With their day-to-day business practices likely to change as a result of the new financial-reform law, broker-dealers are scrambling to assess their technology preparedness.
Against this backdrop, Patrice Stewart's timing couldn't be better. She is the founder and chief executive of Investor Reports Inc., a technology startup whose flagship product, Compliance View, specifically addresses many of the current and pending headaches -broker-dealers face.
Ms. Stewart knows compliance.
During the past eight years, she has consulted for several securities firms and served as an expert witness in arbitration cases that involved trading and client account issues. That experience, combined with many years in compliance management at Merrill Lynch & Co. Inc. and PaineWebber Inc., led her to develop Compliance View.
Several revisions have taken the web-based software-as-a-service tool from an individual-account-review program to a system that allows broker-dealers to review all their accounts.
Although not strictly comparable on an apples-to-apples basis, Compliance View is intended to compete in the small independent-broker-dealer market against offerings from industry giant SunGard Data Systems Inc. as well as those of smaller companies, including Compliance Science Inc., Compliance 11 Inc., MyComplianceOffice and StarCompliance Software Inc.
“Our software provides supervisory oversight, automates costly manual tasks, consolidates multiple data sources into useful reports, creates on-demand P&L reports and keeps records of account audits,” Ms. Stewart said.
Key to her firm's software is its ability to aggregate disparate data into consistent alerts and warnings intended to raise the antennae of compliance officers to patterns and trends in behavior that may otherwise go undetected.
While he has not seen the Investor Reports software, Paul Tolley, chief compliance officer at Commonwealth Financial Network, said that. many broker-dealers, especially those with antiquated legacy systems, are going to be in desperate need of compliance technology with a similar feature set.
“Our systems are virtually all homegrown and are very flexible because we have relied on our internal IT folks to design those systems,” he said, adding that many broker-dealers don't have similar resources and will instead be forced to rely on third-party providers.
Even if they have their own systems, larger independent broker-dealers and those with extremely diverse product offerings are probably going to turn to outside vendors with expertise in the compliance realm to satisfy their new needs.
One such provider, SunGard, is keeping a wary eye on regulatory developments.
“If you look at the current bill, there are 243 rulemaking changes and 67 studies proposed,” said Steve Sabin, chief operating officer of the Protegent compliance solutions unit within SunGard's trading business.
He contends that while broker-dealers have a two- or three-year grace period before enforcement of the new law is likely to begin, there are particular areas of interest to regulators that broker-dealers should start thinking about and preparing for now.
“In addition to suitability, trades and exceptions, you are going to see more emphasis from regulators on the held-away business of reps, for example,” he said.
Amy Lynch, founder and president of FrontLine Compliance LLC, a securities compliance services firm, said that technology is going to be critical for compliance officers' own internal needs as well as for regulators who audit the firms. She agrees that technology firms likely will have a competitive advantage if they can help focus on upcoming areas of concern.
“Having a piece of technology that would make it easy to report outside business activities, for example, would be a big leg up for many broker-dealers,” Ms. Lynch said.
Firms shouldn't count on regulators' providing a lot of specific detail, she said. Having worked as an investigator for both the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc.'s predecessor, NASD, Ms. Lynch knows from experience that there will be no one-size-fits-all approach taken by the agencies.
“Every independent broker-dealer has a different business model, and they're all very different from the wirehouses,” she said. “So saying that they all need to have the same infrastructure doesn't make sense.”
Aaron Guidotti, whose firm created the Grendel online information management system for financial advisers, said he is already seeing interesting questions from broker-dealers concerned about the future.
“Many of them are asking "what if?' questions because they want a system that is flexible and won't cost them a lot to accommodate any new requirements, no matter whatever the future brings,” said Mr. Guidotti, chief executive of Big Brain Works LLC.
By way of example, he shared some of the questions raised about Grendel by a top independent broker-dealer currently in the process of purchasing the application: “What if we need to extend retention lockout periods of digital documents in the future? How does your system handle compliance meta-data? What about compliance chain-of-custody services if we ever decide to move to another vendor?”
The firm asking the questions is very concerned with how potential changes are going to affect its bottom line, Mr. Guidotti said.
For some experts, it is too early to draw any conclusions as to who will be best-prepared.
“In my mind, the requirements of this new law or regulatory scheme are completely up in the air,” said Sean Cunniff, research director for brokerage and wealth management at The Tower Group Inc.
“Early indications are that there isn't going to be a strict fiduciary standard in the true sense of the word, and there is some language in the law that is indicating that they are going to try and find some sort of compromise between the broker-dealer world and the adviser world,” he added, noting that the muddle could make things even more difficult for technologists.
E-mail Davis D. Janowski at [email protected].
