Big data: New technology comes to compliance

As regulatory reporting demands increase, software providers are coming up with new products to help broker-dealers and advisory firms comply.
Riskalyze, which offers software that scores a client’s risk tolerance prior to investment, has just launched Compliance Cloud, a big-data platform advisers can use to uncover accounts with problems such as inappropriate holdings, high-risk positions and long periods of inactivity.
The Auburn, Calif.-based company decided to develop the product after receiving requests for help from compliance and supervision teams at broker-dealers and large registered investment advisory firms.
“When advisers started using Riskalyze, many would send our data to their compliance departments for approval, and those departments started buying Riskalyze themselves to do random spot checks of their accounts,” said chief executive Aaron Klein.
Compliance departments are grappling with high-volume, high-velocity data flooding the marketplace at the same time regulators are pressuring them to do a better job of uncovering risks.
The Financial Industry Regulatory Authority Inc.’s proposed Comprehensive Automated Risk Data System, or CARDS, aims to improve Finra’s ability to protect the investing public by using automated analytics on brokerage data to identify problematic sales practices.
Since opening the proposal for comments last December, Finra has been bombarded with comments, both pro and con, from industry participants. In the coming months, Finra will produce a formal CARDS proposal that includes a cost-benefit analysis. Issued as a “concept release,” CARDS could eventually be drafted and approved by Finra’s board of directors and the Securities and Exchange Commission.
It’s not surprising that a product would be launched to help compliance departments adhere to the CARDS proposal in the meantime, said Joanna Belbey, a former Finra associate vice president of education and training.
“That makes perfect sense,” said Ms. Belbey, who now serves as a social media and compliance specialist for Actiance Inc., a communications archiving and security company. “When regulators challenge firms with new regulations, there is an emergence of technology that arises to meet those challenges. It becomes an opportunity in the market for vendors to come up with new technologies.”
Actiance launched 15 years ago, when the Securities and Exchange Commission began to focus on secure capture and archiving of instant messages, she said.
CARDS itself is another instance of managing big data, said Ms. Belbey, who added that Finra wants big-data technologies to catch bad or fraudulent practices in real time rather than after the fact.
“Software providers are going to emerge to help firms meet this need of submitting and capturing this large amount of data,” she said.
Chip Kispert, managing partner of broker-dealer technology consultant Beacon Strategies, said he hasn’t yet seen any other tech products geared exclusively to supporting CARDS. Products such as SunGard’s Protegent and Fetter Logic Inc.’s Quadron Data Solutions help firms identify transactions and patterns of trading behavior, he said, but they are focused more on tracking advisers’ sales activity rather than on investors’ account activity.
“They don’t necessarily align with the CARDS program,” Mr. Kispert said.
He expects to see more broker-dealer technologies that address the concerns of end users, whether advisers or their clients.
“The regulatory demands have been increasing dramatically over the last four to five years,” Mr. Kispert said. “There’s a lot going on in the space right now. We’re working with our broker-dealer customers on infrastructure and improving the end-user experience for adviser customers.”
Some of the broker-dealers using Riskalyze’s Compliance Cloud are also participating in a Finra CARDS pilot project, according to Mr. Klein.
Compliance Cloud recalculates risk nightly across millions of client holdings and indexes the results so they can be searched by client, adviser, balance and risk level, he said.
“It’s a massive computing operation,” Mr. Klein said. “It’s like a Google search.”

Related Topics: Financial Industry Regulatory Authority