By Peggy E. Chait
40 years ago, when I started working in this illustrious industry, we call Wall Street, much of what was agreed upon was done with a handshake. A person’s word was his or her word, and “just and equitable principles of trade” as espoused in FINRA Rule 2010, were understood and confirmed through the extension of a hand. Trust existed between client and professional and the number of rules that existed to “guide” the behavior of the professional was limited. Trust existed between professionals as well. For some reason, written agreements between Broker-Dealers were concise, and made their point without pages and pages of representations and warranties. Somehow, the majority of Registered Representatives made a decent living in a responsible law-abiding way without having to be monitored under a microscope. There were always exceptions to the rules; those who willingly thumbed their noses at the notion of ethics in the workplace; those who thought they could get away with swindling and carrying on illegal trading activity without getting caught and were smart enough to know better.
Some of the rules which came into place, such as FINRA Rule 2090 “Know Your Customer” has actually enhanced the relationship between the customer and the representative, and also has aided in a Firm’s Anti-Money Laundering regimen. This is a suitable companion to FINRA’s Rule 2111, Suitability, which spelled out what information should be obtained from a customer and how to analyze the information to make a suitable recommendation for that particular customer. It requires an Institution to attest that it has the ability to exercise “independent judgment” in making the investment. Was it conceivable that prior to putting the attestation into writing, the Institution had been able to make suitable investment decisions without stating so and without a Broker-Dealer confirming it? I believe so. Yet, the regulators believe that this obligation would be a necessary one to fulfill in order to have a client treated suitably, fairly and consistently. Whether the rule made an impact on the care a Registered Representative gives to a customer is questionable. Yes, it does make one think about how they can avoid the appearance of impropriety in decision-making for the customer. It also makes every decision more onerous and requires documentation of the process. Registered Representatives may spend less time following the market and more time concerned with proving that their decision making was valid.
Let’s move forward to June 1, 2020 when Regulation “Best Interest” came into effect, the baby of “Know Your Customer” and “Suitability.” Isn’t it possible that the industry would still for the most part behave in an ethical way without it? Haven’t most Broker-Dealers already instilled a corporate climate of ethical behavior into its Registered Representatives as part of its normal routine, and provided a myriad of disclosures to its customers? Do the regulators really believe that one more document will change the way that most Broker-Dealers conduct business? Equally, do they really think that most customers will read the disclosures, or just toss them into the wastebasket? Therein lies the reality.
Nonetheless, the regulation has to be complied with and executed in the fashion prescribed. If you have not yet addressed the regulation, or need help or training in doing so, please let us know.
Ironically, COVID-19 has perhaps made the handshake an icon of the past. So goes the way of the handshake to seal a deal in our business. One can no longer trust that a handshake doesn’t contain germs leading to our demise, no more that it can exemplify the trust between representatives and their clients that had previously existed in our business.
Peggy E. Chait has been working on Wall Street since 1980. She has held positions as a Chief Compliance Officer, and Financial and Operations Principal, and was involved in both Retail and Institutional Sales and Trading, specializing in Convertible Arbitrage. She was formerly an Allied Member of the New York Stock Exchange. She holds a B.A. in Creative Writing and is a published author. She has been working as a Compliance Consultant with Integrated Solutions for the past 18 years.