Why Do Stock Brokers Hate Compliance?
Each year a voluminous number of disciplinary actions are instituted against major broker-dealers for failure to supervise their own brokers and financial advisers.  The number of fines levied against broker-dealers is about to increase with (1) the abolition of the “Merrill” Rule, (2) the new rules governing supervision of variable annuity sales, which will start in 2008, (3) the ongoing crackdown on “free-lunch” seminars and phony, official-sounding titles, which was emphasised during the SEC Senior Summit on September 10, 2007. In this climate, one would expect the repeat offenders to change their ways.  One would expect them to adopt stricter compliance standards.  But that has not been the case.  Broker-dealers remain as defiant as ever.  In a recent article in The Registered Rep Magazine, entitled “The New Big Brother,” contained the following caustic remarks:

“Do you ever get the feeling that your compliance department is the securities industry’s version of the Stasi — the East German secret police who eavesdropped, opened mail and in general spied on its own citizens with ruthless efficiency?  When it comes to client communications, registered reps describe aSoviet Bloc-like police state that forces them — in the interest of actually conveying real financial information and advice to their clients — to break NASD and individual firm protocol for communications.”

Mr. Churchill’s lament is not in harmony with reality.  They are the rantings of a paranoid.  A Soviet Bloc-like police state?  The East German secret police?  Big Brother?  When did the practice of monitoring registered representatives for compliance turn into something intrusive and sinister? The rules are in place to be followed.  If the rules are not followed, the firm will find itself embroiled in multiple arbitrations.  Mr. Churchill speaks of “eavesdropping,” and “spying on its own citizens.”  But the compliance rules are there to protect the customers. It is not unreasonable to require the registered representatives to carefully document all client communications.  It is not unreasonable to require a rep to give the investor an intelligible explanation for every investment decision.  It is not unreasonable to require that the rep make all necessary risk disclosures.

As you can see by following the above link, the article is “presented by Raymond James.”  Therefore, it is reasonable to assume that Raymond James agrees with Mr. Churchill’s statements. You would think Raymond James would have learned by now, considering that earlier this year they were hit with a rather hefty fine.   On February 21, 2007, the NASD fined Raymond James Financial Services, Inc. of St. Petersburg, Florida, $2.75 million for failing to maintain adequate supervisory system to oversee the sales activities of over one thousand of its branch managers working throughout the United States. (See NASD News Release: NASD Fines Raymond James Financial Services, Inc. $2.75 Million for Lax Supervision of Producing Branch Managers, February 21, 2007).

Donna Vogt, a Raymond James producing manager in Cambellsport, Wisconsin, was permanently barred.  Vogt treated her customers as a homogeneous group, regardless of age, income, experience or objectives.  Basically, she recommended unsuitable mutual funds and variable annuities to a number of elderly and retired customers. (See NASD News Release: NASD Fines Raymond James Financial Services, Inc. $2.75 Million for Lax Supervision of Producing Branch Managers, February 21, 2007). The attitude expressed in “The New Big Brother” article is indicative of the broker-dealer industry as a whole. Vestment Advisors Inc., a Shorewood, Minnesota-based consulting and training firm for the financial service industry, conducted a survey of 100 investment advisers and other financial services professionals. The survey found that “many financial advisers knowingly sidestep their firm’s compliance policies and sometimes show little regard for rules and regulations,”reported InvestmentNews.com. (See Bruce Kelly, Advisers Often Skirt Compliance Rules, Survey Finds, InvestmentNews, May 29, 2007).
  • 45% said they were concerned that an investor would file an arbitration complaint or lawsuit against them for violation of compliance rules.
  • 20 % of the surveyed professionals said they knew of someone who knowingly violated compliance rules and regulations.
  • 21 of the registered representatives surveyed said they spent less than one hour a week on compliance, while 13% said they lost one full day each week on dealing with compliance issues.
(See Bruce Kelly, Advisers Often Skirt Compliance Rules, Survey Finds, InvestmentNews, May 29, 2007).  The blunt, matter-of-fact manner in which those surveyed confessed to violations is telling.  Consider the following examples, as reported the InvestmentNews article:
“I would not believe anyone that says they have never violated a compliance rule.” “Of course, everyone violates it every day.  You can’t work in the securities industry and not violate an NASD or SEC rule every single day — it can’t be done.” “Some reps at my firm don’t want to spend time taking our firm element training tests online.  They ask their assistants, managers or other reps to take the exams.”

(See Bruce Kelly, Advisers Often Skirt Compliance Rules, Survey Finds, InvestmentNews, May 29, 2007).

The candid nature of the responses is telling.  The feeling of the industry is one of laxness and complacency.  There is a cynical inevitability in the comments.  Essentially, the industry says the compliance rules are going to be violated and there is nothing anyone can do about it.

The survey identified specific compliance rules often violated:

  1. Advisers signing account forms for clients.
  2. Not sending email to the compliance officer for review.
  3. Not processing checks the day they were received. 
  4. Advisers sending letters to clients without first passing them through compliance
  5. Unauthorized trading.
  6. Selling away clients’ loans.
  7. Forging client signatures on transfer paperwork.
  8. Skipping exams and courses on compliance and ethics

All compliance violations are twofold: first, the broker violates the compliance rule; second the supervisor fails to notice the violation or fails to take action.  The party ultimately harmed is the investor.

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