INFORMATION SHARING CHALLENGES
Shield
INFORMATION SHARING CHALLENGES AT SHIELD Recently the Financial Industry Regulatory Authority hit independent broker-dealer Cambridge Investment Research and Merrill Lynch with fines totaling $850,000 for failing to properly supervise employees who were involved in the sale of mutual funds, and not properly monitoring the exchanges between retail marketers and exchange-traded note traders. Notably, although Merrill Lynch did have a flagging system in place, built around a general lexicon search, it reportedly didn’t have sufficient reviewing practices organized — including no process for escalating reviews of private-public side communications that contained potential material information, or for enforcing required measures for separating traders and marketers in the global wealth and global banking and markets divisions.
Building the Chinese wall This highlights a major challenge when it comes to compliance — particularly when it comes to the public and private side employees in financial institutions. The problem comes down to the fact that financial services firms frequently receive and handle information that counts as confidential or “insider” information (also known as MNPI – or Material Non-Public Information). To maintain this divide, firms must erect information barriers around proper control of the flow of non-public information from one department to another. This is frequently called a Chinese wall, or informational firewall, referring to a virtual barrier that’s in place to stop the exchange of information that could result in illegal or ethically dubious activities.
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A brief history of informational firewalls The concept of Chinese walls has existed since the 1929 stock market crash when Congress first seriously discussed regulatory barriers separating investment bankers and brokers. However, the need for such divides has greatly increased over the past couple of decades, following the enacting of the Gramm-Leach-Bliley Act of 1999 (GLBA). This law, which helped empower many of today’s biggest financial powerhouses, repealed previous regulations that stopped firms from carrying out combinations of investing, banking, and insurance services.
Have the right tools in place Today’s firms must be diligent in their stance on information sharing, ensuring that this happens only where absolutely required and lawful. As the Merrill Lynch example shows, having protective measures in place when it comes to monitoring isn’t enough. Lexicons, referring to a simple keyword or phrase searches, are massively outdated tools that can cause more problems than they solve. Lexicons yield a massive number of false positives (FPs), inundating system operators with high numbers of erroneous flagged messages, making them virtually valueless. At Shield, we know that the world of detection doesn’t stay still. It’s not enough to simply set up lexicon-based models and hope that they will catch any potentially violating behavior that’s thrown at them. With that in mind, we continually add to, modify, and otherwise improve the detection models we used to provide updated coverage regarding the latest risk areas, along with new products, areas of business, mandated lines, and comments from regulators.
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