Imagine a world in which regulators and members firms always got along - where member firms proactively brought problems to regulator attention and sanctions were obsolete (or significantly reduced). Can such a utopia ever exist? Maybe.
Comments from senior SRO personnel attending this year's Annual Forum On Responding To Broker-Dealer Litigation & Regulatory Enforcement held last week in NYC may surprise you. From the regulator's perspective, member firms have been slow to bring to their attention problems which firms may have known about for several months or even years. In turn, when member firms later, during an SRO investigation, ask for lesser sanctions, regulators are less likely to credit the member firm's cooperative efforts. Why, you ask? Credibility. Member firms are comprised of people, regulators are people, and they interact. Relationships are formed, broken, strengthened and weakened through these interactions and earning credibility on the front end may pay huge dividends for member firms faced with an investigation down the road.
Discussion during this year's conference compared and contrasted hypothetical member firms who took the initiative and contacted SRO's prior to receiving notice of a regulatory investigation versus firms who waited, and why these firms would be treated differently by regulators. A regulator wants to know about a problem sooner rather than later for obvious reasons. But member firms have concerns as well. Disclosing a problem before a firm has time to get its hands around the issues would serve no purpose and might send the organization and regulators on a wild goose chase. Similarly, some member firm representatives expressed concern that even when steps were taken to disclose problems early on and efforts were made to resolve issues hand in hand with regulators, no credit was given.
Comments from both sides boil down to a lack of trust. Right or wrong, firms must overcome the perception of playing "hide the ball" with regulators and, conversely, regulators should consistently reward firms for proactively bringing problems to their attention. A member firm that informs regulators about a problem but asks for more time to conduct its own internal investigation and takes substantive steps to correct any problems identified, necessarily stands a better chance of obtaining credit for its efforts than a firm on the opposite end of the spectrum who is perceived to be stymieing regulatory investigations.
A middle-ground both sides can live with and perhaps even like exists. It is just going to take effort and trust from both sides to get there.
