Industry-Specific Programs
The Rising Importance of Compliance

For financial services firms, compliance has moved from a cost of doing business to an issue central to the company's reputation and perhaps survival. In the process, the role of the Chief Compliance Officer has been transformed. Douglas Shulman, President of Markets, Services, and Information at NASD (National Association of Securities Dealers), recently spoke with us about these changes and how The NASD Institute at Wharton Certificate Program is helping compliance officers and regulators meet these increasing demands.

Q: Why has the role of the Chief Compliance Officer become more important in recent years?

It started with things that were not really related to financial services but were close enough that they raised concerns. Enron and WorldCom made people worry about whether the whole system was working well. Then there were the high-profile analyst cases that NASD brought together with the states and the SEC, concerned with potential conflicts of interest in big financial services firms. Then there was all the press about mutual-fund scandals. What this did was erode the trust that the public had in people providing financial advice and services to them.

Q: What impact did this have on the work of the Chief Compliance Officer?

Against that backdrop, the compliance officer became very important to firms. Firms realized that staying out of trouble is integral to their brands. The Chief Compliance Officer now sits on the executive committee of many firms and has direct access to the CEO and board. Compliance officers command more resources in recent years — a lot of the technology spending of firms has been dedicated to compliance issues. In the past, companies saw these as positions that were a necessary cost center. Now they see these positions as helping to preserve one of the main things they are trying to sell as a value proposition, which is the trust and integrity of the firm.

Q: Why is trust so important?

A: The value proposition of any financial service firm, and especially a brokerage firm that people are trusting with their retirement and investment money, is based on a foundation of trust. That is really the core. People want to get good market returns, but they could use an index fund and get a market return. The real value is that they need to feel that they can trust whoever is dealing with their money, that they are following the rules and are very upright citizens.

Q: How do compliance officers keep up with these new demands?

As these roles change, programs like the NASD Institute at Wharton that allow people to be able to get information and share information with their colleagues become more important. Although many compliance officers come from legal backgrounds, there is no formal educational path. We have been trying to fill the void to create opportunities for people to obtain the knowledge they need to keep up with the onslaught of new rules and requirements. We also create networking opportunities so people can share information with their peers. In any field that is evolving as rapidly as compliance, one of the best resources you can have is a network of peers.

Q: Was the program at Wharton created in response to the scandals and new regulations?

A: It was actually created in the late 1990s before the serious challenges surfaced. We have focused on educating professionals for years, but this became more timely after compliance became a major issue.

Q: Given the rapid pace of change, how do you keep the program current?

A: The program is integrally linked to our regulatory efforts. We have a team of people who update the materials, and most of the materials make their way through our regulators who are the ones writing the current laws and interpreting the current laws and rules.

Q: Some executives have grumbled about the burden of following regulations such as Sarbanes-Oxley. How has it changed the volume of work?

Anecdotally, it has changed it significantly because firms realize that not complying with rules can cause huge reputational damage. We've seen compliance departments that have doubled in size. We are very strong believers that the whole issue of regulation and following the rules shouldn't be shunted off into a compliance department. It is something that the leaders of the firm should take to heart. If you want to do well by your clients and treat them right, make sure you are in compliance with these rules. These rules are not just there to be mechanically applied; they are there to actually provide protection.

Q: What should be the role of the chief executive in compliance?

We recently passed a rule that said that all CEOs of firms certify that procedures are in place to comply with our rules and that they have had conversations with their Chief Compliance Officer about those procedures. This makes sure the compliance officer is not put off in a corner, but the CEO is taking seriously the compliance issues at a firm.

Q: Has this attention to compliance had an impact on investor confidence?

The SIA does an investor survey every year, and it said that investor confidence was up this year. I can't say if that is accurate or not, or if it is related to compliance efforts. The best compliance offices often go unnoticed. No one is going to use XYZ Securities because they hear they have a great compliance office. But if the firm is in the headlines because of compliance issues, clients are not going to go there. It is the dog that doesn't bark. One of the compliance officer's jobs is to make sure the leading story in the paper is not that your company is doing something wrong.

Q: Where is compliance work headed?

A: I think that the major wave of changes have been over the last five years, given the reputational issues major firms have seen in light of the scandals in the financial services industry at the turn of the century. The main change has been the increased importance and visibility of compliance in the firm. I wouldn't expect that to change anytime soon.

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