A Blog By : Michael Rabinowitz The Many Challenges of Information Sharing Financial Industry Regulatory Authority Fined $850,000
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. 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). Traders or other agents who possess material information that has not been made public are prohibited from sharing it with others who do not who do not have a need to know. To maintain this divide firm has to build a barrier Called Chinese Wall or informational firewall
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 This law, which helped empower many of today’s biggest financial powerhouses, repealed previous regulations that stopped firms from carrying out combinations of investing, banking, and insurance services.
Why Communication Barrier is Neccessary Failing to maintain this informational divide can lead to some devastating consequences for financial institutions. In 2003, the Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD), New York Stock Exchange (NYSE), and other regulators announced that they had agreed a massive $1.4 billion settlement with 10 Wall Street firms for failing to mitigate against these conflicts of interest. Two well-known analysts were fined and given lifetime bans from participating in the securities industry.
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. 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.
By keeping all this in mind, The Shield 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. By knowing the employee department, job, management line, and other relevant information, Shield constructs specialized models to surveil specifically the eComm interactions between different groups of employees like traders and marketers within its global wealth and global banking and global banking divisions. We combine new age lexicon technologies, along with the latest AI innovations, to provide the best quality surveillance system of eComms
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