Doing the Right Thing: A Regulatory Rant

Quattrone, Grasso, laddering, conflict-of-interest, front-running, late trading, hedge-fund investigations ... Will this ever end?

While I have lived and worked my way through many a scandal - Milken in the '80s, the Treasury Bonds in the early '90s, OTC price fixing in the mid '90s, and the Internet hoopla and subsequent crash in the late '90s and '00s - I don't ever remember such a relentless barrage of problems, recriminations, criminal investigations and just plain bad press. It's enough to make you puke.

Whether it's because of the Internet crash, 9/11, ubiquitous e-mail use, lax oversight, the need for better fraud-detection or, more simply, greed and deceit, I don't know. But what I do know is that we had better clean up our act, or risk the regulators doing it for us, or worse, risk a loss of financial-markets confidence.

Enough lecturing! What can we do about it? We actually can do a lot.

While it starts at the corner office, we need to change the way we think and feel about regulation, compliance, and just plain doing the right thing. We need to seriously pay attention to not only making money, but how we make money.

We need to stop paying lip service to audit, compliance, and the regulators, and build ethics and compliance directly into our processes. This is beginning to occur as both brokerage firms and investment managers have taken some high-profile actions in regards to the recent late-trading scandals. However, a few key offerings and a few strong actions will not do it all.

Second, a more rigorous internal-audit process needs to be implemented throughout the industry, and we need to develop a sense of partnership between audit and operations. This is easier said than done.

Audit results unfortunately tend to be used more as a whip rather than a learning experience. This however, must change if you want behavior modification rather than sweeping the problems under the carpet.

Finally, as the old saying goes, "Trust everybody, but cut the cards." The compliance technologies that have been discussed over the past five years need to be implemented.

The first stage is to get the various communications mechanisms under control.

Before we even discuss what archival and surveillance, we need a method of linking communications channels back to the sender. Corporate e-mail and physical correspondence are not a challenge, however instant messaging, Web mail and voice are much more difficult as screen names and employee names may differ.

Once we know the sender, it is critical that all forms of communications: e-mail, IM, traditional mail, and even voice, are captured, archived, surveilled, indexed and accessible not only to regulators but to management. There are new document-storage capabilities that rely on traditional disk storage and provide more flexibility in reporting, surveillance and retrieval than the traditional optical platter.

Besides storing the data, we need to implement more comprehensive surveillance technologies. The traditional surveillance technologies have been keyword dependent and are easily manipulated. Keyword surveillance may be good for stopping sexual harassment, however stopping insider trading, high-pressure sales tactics, late trading, or any number of more conceptual regulatory issues is another matter.

Creating a formal process to manage communications is also important. No longer can we blame the problem on John or Mary in compliance. The industry must embrace workflow technologies that capture the communication, index it, surveil it, flag it, and retrieve it if necessary. Without stringent workflow technology, the surveillance, archival and retrieval processes will be dependent upon the weakest link.

We need to take these issues seriously. Not only are we paying a fortune to the regulators, but we are doing everyone in the industry a tremendous disservice. This will not be easy, but true leadership never is. If senior management respects profits above all else, then we will have an industry that demands profits above all else. Is that the industry that we want to work for? Is that the industry that we want to fight for? Is that the industry that we really want to call our own?

Larry Tabb is founder and CEO of Westborough, Mass.-based The Tabb Group, a financial-markets strategic-advisory firm.

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