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Keep An Eye On Your Outsourcers

One message that rang out loud and clear from some of the compliance discussions today at the SIFMA show was: broker-dealers take outsourcing lightly at their peril. Broker-dealers retain regulatory responsibility for the functions they outsource. One of the regulators scrutinizing securities' firms outsourcing relationships is the NYSE. "There's been controversy over the rule we proposed [NYSE Rule 340]," said Grace Vogel, executive vice president, member firm regulation at NYSE Regulat

One message that rang out loud and clear from some of the compliance discussions today at the SIFMA show was: broker-dealers take outsourcing lightly at their peril. Broker-dealers retain regulatory responsibility for the functions they outsource. One of the regulators scrutinizing securities' firms outsourcing relationships is the NYSE. "There's been controversy over the rule we proposed [NYSE Rule 340]," said Grace Vogel, executive vice president, member firm regulation at NYSE Regulation. "We don't object to outsourcing. Where we see problems is when something goes wrong and a firm says, 'We're not responsible' and points to the outsourcer and says, 'go regulate them.' The outsourcer is outside of our jurisdiction. Firms should outsource functions, not responsibilities."Vogel said Rule 340 has been re-drafted and was re-filed to the SEC two weeks ago. In its current version, it prohibits certain functions from being outsourced, including: establishment of supervisory principles or exercise of supervisory compliance responsibilities; activities that require registration with or qualification by the Exchange, including the performance of functions customarily performed by principle executive officers; control over cash or securities of the member organization and its customers; control over the accuracy and integrity of the books and records of a member organization; control over compliance with the SEC's Net Capital and Customer Protection Rules; non-ministerial clearing and custodial services; and establishment of and control over the maintenance and implementation of risk management control systems.

"We expect firms to oversee and monitor outsourcing services," Vogel said. "We would review a provider's books and records the way we review your books and records." Adam Behar, general counsel, ADP Clearing & Outsourcing Services, says his firm considers several supervisory tools important for outsourcing relationships, including service level agreements, governance committees, access to books and records, surveillance and exception reports, and audit and inspection rights.

A separate but related issue is how to address the needs of employees in a captive outsourcing organization who are looking to move along a career path, without expanding costs or running afoul of Rule 340, said Cheryl Geremia, director and COO of Deutsche Bank Securities. Her firm provides newsletters, town halls, senior management forums, rewards, recognition, team-building events, training and employee referrals to help build employee morale in its captive. "Treat a captive like its own business, let them make decisions about firing and training," she said.

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