A Multi-Dimensional Perspective On Regulatory Compliance
MARCH 17, 2017 • BILL HORTZ
[The Institute for Innovation Development interview series invites innovation experts, innovative business leaders and emerging FinTech companies to talk to our readers about their latest innovation activities. The series seeks to learn from innovative business creators, uncover innovation best practices, and apply these insights into a financial services business model.
One key factor we have seen repeatedly in interviewing innovative solutions providers to industry challenges has been an inquisitive, open mindset that actively seeks and is aware of ideas, trends and perspectives from many viewpoints, including cross-industry and non-traditional sources. We recently talked with Don Pollard and Ernie Kappotis, principals of the Intersource Consulting Group, a comprehensive regulatory consulting firm with a very expanded sense of perspective.]
Hortz: Can you tell us about the scope of your services for your independent advisor and broker-dealer clients?
Pollard: Intersource is a full-service securities regulatory consulting firm covering compliance, financial operations (FINOP), cybersecurity, CMA applications, and financial exams, among other areas. We help firms identify weaknesses in policies, compliance culture, surveillance, back office operations, training, and technology to increase their readiness in regulatory exams and various market conditions. There is a real need out there for a one stop solution for securities regulatory consulting and that is what Intersource Consulting Group is providing.
Hortz: Ernie, what does your experience from the other side of the desk as a FINRA District examiner bring to your services?
Kappotis: My FINRA experience certainly adds another dimension to my ability to advise my clients. Knowing the way that regulators look at information and communications is a key benefit. These are areas that we can coach our clients, not only with complying with the regulators, but also grasping their nomenclature, playing on their turf, and understanding how to get through these examinations more smoothly.
Hortz: What do you see as the most onerous compliance issues that advisors or broker/dealers are not properly prepared for?
Kappotis: We see cybersecurity as a major risk where a lot of advisors and firms are not necessarily preparing themselves to the extent they should be. In this day and age of constant hacking, firms have to be able to protect their clients’ information. This is one of the most onerous and prevalent threat areas that the SEC and FINRA are looking at. It is important to further underline that the OCIE alert (Office of Compliance Inspections and Examinations) that came out in Sept 2015 was not a recommendation. Most have read it that way. The SEC also came out with 6 major points that need to be identified and codified with procedures around cybersecurity. We have both seen numerous SEC citation letters over cybersecurity readiness particularly going to investment advisors. Many FINRA exams, before even starting, have been requesting the paper copy of the firm’s cybersecurity assessment that was done by a third party.
Pollard: Another key area is supervisory controls. The FINRA mandate for broker/dealers is to be conducting annual reviews and, not only do risks need to be identified annually, you need to quantify how substantial these risks are to your firm. You need to defend why you chose these risks and a lot of firms are still scratching their heads on how to do this properly. We have a fluid system that helps our clients identify these supervisory risk controls, helps determine which personnel at the firm should be responsible, not only for monitoring these risks, but for helping identify them. Sometimes these processes can be more readily streamlined from the outside of the firm than it can from the inside, especially when you are amidst all the rush and preoccupations of the business. It is prudent to get an expert eye from outside to come in to give a truly objective opinion on your controls and procedures.
Hortz: I see from your blog that you keep up with and report on international compliance issues happening around the world. Why do you spend the time doing that and why is it relevant to US compliance issues?
Pollard: Basically, the global markets and geopolitical trends in this day and age can be pretty closely tied together, especially when you are dealing with AML and cybersecurity risks. The Brexit vote in the UK was a great example of an early indicator of things to come globally. We want to keep an eye on foreign trends. We want to make sure we are up-to-date with global compliance activities. That is something that we feel is our responsibility, to be on the fore-front of global regulatory issues and providing an informed perspective for our clients.
Hortz: Many advisors feel that it is hard to truly innovate in our highly regulated business environment. How do you answer that concern? Are there ways of working with regulators and these issues that will allow them to innovate?
Kappotis: Transparency is a key factor in working with regulators. As a former regulator I know, not even from my predilections, but from watching other agents, surveillance directors and coordinators around me, when they feel that they cannot get information from a firm, the red flag goes up. They have that feeling that you are hiding information from them. What I would urge is to not to be so afraid about talking about the good things that your firm does and is considering doing, about the best practices of your firm that you feel makes your firm a safer place to invest and work with your clients. Don’t hesitate to tout your best practices and experiments to deliver more and better services that address the needs of your clients.
Hortz: Are you aware of how other industries handle or work with compliance and regulations to be able to continue innovating?
Pollard: We also keep an eye on other industries that have similar regulatory environments. Healthcare is another highly regulated industry and has gotten more and more regulation over the past years. With HIPAA, CMS, HITECH, and a labyrinth of oversight agencies, it is much like the securities compliance environment. They are constantly revising compliance programs and managers of health organizations are doing the same kind of work as financial services compliance officers. They get audited by the OIG, the Office of the Inspector General. We deal with FINRA. It’s the same side of the coin, just different industries. Despite the tight regulatory environment, there is a huge amount of innovation happening throughout the healthcare industry.
Hortz: I see you are involved in the FinTech space as well. How do you work with emerging FinTech companies?
Pollard: We are working with FinTech companies in a number of ways. We help them meet industry regulatory issues. We can review the policies and procedures of the FinTech company and provide them with the consulting that can identify the best most efficient solutions and cost effective methods of execution in the financial services industry; offering advice that can drive down costs, and better deliver their products and services. Working with FinTech companies allows us to apply our knowledge in working with regulators with the most innovative companies bringing new solutions for clients.
Intersource also pledges our networking support to accelerators, incubators and FinTech clients. Through our wide network of financial services and investment advisory companies, we strive to do strategic introductions and identify business synergies and potential business opportunities.
Hortz: How do you price out your engagements, especially as your support services encompasses so many different areas, and how is that beneficial for your clients?
Pollard: Depending on the client need and statement of work we jointly develop, we charge a monthly subscription fee to cover all of the support activities we perform for the client firm, or charge as a one-off service on a single project as needed.
When it comes to our broker/dealer clients, one of FINRA’s hot topics, especially for broker/dealers, is the size of your compliance solution. Whether that’s right or wrong, from the first pieces of data that they look at, when they do an exam, is who’s on the compliance team, how many compliance staff personnel and resources does the firm have. Of course staffing comes with a high level of cost – benefits, insurance, 401k, bonus, etc. By hiring us, we provide more resources and leverage that you can demonstrate as part of your compliance action.
The key benefit that Intersource provides for advisory firms is, rather than having an in-house Chief Compliance Officer and staffing support, at high salary and carry costs, we offer an alternative to that costly proposition. We have estimated that the savings of out-sourcing versus in-house compliance solutions can save as much as 30% or more. Alternatively, we register a 1099 individual with you with the expertise to carry out those responsibilities and filings for your firm and are able to view the regulatory consulting environment from an over arching perspective.
That over arching perspective is another major benefit we provide. Since we have different clients that are in different or similar lines of business, that wider view of the regulatory landscape puts us more at the cutting edge of seeing what FINRA or the SEC is doing and requires. Sometimes, when you are in a firm, you can get so bogged down with the complexities and intricacies of your business that you do not see the big picture of the forces at work around your firm.
Hortz: Given your global, cross-industry, FinTech-informed perspective, is there some general advice you would like to share with advisors about compliance and regulation issues?
Pollard: We would want to share the objective reality that this is an ongoing, complex, ever changing environment. Just as we are learning about and addressing one regulation, something changes and you have to take the time to understand what the new regulations are, and be able to pivot to take the steps to respond to it. It is important to follow closely the regulatory trends, both here and abroad, and compare notes with other industries and more innovative companies with similar compliance challenges to find best practices. We built Intersource as an outsourced, regulatory compliance resource for our clients. With our expertise and vigilance, especially coming from the regulatory side, we have an excellent grasp on how regulators will be looking at and engaging the industry.
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