A disturbing portrait of the industry

“Wall Street’s future leaders … have lost their moral compass, accept corporate wrongdoing as a necessary evil and fear reporting this misconduct.”

That quote captures a major conclusion reached by law firm Labaton Sucharow LLP from its second annual U.S. Financial Services Industry Survey.

Labaton Sucharow, a securities and business litigation firm, summarized its findings in a white paper titled “Wall Street in Crisis: A Perfect Storm Looming” (available at secwhistlebloweradvocate.com).

The paper paints a disturbing portrait of the financial services sector from the perspective of key market participants, such as investment managers, financial advisers, brokers and bankers. Key findings show that investment professionals perceive deep-seated deficiencies in the areas of individual integrity, corporate leadership and regulatory effectiveness.

The findings are nothing short of depressing. More than half (52%) of the respondents said they consider it likely that competitors have engaged in unethical or illegal activity to gain an edge in the market.

WOULD IF THEY COULD

Nearly one-quarter (24%) said they suspect that employees in their own company have engaged in misconduct, and 29% said they think that financial services professionals may need to engage in unethical or illegal activity to be successful. Most concerning of all is the fact that 24% of the respondents said they would likely engage in insider trading to make $10 million if they could get away with it.

With respect to corporate leadership, the survey outcomes point to both structural and cultural impediments to ethical conduct. Twenty-six percent of the respondents said they think that the compensation and bonus plans at their companies give employees an incentive to compromise ethical standards or violate the law.

When asked about how management would respond to suspected insider trading by a top performer, 17% said they expect that their leaders would look the other way. Even more worrisome is the finding that 24% of the respondents said they would fear retaliation if they reported wrongdoing.

As an overall assessment, 28% of the respondents said the financial services industry doesn’t put the interests of clients first.

The survey captured perceptions of rising regulatory effectiveness from the previous year’s findings. Although this was characterized as a bright spot in the survey results, the statistics fell well short of what objectively could be called positive news.

The Securities and Exchange Commission is viewed by 62% of respondents as effective in detecting, investigating and prosecuting misconduct; 57% similarly said they consider the Financial Industry Regulatory Authority Inc. effective. Just 36% said they think Wall Street has changed for the better since the Dodd-Frank Act was enacted in 2010.

All these statistics pertain to aggregate survey data.

AGE DIFFERENCES

The survey captured sharp differences in the responses of those with 10 or fewer years of experience in the financial services field, versus those with more than 20 years of experience. Across nearly every reported line of inquiry, the respondents with the least amount of experience indicated significantly lower assessments of individual integrity and corporate leadership than the most-experienced group.

For example, twice as many of the least-experienced group said they think that financial service professionals may have to engage in misconduct to get ahead as the most-experienced segment (36% versus 18%). Compounding concern about that statistic is the finding that nearly three times as many of the least-experienced respondents said they fear retaliation for reporting wrongdoing (32% versus 11%).

But most shocking of all is the apparent propensity for the least experienced to commit wrongdoing. More than four times as many of the least-experienced respondents said they would be likely to commit insider trading if they could make $10 million and had no chance of getting caught (38% versus 9%).

The authors of the white paper noted: “No matter what commercial crisis we examine, there are, almost without exception, three factors that form a perfect storm: greed, weak leadership and fear.”

All isn’t well in the financial services sector. Regulatory reform is necessary but not sufficient to create a culture of integrity and fiduciary responsibility; corporate and professional leadership also are essential.

Blaine F. Aikin is president and chief executive of fi360 Inc.