Integrity Is Still Lost on Wall Street, Survey Finds

One in three financial executives have witnessed unethical and illegal behavior first hand.

Wall Street firms have scarcely improved their bad behavior in the nearly eight years since the financial crisis, according to a survey of 1,200 financial service professionals in the US and the UK.

Conducted by Notre Dame University and law firm Labaton Sucharow, the study found industry attitudes towards corruption remarkably unchanged—perhaps even worse—since 2012.

“The answers are not pretty,” the report said. “There is no way to overlook the marked decline in ethics and the enormous dangerous we face as a result.”

Nearly half of Wall Street executives said they believe their rivals have engaged in illegal or unethical behavior, an increase from 39% in 2012. Even worse, 34% of those earning $500,000 or more annually said they have witnessed such wrongdoing in the workplace.

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“When corporate whistleblowers are prohibited, discouraged, or retaliated against for reporting crime to cops, we should all be scared—very scared.” 

The pressure to engage in illegal activities was also great, the study found, with one in five respondents feeling the need to be unethical to be successful in the current financial environment.

“Despite numerous reform efforts and severe fines levied against industry Goliaths, one-third of those surveyed do not believe the financial services industry has changed for the better since the financial crisis,” the report said.

The Wolf of Wall Street-like behavior and thinking was even more prevalent among junior employees, the survey found.

One in three respondents with less than a decade of experience said they would likely insider trade to make $10 million if there was no chance of being arrested.

“Educating a generation of young professionals—early and often—on the importance of ethics, transparency, and honesty is crucial if we wish to affect real change in the industry and avert another, perhaps more destructive, financial crisis,” the report said. 

Corporate policy and financial firm leadership were a large part of the problem, the survey found.

Some 15% of the respondents said they expected company leaders to look the other way if a top performer in the fund was earning large profits from insider trading.

Furthermore, financiers described a “proliferation of secrecy policies” aimed to prevent employees from reporting illegal or unethical action to the government. Nearly one in ten employees said they had either signed or has been asked to sign confidentiality agreements that essentially acted as gag orders.

“When corporate whistleblowers are prohibited, discouraged, or retaliated against for reporting crime to cops, we should all be scared—very scared,” said securities fraud prosecutor Jordan Thomas, a partner at Labaton Sucharow. 

Younger and more junior employees are increasingly subjected to these agreements, the survey found, with 16% of respondents saying they were actually limited by their contracts from reporting to the authorities. 

Despite increase in regulation reforms—largely brought on by Dodd-Frank policies in 2010—nearly 40% saw authorities as ineffective in “detecting, investigating, and prosecuting securities violations.”

Finally, more than a third of financial professionals said they were unaware of the US Securities and Exchange Commission’s whistleblower program.

Read the full report—“The Street, the Bull, and the Crisis”—by Notre Dame University and Labaton Sucharow.

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Why Staying In the EU Could Scupper UK Pension Innovation

A warning has been sounded ahead of an expected in/out referendum in 2017.

There are “nasty surprises” ahead for UK public sector pensions if the country remains in the European Union (EU) beyond 2017, a lawyer has warned.

Prime Minister David Cameron has promised to renegotiate the terms of the UK’s membership of the union before calling an in/out referendum on EU membership in 2017.

“There are some nasty surprises waiting for the government if the IORP directive does apply.” —Clifford Sims, Squire Patton BoggsAn exit would cause major disruption for the financial sector as well as high levels of uncertainty and volatility in markets, commentators have predicted. However, Clifford Sims, partner at Squire Patton Boggs, told a session of the National Association of Pension Funds’ Local Authority Conference that remaining in the EU would also pose serious problems, particularly to the establishment of common investment vehicles (CIVs) for public pensions.

The problems centre on the 2003 Institutions for Occupational Retirement Provision (IORP) directive.

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“There are some nasty surprises waiting for the government in there if the IORP directive does apply [to public funds],” Sims said. “The directive says member states shall not subject the investment decisions of institutions or its investment managers to any kind of prior approval or systematic notification requirements. There is also a provision which says member states shall not require institutions located in their territory to invest in particular categories of assets.”

Sims said the interpretation of these provisions was uncertain, but it would certainly affect the UK government’s desire for public sector pensions to pool resources. London’s 33 local authority pensions are already working on CIVs for shared mandates, with the first investments slated to go live later this year.

In addition, there are several areas of investment rules within the IORP directive with which local government pension funds do not comply, Sims said.

“There are various provisions in [LGPS] rules which do not comply expressly with the IORP directive,” he said. “For instance, in IORP you have to invest with a view to liquidity, security, and profitability—those technical principles are not incorporated at all into the LGPS investment regulations.”

“There will be at least one poll that will show a majority wants to leave the EU, and that will put uncertainty into the financial markets.” —David Page, AXA IMThe UK government has cited Article 5 of the directive as a get-out clause, as it states that if a guarantee is in place then an EU member “may choose not to apply” some parts of the directive. However, there is no legal agreement that Article 5 applies to UK local authority pensions.

Meanwhile, David Page, senior economist at AXA Investment Managers, and Phil Triggs, strategic finance manager at Surrey County Council, both warned of the significant and wide ranging impact of a UK exit from the EU.

Page said AXA had reduced its growth forecasts for the UK for 2016 due to the uncertainty the impending referendum would introduce to UK businesses. Deutsche Bank this morning confirmed it would switch areas of its UK business to Germany if an exit was confirmed.

“I’m pretty certain there will be at least one poll that will show a majority wants to leave the EU, and that will put uncertainty into the financial markets,” he said.

Triggs said an exit was “a considerable risk” as it would require the UK to renegotiate separate trade agreements with non-EU countries. He also warned of a possible exit of Scotland from the UK, and the potential for a full break-up of the union.

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