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SEC COMPLIANCE MEANS APPLYING TECHNOLOGY

	SEC COMPLIANCE MEANS APPLYING TECHNOLOGY Posted: Jun 16 2003 James Carlini INTRO: “The whole area of SEC compliance has changed as the SEC gets more aggressive in cracking down on broker/dealer fraud and investment advisor white collar crimes. Applying technology to comply is key,” observes Northwestern Adjunct Professor James Carlini. At a recent Compliance Conference presented by the National Regulatory Services held last month in Tucson, attendees heard several prominent speakers address new Securities and Exchange Commission (SEC) compliance issues including the SEC Director of the Office of Compliance, Lori Richards and a retired FBI Agent, Brent Braun, who was in charge of the FBI Los Angeles’ White Collar Crime Division. He supervises 185 Special Agents and is in charge of a seven county territory in the Los Angeles. Both Richards and Braun spoke about the changes in regulations addressing compliance with the SEC for broker dealers and investment advisory firms that include areas where technology should be applied. Braun also tied in compliance with the USA Patriot Act, money laundering, financial scams and how people could write up Suspicious Activities Reports if they saw something questionable going on at their firm. The SEC changes really affect firms and their need to manage records, transactions and documents for reporting as well as complying with SEC audits. What was sufficient a couple of years ago is now, “not good enough.” Keeping a lot of information also means keeping better security. Several organizations and companies provide industry updates and conferences that educate investment firms on what they should be doing in order to comply with regulatory changes. Another organization that provides these updates is the ICAA (Investment Council Association of America). Firms should attend these to keep up with all the changes that have occurred since the passing of the Patriot Act as well as stricter SEC changes in regulations. WHY DO FIRMS NEED TO UPDATE THEIR KNOWLEDGE? Compliance officers and other management personnel including IT managers within broker dealers as well as investment advisory organizations have to keep track of all correspondence by all brokers and any other individuals tied into financial transactions. With the problems that arose in the last two years with insider trading and other violations of SEC regulations, these organizations have had to keep better track of information and transactions on a daily basis. Today, many small investment firms have various ways to address SEC Compliance issues. Most use a manual way of tracking trades and personal trades done by their employees. The requirements mandated by the SEC are at a point where revisiting the decision to automate tracking may be necessary. Arguments used to include the fact that the cost of implementing the technology was not worth the bother or the company was not large enough to buy sophisticated software or additional servers. However, with the requests of the SEC growing and the fines becoming real, the cost of using some of these tools is no longer outrageous. With the recent obstruction of justice charges filed last week in New York against Frank Quattrone of Credit Suisse First Boston (CSFB), now is not the time to be skimping on buying technology that can assist in responding to SEC audits and requests for trade information. Destroying files or other documentation cannot be as easily achieved if the information has been archived on a computer data base. Braun stated that a document retention plan is critical. If that is the case, computerizing it would be the way to go. Many functions like reviewing data bases of correspondence and voting proxies can also be outsourced to firms that specialize in these functions. This minimizes the need to add on a huge staff for IT, but the functions should be automated to eliminate mistakes and speed up information retrievals. APPLYING TECHNOLOGY IS A MUST IN TRYING TO KEEP UP WITH THE SEC. The need for sophisticated data base related tools to be able to search Emails and other correspondence that were linked to a specific trade is critical. Getting back to the root of a bad trade or an illegal insider trade is a common request that must be responded to in today’s regulatory environment. Trying to assemble everything manually is not realistic. As with other industries that are trying to shy away from adding on more IT when they really need it, brokerage dealers as well as some investment advisory firms don’t seem to realize that the cost of doing business includes adding some of these automated tools into their technology infrastructure. They are behind when it comes to applying technology to their business. Many executives across many industries fail to realize that their core business is intertwined with as well as dependent on information technology. Some in the financial industry have not accepted the fact that they have to upgrade their technology. Nevertheless, the minimum competitive level of IT sophistication in their industry has risen which requires the technology upgrade. BUSINESS CONTINUITY PLANS -THIS IS AN OPPORTUNITY. Like so many other industries, the brokerage and investment advisory industries have to re-think their “don’t buy anything” IT attitude and realize that there are good reasons to expand the technology budget and not shrink it. There are other areas that need to be reviewed to see if they are deficient in IT applications as well as security. Another area that is often overlooked is building and maintaining business continuity plans. The SEC is requiring more efforts in this area as well. After 9/11, there were many firms that had to rebuild their whole organization and many had various degrees of success with their disaster recovery plans. Those with no plan in place were the worst off in trying to get operations back to normal. Having a plan and never testing it out or updating it is also a recipe for prolonging the disaster. Many in the IT industry say that there are fewer opportunities to sell products and services but, that is not the case. There are many opportunities to sell technology solutions to this industry if the executives within it realize that the days of manual operations and procedures are over. CARLINI-ISM: You must know how to apply technology to your business. Copyright 2003 – James Carlini For a full bio of James Carlini click Here Go Top