• SEC Order - Blackstone Alternative Credit Advisors LP, Blackstone Management Pa…
• SEC Order - TPG Capital Advisors, LLC
• SEC Order - Kohlberg Kravis Roberts & Co. L.P.
• SEC Order - Apollo Capital Management, L.P.
• SEC Order - Carlyle Investment Management L.L.C., Carlyle Global Credit Investm…
• SEC Order - PJT Partners LP
• SEC Order - Santander US Capital Markets LLC
• SEC Order - Charles Schwab & Co., Inc.

The Securities and Exchange Commission (SEC) announced charges against nine investment advisers and three broker-dealers for failing to maintain and preserve electronic communications, violating federal securities laws. The firms collectively agreed to pay $63.1 million in civil penalties and admitted to the SEC’s findings, which included the use of unapproved off-channel communication methods by personnel at all levels, from supervisors to senior managers. One firm, PJT Partners LP, self-reported its violations and received a reduced penalty of $600,000 compared to other firms, such as Blackstone and KKR, which were fined $12 million and $11 million, respectively.

• Blackstone Alternative Credit Advisors LP, together with Blackstone Management Partners L.L.C. and Blackstone Real Estate Advisors L.P., agreed to pay a combined $12 million penalty;
• Kohlberg Kravis Roberts & Co. L.P. agreed to pay a $11 million penalty;
• Charles Schwab & Co., Inc. agreed to pay a $10 million penalty;
• Apollo Capital Management L.P. agreed to pay a $8.5 million penalty;
• Carlyle Investment Management L.L.C., together with Carlyle Global Credit Investment Management L.L.C., and AlpInvest Partners B.V., agreed to pay a combined $8.5 million penalty;
• TPG Capital Advisors LLC agreed to pay an $8.5 million penalty;
• Santander US Capital Markets LLC agreed to pay a $4 million penalty;
• PJT Partners LP, which self-reported, agreed to pay a $600,000 penalty.

Acting SEC Enforcement Director Sanjay Wadhwa highlighted that these failures undermine not only document production but also the broader accountability of market participants. In addition to financial penalties, the firms were ordered to cease and desist from further violations, censured, and required to enhance their compliance policies.

TLDRS:

• The SEC charged nine investment advisers and three broker-dealers for failing to maintain electronic communications, violating federal securities laws.
• Firms collectively agreed to pay $63.1 million in penalties, with Blackstone fined $12 million, KKR $11 million, and Charles Schwab $10 million. PJT Partners, which self-reported, received a reduced penalty of $600,000.
• The charges stemmed from the use of unapproved off-channel communications by personnel at all levels, including supervisors and senior managers.
• The firms were censured, ordered to cease and desist from further violations, and required to improve compliance policies.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1i0syxe/sec_charges_12_firms_for_recordkeeping_failures/

The Securities and Exchange Commission (SEC) announced today that Robinhood Securities LLC and Robinhood Financial LLC, collectively known as Robinhood, have agreed to pay $45 million in civil penalties to settle a series of charges stemming from significant regulatory violations in their brokerage operations. According to the SEC, the firms failed to comply with critical legal obligations, including maintaining accurate trading reports, safeguarding customer data, and adhering to rules designed to prevent market abuses like short selling. Acting SEC Enforcement Director Sanjay Wadhwa emphasized the importance of such compliance to protect investors and uphold market fairness.

The SEC’s findings detail widespread lapses, including failures to timely investigate suspicious activity, protect customers from identity theft, and address cybersecurity vulnerabilities. Notably, an unauthorized breach in 2021 exposed sensitive data of millions of customers. Additional violations included inadequate recordkeeping, failure to maintain critical brokerage communications, and noncompliance with securities trading regulations like Regulation SHO.

In addition, according to the SEC’s order, Robinhood Securities alone committed the following violations:

• Electronic Blue Sheets: For more than five years, Robinhood Securities failed to provide complete and accurate securities trading information, known as blue sheet data, to the SEC. Robinhood Securities admitted the SEC’s findings concerning blue sheet filings.
• Fractional Share Trading and Stock Lending: In connection with its stock lending and fractional share trading programs, Robinhood Securities failed to comply with Regulation SHO, the regulatory framework designed to address abusive short selling practices. From May 2019 through December 2023, Robinhood Securities violated Reg SHO’s close-out, order-marking, and locate requirements.
• From mid-2019 to June 2023, Robinhood lacked systems to aggregate positions in securities and determine its net position at the time of entering principal sale orders.
• This inability resulted in incorrectly marking principal short sale orders as "long."
• From December 2019 to December 2023, Robinhood misclassified over 15 million principal short sale orders as "long."
• By October 2020, Robinhood began incurring intra-day net short positions, leading to incorrect marking of more than four million short sales monthly by February 2021.
• Robinhood also failed to meet the locate requirement for these misclassified orders.
  • n March 2021, Robinhood made adjustments to its Fractional Trading program to reduce principal short sales:
    • Modified coding to address scenarios leading to short sales.
    • Added static inventory for stocks available for Fractional Trading.
  • While these measures reduced misclassified trades, they did not eliminate the issue entirely.
  • From June 2021 to June 2023, Robinhood continued marking all principal orders as "long," monitoring for further improvements.
  • In June 2023, Robinhood implemented a new system to calculate its net position in real time and comply with Regulation SHO's marking and locate rules.
• Despite the remedial actions, Robinhood misclassified more than 15 million short sale orders as "long" from December 2019 to December 2023.
• From December 2019, Robinhood’s systems marked "street leg" riskless principal short sale orders as "long" based on customers’ underlying positions, which were always long.
• However, Reg SHO Rule 200(g) requires such orders to be marked based on Robinhood’s own net position in the security.
• Between February and May 2022, Robinhood took measures to address the issue:Increased static inventory to reduce riskless principal short sales.Marked orders "long" only if the net position at the start of the day was long.Used a "short exempt" order mark when the position was short at the start of the day.
• These changes reduced misclassifications but did not fully comply with Rule 200(g), as Robinhood continued to mark some orders incorrectly based on customers' positions rather than its own.
• From December 2019 to May 2022, Robinhood misclassified over 58 million Fractional Trading riskless principal short sale orders as "long" instead of using its net position for accurate marking.
• From May 2022 to December 2023, Robinhood used the "short exempt" mark for transactions that did not comply with Rule 201(d)(6).
• The company lacked necessary written policies and procedures during this period.
• In December 2023, Robinhood implemented compliant policies and procedures.
• Robinhood applied the "short exempt" mark to certain riskless principal short sale orders that did not qualify. This occurred because Robinhood executed customer orders at different prices than what it received, violating the definition of a riskless principal transaction under Rule 201(a)(8).
• From May 2022 to December 2023, Robinhood misclassified over 4.5 million principal orders (including riskless principal orders) as "short exempt", when they should not have been.

Robinhood admitted to many of the findings and has agreed to conduct internal audits and certify remedial actions. Robinhood Securities will pay $33.5 million, while Robinhood Financial will pay $11.5 million, in penalties as part of the settlement.

This settlement marks another regulatory challenge for Robinhood, which has faced heightened scrutiny over its operations in recent years. The SEC’s action underscores the importance of robust compliance measures for broker-dealers and raises questions about Robinhood’s commitment to investor protections and market integrity.

Robinhood Securities submitted incomplete or inaccurate EBS data to the SEC 11,849 times during the specified period, affecting the reporting of 392 million transactions.

The company failed to comply with Regulation SHO:

• From May 2019 to March 2020, it did not close out "fails to deliver" resulting from stock lending activities.
• Between December 2019 and December 2023, it misclassified millions of short sale trades as "long" due to its inability to calculate proprietary positions at the time of sales.
• From May 2022 to December 2023, it misclassified 4.5 million trades as "short exempt" despite not meeting the required conditions.

• In late 2018, Robinhood began developing a stock lending business where it loaned out customer-owned securities.
• Robinhood knew this could lead to fails to deliver when customers sold securities that had been loaned to third parties.
• Instead of ensuring compliance, it relied on recalling stock loans, but these recalls did not always return shares in time to meet close-out obligations.
• Between May 2019 and March 2020, Robinhood systematically incurred fails to deliver that were not resolved per Rule 204(a)'s requirements.

• From mid-2019 to June 2023, Robinhood lacked systems to aggregate positions in securities and determine its net position at the time of entering principal sale orders.
• This inability resulted in incorrectly marking principal short sale orders as "long."
• From December 2019 to December 2023, Robinhood misclassified over 15 million principal short sale orders as "long."
• By October 2020, Robinhood began incurring intra-day net short positions, leading to incorrect marking of more than four million short sales monthly by February 2021.
• Robinhood also failed to meet the locate requirement for these misclassified orders.
  • n March 2021, Robinhood made adjustments to its Fractional Trading program to reduce principal short sales:
    • Modified coding to address scenarios leading to short sales.
    • Added static inventory for stocks available for Fractional Trading.
  • While these measures reduced misclassified trades, they did not eliminate the issue entirely.
  • From June 2021 to June 2023, Robinhood continued marking all principal orders as "long," monitoring for further improvements.
  • In June 2023, Robinhood implemented a new system to calculate its net position in real time and comply with Regulation SHO's marking and locate rules.
• Despite the remedial actions, Robinhood misclassified more than 15 million short sale orders as "long" from December 2019 to December 2023.

• From December 2019, Robinhood’s systems marked "street leg" riskless principal short sale orders as "long" based on customers’ underlying positions, which were always long.
• However, Reg SHO Rule 200(g) requires such orders to be marked based on Robinhood’s own net position in the security.
• Between February and May 2022, Robinhood took measures to address the issue:Increased static inventory to reduce riskless principal short sales.Marked orders "long" only if the net position at the start of the day was long.Used a "short exempt" order mark when the position was short at the start of the day.
• These changes reduced misclassifications but did not fully comply with Rule 200(g), as Robinhood continued to mark some orders incorrectly based on customers' positions rather than its own.
• From December 2019 to May 2022, Robinhood misclassified over 58 million Fractional Trading riskless principal short sale orders as "long" instead of using its net position for accurate marking.

TLDRS:

• The SEC announced a $45 million settlement with Robinhood Securities LLC and Robinhood Financial LLC over significant regulatory violations in brokerage operations.
• Robinhood failed to comply with legal obligations, including maintaining accurate trading reports, safeguarding customer data, and adhering to anti-market abuse regulations like those addressing short selling.
• A 2021 cybersecurity breach exposed sensitive data of millions of customers, highlighting Robinhood's lapses in addressing cybersecurity vulnerabilities.
• The SEC found Robinhood failed to protect customers from identity theft, investigate suspicious activity, and maintain adequate recordkeeping and brokerage communications.
• Robinhood Securities failed to provide accurate Electronic Blue Sheets (EBS) data to the SEC over a five-year period.
• Violations of Regulation SHO spanned from May 2019 to December 2023, including noncompliance with close-out, order-marking, and locate requirements in fractional share trading and stock lending programs.
• Robinhood misclassified over 15 million short sale orders as "long" from December 2019 to December 2023 due to its inability to calculate net positions in securities.
• More than 58 million riskless principal short sale orders were also misclassified as "long" from December 2019 to May 2022.
• From May 2022 to December 2023, over 4.5 million principal orders were improperly marked as "short exempt", despite failing to meet regulatory requirements.
• Robinhood implemented some remedial actions, including coding adjustments and enhanced inventory systems, but compliance issues persisted until June 2023.
• The settlement includes penalties of $33.5 million for Robinhood Securities and $11.5 million for Robinhood Financial, alongside commitments to conduct internal audits and certify remedial measures.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1i0q1tf/sec_robinhood_failed_to_comply_with_regulation_sho/

CFTC Announces Departure of Division of Clearing and Risk Director Clark Hutchison

The Commodity Futures Trading Commission (CFTC) has announced that Clark Hutchison, Director of the Division of Clearing and Risk, will leave the agency on January 15. Hutchison, who has held the position since July 2019, has played a pivotal role in supervising derivatives clearinghouses and their members. His leadership came during a period of significant market growth, historic volatility, and structural changes, earning praise from CFTC Chairman Rostin Behnam, who lauded Hutchison’s “precise, thoughtful, and practical approach to management and financial markets policy.”

Hutchison, who has not disclosed his next steps, leaves behind a legacy shaped by both public and private sector expertise. Before joining the CFTC, he spent over 30 years in high-level roles at major global financial institutions, focusing on clearing and risk management. He also served in advisory and leadership roles for key industry organizations, including the Futures Industry Association and NASDAQ Futures, Inc. His imminent departure, with just two days’ notice, is quite curious, given the critical responsibilities his division holds in maintaining the stability and integrity of derivatives markets.

The Commodity Futures Trading Commission today announced Division of Clearing and Risk Director Clark Hutchison will depart the agency Jan. 15. Mr. Hutchison has served as director since July 2019. 

“Clark has led the Division of Clearing and Risk with distinction for nearly six years, bringing extensive market experience to the CFTC, and guiding the Commission through periods of immense market growth, multiple episodes of historic volatility, and significant changes in market structure,” said CFTC Chairman Rostin Behnam. “Clark’s precise, thoughtful and practical approach to management and financial markets policy will be missed across the CFTC. I wish Clark well as he turns to new opportunities in his career.” 

“I want to thank Chairman Behnam for appointing me to lead the Division of Clearing and Risk,” said Hutchison. “I especially want to thank the staff of the division and all of CFTC for making this job one of the highlights of my career.”

Mr. Hutchison, who has no announced plans, managed a team that are responsible for the agency’s supervision of derivatives clearinghouses and their members, including oversight of clearing processes through risk assessment and surveillance.

Prior to joining the CFTC, Mr. Hutchison spent more than three decades in top positions in large global financial institutions, where he specialized in clearing and risk management. In addition to his private sector experience, Mr. Hutchison has served as a special advisor to the board of directors of the Futures Industry Association, as a member of the Chicago Mercantile Exchange’s Risk Committee, and as a member of the board of directors of NASDAQ Futures, Inc.

TLDRS:

• CFTC announced that Clark Hutchison, Director of the Division of Clearing and Risk since 2019, will leave the agency on January 15.
  • He played a key role in overseeing derivatives clearinghouses.
• Hutchison brought over 30 years of experience in clearing and risk management from top global financial institutions and served in advisory roles for key industry organizations like the Futures Industry Association and NASDAQ Futures, Inc.
• Hutchison has not revealed his future plans, and his decision to leave with only two days' notice raises questions given the critical nature of his division’s responsibilities in ensuring market stability.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1i0jnx9/cftc_announces_departure_of_clearing_and_risk/

The Office of the Comptroller of the Currency (OCC) closed The First National Bank of Lindsay today, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver. To safeguard depositors, the FDIC has entered into an agreement with First Bank & Trust Co. of Duncan, Okla., to assume the insured deposits of the failed bank.

The OCC acted after identifying false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank’s capital. The OCC also found that the bank was in an unsafe or unsound condition to transact business and that the bank’s assets were less than its obligations to its creditors and others.

The sole branch of The First National Bank of Lindsay will reopen as a First Bank & Trust Co. location on Monday, October 21, 2024, maintaining its regular business hours. Customers of the closed bank will automatically become First Bank & Trust Co. depositors, and their deposits will remain insured by the FDIC. Customers will not need to take any action to retain their insurance coverage.

During the transition, depositors will still have access to their insured funds, with ATM and debit card services, as well as check processing, continuing as normal throughout the weekend. Loan payments should also be made as usual.

For uninsured depositors, the FDIC will make 50% of uninsured funds available starting Monday, with potential increases as the FDIC sells the bank’s assets.

As of June 30, 2024, The First National Bank of Lindsay had reported total assets of $107.8 million and deposits of $97.5 million, of which approximately $7.1 million exceeded FDIC insurance limits. This figure may change as more information becomes available.

TLDRS:

• The First National Bank of Lindsay was closed by the OCC, and the FDIC was appointed as receiver, transferring insured deposits to First Bank & Trust Co. of Duncan, Okla.
• The bank will reopen as a First Bank & Trust Co. branch on October 21, 2024, with depositors automatically becoming customers of the new bank, retaining FDIC insurance.
• The OCC acted after identifying false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank’s capital.
  • The OCC also found that the bank was in an unsafe or unsound condition to transact business and that the bank’s assets were less than its obligations to its creditors and others.
• Customers will continue to have access to their funds over the weekend via ATMs, debit cards, and check processing, with loan payments also proceeding as normal.
• The FDIC will provide 50% of uninsured deposits starting Monday, with potential increases as assets are sold.
• As of June 2024, the bank had $107.8 million in assets and $97.5 million in deposits, with approximately $7.1 million exceeding FDIC insurance limits.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1g6vzrt/bank_fail_friday_first_national_bank_of_lindsay/

For those of you out of the loop - we're getting rid of Wall Street's loophole of a rule, that allows them to throw out rules. Why? Because it's time for them to close their short positions.

And we're doing this by petitioning the SEC for a rule change.

This is the NSCC rule we're looking to fix:

And in heroic style, household investors around the world have already made quite the splash.

I mean check just out this for starters:

Pretty awesome, right?

This list was last updated on the 6th September, so there are quite a few submissions missing but you can keep tabs [here].

And with our last count at approx. 150 submissions:

Well, we gotta say it's an impressive start.

Seriously guys, bravo. When faced with a choice to create positive change or do nothing, you chose to act as heroes do. You chose to make a difference.

Not to mention, boy howdy - the comments have just been pouring in:

It's quite the sight to behold.

But...

This is Superstonk, home of the legends. And we're here to make history - so it's time to explore the ways we can make this process even easier for you so we can pump those numbers up.

Because truly, if we want change - getting involved with market reform (and submitting this email) is the way to get it done.

And it couldn't be any easier.

Now in the famous words of dear ol' Kevin here:

For all those who like to say more with less, here's a short template version just for you.

Inspired and including extracts by the masterful original as provided to us by WCIMT: [here] ^{← it really is the best version to send.}

⭐️⭐️⭐️

KEY:

• strikethrough text = removed rule
• highlighted text = proposed changes

EMAIL: Secretarys-Office@SEC.GOV

SUBJECT: Petition for Rulemaking: Amend Clearing Agency Rules for Consistent Close Outs

Dear Ms. Countryman,

I am writing as a retail investor to submit a petition for rulemaking under Rule 192 of the Securities and Exchange Commission’s (“SEC”) Rules of Practice, requesting amendments to the National Securities Clearing Corporation (“NSCC”) Rules & Procedures. Specifically, I propose revisions to Rules 4, 18, and 22 to address several critical issues related to settlement of guaranteed transactions, central counterparty (CCP) resilience, and overall financial market stability.

It has come to the attention of retail investors that NSCC Rules and Procedures do not codify strict procedures for closing out positions (e.g., in the event of a Member default).  Per NSCC’s Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructures, “[a]s a cash market CCP, if a Member defaults, NSCC will need to complete settlement of guaranteed transactions on the failing Member’s behalf” [4 “Liquidity risk management framework”].  However, NSCC Rule 18 SEC. 6(a) contains a provision that “if, in the opinion of the Corporation, the close out of a position in a specific security would create a disorderly market in that security, then the completion of such close-out shall be in the discretion of the Corporation”.  

The existing framework inadvertently incentivises Members to build up large positions that could become disorderly if closed out, thus becoming de facto “Too Big To Fail.” This misalignment of incentives can lead to systemic risks and a potential bailout scenario where losses are socialised.

As such, members may exploit the discretion afforded by the NSCC to perpetuate market distortions, such as through naked short positions. This can create artificial inflation of supply and disrupt market stability, with the CCPs bearing the risk and cost of unwinding such positions.

The costs associated with closing out disorderly positions should not solely fall on CCPs and the general public. Financial market participants responsible for creating these positions should bear the costs. The current rules fail to ensure that those responsible for creating risky positions are held accountable for the associated costs.

To address these issues, I propose the following changes to the NSCC Rules:

NSCC Rule 4 Proposed Change

SEC. 4. Loss Allocation Waterfall, Off-the-Market Transactions.

Each Member [, including its executives,] shall be obligated to the Corporation for the entire amount of any loss or liability incurred by the Corporation arising out of or relating to any Defaulting Member Event with respect to such Member. [To the extent that such loss or liability is not satisfied by the Member, all executives of the Member (past or present) shall be obligated to the Corporation for an amount equivalent to the preceding 5 years of compensation from the Member.] To the extent that such loss or liability is not satisfied pursuant to Section 3 of this Rule 4, the Corporation shall apply a Corporate Contribution thereto and charge the remaining amount of such loss or liability ratably to other Members, as further provided below.

NSCC Rule 18 Proposed Change

SEC. 6. (a) Promptly after the Corporation has given notice that it has ceased to act for the Member, and in a manner consistent with the provisions of Section 3, the Net Close Out Position with respect to each CNS Security shall be closed out (whether it be by buying in, selling out or otherwise liquidating the position) by the Corporation--; provided however, if, in the opinion of the Corporation, the close out of a position in a specific security would create a disorderly market in that security, then the completion of such close-out shall be in the discretion of the Corporation--.

NSCC Rule 22 Proposed Change (Option A – Public Notice)

RULE 22. SUSPENSION OF RULES

The time fixed by these Rules, the Procedures or any regulations issued by the Corporation for the doing of any act or acts may be extended or the doing of any act or acts required by these Rules, the Procedures or any regulations issued by the Corporation may be waived or any provision of these Rules, the Procedures or any regulations issued by the Corporation may be suspended by the Board of Directors or by the Chairman of the Board, the President, the General Counsel or such other officers of the Corporation having a rank of Managing Director or higher whenever, in its or his judgment, such extension, waiver or suspension is necessary or expedient.

A written report of any such extension, waiver or suspension (other than an extension of time of less than eight hours), stating the pertinent facts, the identity of the person or persons who authorized such extension, waiver or suspension and the reason such extension, waiver or suspension was deemed necessary or expedient, shall be promptly made [and published on the Corporation’s website for access by the general public within 1 business day] and filed with the Corporation’s records and shall be available for inspection by any [person,] Member, Mutual Fund/Insurance Services Member, Municipal Comparison Only Member, Insurance Carrier/Retirement Services Member, TPA Member, TPP Member, Investment Manager/Agent Member, Fund Member, Data Services Only Member or AIP Member during regular business hours on Business Days. Any such extension or waiver may continue in effect after the event or events giving rise thereto but shall not continue in effect for more than 60 calendar days after the date thereof unless it shall be approved [by] the Board of Directors within such period of 60 calendar days [with a written report made and published as described by this paragraph].

NSCC Rule 22 Proposed Change (Option B – No Exceptions)

RULE 22. SUSPENSION OF RULES [NO EXCEPTIONS]

The time fixed by these Rules, the Procedures or any regulations issued by the Corporation for the doing of any act or acts may be extended or the doing of any act or acts required by these Rules, the Procedures or any regulations issued by the Corporation may be waived or any provision of these Rules, the Procedures or any regulations issued by the Corporation may be suspended by the Board of Directors or by the Chairman of the Board, the President, the General Counsel or such other officers of the Corporation having a rank of Managing Director or higher whenever, in its or his judgment, such extension, waiver or suspension is necessary or expedient. A written report of any such extension, waiver or suspension (other than an extension of time of less than eight hours), stating the pertinent facts, the identity of the person or persons who authorized such extension, waiver or suspension and the reason such extension, waiver or suspension was deemed necessary or expedient, shall be promptly made and filed with the Corporation’s records and shall be available for inspection by any Member, Mutual Fund/Insurance Services Member, Municipal Comparison Only Member, Insurance Carrier/Retirement Services Member, TPA Member, TPP Member, Investment Manager/Agent Member, Fund Member, Data Services Only Member or AIP Member during regular business hours on Business Days. Any such extension or waiver may continue in effect after the event or events giving rise thereto but shall not continue in effect for more than 60 calendar days after the date thereof unless it shall be approved the Board of Directors within such period of 60 calendar days.

[The time fixed by these Rules, the Procedures or any regulations issued by the Corporation for the doing of any act or acts may not be extended.  The doing of any act or acts required by these Rules, the Procedures or any regulations issued by the Corporation may not be waived and any provision of these Rules, the Procedures or any regulations issued by the Corporation may not be suspended.

A written report of any deviation from these Rules, Procedures or any regulations issued by the Corporation (including extension, waiver or suspension), stating the pertinent facts, the identity of the person or persons who authorized such extension, waiver or suspension and the reason such extension, waiver or suspension was deemed necessary or expedient, shall be promptly made and published on the Corporation’s website for access by the general public within 1 business day and filed with the Corporation’s records and shall be available for inspection by any person, Member, Mutual Fund/Insurance Services Member, Municipal Comparison Only Member, Insurance Carrier/Retirement Services Member, TPA Member, TPP Member, Investment Manager/Agent Member, Fund Member, Data Services Only Member or AIP Member during regular business hours on Business Days.

Final Remarks

These proposed changes aim to create a fairer, more transparent, and resilient financial system. By implementing stricter rules and holding responsible parties accountable, we can better manage risks, prevent market distortions, and ensure that losses are absorbed by those who create the risks.

Thank you for considering this petition. I respectfully request prompt action on these proposed amendments to safeguard the interests of all market participants.

Sincerely,

A Concerned Retail Investor

This post has already gone on long enough, so let's quickly recap the steps needed to get involved - and begin your legacy as heroes.

First up, here's where you're sending your petition:

EMAIL: Secretarys-Office@SEC.GOV

SUBJECT: Petition for Rulemaking: Amend Clearing Agency Rules for Consistent Close Outs

↑↑↑↑↑

And here's how to send it:

And then that's it.

No really, that's it.

A few short minutes and you're done.

🌎💃 OPEN TO INTERNATIONAL AUDIENCES🕺 🌎

• ✅ - Do you hold GME (or indeed, any stock on the NYSE)?
• ✅ - Do you live on the planet earth?
• ✅ - Do you wanna be a living legend?

💻 💡DON'T WANT TO USE YOUR PERSONAL EMAIL?

Why not sign up for https://proton.me/mail instead - for a more secure and private way of engaging.

Proton Mail is an encrypted email service based in Switzerland that protects your privacy and data from trackers and scanners. You can create a free account, switch from any email provider, and enjoy features like password protection, aliases, and scheduling.

📚👀 WANNA READ MORE ABOUT THE NSCC RULE?

• 👀💥 WhatCanIMakeToday: [here]
• 👀💥 Kibblepigeon: [here]

And check out WCIMT's latest post: [here]

If you're reading this, and you want to see real change - it starts with you. Take back control of your lives and see that you have the power to make it happen.

It really does take just a few moments to submit your petition, and the resources are all here to make things easy for you.

Don't miss out on this opportunity.

You are the catalyst, you always have been - and your legendary story continues here. Make this moment count.

You've got this 💪

The Commodity Futures Trading Commission (CFTC) held a closed meeting today at 4:00 p.m. to address litigation matters. A special filing regarding the meeting was submitted at 4:15 p.m. No further details about the litigation matters discussed were provided but it is always curious when they need to file emergency filings for litigation.

In the past, litigation matters typically involve enforcement actions against entities or individuals accused of violating commodities laws and regulations. These could include cases related to market manipulation, fraud, or other misconduct in the trading of derivatives, commodities, and futures.

TLDRS:

• CFTC held a closed meeting today at 4:00 p.m. to discuss litigation matters, with a special filing submitted at 4:15 p.m. for the meeting,
• No specific details about the litigation matters were provided, but the emergency filing raises curiosity.
• Litigation matters usually involve enforcement actions against violations of commodities laws, such as market manipulation, fraud, or misconduct in derivatives, commodities, and futures trading.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1fd0ksl/cftc_submits_a_special_filing_at_415_pm_for_a/

US bankruptcy filings surged in August after a slowdown in July, reaching the highest total for the first eight months of the year since 2020, according to data from S&P Global Market Intelligence. A total of 63 public and certain private companies filed for bankruptcy in August, up from a revised 49 in July. This marks the third-highest monthly total in 2023, following 72 filings in June and 68 in April.

With the August spike, the year-to-date total for 2024 stands at 452 filings, nearing the 466 filings recorded during the same period in 2020, when companies were grappling with the fallout of the COVID-19 pandemic.

Despite these challenges, the US economy has shown resilience, with real GDP growing at an annual rate of 3% in the second quarter, according to the Bureau of Economic Analysis.

So far in 2024, 21 bankruptcy filings involved companies with more than $1 billion in liabilities.

TLDRS:

• US bankruptcy filings surged in August, reaching 63 filings, up from 49 in July, marking the third-highest monthly total in 2023.
• The year-to-date total for 2024 stands at 452 filings, nearing the 466 filings recorded during the same period in 2020.
• August's spike in filings follows the earlier highs of 72 in June and 68 in April.
• In 2024, 21 bankruptcy filings involved companies with over $1 billion in liabilities.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1fcvtk3/sp_global_us_bankruptcy_filings_spiked_in_august/

The Securities and Exchange Commission (SEC) announced today that it has settled charges with seven public companies for using employment, separation, and other agreements that violated SEC rules designed to protect whistleblowers. These agreements impeded employees from reporting potential misconduct to the SEC.

As part of the settlement, the companies agreed to pay over $3 million in combined civil penalties. The SEC emphasized its commitment to ensuring that whistleblowers can report violations without fear of retaliation or restrictions.

• Acadia Healthcare Company, Inc., agreed to pay a $1,386,000 civil penalty;
• a.k.a. Brands Holding Corp. agreed to pay a $399,750 civil penalty;
• AppFolio, Inc., agreed to pay a $692,250 civil penalty;
• IDEX Corporation agreed to pay a $75,000 civil penalty;
• LSB Industries agreed to pay a $156,000 civil penalty;
• Smart for Life, Inc. agreed to pay a $19,500 civil penalty; and
• TransUnion agreed to pay a $312,000 civil penalty.

“The SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws,” said Jason J. Burt, Director of the SEC’s Denver Regional Office. “According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”

“Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower.

The firms were each charged with violating whistleblower protection Rule 21F-17(a), which prohibits any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. Each of the firms has agreed not to violate this rule in the future and has taken steps to remediate the violations, including making changes to the relevant agreements.

The SEC’s investigation, which is ongoing, is being conducted by Eric Day of the Denver Regional Office with assistance from Helena Engelhart Bean and the staff of the SEC’s Office of the Whistleblower, including Kelly Breakey and Elizabeth McMurray, and is supervised by Danielle R. Voorhees, Nicholas P. Heinke, and Mr. Burt, also of the Denver Regional Office.

• Order - a.k.a. Brands Holding Corp.
• Order - Acadia Healthcare Company, Inc
• Order - AppFolio, Inc.
• Order - IDEX Corporation
• Order - LSB Industries, Inc.
• Order - Smart for Life, Inc.
• Order - TransUnion

TLDRS:

• The SEC settled charges with seven public companies for using agreements that violated whistleblower protection rules, preventing employees from reporting misconduct to the SEC.
• The companies agreed to pay over $3 million in combined civil penalties.
• The SEC reaffirmed its commitment to protecting whistleblowers from retaliation or restrictions when reporting violations.
• Penalties by company:
  • Acadia Healthcare Company, Inc.: $1,386,000 civil penalty
  • a.k.a. Brands Holding Corp.: $399,750 civil penalty
  • AppFolio, Inc.: $692,250 civil penalty
  • IDEX Corporation: $75,000 civil penalty
  • LSB Industries: $156,000 civil penalty
  • Smart for Life, Inc.: $19,500 civil penalty
  • TransUnion: $312,000 civil penalty

https://www.reddit.com/user/Dismal-Jellyfish/comments/1fcrpn5/sec_announces_settled_charges_against_7_public/

Hey folks,

You might have already seen - but the hero we know as WhatCanIMakeToday has created this masterpiece of a post 🏆

👆 Seriously, check it out - it's also pinned in the community collection at the top of this sub.

And in sheer celebration of it's excellence, we're going to compliment this fine piece of mastery by breaking down what it all means exactly - and how the rest of us crayon-lovin' apes can get in on the action as we remove Wall Streets "get out of jail free" card.

Because I think we're all done with this monopoly, and it's time for the structures to come down.

So strap in folks, we're about to show Wall Street what they're up against 😎

Felt cheated in the Wall St casino? You probably were.  We've been robbed and the rules of Wall St's casino allow them to. The National Securities Clearing Corporation (NSCC), which clears and settles stock trades, has a Rule for throwing out rules [NSCC Rules]. The playing field has never been level.

TL:DR(s):

Hold on to your hats guys, because this rule's a real stinker 💩

• ⚠️ Rule 22 allows NSCC officials to change or ignore timing and procedural rules at their discretion.
• AKA - They have the power to ignore the rules whenever they want.
• ⚠️ Officials can waive requirements - like immediate liquidation of failing positions.
• AKA - Officials can decide not to close out short positions (like GME) if it might "disrupt the market".
• ⚠️ Changes must be reported but don't have to be fully disclosed to the public.
• ⚠️ These rule deviations can last up to 60 days without additional approval.

And when it comes down to it, market participants like:

• Brokerage firms
• Investment banks
• Hedge funds
• Asset managers

Can take excessive risks, knowing the NSCC will cover costs if they fail.

This also leads to “Too Big To Fail” scenarios, where risky behavior (aka, Wall Street Casino gambling with the stock market - sigh) is incentivised. Because what's the risk, when the rules don't matter.

Yeesh.

Me neither dude, me neither.

We don't want to see Wall Street exploiting every loophole and rule change to avoid responsibility when the market starts getting a little chaotic, right? 🚀🚀

So we're going to throw out their rule for throwing out rules. With a petition.

And it's never been so easy.

So let's get into the stuff that keeps Wall Street up at night 😎😎😎

So what do we mean by "petition"?

Typically, when you think "petition" you might picture some local legend collecting signatures on street corners or knocking on doors to rally support for some important cause.

❌ But that's not what we're doing here.

No - this is all about putting the power back in your hands. ✅

And that starts with us submitting our thoughts in an email as we petition rule changes to the SEC. Sounds easy, right?

That's because it is - we can have a really important and positive impact on rule making by just as simply petitioning for or against rules as currently exist.

Check out the SEC page here:

If you wanna check out this resource yourself, you can do so here:

SEC.gov | Petitions for Rulemaking Submitted to the SEC

U.S. Securities and Exchange Commission

So that's exactly what we're going to do.

We're going to get into the excellent template that WCIMT has already made for us very shortly, it's a real banger - and if you don't want to wait, you can check it out [here].

But he's prepared a petition ready to send to the SEC to address, let's be honest, the shit show of a rule we're dealing with here—and here's a breakdown of what is discussed:

Summary of the Petition: Amend Clearing Agency Rules for Consistent Close Outs

🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑

Problem with Current Rules:

• The NSCC can decide not to close out failing trades if it thinks doing so would disrupt the market.
• Members may take excessive risks because they know the NSCC will cover the costs if they fail, creating a “Too Big To Fail” scenario.

What we want changed:

• The NSCC should have clear, strict rules and procedures in place for closing out trades to prevent market disruption. No discretion allowed.
• Executives of failing members should be held responsible for up to five years of their compensation to cover the costs of closing out disruptive positions.
• NSCC rules should not allow exceptions or extensions without full public disclosure.

Why It Matters:

• Ensures that risks and costs are managed fairly and not shifted to the public or the NSCC.
• Prevents financial institutions from profiting at the expense of market stability and forces them to face the costs of their risky bets.

Rule Changes Being Proposed:

🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑🖊️ 📑

• Rule 4: Executives of failing members must cover costs up to five years of their salary. This ensures managers are accountable for their company’s risks.
• Rule 18: Positions must be closed out promptly, regardless of market impact. This prevents delays and market distortions.
• Rule 22:
  • Option A: Require NSCC to publicly report any rule changes, extensions, or suspensions within 1 business day.
  • Option B: No rule changes, extensions, or suspensions allowed.

Pretty simple, right?

So now we got the basics covered, let's check out masterpiece that encapsulates all this into one, easy to copy & paste petition.

All ready for you to send 💪

Here it is, in all it's glory:

Prepare your eyes for a feast of excellence! 👀

Impressive, right?

Damn right.

And if you wanna get in on the action - you can check it out here [reddit link] , here [dismal link], or here [ready-to-copy pastebin].

Credit: WhatCanIMakeToday 👏👏👏

So now we've got our templates ready - what do with do with it next?

Drumroll please...... 🥁🥁🥁

1. Copy (template here)
2. Paste (into your email)
3. Send (press the button)

Easy, right?

And because WCIMT is so wonderfully clever, having already written a letter that is so unbelievably comprehensive that it boggles the mind with it's excellence, all you gotta so is follow these steps now t0 get in on the action:

You can find the letter templates ready to COPY/EDIT here:

🗣️ - here [reddit link]

🗣️ - here [dismal link]

🗣️ - here [ready-to-copy pastebin].

This template is all ready to send! All you got to do is COPY this into an email.

Want to spice things up a bit, make it your own but not quite sure where to start? I gotcha covered:

💻 💡 Work Smarter, not Harder - with ChatGPT

An AI Language Model designed to help you.

Consider inputting writing guides and prompts into ChatGPT to help you compose your own comment: → https://chatgpt.com/ ←

All you gotta do is paste the petition template, and prompt ChatGPT to help you rewrite the letter.

Here's a prompt to help you get started:

Using this letter template, can you re-word this petition for rulemaking to the SEC requesting amendments to clearing agency rules. The petition should propose changes to NSCC Rules 4, 18, and 22 to enhance market stability by eliminating discretion in close-outs, clarifying loss allocation, and including clawback provisions for executives. Emphasise the need for consistent procedures to avoid market distortions, ensure fair risk management, and improve overall financial system stability. Include a brief background explaining concerns about current practices and outline proposed changes with clear justifications. Be polite and professional.

🚨❗️ - YOU are the fact checker, read through your work before submitting to the SEC. ChatGPT is an AI language tool and can produce incorrect responses.

✅ EMAIL TO: Secretarys-Office@SEC.GOV

✅ SUBJECT: Petition for Rulemaking: Amend Clearing Agency Rules for Consistent Close Outs

Helpful tip!

💻 💡Don't want to use your personal email? Why not sign up for https://proton.me/mail instead - for a more secure way of engaging.

Proton Mail is an encrypted email service based in Switzerland that protects your privacy and data from trackers and scanners. You can create a free account, switch from any email provider, and enjoy features like password protection, aliases, and scheduling.

And the last step is the easiest, most excellent one:

And that's it.

No seriously - that's all it takes, to take back control of your lives, and out of the clutches of ol' scammin, greedy Wall Street.

1. Copy (template here)
2. Paste (into your email)
3. Send (press the button)

Easy, huh?

And remember folks, this is open to international investors everywhere:

🌎🌎 🌎 🌎 🌎 🌎 🌎 🌎

And that's it from me. Time for less, talking - and more action 💪

As Wall Street know all too well how screwed they are when up against you guys, that's for sure.

So let's keep reminding them with our regulatory reform efforts.

And with appreciation to WCIMT's legendary post here, there are additional ways you can check out & submit your petition too:

• ⭐️ [Dismal Jellyfish] Thanks to our very own Dismal Jellyfish, [WCIMT] is now a proud new author on his site at https://dismal-jellyfish.com/! This petition is also available on Dismal's Smacks here where you can copy, paste, modify, and send. (A good option as Dismal's site allows more formatting options which copies over to your email.)
• ⭐️ [WhyDRS] The good people at WhyDRS have a joint petition on their site which lets you email a petition with just a few clicks. (An easy option for those who support spreading the word of DRS. Just a few clicks and paste into your, preferably anonymous, email to review and send this petition.)

Thanks to everyone involved in making this happen!

So what you waiting for?

You want to be your own catalyst for MOASS, right?

Then why not grab the letter template in this link [here] and slap it in an email to: Secretarys-Office@SEC.GOV

Takes two minutes to change the world, and it's worth taking a few moments out of your day for the bragging rights, isn't it?

So let's remind Wall Street who they are up against - because there's only going to be one winner in all this, and that's you.

Game On 😎

Today the FDIC released second quarter financial results in its latest Quarterly Banking Profile published today.

U.S. commercial banks and savings institutions insured by the FDIC reported $71.5 billion in net income for Q2 2024, a $7.3 billion (11.4%) increase from the previous quarter, driven by lower noninterest expenses and one-time gains.

The profit increase was primarily due to reduced noninterest expenses (down $3.6 billion) and one-time gains on equity security transactions ($10 billion) and the sale of an institution’s insurance division, contributing an after-tax $4.9 billion gain.

FDIC-insured community banks reported a modest net income increase to $6.4 billion, up 1.1% from Q1 2024, largely due to higher net interest and noninterest income.

The industry’s net interest margin (NIM) decreased slightly by one basis point to 3.16%, driven by larger banks with over $250 billion in assets, while community banks saw a seven basis-point increase in NIM.

Total loan balances increased by $125.8 billion (1.0%) from the previous quarter, led by loans to nondepository financial institutions and consumer loans. Annually, loans grew by $244.5 billion (2.0%).

The net charge-off rate increased to 0.68%, the highest since Q2 2013, with credit card net charge-offs rising to 4.82%, the highest since 2011.

Domestic deposits fell by $197.7 billion (1.1%) from Q1 2024, with decreases in savings and transaction deposits, partially offset by small time deposit growth.

The Deposit Insurance Fund balance grew by $3.9 billion, bringing the reserve ratio up four basis points to 1.21%.

The total number of FDIC-insured institutions dropped by 29 to 4,539 in Q2 2024, primarily due to mergers and one bank failure.

Unrealized losses on securities totaled $54.8 billion in second quarter 2024, down $775.7 million (1.4%) from the previous quarter and down $7.7 billion (12.3%) from the previous year. Unrealized losses on held-to-maturity securities ($9.1 billion) and available-for-sale securities ($45.7 billion) both decreased quarter over quarter. The vast majority of community banks (96.7%) reported unrealized losses on securities.

"However, the banking industry still faces significant downside risks from uncertainty in the economic outlook, market interest rates, and geopolitical events.  In addition, weakness in certain loan portfolios, particularly office properties, credit cards, and multifamily loans, continues to warrant monitoring.”

— FDIC Chairman Martin J. Gruenberg

Remember, "As of Q4 2023, 185 banks with $524 billion of assets had unrealized securities losses that exceeded their shareholders’ equity."

OFR: 185 Banks Face Unrealized Losses Exceeding Equity

OFR reports 185 banks with $524B in assets had unrealized losses exceeding shareholders’ equity. CRE losses could further impact 229 banks.

Dismal's Smacksdismal-jellyfish

The 2023 bank failures revealed banks' vulnerability to unrealized securities losses and rapid uninsured deposit withdrawals. Despite this, many banks still hold significant unrealized securities losses and uninsured deposits at risk of major commercial real estate (CRE) loan losses. This analysis from the Office of Financial Research (OFR) identifies which banks are most susceptible to these losses.

Banks are heavily invested in CRE debt, with many having concentrations that have been problematic in the past. Without reducing their CRE exposure, banks face heightened risk, particularly if the office sector continues to underperform.

The uncertainty regarding banks' resilience to CRE loan losses could lead to a loss of confidence among investors and depositors. Following the 2023 bank failures, many shifted their funds to larger banks, a trend that could recur for today's vulnerable banks.

If future CRE loan losses match those of past downturns, numerous banks might see combined CRE and unrealized securities losses surpassing their shareholders' equity, even in a better interest rate environment....

"CRE Downturns and Bank Failures"

Since 1987, five downturns in CRE have coincided with recessions or high-interest rate periods. As of Q4 2023, banks are heavily invested in CRE debt, holding $2.2 trillion in CRE loans, including $406 billion in construction loans, making up 9% of their total assets.

Historically, CRE loan losses have been a major factor in bank failures, notably during the 2008-11 and 1987-90 periods. While multiple factors can lead to bank failures, CRE loan losses have frequently been the catalyst during these times.

"The Office Sector Is Weighing Down CRE Performance"

CRE is experiencing a modest downturn due to higher interest rates and reduced liquidity. However, the analysis calls out that the office sector is significantly under-performing, primarily due to the widespread adoption of work-from-home (WFH)--companies are cutting back on office space as leases come up for renewal, leading to a gradual but steady increase in vacancies.

The sector's declining valuations and cash flows have resulted in higher delinquencies and defaults. The stock market performance of office Real Estate Investment Trusts (REITs) mirrors this trend, with office REIT prices dropping 52% since early 2020. In contrast, industrial REITs have seen a 33% increase, highlighting the varying impacts within the CRE market.

"How Many Banks Are Vulnerable to CRE Loan Losses?"

An analysis assessing bank vulnerability to commercial real estate (CRE) loan losses used data from the 2023 failures of Silicon Valley Bank (SVB), Signature Bank (SB), and First Republic Bank (FR-B). A bank is considered vulnerable if it has above-average CRE loan exposure, significant unrealized securities losses, and a high level of unsecured deposits.

CRE Loan Exposure: Small banks (assets ≤ $1 billion) tend to have higher CRE loan concentrations.

• As of Q4 2023, 102 small banks with $109 billion in combined assets had a CRE loans-to-assets ratio of 50%.
• Conversely, larger banks with over $250 billion in assets had an average CRE-to-assets ratio of 4%.

Significant Unrealized Securities Losses: High CRE loan concentrations alone do not necessarily indicate risk. However, many banks with high CRE concentrations also have substantial unrealized securities losses.

• As of Q4 2023, 185 banks with $524 billion in assets had unrealized securities losses exceeding their shareholders’ equity.
  • Among these, 21 banks with $21 billion in assets had a CRE concentration of 25% or more.
• Additionally, 764 banks with $1.2 trillion in assets had unrealized losses equal to 75% of shareholders’ equity, including 120 banks with $130 billion in assets and a CRE concentration of 25% or more.

Deposits, essentially short-term loans from depositors, fund nearly 80% of banks’ assets. A lack of confidence can lead to deposit withdrawals, destabilizing banks. The 2023 failures of SVB, SB, and FR-B highlighted this risk, triggering significant official-sector intervention to prevent a wider banking crisis.

• As of Q4 2023, 81 banks had an uninsured deposits ratio of 50% or higher, exceeding FR-B’s 48% before its failure.
  • Among these, 54 banks with $187 billion in assets also had a CRE concentration of 25% or more.

"Deterioration of the Credit Quality of CRE Loans"

The credit quality of bank CRE loans has recently deteriorated, evidenced by a sharp rise in past due and non-accrual (PDNA) CRE loans.

• As of Q4 2023, PDNA CRE loans totaled $28.7 billion, marking a $12.0 billion or 72% increase since the beginning of the year.
• The PDNA rate rose to 1.28%, up from 0.77% a year ago, reaching its highest level since Q3 2015.

Currently, aggregate CRE net charge-offs are under $1 billion, but these typically lag behind the growth of PDNA loans. Historically, during a CRE downturn, loan losses can be substantial. For instance, the authors call out that during the 2007-2009 financial crisis, cumulative net CRE loan losses escalated to $93 billion, corresponding to a 7.3% CRE net charge-off rate, though these losses were realized over several years.

"Estimated CRE Loan Losses"

The authors state potential future losses from CRE loans remain uncertain, but historical net charge-off rates provide a reference. During the 2007-2009 financial crisis, CRE loan losses peaked at 7.3%. If banks faced a similar rate today, they would incur a $163 billion charge-off. Even at a 4% loss rate, banks would see an $89 billion impairment.

Using these estimates, vulnerable banks—those where CRE loan losses plus unrealized securities losses exceed shareholders' equity—were identified. As of Q4 2023, 185 banks with $524 billion in assets already had unrealized securities losses surpassing their equity. If CRE loan losses hit 4%, 229 banks with $542 billion in assets would be underwater. At an 8% loss rate, 278 banks with $614 billion in assets would be affected.

As of Q4 2023, 185 banks with $524 billion in assets already had unrealized securities losses surpassing their equity. If CRE loan losses hit 4%, 229 banks with $542 billion in assets would be underwater. At an 8% loss rate, 278 banks with $614 billion in assets would be affected.

These 278 banks are generally small, with assets of $1 billion or less, and are mainly located in the Midwest and South. The Midwest has 102 vulnerable banks with $50 billion in assets, while the South has 141 banks with $494 billion in assets. The Northeast and Pacific regions have fewer at-risk banks, with none in New England.

Many of the vulnerable banks have high CRE loan concentrations and large unrealized securities losses. Of the 37 banks reporting uninsured deposits, 18 have an uninsured deposits-to-total deposits ratio of 33% or higher, and seven exceed 50%.

Three states have the highest concentration of vulnerable banks: Texas (43 banks with $442 billion in assets), Alabama (20 banks with $9 billion in assets), and Minnesota (19 banks with $6 billion in assets). These states have 33 banks with significant CRE loan concentrations, and their loan performance is below average, with a Q4 2023 aggregate PDNA rate of 1.94%, compared to the overall bank average of 1.28%.

"The Effect of Changing Interest Rates on Unrealized Securities Losses"

Banks' securities portfolios, largely composed of long-term, fixed-rate debt securities, have suffered significant fair-value losses due to rising interest rates. By Q4 2023, banks faced $478 billion in unrealized securities losses. This shift began when the Federal Open Market Committee (FOMC) started raising rates in March 2022, pushing the federal funds rate target range from 0.25% to 5.50% by July 2023.

As of Q4 2023, every 50-basis-point change in the 10-year Treasury rate results in a $118 billion change in the aggregate fair value of banks' securities. A 100-basis-point decrease to 3.057% would reduce unrealized losses to $245 billion, while a 100-basis-point increase to 5.057% would raise losses to $709 billion.

Using different interest rate scenarios, the analysis projects the impact on banks' securities portfolios and their vulnerability to commercial real estate (CRE) loan losses. In a scenario with a 100-basis-point rate decrease and no CRE loan losses, 62 banks with $28 billion in assets would have unrealized securities losses exceeding their equity. If CRE loan losses reach 4%, 80 banks with $45 billion in assets would be impacted; at an 8% loss rate, 112 banks with $67 billion in assets would be affected.

Conversely, in a scenario with a 100-basis-point rate increase, 337 banks with $288 billion in assets would have unrealized securities losses surpassing their equity. At a 4% CRE loan loss rate, 438 banks with $412 billion in assets would be vulnerable; at an 8% loss rate, 519 banks with $477 billion in assets would face combined realized and unrealized losses exceeding their shareholders' equity.

The authors conclude that many banks are still grappling with conditions similar to those that led to the significant bank failures in 2023, including substantial unrealized securities losses and high levels of uninsured deposits. The added prospect of CRE loan losses heightens the risk, particularly for smaller banks with assets of $1 billion or less. Even if interest rates decrease this year, hundreds of banks with substantial total assets remain at risk unless they significantly reduce their CRE exposure or bolster their resilience.

Fed Minutes: Economic Risks & Financial Vulnerabilities Rise

Fed minutes reveal significant financial vulnerabilities, high asset prices, & historic hedge fund leverage, with inflation risks still elevated.

Dismal's Smacksdismal-jellyfish

• The Fed staff characterized the U.S. financial system's vulnerabilities as notable. Asset valuation pressures remained elevated, with risk premiums low compared to historical standards.
  • House prices were still high relative to fundamentals, and commercial real estate (CRE) prices continued to decline, particularly in the multifamily and office sectors, where vacancy rates increased.
• The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, continued to characterize the system's financial vulnerabilities as notable.
• The staff judged that asset valuation pressures remained elevated, with estimates of risk premiums across key markets low compared with historical standards. House prices remained elevated relative to fundamentals.
  • CRE prices continued to decline, especially in the multifamily and office sectors, and vacancy rates in these sectors continued to increase.
• Participants generally noted that some banks and nonbank financial institutions likely have vulnerabilities associated with high CRE exposures through loan portfolios and holdings of CMBS.

CRE Loan Delinquency Hits 1.4% in Q2 Office Sector Struggles

CRE loan delinquencies hit 1.4% in Q2. Rising rates, office sector vacancies, and falling property values lead banks to increase loss reserves.

Dismal's Smacksdismal-jellyfish

According to data from S&P Global Market Intelligence, the delinquency rate for commercial real estate (CRE) loans across U.S. banks increased to 1.40% in the second quarter, reflecting ongoing stress in the office sector.

CRE borrowers are under pressure from higher interest rates as loans mature, though potential Federal Reserve rate cuts might offer some relief. The office sector, in particular, continues to struggle with high vacancy rates and declining property values, leading banks to increase loss reserves.

Additionally, CRE loan growth has slowed significantly, with year-over-year growth dropping to 2.2% in the second quarter from 12.1% in the third quarter of 2022. The largest category, nonowner-occupied, nonresidential property loans, saw only 1.2% growth, while construction and development loans grew by 2.0%, both well below recent peaks. The slowdown reflects declining property values and stricter lending standards.

TLDRS:

• The FDIC reported that U.S. commercial banks and savings institutions earned $71.5 billion in net income for Q2 2024, up $7.3 billion (11.4%) from Q1, driven by lower noninterest expenses and one-time gains.
• The profit increase was mainly due to a $3.6 billion reduction in noninterest expenses and $10 billion in gains from equity security transactions and a $4.9 billion after-tax gain from the sale of an institution’s insurance division.
• Community banks' net income rose modestly to $6.4 billion, up 1.1% from Q1 2024, due to higher net interest and noninterest income.
• The industry’s net interest margin (NIM) declined by one basis point to 3.16%, driven by larger banks, while community banks saw a seven basis-point increase in NIM.
• Total loan balances grew by $125.8 billion (1.0%) quarter-over-quarter, with the largest increases in loans to nondepository financial institutions and consumer loans. Annually, loans increased by $244.5 billion (2.0%).
• The net charge-off rate rose to 0.68%, the highest since Q2 2013, while credit card net charge-offs increased to 4.82%, the highest since 2011.
• Domestic deposits decreased by $197.7 billion (1.1%) from Q1 2024, driven by declines in savings and transaction deposits, though small time deposits grew.
• The Deposit Insurance Fund (DIF) balance increased by $3.9 billion, raising the reserve ratio by four basis points to 1.21%.
• The number of FDIC-insured institutions fell by 29 to 4,539 in Q2 2024 due to mergers and one bank failure.
• Unrealized losses on securities totaled $54.8 billion, down 1.4% from Q1 2024 and 12.3% year-over-year, with most community banks (96.7%) reporting unrealized losses.
• Remember, "As of Q4 2023, 185 banks with $524 billion of assets had unrealized securities losses that exceeded their shareholders’ equity."
• Even if interest rates decrease this year, hundreds of banks with substantial total assets remain at risk unless they significantly reduce their CRE exposure or bolster their resilience.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1f9q3aq/fdic_second_quarter_quarterly_banking_profile_the/

The Federal Reserve Bank of Philadelphia has begun its search for a new president and CEO to succeed Patrick T. Harker, whose tenure will end on June 30, 2025. A committee of eligible Philadelphia Fed board members, in accordance with Federal Reserve policies, will lead the search, chaired by Anthony Ibargüen, CEO of Quench USA, Inc.

The search will be nationwide, aiming to find a leader who will continue Harker's legacy of promoting economic growth and serving the Third District. The committee, which includes prominent business and community leaders like Sharmain Matlock-Turner, CEO of the Urban Affairs Coalition, and Drexel University President John Fry, will focus on identifying a diverse pool of qualified candidates committed to public service.

The new president will play a crucial role in shaping monetary policy as a member of the Federal Open Market Committee and overseeing the Bank’s key functions, including payment services, bank supervision, and community engagement. Global executive search firm Spencer Stuart has been retained to assist in the process.

TLDRS:

• The Federal Reserve Bank of Philadelphia has begun its search for a new president and CEO to replace Patrick T. Harker, who will step down on June 30, 2025.
• The search is being led by a committee of Philadelphia Fed board members, chaired by Anthony Ibargüen, CEO of Quench USA, Inc.
• The new president will be a key player in shaping monetary policy as a member of the Federal Open Market Committee and will oversee functions like payment services, bank supervision, and community engagement.

https://www.reddit.com/user/Dismal-Jellyfish/comments/1f8x7gx/philadelphia_fed_launches_search_for_its_next/

Inflation measured by the Multivariate Core Trend (MCT) model increased to 2.5% in July, up from a revised 2.2% in June, signaling growing inflationary pressure. The MCT, which gauges inflation’s persistence across 17 core sectors of the personal consumption expenditures (PCE) price index, indicated that the probability band for inflation stood between 2.0% and 2.9%.

The rise in MCT inflation was primarily driven by the housing sector, contributing 0.22 percentage points (ppt) to the increase relative to its pre-pandemic average. Services excluding housing made an even larger impact, contributing 0.39 ppt, while core goods added a smaller 0.05 ppt. Inflation persistence was largely driven by sector-specific factors within services excluding housing, underscoring the unique inflationary trends within services where about ~2/3 of consumer spending occurs.

The MCT model offers a dynamic factor analysis to assess how inflationary pressures are spread across sectors, providing key insights for policymakers looking to understand the breadth and drivers of inflation. This model also accounts for outliers and changing relationships over time, making it a valuable tool for evaluating inflation trends and pressures and at this moment, it is showing that inflation is back on the upswing...

TLDRS:

• Inflation measured by the Multivariate Core Trend (MCT) model rose to 2.5% in July, up from a revised 2.2% in June.
• The housing sector contributed 0.22 percentage points (ppt) to the increase relative to its pre-pandemic average.
• Services excluding housing had a larger impact, contributing 0.39 ppt to the increase.
• Core goods made a smaller contribution of 0.05 ppt.
• This model accounts for outliers and changing relationships over time, making it a useful tool for evaluating inflation trends and pressures of the Fed's preferred inflation gauge, and at this moment, it is showing inflation is back on the upswing...

https://www.reddit.com/user/Dismal-Jellyfish/comments/1f8ohnd/multivariate_core_trend_mct_inflation_increased/

According to data from S&P Global Market Intelligence, the delinquency rate for commercial real estate (CRE) loans across U.S. banks increased to 1.40% in the second quarter, reflecting ongoing stress in the office sector.

CRE borrowers are under pressure from higher interest rates as loans mature, though potential Federal Reserve rate cuts might offer some relief. The office sector, in particular, continues to struggle with high vacancy rates and declining property values, leading banks to increase loss reserves.

Additionally, CRE loan growth has slowed significantly, with year-over-year growth dropping to 2.2% in the second quarter from 12.1% in the third quarter of 2022. The largest category, nonowner-occupied, nonresidential property loans, saw only 1.2% growth, while construction and development loans grew by 2.0%, both well below recent peaks. The slowdown reflects declining property values and stricter lending standards.

Other times CRE has been covered on djf recently:

Fed Minutes: Economic Risks & Financial Vulnerabilities Rise

Fed minutes reveal significant financial vulnerabilities, high asset prices, & historic hedge fund leverage, with inflation risks still elevated.

Dismal's Smacksdismal-jellyfish

• The Fed staff characterized the U.S. financial system's vulnerabilities as notable. Asset valuation pressures remained elevated, with risk premiums low compared to historical standards.
  • House prices were still high relative to fundamentals, and commercial real estate (CRE) prices continued to decline, particularly in the multifamily and office sectors, where vacancy rates increased.
• The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, continued to characterize the system's financial vulnerabilities as notable.
• The staff judged that asset valuation pressures remained elevated, with estimates of risk premiums across key markets low compared with historical standards. House prices remained elevated relative to fundamentals.
  • CRE prices continued to decline, especially in the multifamily and office sectors, and vacancy rates in these sectors continued to increase.
• Participants generally noted that some banks and nonbank financial institutions likely have vulnerabilities associated with high CRE exposures through loan portfolios and holdings of CMBS.

OFR: 185 Banks Face Unrealized Losses Exceeding Equity

OFR reports 185 banks with $524B in assets had unrealized losses exceeding shareholders’ equity. CRE losses could further impact 229 banks.

Dismal's Smacksdismal-jellyfish

The 2023 bank failures revealed banks' vulnerability to unrealized securities losses and rapid uninsured deposit withdrawals. Despite this, many banks still hold significant unrealized securities losses and uninsured deposits at risk of major commercial real estate (CRE) loan losses. This analysis from the Office of Financial Research (OFR) identifies which banks are most susceptible to these losses.

Banks are heavily invested in CRE debt, with many having concentrations that have been problematic in the past. Without reducing their CRE exposure, banks face heightened risk, particularly if the office sector continues to underperform.

The uncertainty regarding banks' resilience to CRE loan losses could lead to a loss of confidence among investors and depositors. Following the 2023 bank failures, many shifted their funds to larger banks, a trend that could recur for today's vulnerable banks.

If future CRE loan losses match those of past downturns, numerous banks might see combined CRE and unrealized securities losses surpassing their shareholders' equity, even in a better interest rate environment....

"CRE Downturns and Bank Failures"

Since 1987, five downturns in CRE have coincided with recessions or high-interest rate periods. As of Q4 2023, banks are heavily invested in CRE debt, holding $2.2 trillion in CRE loans, including $406 billion in construction loans, making up 9% of their total assets.

Historically, CRE loan losses have been a major factor in bank failures, notably during the 2008-11 and 1987-90 periods. While multiple factors can lead to bank failures, CRE loan losses have frequently been the catalyst during these times.

"The Office Sector Is Weighing Down CRE Performance"

CRE is experiencing a modest downturn due to higher interest rates and reduced liquidity. However, the analysis calls out that the office sector is significantly under-performing, primarily due to the widespread adoption of work-from-home (WFH)--companies are cutting back on office space as leases come up for renewal, leading to a gradual but steady increase in vacancies.

The sector's declining valuations and cash flows have resulted in higher delinquencies and defaults. The stock market performance of office Real Estate Investment Trusts (REITs) mirrors this trend, with office REIT prices dropping 52% since early 2020. In contrast, industrial REITs have seen a 33% increase, highlighting the varying impacts within the CRE market.

"How Many Banks Are Vulnerable to CRE Loan Losses?"

An analysis assessing bank vulnerability to commercial real estate (CRE) loan losses used data from the 2023 failures of Silicon Valley Bank (SVB), Signature Bank (SB), and First Republic Bank (FR-B). A bank is considered vulnerable if it has above-average CRE loan exposure, significant unrealized securities losses, and a high level of unsecured deposits.

CRE Loan Exposure: Small banks (assets ≤ $1 billion) tend to have higher CRE loan concentrations.

• As of Q4 2023, 102 small banks with $109 billion in combined assets had a CRE loans-to-assets ratio of 50%.
• Conversely, larger banks with over $250 billion in assets had an average CRE-to-assets ratio of 4%.

Significant Unrealized Securities Losses: High CRE loan concentrations alone do not necessarily indicate risk. However, many banks with high CRE concentrations also have substantial unrealized securities losses.

• As of Q4 2023, 185 banks with $524 billion in assets had unrealized securities losses exceeding their shareholders’ equity.
  • Among these, 21 banks with $21 billion in assets had a CRE concentration of 25% or more.
• Additionally, 764 banks with $1.2 trillion in assets had unrealized losses equal to 75% of shareholders’ equity, including 120 banks with $130 billion in assets and a CRE concentration of 25% or more.

Deposits, essentially short-term loans from depositors, fund nearly 80% of banks’ assets. A lack of confidence can lead to deposit withdrawals, destabilizing banks. The 2023 failures of SVB, SB, and FR-B highlighted this risk, triggering significant official-sector intervention to prevent a wider banking crisis.

• As of Q4 2023, 81 banks had an uninsured deposits ratio of 50% or higher, exceeding FR-B’s 48% before its failure.
  • Among these, 54 banks with $187 billion in assets also had a CRE concentration of 25% or more.

"Deterioration of the Credit Quality of CRE Loans"

The credit quality of bank CRE loans has recently deteriorated, evidenced by a sharp rise in past due and non-accrual (PDNA) CRE loans.

• As of Q4 2023, PDNA CRE loans totaled $28.7 billion, marking a $12.0 billion or 72% increase since the beginning of the year.
• The PDNA rate rose to 1.28%, up from 0.77% a year ago, reaching its highest level since Q3 2015.

Currently, aggregate CRE net charge-offs are under $1 billion, but these typically lag behind the growth of PDNA loans. Historically, during a CRE downturn, loan losses can be substantial. For instance, the authors call out that during the 2007-2009 financial crisis, cumulative net CRE loan losses escalated to $93 billion, corresponding to a 7.3% CRE net charge-off rate, though these losses were realized over several years.

"Estimated CRE Loan Losses"

The authors state potential future losses from CRE loans remain uncertain, but historical net charge-off rates provide a reference. During the 2007-2009 financial crisis, CRE loan losses peaked at 7.3%. If banks faced a similar rate today, they would incur a $163 billion charge-off. Even at a 4% loss rate, banks would see an $89 billion impairment.

Using these estimates, vulnerable banks—those where CRE loan losses plus unrealized securities losses exceed shareholders' equity—were identified. As of Q4 2023, 185 banks with $524 billion in assets already had unrealized securities losses surpassing their equity. If CRE loan losses hit 4%, 229 banks with $542 billion in assets would be underwater. At an 8% loss rate, 278 banks with $614 billion in assets would be affected.

As of Q4 2023, 185 banks with $524 billion in assets already had unrealized securities losses surpassing their equity. If CRE loan losses hit 4%, 229 banks with $542 billion in assets would be underwater. At an 8% loss rate, 278 banks with $614 billion in assets would be affected.

These 278 banks are generally small, with assets of $1 billion or less, and are mainly located in the Midwest and South. The Midwest has 102 vulnerable banks with $50 billion in assets, while the South has 141 banks with $494 billion in assets. The Northeast and Pacific regions have fewer at-risk banks, with none in New England.

Many of the vulnerable banks have high CRE loan concentrations and large unrealized securities losses. Of the 37 banks reporting uninsured deposits, 18 have an uninsured deposits-to-total deposits ratio of 33% or higher, and seven exceed 50%.

Three states have the highest concentration of vulnerable banks: Texas (43 banks with $442 billion in assets), Alabama (20 banks with $9 billion in assets), and Minnesota (19 banks with $6 billion in assets). These states have 33 banks with significant CRE loan concentrations, and their loan performance is below average, with a Q4 2023 aggregate PDNA rate of 1.94%, compared to the overall bank average of 1.28%.

"The Effect of Changing Interest Rates on Unrealized Securities Losses"

Banks' securities portfolios, largely composed of long-term, fixed-rate debt securities, have suffered significant fair-value losses due to rising interest rates. By Q4 2023, banks faced $478 billion in unrealized securities losses. This shift began when the Federal Open Market Committee (FOMC) started raising rates in March 2022, pushing the federal funds rate target range from 0.25% to 5.50% by July 2023.

As of Q4 2023, every 50-basis-point change in the 10-year Treasury rate results in a $118 billion change in the aggregate fair value of banks' securities. A 100-basis-point decrease to 3.057% would reduce unrealized losses to $245 billion, while a 100-basis-point increase to 5.057% would raise losses to $709 billion.

Using different interest rate scenarios, the analysis projects the impact on banks' securities portfolios and their vulnerability to commercial real estate (CRE) loan losses. In a scenario with a 100-basis-point rate decrease and no CRE loan losses, 62 banks with $28 billion in assets would have unrealized securities losses exceeding their equity. If CRE loan losses reach 4%, 80 banks with $45 billion in assets would be impacted; at an 8% loss rate, 112 banks with $67 billion in assets would be affected.

Conversely, in a scenario with a 100-basis-point rate increase, 337 banks with $288 billion in assets would have unrealized securities losses surpassing their equity. At a 4% CRE loan loss rate, 438 banks with $412 billion in assets would be vulnerable; at an 8% loss rate, 519 banks with $477 billion in assets would face combined realized and unrealized losses exceeding their shareholders' equity.

The authors conclude that many banks are still grappling with conditions similar to those that led to the significant bank failures in 2023, including substantial unrealized securities losses and high levels of uninsured deposits. The added prospect of CRE loan losses heightens the risk, particularly for smaller banks with assets of $1 billion or less. Even if interest rates decrease this year, hundreds of banks with substantial total assets remain at risk unless they significantly reduce their CRE exposure or bolster their resilience.

Banks’ CRE Holdings Under Increased SEC Scrutiny

SEC’s heightened scrutiny on banks’ CRE portfolios comes amid stability concerns, requiring detailed loan breakdowns & risk management practices.

Dismal's Smacksdismal-jellyfish

S&P Global's Zoe Sagalow is reporting that the US Securities and Exchange Commission (SEC) is intensifying its scrutiny of public US banks with high concentrations of commercial real estate (CRE) holdings. This move comes as federal bank regulators, including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve, increase their own examinations of banks' CRE portfolios for safety and soundness concerns.

Banks must now provide detailed disclosures about their CRE portfolios, including industry and geographic breakdowns, loan-to-value ratios, occupancy percentages, loan modifications, appraisal sources, and risk management practices. The SEC's involvement, typically outside its usual purview, indicates a significant shift in regulatory focus.

In April, Independent Bank Group Inc. and New York Community Bancorp Inc. received SEC letters requesting additional CRE details, following earlier letters to Western Alliance Bancorp and several community banks. This trend has been ongoing for at least a year, with the SEC sending numerous letters seeking granular CRE data, particularly breakdowns by industry.

Despite the SEC's lack of authority to demand changes in banks' lending behaviors, its increased focus aims could be to enhance transparency for investors. Experts speculate that the SEC's actions might be driven by concerns highlighted in the Financial Stability Oversight Council's latest report, which identified CRE as a potential vulnerability for banks.

Again, it is unclear why the SEC is probing CRE books, especially since the SEC does not have authority to demand banks' change their lending behavior like the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve do.

It is also possible banking agencies asked the SEC to get involved.

TLDRS:

• S&P Global Market Intelligence: The delinquency rate for CRE loans across U.S. banks rose to 1.40% in Q2, indicating ongoing stress in the office sector.
  • CRE borrowers face pressure from rising interest rates as loans mature, though potential Fed rate cuts could offer relief.
  • The office sector is particularly hard-hit, with high vacancy rates and declining property values leading banks to increase loss reserves.
  • Year-over-year CRE loan growth slowed to 2.2% in Q2, down from 12.1% in Q3 2022, reflecting declining property values and stricter lending standards.
  • Growth in nonowner-occupied, nonresidential property loans was just 1.2%, while construction and development loans grew 2.0%, both well below recent peaks.
• Banks and nonbank financial institutions with high CRE exposures are vulnerable, with some facing significant potential losses if CRE loan losses increase.
• A 4% CRE loan loss could leave 229 banks underwater, with losses potentially reaching $163 billion at a 7.3% loss rate, similar to the 2007-2009 financial crisis.
• Even if interest rates decrease this year, hundreds of banks with substantial total assets remain at risk unless they significantly reduce their CRE exposure or bolster their resilience.
• To fix one end of their mandate (price stability) from the inflation problem they created, the Fed will continue sacrificing employment (the other end of their mandate) to bolster price stability by continuing to hold or even increasing interest rates--causing further stress to businesses and households.
• I believe inflation is the match that has been lit that will light the fuse of our rocket.

The Securities and Exchange Commission (SEC) announced charges against six nationally recognized statistical rating organizations (NRSROs) for failing to maintain and preserve electronic communications as required by federal securities laws. The firms admitted to the violations, agreed to pay over $49 million in combined civil penalties, and have begun implementing improvements to their compliance policies.

• SEC Order - Moody's Investors Service, Inc
• SEC Order - S&P Global Ratings
• SEC Order - Fitch Ratings, Inc.
• SEC Order - HR Ratings de México, S.A. de C.V.
• SEC Order - A.M. Best Rating Services, Inc.
• SEC Order - Demotech, Inc.

Penalties Imposed:

• Moody’s Investors Service, Inc.: $20 million civil penalty
• S&P Global Ratings: $20 million civil penalty
• Fitch Ratings, Inc.: $8 million civil penalty
• HR Ratings de México, S.A. de C.V.: $250,000 civil penalty
• A.M. Best Rating Services, Inc.: $1 million civil penalty
• Demotech, Inc.: $100,000 civil penalty

SEC Order - Moody's Investors Service, Inc

The SEC investigation revealed significant failures in Moody's retention of business-related electronic communications, particularly those conducted through off-channel platforms like text messages and WhatsApp. Despite having policies in place since at least 2020 prohibiting the use of non-email communication methods for business purposes, Moody’s Ratings employees, including senior staff, frequently used these platforms for credit rating activities without retaining the records as required by law.

• Moody’s Ratings had policies prohibiting the use of text messages and instant messaging apps for business communications, mandating the use of official email systems instead.
• Specific incidents include senior staff exchanging off-channel messages about credit rating committee meetings and client-related discussions.
• From at least January 2020, employees, including those at senior levels, used off-channel communication methods for discussions related to credit rating activities, which were not retained or monitored.
  • Between at least December 2020 and March 2022, an Associate Managing Director exchanged numerous off-channel communications relating to Credit Rating Activities for various credit rating clients with multiple other Moody’s Ratings employees, including communications regarding their reactions to comments made by other Moody’s Ratings employees during credit rating committee meetings and other internal meetings involving Credit Rating Activities.
• In March 2023, an SEC investigation found widespread use of off-channel communications among Moody’s Ratings employees, including discussions on rating decisions and client meetings.
  • For example, in March 2023, an Associate Managing Director who serves as the Head of Relationship Management for a line of business in Moody’s Ratings Commercial Group exchanged off-channel communications with a Managing Director in the Commercial Group in which they discussed a meeting with a credit rating client regarding whether Moody’s Ratings could rate a new product developed by the credit rating client.

SEC Order - S&P Global Ratings

S&P Ratings had policies in place to ensure the retention of business-related communications, requiring employees to use approved digital platforms for such exchanges. However, until August 2023, S&P failed to specify which platforms were approved, leading to widespread use of unmonitored and unretained messaging platforms like WhatsApp.

The SEC's investiaation revealed that many S&P employees, including senior executives, used these off-channel methods for internal and external communications related to credit rating activities. These communications, which should have been retained and monitored as per regulatory requirements, included critical discussions on credit rating decisions, criteria, and client interactions.

The SEC’s probe uncovered extensive use of these off-channel communications, which likely hampered the Commission's ability to assess compliance and investigate potential violations of federal securities laws. The failure to preserve these records raises concerns about the integrity of S&P’s credit rating processes and their adherence to regulatory standards.

For example, between at least March and June 2022, a managing director and an associate director exchanged numerous off-channel communications relating to credit rating clients, including their reactions to comments made by other S&P Ratings employees during credit rating committee meetings and other internal meetings discussing Credit Rating Activities.

In addition, between at least July 2021 and November 2021, a senior director exchanged numerous off-channel communications with multiple credit rating clients, which communications included discussions relating to Credit Rating Activities, such as credit rating committee meetings, S&P Ratings credit rating criteria, and comments made in meetings between S&P Ratings employees and the credit rating clients.

As another example, in November 2021, two associate analysts discussed, through off-channel communications, presenting the quantitative testing results for a transaction involving a particular credit rating client at a credit rating committee meeting.

SEC Order - Fitch Ratings, Inc.

Despite having policies in place since at least 2020 to ensure the retention of business-related communications, many Fitch employees, including senior executives, have been found to use unapproved messaging platforms like WhatsApp and WeChat for credit rating activities. These off-channel communications were not monitored, reviewed, or archived, contrary to regulatory requirements.

The SEC launched an investigation in August 2022 to assess whether Fitch Ratings was properly retaining communications related to credit rating activities. The investigation uncovered widespread use of these unmonitored channels, with multiple instances of critical discussions about credit ratings taking place outside approved communication methods. These lapses likely hindered the SEC’s ability to detect potential compliance issues and violations of federal securities laws during their examinations.

For example, on May 24, 2020, a Fitch Ratings senior director and associate director exchanged multiple off-channel communications, via WhatsApp, relating to Credit Rating Activities, including recommendations regarding a rating to be considered at an upcoming rating committee meeting.

In addition, between October and December 2022, a Fitch Ratings associate director and a representative of a credit rating client exchanged numerous off-channel communications, via WhatsApp, relating to Credit Rating Activities, including communications regarding the terms of a proposal for a rating engagement.

Fitch Ratings has cooperated with the investigation, but the findings raise serious concerns about the integrity of the company’s compliance with regulatory standards and the transparency of its credit rating processes...

SEC Order - HR Ratings de México, S.A. de C.V.

Despite having policies in place since 2020 to retain business-related communications, HR Ratings failed to monitor or archive critical communications conducted through unapproved platforms like WhatsApp.

The SEC's investigation revealed that HR Ratings employees, including senior executives, frequently used WhatsApp for communications related to credit rating activities. These off-channel communications were not retained or monitored, violating regulatory requirements. Although HR Ratings approved the use of Slack for internal messaging in October 2022, the company did not implement a policy for preserving communications on mobile devices until August 2023.

The SEC’s probe uncovered widespread use of these unmonitored channels, with numerous instances of critical discussions about credit ratings taking place outside approved systems. This failure likely impeded the SEC’s ability to identify compliance deficiencies and potential violations of federal securities laws during their examinations of HR Ratings.

For example, on September 28, 2022, a senior executive director exchanged numerous off-channel communications via WhatsApp relating to Credit Rating Activities with a ratings analyst. Some of these messages attached snapshots of internal draft reports.

HR Ratings has cooperated with the investigation, but like with Fitch and the others, the findings raise concerns about the company’s adherence to regulatory standards and the integrity of its credit rating processes.

SEC Order - A.M. Best Rating Services, Inc.

A.M. Best Rating Services, despite having policies in place since at least 2020 aimed at preserving electronic communications, many employees, including senior executives, used personal devices for critical communications related to credit rating activities, which were not retained or monitored.

A.M. Best Rating Services had implemented mobile device management technology on firm-issued devices as early as 2014 to ensure the retention of electronic communications. However, this technology did not extend to personal devices, leading to significant gaps in recordkeeping.

The SEC's investigation found that a majority of the employees sampled had engaged in off-channel communications on their personal devices. These communications, which involved discussions related to credit rating decisions and interactions with clients, were not archived as required by regulatory standards.

For example, from December 2, 2022 to December 15, 2022, a managing director exchanged numerous off-channel communications, on his personal device, relating to Credit Rating Activities with a representative of a potential client...

SEC Order - Demotech, Inc.

Before July 2023, Demotech had no clear guidelines on which communication methods were approved for discussions about credit rating activities. This gap allowed employees, including senior executives, to engage in off-channel communications that were not preserved, undermining regulatory compliance. It wasn't until July 2023 that Demotech implemented a policy explicitly prohibiting the use of unapproved email or messaging systems for business-related communications without board approval.

The SEC’s investigation uncovered widespread use of off-channel communications across all levels of the company, involving both internal discussions and interactions with clients. Notably, in the weeks following Demotech's registration as an NRSRO, a senior executive engaged in numerous unmonitored exchanges with both the CEO of a credit rating client and Demotech's ratings analysts. These communications included discussions on credit rating decisions and sensitive internal templates.

For example, in the weeks immediately after Demotech registered as an NRSRO, a senior executive exchanged numerous off-channel communications with the Chief Executive Officer of a credit rating client relating to Credit Rating Activities. That same senior executive also exchanged multiple off-channel communications with Demotech ratings analysts, including a credit analyst supervisor, relating to Credit Rating Activities with respect to the same client.

Demotech has cooperated with the SEC's investigation, but the findings raise serious concerns about the agency’s compliance with federal regulations and the integrity of its credit rating processes.

TLDRS:

The Securities and Exchange Commission (SEC) announced charges against six nationally recognized statistical rating organizations (NRSROs) for failing to maintain and preserve electronic communications, particularly those conducted through off-channel platforms like text messages and WhatsApp. as required by federal securities laws. The firms admitted to the violations, agreed to pay over $49 million in combined civil penalties, and have begun implementing improvements to their compliance policies.

Penalties Imposed:

• Moody’s Investors Service, Inc.: $20 million civil penalty
• S&P Global Ratings: $20 million civil penalty
• Fitch Ratings, Inc.: $8 million civil penalty
• HR Ratings de México, S.A. de C.V.: $250,000 civil penalty
• A.M. Best Rating Services, Inc.: $1 million civil penalty
• Demotech, Inc.: $100,000 civil penalty