Advisers often skirt compliance rules, survey finds

NEW YORK — Sick and tired of complying with an increasingly complex regulatory framework, many financial advisers knowingly sidestep their firms’ compliance policies and sometimes show little regard for rules and regulations, according to a new survey of advisers and other financial services professionals.
Of the 100 such professionals interviewed for the survey, conducted by Vestment Advisors Inc., a Shorewood, Minn.-based consulting and training firm for the financial services industry, nearly 20% said they knew of someone who knowingly had violated compliance rules and regulations.
When asked “how” someone had broken rules, the responses were surprisingly blunt.
“Of course, everyone violates it every day,” said one respondent. “You can’t work in the securities industry and not violate an NASD [of Washington] or [Securities and Exchange Commission] rule every single day — it can’t be done.”
“No specifics,” said another respondent. “There are hundreds of rules out there to follow. I would not believe anyone that says they have never violated a compliance rule.”
Other responses focused on specifics, including unauthorized trading, “selling away” clients’ loans, forging their signatures on transfer paperwork and providing copies of paperwork to them. Of those surveyed, 71 were registered representatives.
Skipping exams
Some advisers simply don’t have the time or the desire to complete training, according to the survey.
“Some reps at my firm don’t want to spend the time taking our firm element training tests online,” said one respondent. “They ask their assistants, managers or other reps to take the exams.”
The responses are “extremely blunt, and I think it definitely characterizes the feeling in the industry,” said Katherine Vessenes, president of Vestment Advisors.
She blames compliance officers and poor training for the breakdown.
“I’m reading between the lines” of the responses, “but very few compliance officers get it,” Ms. Vessenes said. “Also, as an industry, we do a lousy job of training in compliance and ethics.”
For example, the financial services industry has moved to using computerized exams in a number of areas.
“They’re dreadful, dreadful, dreadful,” Ms. Vessenes said. They often are “hard to read and boring. They don’t focus on everyday situations.” Such exams “set themselves up well for people to cheat,” Ms. Vessenes said.
Other violations of compliance rules include advisers’ signing account forms for clients, not sending e-mail to the compliance officer for review and not processing checks the day they were received. Advisers also send letters to clients without first passing them through compliance.
Meanwhile, advisers are stymied and often have legal and ethical activities turned down by the home office, Ms. Vessenes said, with about 40% of those responding to the survey saying that they had been told they couldn’t do something they knew was legal and not in violation of rules and regulations.
She said that the industry is “discouraged” over the level of regulations, with one survey respondent saying his firm spent more on compliance than on rent. “It’s eating into profitability and time,” Ms. Vessenes said.
Time certainly is a factor. Thirteen percent of the registered reps surveyed said they lost one full day each week to compliance issues and paperwork, according to the survey.
On the opposite end of the spectrum, 21 of the 71 reps who responded said they spent less than one hour a week on compliance.
And many advisers live in fear of retribution from clients, according to the survey. Forty-five percent of the respondents, which also included fee-only advisers, branch office managers and compliance supervisors, answered “yes” when asked if they were concerned that an investor would file an arbitration compliant or lawsuit against them.