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Can Innovation and Compliance Be Balanced?

As budget spigots open, it is imperative that compliance technology remains a top priority if the current cycle of regulation is to stop.

The SIA Technology Management Conference and Exhibit this year is themed "Balancing Innovation With Compliance." But can innovation and compliance co-exist? Can we really think, develop and perform within the bounds of regulatory compliance in a period of rapid growth? Will we learn from the challenges of the late '90s and early '00s, pay penance, make amends and move forward on the straight and narrow?

Alternatively, are compliance and innovation mutually exclusive? They may well be, as the mid-80's boom gave us Milken and Boeskey and the late-90's boom gave us ... well, too many to count.

Traditionally, scandal fallout has been limited -- we throw folks in jail and change a few laws, but when market composure is regained, we seem to forget about previous transgressions and transgress anew. So, are we predetermined to repeat the past?

This time things look different. The settlement cost, the industry governance structure, the problem's magnitude -- and the focus on enforcement, litigation and legislation -- demand it.

The cost of problems and penalties this time has been huge. While the Milken settlement was $1 billion, today's legal challenges are costing firms far more. The research scandal alone cost $1.4 billion, while the Citigroup/WorldCom settlement last month drew $2.6 billion -- and these are only two of the numerous recent settlements.

Additionally, the Milken and Boeskey settlements were personal, while recent scandals were corporate. While personal fines are a concern, corporate fines hit the pocketbooks of firms and their shareholders and dent management's bonuses.

The industry's governance model has also changed. A decade ago, many firms were still partnerships, governed by groups that could afford to take a penalty on the chin. Today, most, if not all, major securities firms are either banks, are owned by banks or are public corporations, which, as we saw with Andersen, may be able to afford the financial cost of a scandal but are unlikely to endure the political and reputational costs.

The magnitude of these scandals will also change industry behavior, as today's scandals are much more far-reaching than those of a dozen years previous. Yesteryear's scandals focused on a few rogues, insider traders or an out-of-control brokerage. Today's scandals not only hit the top global brokerages and banks, but they also reach across the brokerage industry to the investment-management industry, which has been typically untarnished by previous issues. While regulators and legislators may go easier on brokerages and banks, when it comes to the surety of assets of non-sophisticated investors through mutual fund and retirement accounts, the regulatory bodies will act. The political fallout that results when the perception of legislators is that they are not protecting retirement assets is tremendous, as we have seen post Enron, Anderson, WorldCom, Global Crossing et al.

The scale of the regulatory, legislative and legal initiatives has also been daunting. While the New York Attorney General was center stage on both actions, recent initiatives have been more comprehensive and far reaching, and they were executed in conjunction with SEC actions, SRO actions, as well as legislative initiatives around Sarbanes-Oxley and the USA PATRIOT Act.

So, I don't believe that the industry is headed for a relapse -- at least in this decade. But, can we truly maintain compliance and innovation as the market begins to heat up?

For that answer, we will need to look to our leadership. While the chief compliance officer, COO and CIO will need to spearhead this effort, selling the plan upward to the CEO and the business-line executives is imperative for success.

Top leadership for compliance efforts is more critical in an opportunistic environment than it has been over the past few years, as constricted technology budgets have proven fertile ground for compliance. As budget spigots open, it is imperative that compliance technology remains a top priority if we are to stop this cycle of regulation.

As the clock hands go around again and the economy heats up, and as more business heads vie for a portion of the technology budget, keeping focused on compliance will be difficult and paramount.

If we forget about the past, we are doomed to relive it. It is like a bad rendition of Bill Murray's "Groundhog Day," in which we'd be destined to repeat our scandals until we become morally pure, or build the right infrastructure to stop from doing wrong. Otherwise, we will just keep on reliving the same day, trying in vein to get it right and waking up to Sonny and Cher -- over and over and over again. Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio

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