Human Factor Decay and the Failure of Regulatory Responses to Unethical Business Practices

With the end of World War I and the prosperity that followed, the securities industry saw a large increase in the number of investors participating in the stock market. During the 1920s, approximately 20 million people became shareholders, expecting the amassing of more wealth with little or no consideration of the risk of potential loss. But of the $50 billion in securities that was amassed during this time, approximately half disappeared during the stock market crash of 1929 (www.sec.gov/about retrieved 2/23/2010). As a result of the crash and the significant loss of confidence investors now had in the stock market, Congress decided it was time to play a role. With the Securities Act of 1933 and the Securities and Exchange Act of 1934, initial legislation was activated and the Securities and Exchange Commission (SEC) was born. With the securities-related law, Congress stepped into the industry and since then has never taken a step back.
This book begins with a review of the history of legislation enacted to control the brokerage business in the United States. The historical perspective establishes a trend of legislators creating laws, establishing bureaucracies and multiple layers of oversight that have been largely useless and definitely costly. There are significant costs tied to the maintenance of a system that simply accepts and works with the understanding that the players in the industry pursue corrupted, greedy, and unethical practices. Rather than making the effort to correct the problems that face the system by improving the attitudinal and behavioral practices of industry players, government officials currently provide ineffective regulatory remedies to correct the system. Congress has created a number of laws with such burdensome requirements that some brokerage firms have simply had to shut their doors in the face of escalating costs to comply with the demands of the regulators.
For smaller broker/dealers, business can nearly cease during an audit, resulting in a loss of productivity. In addition to costs associated with compliance, firms are burdened with ever-increasing expenses related to Errors and Omissions coverage and legal costs as more consumers are encouraged to file complaints. The media and the government have unfairly made Wall Street the scapegoat for all that has impacted our economy. While there is certainly some responsibility here, this industry is already heavily regulated, and additional regulations will not solve any problems.
Particularly in the last few years, companies that had previously been considered stalwart in corporate society have been exposed, and unethical practices have led to their downfall. This is in spite of several existing laws and systems designed expressly to ensure that business is run fairly and ethically. Regardless of the efforts that federal and state governments have made, the problems of unethical practices in the industry remain and costs continue to increase.
In light of these realities, the primary thesis of this book is that when we spend the money intended for oversight and regulatory compliance on human factor-based education at all levels of academic training and leadership development, we will minimize acts of fraudulent business practices and subsequently increase company profitability in the industry. Secondly, profitability increases in direct proportion to any improvement made to the quality of the human factor.