How do you create a culture of compliance? Securities and Exchange Commission Chairman Mary Jo White believes you do it by aggressive enforcement, showing the financial services industry that every securities infraction — no matter how seemingly inconsequential — will be taken seriously and could result in a fine or other type of penalty. By letting it be known that the SEC
is paying attention to the small stuff, she hopes to create an atmosphere of respect for the law and encourage an environment where more-serious fraud is less likely to flourish.
In a recent speech, Ms. White pointed to the crime-fighting initiative of New York Mayor Rudolph Giuliani and Police Commissioner William Bratton in the 1990s. During that period, the police mounted a no-holds-barred assault on petty crime — such as aggressive panhandling, subway graffiti and prostitution.
The idea was to stop small crimes before they turned into bigger crimes, and let potential criminals know there was a cop on the beat who was watching them. This zero-tolerance policy worked — the crime rate in the city declined dramatically.
Ms. White believes that theory can work in the securities industry. “Minor violations that are overlooked or ignored can feed bigger ones,” she said in her speech, “and perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”
Executives and managers at broker-dealers and investment advisory firms should pay attention to the SEC chairman.
For one, doing so might prevent their firms from becoming targets of enforcement actions down the road. Furthermore, every manager in the securities industry should adopt the same policy and attitude within their firms. Let it be known that from here on in, there will be zero tolerance for violating industry rules and company policies.
In the beginning, examples might have to be made, including termination of some employees. But eventually, if the message from manage- ment is consistent and workers know there will be consequences for their actions, fewer violations and more adherence to securities laws will result. In essence, management will have created a culture of compliance.
