Exclusive Online Only ContentTechnology Will Lead Industry Into New Compliance Era, Says Finra Exec
March 30, 2009
Despite cutbacks across the industry, technology will play an increasingly important role in compliance under a revamped financial regulatory structure, according to James Donovan, senior EVP of technology for the Financial Industry Regulatory Authority (Finra).
In the new environment, “there will be more regulation and a need for a sharper focus on compliance--and an interplay between regulation, compliance and technology,” said Donovan at the International Securities Association for Institutional Trade Communication’s annual meeting in Boston last week.
Noting that many firms have made a new commitment to technology and the independent compliance function, he added that “we need to make a culture of compliance second nature. That’s the only way we’ll build investor confidence.” Donovan, head of Swift’s securities division from 2005 to 2007 and a former Citigroup securities services executive, joined the self-regulatory organization in June.
Market participants and regulators must adapt to the events of the past year, without waiting for legislative solutions, he noted. “We don’t have the luxury of waiting for the perfect regulatory system to be created,” said Donovan. “We need to fix the problems that we can--today.”
Technology will play a key role in those efforts, he stressed. “In many ways, technology will lead firms into the next era of compliance. … Every day, new models and new tools are being developed in the world of compliance. New technology is being developed to identify risk patterns in aberrant behavior. And we would like to see the analysis of these things embedded firmly within firms.”
The difficultly may be paying for such initiatives. Donovan cited a recent survey conducted by complex event processing vendor StreamBase Systems that found that 58 percent of sell-side firms and 50 percent of the buy side see cost reduction as their primary data management objective this year. Thirty-three percent of sell-side respondents said they plan to reduce IT staff.
“As a regulator,” said Donovan, “this isn’t something you like to hear. It’s important to understand that while they’re under a lot of pressure, the obligation to compliance has not changed. We just can’t wait for Congress to act. We need to move ahead now where we can, in any way possible.”
For regulators, “our job is more than just enforcing rules,” he added. “As essential as that is, we need to do more. Truly effective regulation is the marriage of numerous processes. It brings together surveillance, data analysis and information sharing.”
Earlier this month, Finra created a whistle-blower office to speed up the review of high-risk tips by senior staff. That office, headed by SVP Cameron Funkhouser, is “an initial step in breaking down the walls that existed for far too long, that had prevented the free flow of actionable intelligence that can mean the difference between investor dollars being lost and bringing down a well-dressed criminal disguised as an investment adviser,” said Donovan.
