Regulatory Enforcement Creates Little Deterrence for Wall Street


New York, NY – According to a survey released last week, many on Wall Street believe that securities regulators in the US and UK are not particularly effective in investigating or deterring securities violations  This is despite the large number of individuals who have either plead guilty or were found guilty of insider trading over the past few years.

Regulators Not Effective

A survey of over 500 financial professionals sponsored by law firm Labaton Sucharow revealed that that 74% of those surveyed feel that the SEC of other securities regulators do not effectively deter, investigate, or prosecute securities violations.

This finding is somewhat surprising given the fact that the SEC has been extremely aggressive and successful at investigating and prosecuting people for insider trading over the past few years.  Since 2009, 64 of 70 people charged with insider trading have pleaded guilty or been convicted of criminal charges in the insider trading probe.

However, most feel that the SEC is simply not equipped to effectively regulate the financial markets given its limited budget and the technology gap between it and the large sell-side investment banks and buy-side investors it regulates.

A Number Would Commit Insider Trading

One of the most disturbing findings of this survey was that 16% said they would absolutely engage in insider trading if they could make $10 million and not get caught. Only 55% of those surveyed said they “definitely” would not, with the remaining 29% of those surveyed were on the fence about committing crimes.

We think that the way this question was asked could have lead to a biased response as many would commit a crime if the reward were high enough and the risk of being caught were non-existent.  However, the fact that almost three-quarters of the survey population already believe that regulators don’t effectively investigate or prosecute securities violations could mean that most don’t think the likelihood of getting caught is terribly high anyway.

One of the reasons for this finding could also be the extreme pressure that many feel they are under to produce results.  This was proven out by the fact that 24% of the financial professionals who were surveyed feel they may need to engage in unethical or illegal conduct to be successful.

Good News for Whistleblowers?

Of all those surveyed, 26% say they have either observed or had firsthand knowledge of wrongdoing in the workplace.   The good news is that that 94% say they would report misconduct in the workplace if it could be done anonymously, with adequate employment protections, and if monetary awards were provided.

These are all attributes of the Whistleblower Program established by the Dodd Frank Act.  Unfortunately, only 44% of financial executives say they are aware of the Whistleblower program. Obviously, the SEC needs to do a better job in raising the public’s awareness of this program.

Besides raising awareness of the Whistleblower Program, regulators will also need to try and help employees feel like the existing safeguards of this program will be effective.  News about the recent Pipeline Trading case make it clear that regulators did not adequately protect the identity of the Whistleblower when interviewing company management.


While some suggest that the results of this survey are a reflection of the ineffectiveness of regulators, we disagree.  Of course, the regulators could be more effective if they had more resources and better technology.  However, the recent spate of insider trading convictions is proof that adopting more aggressive tactics like using wiretaps, has produced astonishing results.

Instead, we think that a few factors are probably better at explaining the results seen in the recent Labaton Sucharow survey.  The first are incentives.  The mere size of the bonuses paid to employees at hedge fund and investment banks for producing outsized returns creates a tremendous motivation for some to “do whatever it takes” to earn these bonuses – including committing crimes like insider trading.

Another factor might be the disintegration of a moral or ethical framework to help us “make the right decisions”.  Clearly, more than half (55%) said they would not engage in insider trading – even if the profits were large ($10 mln) and the likelihood of getting caught was low (0%).  However, the remaining 45% were not so sure.  Could this be the same group of people who feel that cheating on tests (including the SATs), plagiarizing others’ work, or lying on resumes are not terribly wrong, but rather necessary steps to get ahead?

Unfortunately, results like those found in the Labaton Sucharow survey clearly explain why so many have a negative opinion of those of us who work in the financial services industry.



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