Securities Industry Group Outlines Best Practices For Supervisors and Compliance Professionals To Protect Investors

he Securities Industry and Financial Markets Association (SIFMA) - formerly the Securities Industry Association, a trade group for 650 financial services firms in the U.S. and throughout the world -- has published "Best Practices" for its member firms. Although "aspirational in nature", SIFMA states that its members have an obligation to "abide by the highest professional standards" because "anything less would be inconsistent with the trust our clients have placed in us."

The Best Practices cover several areas - from firm management to relationships with regulators - but the two most interesting relate to the Best Practices for sales supervisors and for compliance professionals. SIFMA does cover the area of "investor rights", but its treatment is generic -- the right to "quality service", "full, clear reporting", and "prompt, fair resolution of problems" - with two exceptions. The first is that "significant conflicts of interest" must be disclosed. The second is that, in presenting investment recommendations, the firm "will present you [the investor] with reasonable investment alternatives" and "disclose the comparative risks, benefits and costs." The author's experience is that firms often fail to follow these two Best Practices.

Clearly, the two most substantive Best Practices relate to sales supervision and the role of the compliance professional. Let's examine four excellent recommendations for sales supervision. First, SIFMA expects firms to have "stringent" hiring procedures for financial advisers. Firms need to review their practices to ensure that they capably can screen candidates and whether additional protections are necessary.

Second, firms should use "special supervision" for financial advisers who have a disciplinary history of customer sales abuse or other customer harm. In the author's experience, this kind of heightened supervision frequently can detect, if not prevent, significant customer harm that may escape standard supervision processes.

Third, firms should understand that effective supervision and sound written supervisory procedures are the "first line of defense in guarding against sales practice abuses." Securities regulators have delivered this message for many years. When firms detect problems, they must take corrective action.

Finally, the Best Practices call for firms to "consider tying a component of the branch manager's compensation to his/her effective supervision" of financial advisers. That should get the point across!

SIFMA's Best Practices have a similar theme with respect to the role of the compliance professional. There are five excellent recommendations. First, firms must insist on "compliance and high ethical standards" throughout the firm, and senior management must lead by example. Securities regulators recently have emphasized that this "culture of compliance" is necessary to comply with securities rules and regulations.

Second, personal performance evaluations should have a component for the compliance record of the individual as well as for the branch office. This is similar to the sales supervision Best Practice noted above for branch manager compensation, and it makes sense.

Third, firms should ensure that they provide an effective means of communicating compliance, regulatory or ethical concerns to compliance professionals and senior management. The Best Practice envisions firms including confidential and anonymous communications so that there is no fear of retaliation against those who may be viewed as "whistleblowers".

Fourth, firms must support and provide adequate resources to compliance professionals. That includes having programs for skill development as well as "compensation, benefits and recognition in keeping with their contributions." That also includes ensuring that compliance professionals have sufficient access to information at the firm to discharge their duties.

Finally, SIFMA recommends that firms involve compliance professionals in, and recognize their input "as an integral component" of, hiring and firing decisions. Likewise, firms should "actively involve" compliance professionals in internal disciplinary processes to make certain that action taken is "fair, consistent and appropriate."

In conclusion, SIFMA's Best Practices should be followed, as securities regulators already require, or soon may require, these "best practices" to be minimal standards of conduct.

_______________________________________________________________________
James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.