Automating the Compliance and Supervision Process

New technology enables large broker/dealers to supervise and ensure compliance across multiple branches and managers.

The task of supervising and performing compliance functions for brokers and managers in tens or hundreds of branch offices is obviously quite complicated and requires significant time, resources and planning. But recent events - such as the case of a Lehman broker accused of stealing at least $40 million from customers - have shed light on a quiet technology trend aiming to help prevent this type of loss. More specifically, technology to automate the compliance process is coming onto the scene in the broker/dealer arena.

Automated compliance and supervision tools can help firms monitor brokers' behavior and the quality of supervision at various business and branch levels, accommodate business rules, take into account client profiles and risk tolerance and prioritize risk events. The technology also creates an audit trail of issues, communications and resolutions across the firm.

"We see this trend as a way to fully automate what, in the past, has been almost a completely manual process," says Dave Tilkin, president of Protegent, a provider of compliance technology. As an example, Tilkin says that users in the field must review transactions, produce and understand daily exception reports and view trends in their locations, as well as record all of these compliance and supervision activities on a regular basis. "This has extended so far out that most companies can't correlate that data to produce advanced analysis or supervision," he adds.

End users In Action
James Port, national supervisor at Montauk Financial Services Corp., an independent financial-services provider with 550 brokers in over 200 offices in 38 states, emphasizes that the trend towards automating the compliance process has become quite important for his firm. "With so many offices scattered around the U.S., supervision is not an easy task," he says.

Montauk Financial has implemented Protegent's BrokerAudit product and has begun rolling it out to regional supervisors and branch offices, as well as to its compliance department to review broker activity. "It puts us into a proactive rather than reactive state," says Port. "We get a heads up on the issues that might be coming up within customer accounts and we feel it has increased the communication between supervisors and the representatives that they supervise."

He adds that with the technology in place, supervisors or branch managers are able to use their time more effectively. "They are able to log in and immediately see issues that need to be addressed rather than trying to locate patterns," says Port. Montauk Financial supplies Protegent with a daily download of the firm's trade data, which is then analyzed with over 60 different algorithms and customized parameters. The BrokerAudit platform monitors for conditions including security quality, short sales, low-priced securities, restricted-account activity, cancelled trades, mutual-fund quality, account velocity, security-market-value loss and mutual funds.

The platform also provides exception reporting and enables end users to set up customized alerts. The resulting data is then put into a Web-based format for branch managers and supervisors to log into and view. "With different people looking at different levels of reviews, there's always somebody looking over their shoulder," says Port. "It's an early-warning system so we'll see the smoke signals very quickly and be able to resolve the issues."

Port adds that before BrokerAudit was implemented Montauk Financial relied upon an exception-based-reporting process, which required more paperwork and time. From the end-user perspective, Paul Lieberman, general counsel, Montauk Financial, says that some of the firm's recent additions on the branch-manager level reported that they are able to manage more effectively than at prior firms. "They're locating issues that they might have overseen at their prior firm and they're able to do it a lot faster and easier," he adds.

Protegent's Tilkin says, "Every firm is as good as the quality of management they have at the local level and a lot of the most qualified, talented people have elected not to continue managing others because of the exposure and potential risk." He adds that branch managers are also producers and must perform the two functions simultaneously. "Giving them the technology to be able to automate the oversight process and get an immediate vision of risk issues substantially increases their peace of mind," says Tilkin.

While compliance technology has been available in order-management systems for some time as modules or customized add-ons, it has traditionally not been supervision-focused and has relied mostly on exception-based reporting.

David Sliney, director of strategic planning, technology and operations at Stifel, Nicolaus & Company, a Midwest-based retail-brokerage firm with about 80 offices, has also recently implemented the BrokerAudit product, partly because the technology is "not available in modern-day fashion in today's order-management systems." But order-management-system vendors are taking compliance modules more seriously says Damon Kovelsky, analyst in the emerging-trading-technologies group at Meridien Research. "The depth of compliance functionality varies by OMS vendor, but it is more of a trend these days to have the compliance engine embedded within the OMS," he adds.

Stifel, Nicolaus previously relied upon a combination of electronic and paper-based compliance-reporting systems. "It had five separate interfaces that were never brought together and never were as in-depth and as broad reaching as what we have now," says Sliney. He adds that in the previous, mostly paper-based systems, compliance officers and branch managers had to view one screen at a time to find what they were looking for and then drill into an account. "The Protegent platform does the same routine tests every day on every account with different sensitivity parameters," says Sliney, "You don't get that much of a thorough analysis with paper."

Stifel, Nicolaus has rolled out the BrokerAudit platform to about 100 users, with the compliance department continuously training users and rolling it out to additional branch offices. "It's an ongoing process of training and revising our entire compliance procedures," says Sliney. "Our old procedures were manual, saying, 'This is what you need to check, you need to go to this Web page.'"

Sliney adds that the centralization of data is key to the success of supervisory technology, such as the BrokerAudit platform, in order to streamline the process at the branch-manager level. "Branch managers want a tool like this because it makes their job easier and takes the guess work out of their jobs," says Sliney. He adds that the platform also brings branch managers and the compliance department together on the same page, literally viewing the same information and collaborating on the correct actions to take if need be.

---

Moving Forward
These types of technologies will give institutions a competitive advantage," says Stephen Ross, analyst in the CRM group at Meridien Research. While he says that this type of compliance technology has been a trend, Ross says the business processes must also be adapted to keep up with the changing times.

"We will see compliance start to grow and become more visible and technology can support the changes, but it all starts with the culture within the firm," says Ross.

"Then the technology can be there to support and enable departments and organizations to improve the effectiveness of individuals and groups and protect their interests."

Meridien's Kovelsky adds that while compliance has always been an important function, recent trends have been moving the functionalities into the front office where they can be integrated with other core aspects of businesses processes.

"They are becoming part of what a broker does on a daily basis, in more of a real-time environment, where changes with compliance implications can affect the process immediately," he says.