While it is necessary to sanction Dealers /individuals for breaches, it is also necessary to drill down further. Is the Rep proficient in dealing with de-accumulating accounts? Is the compensation and reward system designed to incent individuals to cross the line? Are sales quotas unrealistic and/or inappropriate? Have Reps been provided the tools they need to do their job? Are supervisory control systems robust? Are dealing representative recruitment criteria matched up with the ethical and conduct standards to comply with securities regulations /laws and the provision of trustworthy personalized financial advice? Are controls and information systems designed to promptly detect system breaches? It is only by addressing root causes that we can improve the system , reduce breaches and improve the fairness of decisions.
When a Dealer or Rep has “actual or de facto control” over a client’s account, there must be a reasonable basis that a series of recommended securities transactions are not excessive and unsuitable in light of the client’s investment profile. DSC mutual fund manipulations and fund churning are a classic example that should not be permitted to happen. Some progressive dealers have developed parameters for trading volume and cost to identify and prevent excessive trading/fund churning as well as restrictions on frequency or patterns of clustered or single product exchanges. In some cases, clients whose accounts breached the firm’s thresholds should receive telephone calls from principals or detailed activity letters setting forth the frequency and cost of trading over specific periods. These are the kind of learnings and action plans we’d like to see integral to Panel Decisions.
The best dealers have an organized, validated risk profiling process. System triggers should kick in when certain KYC criteria are incongruent or suspicious. Too many dealers do not have controls in place to validate changes in risk profile. All too often we see risk tolerance increased simply to justify what has been sold to clients. Better supervisory controls should be applied to risk profile changes increasing the client’s risk tolerance. Our review of numerous Panel cases suggests that Seniors/ retirees should not be put through the same KYC processes as clients of other age groups and the frequency of KYC updates /type of KYC information gathered should vary with age.
The bottom line