Risk & Compliance

Securities Firms Bemoan Compliance Costs

Trade group attributes a dramatic rise in costs to duplication of examinations, regulations, and supervisory actions; inconsistencies or lack of ha...
Stephen TaubFebruary 28, 2006

Compliance costs on Wall Street have nearly doubled in the past three years, to more than $25 billion in 2005 from $13 billion in 2002, according to a study by the Securities Industry Association.

This increase is equivalent to nearly 5 percent of the industry’s average annual revenues, according to the SIA.

The industry trade group insisted that a substantial portion of these increased costs were avoidable. The SIA attributed them to duplication of examinations, regulations, and supervisory actions; inconsistencies or lack of harmonization in rules and regulations; ambiguity; and delays in obtaining clear guidance, among other things. The trade group
also claimed that securities firms reported receiving an average of 231 inquiries per firm over the last 12 months — nearly one every business day.

In a statement, SIA president Marc Lackritz stressed that the industry is not calling for a rollback in regulations, which he maintained would only increase costs. “Instead, we hope that going forward this study influences how policymakers think about the rules they write,” he stated. “The industry is absolutely committed to compliance, but we hope this highlights the need for rules and regulations whose costs do not exceed their benefits.”

MarketWatch also noted that to “reduce regulatory duplication [that] could result in significant cost savings,” the trade group has advocated restructuring the New York Stock Exchange and the NASD.

However, unlike small companies — whose burdensome costs for meeting certain provisions of Sarbanes-Oxley have received widespread sympathy — Wall Street firms unlikely to convince many regulators that changes are needed. Goldman Sachs earned $5.6 billion from continuing operations in its most recent fiscal year; Lehman Brothers, nearly $3.3 billion. Profits at both those firms, and many others, climbed substantially compared with the prior year.

“These small regulatory costs are nothing compared to the damage that was done by WorldCom and Enron,” countered Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, according to Reuters. “Increased costs are being borne because they are filling huge deficiencies in the regulatory approach,” Ferlauto reportedly added.