Bank Broker-Dealers Get
Some Compliance Advice
In the wake of the mutual fund scandals and other troubles centered on sales of financial products, bank broker-dealers must stay clear of any problems bank securities regulators are watching closely, a legal expert warned at the recent Bank Insurance & Securities Association conference here.
Financial service firms often can reduce potential problems by remembering to keep a serious demeanor in formal corporate discussions, said John F. Hartigan, partner with the Washington law firm, Morgan Lewis & Bockius LLP.
In the current regulatory atmosphere, “the cardinal sin broker-dealers can make in their annual sales meetings is to open with a joke,” Hartigan said. “You need to take your responsibility seriously and with a sufficient degree of gravity.”
The Securities and Exchange Commission takes a stone-faced view of levity in brokerage operations, he warned. One company was called to account when its brokers staged a skit at an annual sales meeting depicting brokers talking about fleecing senior citizens.
That may have been just a joke under normal circumstances, but when the firm came under investigation, the SEC wasnt laughing.
Jokes “can be death,” he warned.
Another regulatory hot spot involves preserving information about the rationale behind trades. Often, regulators are more worried when they see a firm trying to hide unfavorable trading information than they are about the actual trades themselves, he said.
Therefore, if a firm finds information in its own records that reflects unfavorably upon its trade practices, it should come clean, he warned. A firm is better off reporting its own brokers questionable conduct than trying to hide it. “Dont destroy and dont obstruct.”
The way the SEC sees it, there are the good guys and the other guys, he said.
“You either cooperate and self-report, or you are the other guys,” Hartigan observed.
When it comes to full disclosure, e-mail is frequently an issue with regulators, he said.
Broker-dealers are required to maintain a record of all e-mails relevant to financial transactions so records are easily accessible. “Have you trained people so they understand e-mail should be thought of as correspondence?” Hartigan asked.
To protect privileged information, such as certain correspondence between bank broker-dealers and their attorneys, such information must be appropriately coded as privileged, he said.
Procedural and policy manuals within banks are other items needing serious review, he said.
“Its really incumbent upon them to read their manuals cover to cover,” Hartigan warned.
One key aspect of reviewing records for compliance is in the suitability of given products for given clients, he said.
“If Im pitching a variable product, then I must tell the client where the value of it is,” he advised.
Another telling question investigators may look at is whether supervisors are diligently trying to do their jobs, he said. Branch managers who never nixed a trade because it seemed inappropriate for a given client or who never said “no” to a salesperson may not be providing meaningful reviews of stock trades at their firm, he warned.
Reproduced from National Underwriter Edition, April 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.