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Compliance

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The New Dream Team

Batman and Robin. Bonnie and Clyde. Compliance officer and CIO. Joining the list of dynamic duos comes the 21st century partnership of compliance officers and chief information officers. Yet, these two aren't appearing in any movies; instead, they're the hottest act on Wall Street.

Compliance officer and CIO. Joining the list of dynamic duos comes the 21st century partnership of compliance officers and chief information officers. Yet, these two aren't appearing in any movies; instead, they're the hottest act on Wall Street.

The securities industry is facing an unprecedented number of new rulings on communications, anti-money laundering, corporate governance and separation of research and banking, and there is a promise of more rules to come. The CIO has a bevy of technological choices to counteract these risks, but often lacks one crucial requirement: legal expertise. Who better to work with on existing and forthcoming legislation at securities firms than the chief legal officer, an executive many are now christening as the "compliance officer"?

Yet, it isn't simply these regulations that are demanding more insight on the part of the compliance officer. A recent rule proposal from the National Association of Securities Dealers stands to heighten the oversight even more, requiring each member firm's compliance officer, along with its chief executive officer, to annually certify that the firm has procedures in place for adequate compliance and supervisory policies.

"We're hoping that the rule increases the compliance officer's stature," explains Marc Menchel, senior vice president of the office of general counsel at the NASD. "We're striving to make compliance a forefront issue of concern for our members. The more effective we are, the less tangible the results, and the less harm to investors."

While the rule must now get comment and approval from the Securities and Exchange Commission, industry experts believe there is no doubt that it will end up etched in stone. "In this industry, we always hate to play by the rules. It takes effort to monitor and ensure that a firm is in compliance," says Robert Iati, a senior analyst at TowerGroup. "But someone has to be responsible at the senior level of these institutions."

With the increased onus on compliance officers, they will undoubtedly explore technology to assist in meeting their increased demands. Consequently, CIOs will soon become, if they are not already, the "right-hand men" of their compliance officers.

"As business has gotten more complex and rules more stringent, we really need technology to ensure we're in compliance," explains Dave DeMuro, managing director at Lehman Brothers and director of global compliance and regulation. "The sheer volumes that we deal with are so great, that the only way we can come close to knowing what is going on at the firm is to avail ourselves of technology."

TD WATERHOUSE PAVES THE STREET

When it comes to compliance technology at New York-based TD Waterhouse USA, it's easy to remember the name of the person in charge. Just call "Richard" and you will end up with one of the two officers responsible for keeping the firm up to regulatory par: Richard Neiman, executive vice president and general counsel; and Richard Rzasa, TD Waterhouse's vice chairman and CIO of Technology Solutions.

Rzasa says that their relationship goes beyond just their names, especially in light of the enormity of regulatory issues that the firm must grapple with. "I don't think there has been any time in recent history where compliance and technology were so closely aligned," he explains, noting that both Richards convene on various executive boards together, in addition to biweekly one-on-one meetings. "From a relationship perspective, if we were any closer, we'd be living together."

As the general counsel with the firm since 1994, Neiman says that he has seen his position evolve. Initially, he dealt with the advent of the Internet and the subsequent liabilities based on this new line of interaction, then through Internet-trading implications in the late 1990s and, finally, moving into the current age of corporate scandals and governance.

"Now, we're trying to create a compliance culture within our firm," Neiman says. "The culture is being dictated and lived by our senior management. Management has decided to treat compliance issues at the same priority level as strategic business initiatives."

Technology, Neiman notes, is the best way to ensure proper compliance. "We are now viewing technology as a critical partner in fulfilling our mission to provide a compliant structure and to enhance our internal procedures," he says. "In the past, if there was a compliance issue to explore, you'd call a branch manager or a middle-level manager. Now, the first call is to technology in order to understand the complexity of the systems."

Rzasa agrees, noting that compliance has become an equal demander of technology within the firm. "In the past, legal and compliance were a corporate function. Now, we consciously dedicate an IT budget to legal-compliance efforts," he says. "Compliance is up at the top of the food chain."

One initiative that Rzasa's technology team is working on is USA Patriot Act compliance, particularly in regards to Section 326, which states that financial institutions must establish customer-identification programs. Rzasa says that, while the deadlines for compliance are not until Oct. 1, TD Waterhouse has tried to take a proactive approach on the issue because the firm allows prospective clients to open accounts online.

"We do an extensive check on the individuals, because we don't want to allow customers to go down the road of opening the account and potentially putting the firm at risk and finding out after the fact. We are focused on enhancing that for Section 326," Rzasa says.

Neiman has also tapped into technology to train and supervise TD Waterhouse's employees. He says that the firm has utilized online instruction in order to distribute and document internal-compliance training, as well as to conduct surveillance among its staff.

TECHNOLOGY TOSS-UP

The technology involved in making compliance successful is a combination of proprietary and third-party solutions for TD Waterhouse. "We've done an excellent job of in-house development, only because the industry wasn't there at the beginning," Rzasa notes. "But with new advances, such as pattern recognition - that's not a core-competency for me, so that is where the industry comes in."

In addition, Rzasa says that cost is a concern, especially when dealing with system maintenance and enhancements, making an off-the-shelf solution a viable option.

"You need to keep one ear to Washington at all times, because regulators are constantly making changes," explains TowerGroup's Iati. "If a firm uses internal solutions, they need to be on the cutting edge and keep up with specialized vendors out there. Otherwise, firms using vendors will have the competitive advantage."

COALITION AT CSFB

The compliance officer and CIO at Credit Suisse First Boston may not share a first name, but they certainly share the responsibility of maintaining regulatory standards for their firm, especially in light of some recent negative publicity.

"Compliance is a major issue on Wall Street right now as a result of initiatives such as the Patriot Act, insider trading, separation of research and banking and IPO activity," says Philip Cushmaro, managing director of CSFB and co-CIO of Information Technology. "The industry needs to do certain things to comply with the regulations, and the best way to do that is for compliance and technology to work closely together."

Cushmaro recalls when compliance was a less-automated process. "It was typically more of a manual procedure embedded in the research, banking and trading departments," he says. "Now, there is a need to come up with solutions that are more real-time, and much more intelligent and far-reaching in nature."

Stuart Breslow, managing director and CSFB's global head of compliance, agrees that technology is the foundation for successful compliance initiatives. "A key relationship that I have is with the technology group and the CIO. We have an open-door policy," he explains. "I have always thought that technology was an important part of what had to go on in my world. I think firms are beginning to realize that there needs to be a huge amount of technological catch up, both in terms of increasing tech-savviness and resourcing."

Like TD Waterhouse, Breslow says that CSFB is focusing technological efforts on the prevention of money laundering. In particular, he notes examination of money flowing in and out of the firm, as well as ensuring adherence to the incumbent know-your-customer rules of the Patriot Act by rehabilitating CSFB's accounting system. In addition, he says, the firm is using electronic-learning programs to train employees on how to ensure that the firm stays in compliance.

"Another key for us is to build an infrastructure that has global consistency," he adds. "That way, we can review activities across the platform and track that activity in a common way."

Mike Haney, a senior analyst at Celent Communications, says, "There are major data-warehousing efforts going on right now. Mapping to an overall corporate-data model allows firms to access data quickly and easily."

Third-party compliance-technology vendors allow Breslow to help encourage standards among the industry, he says, but despite his familiarity with technology, he concedes that the CIO is the enabler of its success.

"The CIO is critical to the selection of the technology," Breslow says. "In addition, he oversees complex installations. Although there is some element of commodity, it is also a fairly customized product. The CIO has the creative thinking to figure out what the system should look like."

Breslow insists that there is only so much that technology can accomplish, and non-compliance can be inevitable, as anyone that reads the newspaper knows. "All that is expected of a compliance department is to establish reasonable standards and supervision," he says. "There will always be people who intentionally choose to violate those laws and regulations."

THE REGULATORY HORIZON

Many say that compliance officers and CIOs shouldn't hop on their horses and ride off into the sunset just yet. "There is still an element of unknown in some of the compliance initiatives out there. We will clearly see additional amendments, if for no other reason than that the public is not yet satisfied," notes Iati. "The confidence level in the market is down. Investors do not feel protected."

Most experts have no doubt that the only way to raise consumer confidence is to elevate the status of compliance officers and increase their access to technology. "I don't see regulations waning at all, and I see no going back in terms of making use of technology," says Lehman's DeMuro. "We have to be constantly vigilant and alert to anything that takes place at our firm."

TD Waterhouse's Rzasa agrees. "Every CIO needs to treat compliance as a serious customer within the firm," he asserts. "Your brand stands for who you are and what you are. People trust us with their money, and we want to ensure that they've got it in a safe place."

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