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6 Areas of Regulatory Focus From a Former FINRA Exec

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Rarely does a former Financial Industry Regulatory Authority executive open with a reference from a recently released movie, but it’s how management consultant Nanci Schimizzi kicked off her keynote at the TechLeaders 2015 conference in Dallas on Tuesday.

“Did anyone see ‘Birdman?’” the former vice president of technology at FINRA asked, referencing the Academy Award-winning Michael Keaton vehicle. “The subtitle was ‘The Unexpected Virtue of Ignorance.’ My presentation today is on your biggest technology weakness and the unexpected virtue of knowledge. You can turn a perceived weakness around with knowledge about where the regulators are focusing their time and resources.”

Noting the commonality in the priorities of various industry stakeholders (regulators, financial services firms and broker-dealers), she began by listing the top areas of scrutiny for regulators, which she claimed were based on her experience while at FINRA and interacting with the Securities and Exchange Commission, Commodity Futures Trading Commission and state banking supervisors:

  1. Cybersecurity — The focus will continue to be on keeping the “wolves” from systems and networks.
  2. Oversight — How firms are addressing information and data security in their systems and operations, as well as the practices and procedures of outsourced vendors.
  3. Big data — Gathering data on products and trades.
  4. Predictive analytics — Using  more sophisticated tools to make sense of the data they have, as well as identifying risk to better focus their efforts.
  5. New rules and regulations — They agree current rules and regulations are reactive and largely diluted by the time they are implemented.
  6. Compliance reporting back to the firms — This includes compliance scorecards, which are available online and in a standardized format for broker-dealers to review.

 Many of the same priorities exist for financial services firms, she added, with the addition of two: social networking and mobile technology.

 “Increasingly, leads and potential sales are either directly or indirectly attributed to social networking activity, but as you all know compliance around the use of social media is restrictive as to how it can be used,” she explained. “I think this will definitely change over time; regulators will have to react faster to the oversight of social networking when used in sales activity because firms and clients are going to demand it.”

 Lastly, broker-dealers are dealing with issues surrounding cloud computing, integration and the reduction of paper-based products through digitization, in addition to the issues mentioned above.

 “You have to deal with both the audits and exams but also the new rules and regulations,” she said. “Just keeping up with the amount of change at a cost you can afford is a delicate balancing act.”

 She concluded by describing the issues likely to fuel regulatory scrutiny in the near future, with a heavy emphasis on mobile technology. Citing a recently released Spectrem study, she noted:

  • 23% of affluent investors (net worth $100,000 -$1 million) use mobile technology devices—such as smartphones and tablets—to buy and sell investments.
  • 39% of millionaires ($1 million to $5 million) and 62% of high net worth investors do the same.
  • 62% of ultra-high net worth investors ($5 million to $25 million).
  • Young investors rely on their mobile devices for the majority of their financial transactions.

“What degree of mobile technology should be my focus and how do I deal with compliance issues? These are the questions broker-dealers should be asking themselves.”

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