SEC chief tells dealers: "create new culture of compliance"

13 May 2004

The chairman of the United States Securities and Exchange Commission (SEC) has called for the creation of a "new culture of compliance in the securities industry". In a landmark speech to the National Association of Securities Dealers (NASD), William Donaldson said the industry was defined by dynamism and frequent change - new products, new systems, and vigorous competition.

"In this climate, business practices will frequently outpace any government regulator's ability to develop specific rules governing these practices", he said "and they will further outpace any lawyer's ability to provide conclusive guidance by interpreting existing rules."

He went on:" This is where having a culture of doing what is right - in the absence of specific rules and even in the face of your competitors' choosing a different path - is vital. This is where the courage and commitment of the firm's leaders is needed to question whether a particular firm practice - no matter what the lawyers say - is truly ethical or is truly in the best interests of client and customers. This culture can't be limited to the senior management level, it can't be limited to the compliance department, and can't be limited to the clever wording of a corporate mission statement - it must be embedded in the firm's "essential DNA" and shared by each and every employee."

Mr Donaldson told the dealers they could play a central role in improving governance, and suggested six ways they might go about it:

1. Identify of potential but not-yet-developed conflicts of interest within the firm - where new business relationships or revenue streams could create conflicts with the best interests of customers. "You can help educate not just the people who report to you, but also the heads of business units and even the firm's senior management on the nature of these potential conflicts".

2. Ensure that employees understand their fiduciary responsibilities to certain customers, such as retail investors and fund shareholders, "and that they understand what those responsibilities mean - that customers always come before the balance sheet and not the other way around."

3. Improve the firm's compliance culture by routinely informing senior management of compliance breaches and "educating your senior managers about trends that may lead to future compliance breaches if not adequately addressed."

4. Get involved in the process of evaluating and approving new products or new business ventures. "This will allow you to immediately implement new compliance processes to address the risks those new products or business lines may present."

5. Stress to compliance staff colleagues that the firm's policies and procedures to track compliance should constantly be evaluated, modified, and updated - "with the goal of adapting compliance to the rapid changes in the business environment in which the firm operates."

6. Set an example. "Each time you make a decision - no matter how large or small the decision, and no matter who is in the room or who is not in the room to see you make the decision - ask yourself more than whether it is the legally required thing to do. Go further: ask yourself whether the proposed decision - to the best of your judgment - is the right thing to do."

Full copy of the speech