Firms will be scored on behavior and culture.
Securities and Exchange Commission Chairman Jay Clayton has warned firms they are being scored on their culture, and that misleading behavior will land tougher and more drawn-out regulatory action.
In a speech for the Federal Reserve Bank of New York conference on governance and culture reform, Clayton said he was dismayed that Wall Street routinely accepted and tolerated lying.
He cited recent studies by the UK Financial Conduct Authority into culture and accountability, and said firms who protect or shield dishonest individuals will be hit harder and judged on their attitude to misconduct as much as any act of wrongdoing itself.
Clayton gave a hypothetical example of a securities trade involving three parties – an asset manager wanting to buy to buy $10m worth of bonds, a broker who would sell the manager those bonds from inventory and the issuer – and said that lying should not be tolerated.
In his example, the asset manager asked the broker if the bonds were available from inventory and what price the broker paid. The broker, who was offering the bonds for sale at 90 – meaning 90 percent of par, or in this case $9m – said he had paid 81 when he had actually paid 80.
“The law may not prohibit all forms of lying, but your culture should reject it,” said Clayton.
Firms need to ask if their controls “make it clear that lying is unacceptable and communications around markups will be monitored. And, were the offending parties dismissed or otherwise meaningfully sanctioned.”
He said Wall Street has “systemic responsibility” and individual responsibility to the investing public. “We are counting on you and more importantly, the public is counting on you to develop cultures that recognize and responsibly address these realities,” Clayton said.
Following the speech, Clayton told the audience of banking and regulatory officials “the amount of retail fraud that still goes on” makes him sick.