COMPLIANCE AUTOMATION WITH MICROSOFT TECHNOLOGY FOR BROKER DEALER FIRMS

Marie Johnson| Peter Ward<>

SoHo Dragon | LiveTiles| Microsoft | Sept 21st 2016

- It’s the new IT buzzword

- So all the big consulting firms are jumping onto the Hype - Deloitte, Accenture, PwC, McKinsey

- Gartner has created a new hype cycle analysis around the term and for 2015 has rebranded its annual portal conference to Digital Workplace Summit.

- All the white papers have the words Millennials, NexGen, Woman In Technology

Access devices Communications infrastructure

Business applications

Digital security

User Zero training

Speed of Delivery

Citizen developer

Knowledge Management

Intranets / portals

Digital Workspace

Access devices Communications infrastructure

Business applications

Digital security

What are people’s roles in their companies?

Who has Office 365?

{

background : “Compliance functions in compliance testing, surveillance program",

skill : “Financial and Operational, Regulatory Compliance",

hobbies : “Baking and gourmet cooking",

}

Lack of a Corporate culture that promotes and supports a mindset of compliance

Lack of documentation to evidence supervisory reviews by trading and sales managers

Inflexible exception/reporting scheme lacking dedicated IT personnel for nimble updates and or development of compliance /surveillance reporting to support the business

Data overload requiring data analytics to understand what the reports may be indicating (e.g. trends)

Much reliance on emails and disjointed reporting

Lack of seamless interface with front office to track activity

Breakdowns in operational controls

Review Annual FINRA and SEC’s Examination Priorities Letters and disseminate to Department Head and Senior Management. Regulators’ Top priorities continue to include supervision, risk management, cybersecurity risk management

Maintain Compliance Testing program/Internal Audit

Prioritize training for personnel including FINRA’s Firm and Supervisory Element

Strong supervision of sales (applicable registrations, KYC, markups, etc.) and internal controls of Trading desks

Compliance and Surveillance programs including document retention

Establish Compliance as the point of contact for regulators for the firm

Clear designation of supervisors

The first level of firm supervision consists of policies and procedures and a culture of compliance

Firm should set up a comprehensive supervisory control program (essentially FINRA 3110) that includes

Proper registration of employees and business - licensed and up to date

KYC(new accounts), CDD, AML

Communications review and retention (emails, chats, IM, etc.)

Monitoring for cybersecurity threats

Front end trading systems- ensure regulatory compliance (pricing, best execution/markup)

Operational processing support to ensure timely regulatory reporting (OATS, TRACE) and identify exceptions to established procedures

Risk management and risk reporting

Data management and systemic controls – adequate systems with protection built in (limits, data checks and validation, operational reconciliations)

Supervision over conduct of sales persons

(Sales Practices) entails reviews for:

Supervision and Internal Controls

• KYC, suitability, churning

• Excessive undisclosed mark ups

• Unauthorized transactions

• Misrepresentations, Unregistered offerings

• Advertising and sales literature

• Scripts, cold calling

• Market manipulation

• Books and Records reviews ( Customer account

activity, Commission reports, blotters, compliance

exception reports)

• Customer complaints

• Best execution, Excessive mark ups

• Unauthorized transactions

• Excessive trading

• Misrepresentations

• Market manipulation

• Unregistered offerings

• Risk limits, risk monitoring

• Books and Records reviews (Trading account

activity, P/L, Trading blotters, compliance

exception reports)

Primary requirement – identify products vs desks vs. people

Identify applicable risks and related controls

Create strong supervisory systems by understanding the risks being managed, how the desks are managing their risk

Supervisory matrix is useful to memorialize what the supervisor is responsible for, e.g., approval of personal trades, review of communications

Regulators have identified the following and their examination programs focus on the areas listed below. Compliance and surveillance program should focus on these also.

UNREGISTERED DISTRIBUTIONS: Abuses of Reg S exemption, 144A

UNDERWRITING ABUSES: Manipulated aftermarket, tie-in sales, Reg M Offerings and Rule 144

OFFERING FRAUD: Private Placements, Regulation D, Misappropriation of investor proceeds, Ponzi scheme, misrepresentations in offering documents

SALES PRACTICE ABUSES: Unauthorized trading, Misrepresentations, Suitability, Failures to sell

EXCESSIVE MARK-UPS

BRANCH SUPERVISION: Supervision of activities of Reps operating in branch locations

WEAK SUPERVISORY SYSTEMS, CONTROLS AND PROCEDURES:

NET CAPITAL VIOLATIONS and RECORDKEEPING PROBLEMS

Corporate culture

Supervisor controls

Technology

{

background : “Founder/Chief Executive Officer",

employee : “SoHo Dragon",

skill : “SharePoint, O365",

hobbies : “Yoga, cooking vegetarian food",

}

Traders’ Compliance Trading Desk Manager Surveillance

User Profile: New at the job, wants something that

is simple, intuitive and easy to use

Pain Points: Would like a better understanding of the

company threshold policy

Desire: Whatever it is, keep it simple, don’t want

another system that requires time away from the trading

desk

Tra

ders

User Profile: Former trader, but now married and

wants, a less stressed life. Now manages the traders on

the desk

Pain Points: The rules for trade supervisor approval, is

an art, rather than a science

Desire: Better visibility to trader activity, with tacking

and trending reports. In short:- Reports, reports, reports

Tra

din

g D

esk

M

an

ager

User Profile: New at the job. Used to work for a larger

firm, with a more formal policy

Pain Points: It’s a challenge, to be proactive with

Compliance, Surveillance, and regulatory requests

Desire: A 1 or 2 click visibility experience would be

perfect and all that web 2.0 stuff people always go on

about. The role, can’t be a responder… Must be

proactive with alerts, on parking, ramping, and fishy

behavior.

Com

pli

an

ce

User Profile: Reports to management on trading desk

activity

Pain Points: Catching trading abuses ASAP.

-Information, price, volume, market view

Desire: A way to identify trading patterns with traders.

Ability to run ad hoc and weekly summary reportsSu

rveil

lan

ce

Bloomberg

Traders

All trading activity

E.g.: - Blotters

Trading Activity DB

Sh

are

Poin

t

Compliance

Trading Desk Manager

Surveillance

12

3

Trading Activity DB

Sh

are

Poin

t

Compliance

Trading Desk Manager

Surveillance

3

Power Bi Live Tiles SharePoint AgilePoint

Power BI Live Tiles SharePoint Agile Point

Trading Desk Manager Compliance

Surveillance

Start End

FYI email

What you are going to see:

-Commercial Mortgage-Backed Securities (CMBS)

Day in the life of a broker dealer firm

Mobile enabled

-Yes all in SharePoint!!!!

Trades above threshold

Trade supervisor – adds comments, approves

Exception Reporting (surveillance). Run canned daily reports

Evidence of supervision

Report sign off, with comments. Audit trail

Monitoring

SoHo Dragon | LiveTiles | Microsoft

Your code is: 757051

QUESTIONS