More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
A quarter of financial services professionals would engage in insider trading to make $10 million if they could get away with it, and a far higher proportion of younger Wall Street professionals, 38%, would do so, a new survey reveals.
A newly released report by Labaton Sucharow, a law firm specializing in SEC whistleblowing cases, reads like those surveys of high school students revealing the prevalence of behaviors their parents wouldn’t approve of.
“We discovered that Wall Street’s future leaders, the young financial services professionals entrusted with, literally, trillions of dollars, feel the most pressure, are the most willing to engage in illegal activity and are the most fearful of retaliation,” the law firm reports in its second annual survey of the U.S. financial sector.
The survey’s comparisons with the attitudes and behaviors were consistently worse than its findings in its 2012 debut. For example, 29% of those surveyed felt that success in the industry required unethical or illegal activity, a 17% increase from last year; and 24% thought that staff at their company had engaged in miscreant behavior, a 14% increase from 2012.
The overwhelming majority of findings in the survey of 250 respondents who work as traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisors, asset managers and stockbrokers, were likewise unflattering to Wall Street.
A majority of respondents, 52%, felt their competitors were breaking the rules to get an edge in the marketplace; 23% said they had firsthand knowledge of wrongdoing in the workplace; and 26% said their compensation structures incentivized unethical or illegal behavior.
The study was the subject of a CFA Institute ethics webinar Wednesday afternoon that reinforced those findings with similar points. For example, the CFA Institute’s ethicist Michael McMillan cited jury testimony by Kweku Adoboli, whose rogue trading cost UBS $2.2 billion, to the effect that senior managers were aware of his actions and encouraged his risk taking. Circumventing rules was standard behavior at the firm, McMillan said, and Adoboli only got into trouble because he lost money.
McMillan also cited a Columbia University study finding that 40% of its graduates had been rewarded for ethically troubling actions, while 31% who refused to engage in misconduct felt penalized for their refusal (while just 20% felt they were rewarded for doing the right thing).
Within the Labaton Sucharow report about Wall Street is a message to Main Street to be very wary about the professionals with whom they do business. More than a quarter (28%) of respondents felt the industry does not put client interests first.
The only reported positive trend in the report was the growing faith in industry regulators, with 62% of respondents viewing the SEC as effective and 57% pleased with FINRA.
The report attributes this finding to the implementation of the SEC’s new whistleblower program, which kicked in at the end of 2011 and received 3,001 submissions last year. A majority of respondents, 60%, were aware of the program, up 11% from the previous year, and 89% of respondents said that its anonymity, employment protections and potential monetary award would induce them to participate — an overwhelming majority, though less than last year’s 95% figure.
Despite this, the report noted that “each critical faction of the marketplace — individuals, leaders and workplace culture — evidenced an astonishing ethical decline."
The report warns Wall Street: “If we don’t take swift collective action, the battle cry this can’t happen again will be nothing more than background music to the next, more potent economic tsunami.”