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September 14, 2012; Source: Washington Post
What does a $5 million fine paid by the New York Stock Exchange (NYSE) have to do with issues of nonprofit transparency? Plenty, if the question is, what is the purpose of transparency?
According to the Washington Post and the Associated Press, the NYSE has been providing certain favored customers real-time market data before providing it to the public – as it is required to do by law and regulation. It has been consistently abrogating its legal obligation to provide fair access to market information since 2008 (the practice apparently ended in mid-2010).
The lag time was somewhere between milliseconds or multiple seconds, according to the Securities and Exchange Commission. If you know how the market works, then you know that there are the big institutional traders who have computerized programs and pre-programmed algorithms to make trades as soon as information is made available. According to Robert Khuzame, director of the SEC’s enforcement division, “Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors.” This was the first-ever SEC fine imposed against an exchange.
It was a technology glitch, says NYSE Euronext, the parent company of the NYSE. There was no intentional wrongdoing in providing certain customers with a head start on trading for more than two years, they say. However, the SEC pointed out that the NYSE somehow deleted computer files that contained information about the specific occurrences and durations of delayed transmission of market data except to those insider traders.
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This chart (PDF) provided by the SEC shows how the SEC staff envisioned the NYSE providing faster information to certain “proprietary customers” than to the general public. The proprietary service called “Open Book” was created in 2001, but the process of providing proprietary customers with faster information than the general public began in 2008 with the NYSE’s new product, “Open Book Ultra”.
OK, bad NYSE, bad, bad NYSE. But what does that have to do with nonprofits? In a way, plenty. The institutions and players with money can obtain information that the rest of a sector – any sector – can’t. In this case, it was the NYSE providing public access information a little quicker to big institutional players, but it was public information nonetheless.
Similarly, in the nonprofit sector, there is the problem of the big political donors to 501(c)(4) social welfare organizations. These donors have turned American elections into a casino for moneyed players. The big donors raise or lower the odds by how much money they are putting behind various candidates – and the public doesn’t get to know who these manipulators are, because their names and donations are kept secret under the donor confidentiality standards that apply for 501(c)(4)s and to 501(c)(3) public charities.
Don’t be fooled, however. The big political fundraisers generally know who gives to whom just like in charitable fundraising where top flight fundraising consultants generally know who gives what. There’s an insider’s game afoot when it comes to access to information. Even publicly accessible information is rarely made available in an easy or useful format, making the role of translators and aggregators such as Guidestar and the Foundation Center crucial and, in the instance of their premium services, pricey.
Information is the most important currency of both the nonprofit and the political sector. The ability to identify and precisely target donors is a valuable asset, available only to a few small slices of the nonprofit sector. Critical information about who is buying and selling tax-exempt organizations is the nonprofit sector’s equivalent of NYSE reporting on stock trades. At least the public gets the NYSE information, even if it’s a few milliseconds after it is provided to the big institutional traders with their own special automated buying and selling programs. In the nonprofit sector, there’s no SEC to ensure that nonprofits all get the information they need and no requirement that the information be made publicly available. The structural imbalance in the nonprofit sector is caused by a reluctance to embrace transparency, meaning that only those who can pay – and pay handsomely – can find out exactly what they need, while the rest of us get to look through a glass darkly. –Rick Cohen