Improved ethics, increased regulation can help restore investor confidence, says U.S. regulator

(March 7, 2003) Acts of malfeasance within the financial services industry have lead to a loss of faith by investors, costing the advisor community heavily in both client confidence and falling revenues, says Mary Schapiro, vice-chair of the NASD, the American self-regulatory organization covering brokerage firms and their registered representatives. NASD, formerly the National Association of Securities Dealers, has working links with the Investment Dealers Association of Canada.

“Investors were holding shares of vastly reduced value,” Schapiro said today during a speech to the Economic Club of Toronto. Schapiro used the “acts of malfeasance” to underpin her call for a more ethical underwriting and investing environment, enforced where necessary by increased regulation in areas such as potential conflicts between brokerage company analysts and investment bankers, along with greater disclosure of real and potential conflicts of interest for professional groups such as auditors and accountants.

Her speech followed by exactly one day NASD’s announcement of charges against Frank Quattrone, former head of Credit Suisse First Boston’s technology sector banking unit. Among other charges, NASD said that Quattrone had overseen “a flawed organizational structure that undermined research analyst objectivity.” NASD began investigating investment banking activities, including research analyst conflict of interest, in May 2000.

Schapiro’s speech is a “call for better ethics in business, trying to give back some semblance of ‘my word is my bond’ for investors,” she told Advisor.ca after she gave her prepared remarks. “It’s a call for increased regulation to the extent that it’s necessary for the time and the particular events that have happened.” These strategies would go part way toward restoring investor confidence, she argued.

Schapiro concedes that cross-border implications of increased regulation have not yet crystallized in such areas as corporate governance and accounting standards.

“This story is yet to be known. We have seen a willingness on the part of the Securities and Exchange Commission with respect to corporate governance requirements to provide some limited exemptions for foreign companies,” she said. “It’s not clear the extent to which they will actively regulate them.”

Responding to a question from Advisor.ca about increased costs of regulation and compliance, Schapiro noted the small size of many NASD member brokerages. “We are dealing them a real blow every time we write a new regulation and they have to put in place a compliance system,” she acknowledged.

Increased costs are also a reality for Canadian securities firm, explained an executive who is facing increasingly complex job specifications in the post-Enron world.

“Regulation is not likely to get any easier or lighter in the coming years. We have to realize that we have to be a lot more vigilant and it’s going to involve greater costs,” according to the executive, who asked not to be named, the compliance director of a retail investment securities firm with branches across Canada.

Added costs appear unlikely to attract universal approval. “That’s problematic within Canada. There’s a pull between people who want to put in more regulation as in the United States, while the British Columbia Securities Commission is exploring a less prescriptive method of regulation,” the compliance director said.

“If there’s more regulation in the U.S., it doesn’t necessarily mean more regulation in Canada,” he said. “It’s certainly an issue that has to be resolved one way or the other.”

• • •

Art Melo is a Toronto-based freelance investment writer.

(03/07/03)