Compliance
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Automation Can Overcome IPO Compliance Hurdles: For Broker-Dealers, Tech Savvy Pays
September 1, 2005
Initial public offerings have picked up steam this year for a broad range of companies, and by mid-August two broker-dealers had successfully gotten in on the action and a third was pending. However, the cost of new capital from public investors may vary widely for those firms and any other broker-dealers considering an IPO, largely depending on their current compliance systems' thoroughness and automation.
Penson Worldwide, a clearing and execution firm focusing on the equity markets, filed with the Securities and Exchange Commission Aug. 10 to sell shares to the public. A day later, Refco, which specializes in executing and clearing derivatives transactions, priced its offering and saw its shares close at more than $5 a share above the offering price--no Google, but not bad for an obscure financial firm.
Also impressive was optionsXpress, with an offering price of $16.50 a share, which closed at more than $20 on it first trading day at the end of January. Its share price soon climbed to more than $23 a share, then tumbled to $14, and by mid-August had returned to over $17 a share. Despite the volatility--a description abundantly applied to the financial markets over the last five years--the stock's first-day pop suggests investors viewed optionsXpress as having its ducks in a row. And many of those ducks centered on its ability to meet ever-growing compliance requirements.
Value Tied to Compliance
"The value of a broker-dealer going public is how well it behaves and complies with regulation," says Jeffrey Abramczyk, a consultant at Capco and a former broker-dealer CFO. "Financial institutions manage people's money in compliance with regulations--that's the value in these companies."
A common thread among all three firms is their plentiful use of technology. As an online broker, optionsXpress' trading business is almost fully automated. New York-based Refco touts its technology acumen in its prospectus, saying it anticipates the increasing popularity of electronic trading to continue to pump up its market share. And Dallas-based Penson is well known as a clearer for active traders, both at broker-dealers and at hedge funds, who employ algorithms and other technology tools to trade huge volumes of securities. These firms' technology prowess may explain, at least in part, why--except for the famed Lazard Freres--they have been the only broker-dealers to approach the IPO market this year.
Even the most technologically savvy broker-dealers, however, are bound to find jumping into public listing a challenge in today's frenzied regulatory environment. Refco notes, for example, that following the effectiveness of its registration statement filed with the SEC it will have to ensure it has the ability to prepare financial statements that meet the regulators' reporting requirements.
"Upon completion of this offering, we will also become subject to other new financial and other reporting and corporate governance requirements, including the requirements of the New York Stock Exchange and certain provisions of the Sarbanes-Oxley Act of 2002 ... which will impose significant compliance obligations upon us," Refco's prospectus states.
Refco then provides a litany of requirements, including creating or expanding the roles and duties of its board of directors; instituting a more comprehensive compliance function; hiring a chief accounting officer and additional controllers and other staff; preparing and distributing periodic public reports; using outside counsel to address compliance issues; establishing an internal audit function; enhancing its investor relations function; and establishing new internal policies, such as those relating to disclosure controls and procedures and insider trading.
