The Securities Investors' Bill Of Rights (SIBORAP): Part Two

[Thierry Martin]

The Securities Investors' Bill Of Rights (SIBORAP): Part Two
by Steven R. Selengut

We the securities investors of the United States, in order to form more transparent financial markets, establish effective regulations, defend against destructive speculation and manipulation, promote financial well-being, preserve working capital, and protect retirement income, do establish this Securities Investors Bill of Rights and Protections (SIBORAP).

These rights are intended to replace, amend and/or abolish all laws and regulations currently in conflict with SIBORAP, and are to be implemented by all parties to financial transactions.

Any institutional efforts to create and/or market securities and/or derivative products that do not comply with the spirit of SIBORAP will result in fines to corporate officers and directors, congressional oversight committee members, regulatory agency directors, and their financial or legal counsel.

All derivative investment products of any kind, any investment programs or specific recommendations promoted in any medium by non-professionals and professionals alike, SEC registered or not, must comply with SIBORAP. Any non-plain-vanilla security, or derivative product containing college-level mathematical complexity, must comply with SIBORAP.

If the average investor cannot understand the purpose of the security, view its content, and form valid expectations about its market value and/or income generation performance in varying market environments--- that security should not be purchased by that person, and must not be sold to him.

It is important that the regulatory bodies responsible for implementing SIBORAP include non Wall Street representatives in their advisory committees. Any and all financial products, contracts, options, and programs approved by regulators will be given a layman's language risk assessment.

All producers of derivative products must provide regulators with clear written documentation of the specific risks involved, in layman's terms. Regulators will label derivatives as to risk "tier level", and identify the entities, persons, and programs prohibited from purchasing them.

The primary purpose of SIBORAP is to protect investors from the actions of others by lessening the global impact of specific types of transactions. A secondary objective is to protect the majority of investors from themselves.

SIBORAP includes these ten specific sections: (1) Product Transparency, (2) Regulation and Education, (3) Protection from Speculators (4) Control of Hedge Funds, (5) Brokerage Account Statements, (6) Retirement Account Investments, (7) Executive Compensation, ( Corporate Financial Statements, (9) Taxation of Investment and Retirement Income, and (10) Transactional Greed and Fear Controls.

SIBORAP includes these ten specific sections: (1) Product Transparency, (2) Regulation and Education, (3) Protection from Speculators (4) Control of Hedge Funds, (5) Brokerage Account Statements, (6) Retirement Account Investments, (7) Executive Compensation, ( Corporate Financial Statements, (9) Taxation of Investment and Retirement Income, and (10) Transactional Greed and Fear Controls.

Section Two: Regulation and Education (continued from Part One of the SIBORAP report).

Security industry regulators will be charged with many responsibilities: (1) educating investors with respect to product content; (2) developing a "hierarchy-of-risk" tool that identifies the risks in all things sold to investors; and (3) preventing the spread of unregulated Internet based investment advice offered by persons of unknown qualifications.

Additionally, they will be responsible for:

(4) Preventing the development of multi-level, multi-leveraged, WMFDs; (5) requiring that all financial blogs include appropriate caveats that speak to the qualifications of contributors; (6) investigating any "acronym" product produced by Wall Street, and (7) preventing rating agencies from separately rating pieces of derivative products.

If it looks and feels like a bond, it better not be a currency futures speculation.

The "hierarchy-of-risk" tool compares the risk vs. reward characteristics of a laundry list of investment securities from lowest-risk, investment grade, through highest-risk, speculation. A risk level "tier" system has been created:

Tier One: government securities, IG (investment grade) municipal and corporate bonds, and US government backed and/or guaranteed securities. Tier Two: individual commercial and residential mortgages, IG preferred stocks, dividend paying IGV stocks, and most REITs.

Tier Three: other exchange-listed stocks, most royalty trusts, and DJIA, S & P, and NASDAQ index funds. Tier Four: IPOs, sector index funds, junk bonds, options, futures and commodities contracts, currencies, multi-level derivatives, penny stocks, and anything with a "traunch" inside, etc.

Special documentation is required for individual investors to purchase anything listed as a Tier Four speculation. Tier Four speculations are only available to individuals with more than two million dollars in invested working capital and a segregated, personal retirement programs, with at least one million in working capital.

Note that individuals who do not comply with SIBORAP rules would continue to be taxed on both retirement and investment income. Investors continue to have an inalienable right to be stupid.

Section Three: Protection from Speculators.

Investors have a right to protection from unexpected risks being added to portfolios without their control, knowledge, or permission. No contract of a derivative and/or a speculative nature may be used in a manner that could impair the perceived investment status of any individual security.

This would preclude the use of almost all forms of "naked" short selling by any entity or person, index fund ownership of more than 100 share positions of tracked equities, and all "naked" stock options. The only short selling that would survive would be "against-the-box", and only in private, non-retirement, portfolios.

Similarly, margin financing in all but individual, non-retirement portfolios, would be prohibited--- which just means that mutual funds and hedge funds would be unable to borrow against the assets within the fund to leverage the portfolio. This eliminates the disruptive effect of margin calls on the values of the securities in non-speculative portfolios, retirement plans, etc.

Certain commodities and currencies speculations must be restricted to professionals within their communities. Basically, if you're not willing to take delivery of the commodity, you can't trade it. In recent years, for example, commodities speculators have been able to place global economies in turmoil by manipulating gasoline and food prices.

Under SIBORAP, regulators would be able to control speculators more quickly, and less experienced (wealthy or not) individual investors would be unable to participate in dangerous speculative endeavors.

Section Four: Controls of Hedge Funds.

Investors have the right to know that the same rules apply to all market participants. Hedge fund disclosure material must be made available to all eligible investors, and all hedge funds are subject to SIBORAP.

Hedge funds of all varieties will become regulated entities, and their operators, principles and officers will be required to fully disclose the processes and methodologies that they will be using in their operations. Any form of collusion between hedge fund operators is illegal, for any purpose.

Clearly, in 2008, hedge fund operators conspired with one another to manipulate the world oil market and to crush companies within the financial sector. Such flagrant breaches of the public interest will be eliminated by SIBORAP.

Hedge funds may not use margin borrowing, must not short securities they do not own, and must not allow entry to anyone who does not meet the funds stated wealth requirements. They may use covered option strategies, but cannot invest in any multi-level derivatives.

No unqualified person, through whatever medium, may participate in any form of hedge fund. Funds that contain hedge funds are prohibited.

Sections Five: Brokerage Account Statements, Six: Retirement Account Investments, and Seven: Executive Compensation, are presented in Part Three of the SIBORAP report.

Steven R. Selengut
http://www.sancoservices.com
http://www.valuestockindex.com
http://www.kiawahgolfinvestmentseminars.com
Professional Portfolio Management since 1979
sanserve@aol.com
800-245-0494

Author of: "The Brainwashing of the American Investor: The book that Wall Street does not want you to read!", and "A Millionaire's Secret Investment Strategy"