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March 1, 1998

New Clearing-Firm Rules Could Upset Trading Desks:Executive Hammers Home the Message: Quality Con

By John A. Byrne

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  • New Clearing-Firm Rules Could Upset Trading Desks:Executive Hammers Home the Message: Quality Con
  • Page 2

A mallet stands out among the clutter on a desktop in Mesirow Financial's offices in Chicago. Is this for Thomas Avgeris, a big man never afraid of strangers in the Windy City?

No, Avgeris needs the mallet to hammer home one of the attributes some say has made Mesirow an important name in the scrappy business of correspondent clearing: good quality control.

That's right, quality control. And it was scrawled in big letters across the mallet crashing down on the desk.

Quality control, repeated Avgeris, a managing director at Mesirow's North Clark Street offices in the Windy City. "When in doubt, bring it out," he said, giving the desk another rap. "Quality control."

Soon the laughter was actually rattling the room. But this was no laughing matter. Mesirow, which has 125 corespondents, likes to rank quality control among the top reasons an introducing broker, or a smaller broker dealer, selects Mesirow to execute, clear and settle its equity transactions.

"We are an extension of the introduction broker, as it were," Avgeris said.

Symbolic Reminder

The mallet, of course, is much more than a symbolic reminder of how important quality of service is at Mesirow. The mallet is a good way to begin any article in 1998 about the correspondent-clearing business.

After all, the industry is now awaiting Securities and Exchange Commission approval on new clearing rules that could utterly change the relationship among clearing firms, their correspondents, the correspondents' customers the ultimate customer, actually as well as the regulators.

The objective is to enhance existing levels of quality control in a business that has not always demonstrated a sterling reputation.

The rules were submitted to the SEC in response to several highly-publicized cases of alleged investor fraud by broker dealers that use other broker dealers or correspondent-clearing firms to clear and settle their business.

In particular, regulators stepped up their demands for stricter clearing rules in the wake of the collapse of New York-based A.R. Baron & Co. Last year, a state grand jury indicted A.R. Baron and 13 former employees on charges of bilking investors of more than $70 million. The firm filed for bankruptcy in 1996.

Bear Stearns & Co., which processed A.R. Baron's business and wins high praise from many of its correspondents for running a good ship was questioned by the SEC, and separately, by the Manhattan district attorney's office about its role in the collapse of A.R. Baron.

At issue was the role of Bear Stearns, passive or otherwise, in the alleged wrongdoings of a correspondent.

Bear Stearns defended its role in the A.R. Baron debacle, pointing out, for instance, that it represented only a small fraction of its total clearing business. (Bear Stearns processes an estimated 12 percent of the volume on the New York Stock Exchange cleared through the National Securities Clearing Corp.)

Moreover, Bear Stearns stressed that customers make it clear in customer agreements they are aware that the firm acts as the backoffice provider that gives them investment advice.