Market regulators are tipping their hats to the Street, which, they believe, has finally learned the ways of conscientious compliance. Now, they’re eager to teach the same sense of accountability to individual traders and executives.

Tom Atkinson, president and CEO of Toronto-based Market Regulation Services Inc. , says he has witnessed a cultural conversion on the Street in the past few years. Brokerage firms are taking compliance much more seriously, best practices are emerging and RS is seeing signs of a much stronger commitment to getting it right.

For example, he cites the appearance of trade-desk compliance officers actually sitting in the trading areas, instead of with the sales compliance officers. “Trade-desk compliance was never a huge priority, and it has become a lot better,” he says. “We’re seeing a big improvement, so we are quite pleased.”

The fruits of the increased attention to compliance are also evident in RS’s market surveillance, compliance reports, alerts and other signals it receives, Atkinson says. As a result of the new focus on compliance, he predicts RS will probably uncover fewer systemic supervisory problems among trading firms.

In the past several years, RS has brought enforcement action in a number of cases, alleging that firms chronically failed to prevent trading offences such as improper off-marketplace trades, undeclared short-selling, wash trading and double-printing.

In one case, RS alleged a firm wasn’t properly carrying out its routine compliance reviews. Now, with firms beefing up their front-line compliance efforts, Atkinson predicts such cases will be relative rarities in the future.

Not that RS believes it is on the way to stamping out market fraud. “Are we ever going to eliminate underlying offences? I doubt it,” Atkinson says. “But everybody’s doing his best to prevent these things from happening, which is the goal.”

RS is also seeing a lot more self-reporting by firms. Atkinson says the Street has become more comfortable with the regulator and its role in the market. “We’re not playing ‘gotcha’ with anyone,” he says. And so, knowing that the regulator isn’t looking to turn every violation into an enforcement case, firms are willing to seek its help in keeping a small problem from snowballing.

At the same time, Atkinson maintains that RS’s past enforcement efforts are behind the Street’s current focus on front-line compliance. “We did a lot of education, a lot of preventative stuff and we’ve backed everything up by tough enforcement. I think we have created a fairly significant change in behaviour.”

The next step that RS would like to take in behaviour modification on the Street is to create more individual accountability. Atkinson says RS is looking into whether it can demand personal liability from individuals who owe enforcement penalties. In other words, RS is looking into whether it can demand that violators pay their penalties out of their own pockets.

Atkinson points out that there have been cases in which, in the course of settling enforcement actions, RS has agreed to accept lower penalties based on the professed ability of the violator to pay the fines — only to have the firm turn around and pay the lower fine on behalf of the wayward trader or executive.

“We’re trying to find a fine that’s going to deter behaviour, and that company support doesn’t help,” he says. “I’ll use a hockey analogy: if there is a high-sticking offence and the player is kicked out of a couple of games and fined heavily, the team can’t pay [the player], and it can’t pay the fine, because it wants the individual’s behaviour to change.”

Atkinson says the U.S. Securities and Exchange Commission is big on ensuring that violators pay their own fines.

He notes there are also provisions in corporate law that prevent a company from reimbursing an individual for criminal fines, and tax law doesn’t allow people to deduct fines as business expenses.

“There is a lot of public policy out there that suggests [holding transgressors responsible for paying their own fines] is the way to go,” he says.

RS is studying the issue and will consult with the industry.

The problem with allowing firms to pay fines, he says, is that it becomes much harder to determine the appropriate size of fine that will serve as a deterrent — an amount that is quite large for a small firm may be inconsequential to a much larger shop. In some cases, companies have publicly stated their intention to pay a particular fine, which, Atkinson says, makes it appear as though the company is condoning the violation. This kind of posturing undermines the regulator’s effort to foster a culture of compliance.

@page_break@It remains to be seen if RS goes ahead and forces individuals to pay their own fines. In the meantime, RS is digging deeper than ever in search of violations. Atkinson says the regulator is engaging in a massive data-mining exercise, subjecting the accumulated trading data of the past few years to its real-time surveillance algorithms.

“You always worry when you have a risk focus that someone could fly under your radar, or that you are not seeing complex manipulations. This exercise allows us to do that,” he says. “It sifts through mountains of information, looking for stocks acting in a weird way and why they are acting differently.”

The result could be the unmasking of a long-undetected trading scandal.

In the meantime, whether it is the result of tougher enforcement, executive epiphanies or a combination of the two, regulators are seeing increased emphasis on compliance.

Now, if they can force violators to pay their own penalties, regulators might make market fraud even less appealing. IE