47B loss in the fourth quarter (on 4Q sales of $399m). Interestingly, the stock (NYSE:MTG) doesn't appear to have been punished as yet.

Negative Home Equity Rates Rise

According to Zillow.com and reported in the WSJ, the threat of homeowners walking away from their mortgages has increased because of negative equity. Arguably, if people owe more on their mortgage than the property is worth, they have an incentive to let the house be foreclosed upon. For buyers of homes in 2006, a whopping 39% had negative equity in 2007. Just as bad, for the median 2006 buyer, he or she had only 5% equity, which is surprising since the median downpayment in 2006 had been 10% downpayment.

Investment Advisory Firms and CMOs

The SEC has sued an investment advisory firm regarding statements made to clients over collateralized mortgage obligations (CMOs). The SEC is trying to take a firm to task over representations on the safety of these investments. Investors with the firm, Magnolia Capital Advisors, lost $6m according to the filing. [SEC v. Reinhard.]

Foley Lardner's Monthly Recap

You can find lawfirm Foley & Lardner LLP's monthly newsletter recapping SEC actions here or here (in PDF form).

Primer on Credit Default Swaps

We found this kind of primer on credit default swaps as an options market from Mike Jakola, a student at Kellogg School at Northwestern. It's from 2006, but deals with issues you're hearing about today.

Subprime Litigation Increasing

Here's a WSJ blogpost about increasing litigation in the subprime area. Bottom line: 278 new federal suits were filed in 2007, with the pace doubling in the second quarter. And, "40% of the cases were filed by home-loan borrowers against lenders, mortgage brokers and many others, alleging discriminatory lending practices, improper charges or inadequate disclosures, among other issues." The source for the post info is here, from Navigant Consulting.

Welcome to FINREP!

Welcome to the inaugural post of our blog. Watch this space for news items and interesting tidbits about professional liability insurance for those in the financial industry, including securities broker-dealers, investment advisors, registered representatives, and financial planners!