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Steve King, President and CEO, ZANTAZ, Inc. and Laura Simone Unger, former SEC Commissioner
Steve King, President and CEO, ZANTAZ, Inc. and Laura Simone Unger, former SEC Commissioner
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From the Top Down: Getting Management on Board With Compliance

Why all the focus on compliance? Simple: Management is charged with protecting their firms' reputations " which translates to customer relationships and shareholder value. Business is at stake, and compliance has taken center stage.

There's a change in the air on Wall Street, and it's more than winter in New York. Compliance and litigation readiness have blasted up the priority list of top management like the morning wind off the Hudson. Leading financial institutions have appointed general counsel into top management roles. Boards of directors are reviewing and approving technology solutions. Why all the focus on compliance? Simple: Management is charged with protecting their firms' reputations"which translates to customer relationships and shareholder value. Business is at stake, and compliance has taken center stage.

The Regulations
Of course, new regulations that increase management accountability are a big reason for the high level interest. Section 404 of the Sarbanes-Oxley Act requires top management of public companies or any company subject to SEC regulations to attest to the effectiveness of their accounting systems and controls. Other initiatives, such as a recently proposed NASD rule, would require the CEO and Chief Compliance Officer (CCO) of member firms to jointly certify annually that their firm has adequate compliance and supervisory policies and procedures in place.

In addition, broker-dealers must supervise all registered representatives by developing, implementing and adhering to a written set of rules and procedures that will "reasonably" ensure daily, periodic, and annual compliance with SEC and NASD regulations. Failure to meet these regulations has resulted in some of the heaviest fines and penalties in Wall Street history and has opened firms up to the potential risk of litigation.

Culture of Compliance

Another area of focus for top executives, though seemingly less tangible but just as important for restoring investor confidence, is the "culture of compliance." The SEC has developed a formalized measurement system to assess a firm's culture of compliance. The new systematic process aims to sharpen the SEC's focus of oversight in compliance, as well as enhance investor protection.

Lori A. Richards, Director, Office of Compliance Inspections and Examinations of the SEC, introduced the formalized measuring system earlier this year. It considers everything from the role of senior management in setting compliance strategy to the extent to which a firm's compliance strategy is embedded into different business units. It measures the priority a firm places on compliance, including how senior management has articulated policies and procedures to employees. It also measures whether a firm has the proper tools it needs to effectively comply with regulations. (For the full transcript of Lori A. Richards' "The Culture of Compliance" speech, please visit www.sec.gov/news/speech/spch042303lar.htm).

There are real ramifications that result from the SEC's review process, which impacts a firm's future inspection cycles and intensity. If a firm receives a high rating, it will have a longer examination cycle. A poor rating will result in more frequent visits and more in-depth examinations.

Good Compliance is Good Business
But the biggest reason to have strong compliance practices is because it's good for business. With all of the recent activity among regulators and the securities industry, firms are anxious to win back investor confidence. Two of the biggest Wall Street firms have even moved their general counsels into top management positions, sending a strong message that compliance isn't just a backroom issue anymore, it's a key initiative at the board level and the basis on which to compete going forward. In fact, those firms that have proactive measures in place to deal with regulatory and legal investigations have a significant competitive advantage over those that are reactively responding to regulatory and discovery requests.

Competition on the basis of sound compliance benefits everyone. It levels the playing field for firms, ensuring that everyone has the highest standards"not the least common denominator. Instead of taking the minimum required action to meet industry regulations, firms are instituting best practices for competitive advantage to retain and attract new customers. It's also good for the industry as a whole because management certifies compliance with industry regulations, adding an extra level of comfort to investors.

Technology Solutions
Technology is another area in which top management has gotten involved. While there's no substitute for ethics and integrity, technology plays a critical role in keeping your firm compliant with industry regulations. Since top management signs on the dotted line that their system is compliant, the decision-making for technology solutions has shot up the ladder as well. In one recent example, a major investment bank required sign-off from its board of directors before implementing a solution. The stakes are that high. In today's environment, firms have to be ready to produce documents quickly and show investors and regulators the measures they've taken to maintain internal controls and supervise their employees. The most effective means to accomplish this is to ensure your solution is a comprehensive, end-to-end offering that encompasses email and IM archiving, supervision and legacy data restoration.

Moving Forward
Compliance will continue to be a key driver of investor confidence, and management must lead the way. Forward-thinking firms will find innovative ways to demonstrate best practices to their customers and implement the policies, procedures and technology that will help them remain compliant with industry regulations. The more firms focus on and invest in strong compliance practices, the more they invest in their valuable reputations.

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