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Best Practices Insider Trading MNPI & Enterprise Conflicts

Making The Modern Control Room: A Conversation

Adapted from the Star US Conference panel discussion, “Making The Modern Control Room,” which offered the facts, forecasts, and considered opinions of two control room experts, as well as an insider’s take on the role tech can play in this increasingly regulated and scrutinized compliance function. The discussion was moderated by Star Director of Product Strategy and Marketing, Tim Ward.

Tim Ward: Today we’re going to talk about what control room is and how technology can impact its operation. Steve, kick us off if you would. Explain to us exactly what control room is—what the phrase means and what kinds of firms would have such a compliance function.

Steve Brown, Director, PwC Capital Markets Advisory: The primary purpose of control room is to control the flow of MNPI—material nonpublic information—in order to maintain an informational barrier. That’s easier said than done. Firms have trading, sales, research, asset management, public-side lines of business, and private-side lines of business. Firms may also have investment banking, corporate banking, and M&A. The control room is responsible for working with firm personnel to monitor, manage, and control the flow of deal-related data that can arise from any and all of that.

Tim Ward: Jamie, can you tell us the kinds of trouble control rooms can run into in the course of their operations?

Jamie Logan,* risk specialist for a large, global asset manager: Since 2001, there’s been an increased level of importance attached to the control room function: what firms are doing to control MNPI, identifying current deal-related conflicts in the firm, and even identifying potential future conflicts. But there’s a tug-of-war between the need to know for deal-team members and the need for compliance to identify conflicts of interest. That’s always going to exist. And that’s one area in which good technology can help, because it can do a lot of the grunt work for you. That is, rather than compliance having to go out and get the information they need to do their jobs and reduce firm risk, tech can bring that information to them.

Tim Ward: Jenn, you and I have been visiting firms around the world over the last few months. Can you relate what we saw in terms of the types of systems firms currently have in place to manage their control room function?

Jennifer Sun, CEO, StarCompliance: There are seemingly more conflicts out there than our clients have the manpower, resources, and technology to track effectively. For so many firms, and the companies we’ve been talking to about Compliance Control Room, the processes are still highly manual; it’s getting on the phone, reaching out via email, and tracking data on Excel spreadsheets. It’s a lot of manual work. And when you and I began our tour we thought control room was something exclusively of value to investment banks. We soon discovered that control room is also important for asset managers and private equity firms. Really, control room is for any financial services firm that needs to maintain and manage information barriers.

Tim Ward: Steve, it’s a demanding job being in the control room itself. Why do you think it’s been a relatively underserved area when it comes to technology?

Steve Brown: Honestly, part of it was compliance was always the last department to receive funding. When I think back to when I was building my control room, we worked exclusively off of Excel spreadsheets. I remember, as we grew, and we began developing applications in-house, I said to my staff that I wish we could have more “smart” surveillance tools, like what’s available today. But the 2008 financial crisis was a turning point; budgets increased significantly. It’s taken awhile for technology vendors to develop software solutions for control rooms, but it’s finally happening.

Tim Ward: In light of that, what kinds of things should we, here at Star, be thinking about as a technology company, Steve?

Steve Brown: Tracking deal-team members down in order to get deal information is always a challenge. Today, firms utilize CRM software programs like Salesforce. These relationship databases are a natural to plug into. If firms can hook into an important information source and bring it in, that’s the way to do it. Firms need information and need it in real time, because firms don’t have the time to chase information down. Being able to plug into a CRM like Salesforce is a great way to be able to help control rooms maintain their watch and restricted lists.

Tim Ward: A compliance platform that can easily integrate with existing firm systems goes a long way toward allowing firms to stay inside their comfort zones, as well.

Jennifer Sun: Yes. 75% of the people we’ve been speaking to are Salesforce users. And it’s used in the investment banking division, too. So just allowing your bankers to continue to use the same CRM system that they’re using today, but also have that ability to feed that data automatically into a control room application is huge. Easy integrations means you can get that critical information into your decision-making process faster: in real time, even, as Steve talked about.

Jamie Logan: Getting complete and accurate information, as everyone in this room knows, is very difficult. Because the world of deal-conflicts is not really rules based, I don’t think there’s any technology that’s ever going to give you 100% of what you need. Star’s Compliance Control Room is as good as anything I’ve seen, but when conflicts come in you still need good, smart questioning to elicit the information that you might not otherwise get. You might run a conflicts check and nothing comes back, but there can be levels within levels that need to be checked.

Tim Ward: So Jenn, given the notion that deal-conflicts checking may never be able to be strictly rules-based, do you still think technology can help?

Jennifer Sun: Yes. The first step is just automating the most tedious task: the gathering and organizing of information. We asked our clients what their biggest pain points were. They said, ‘we want you to serve up the information, but at the end of the day someone who knows our firm policy—who knows all the regulations and all the players—has to look at it and make a proper determination of whether or not there’s risk.’ That’s not a task I felt Star was ready to try to automate. But the gathering and ordering of information is a first step toward further automation. Once we master that, we can start to figure out simple rules that can be automated as a sort of next step in the process of control room automation. We’re starting with what can be automated today, so we can move on to the more sophisticated processes tomorrow.

Tim Ward: Jamie, do you see anything else in particular technology can be of assistance with when it comes to control room? Are there any more specific challenges it can address?

Jamie Logan: Reminders. For example, there’s no such thing as an evergreen conflicts check. You may have cleared every possible aspect of a deal at the start, but three months later how do you know it’s still clear? The ability to remind bankers that, just because this was all cleared three months ago doesn’t mean it’s cleared now, is something that can easily be automated and be of enormous value. It’s easy for people to forget this kind of thing, even senior bankers. And follow-up. People need to follow up but they don’t always. You may have pitched a company months ago, but it didn’t work out and then you never noted that fact in the system.

Tim Ward: And how do you view technology as it relates to control room on the broader level, Jamie? Any parting philosophical thoughts for us?

Jamie Logan: The control room compliance community is very close knit, and everyone benefits if we make it better. Technology can help do that. It can help make the field we’re all playing on more consistent and conducive to doing the right thing for clients. In the end that’s what counts.

The recent StarCompliance US Conference offered attendees a number of key takeaways. Find a roundup and synopses of the best ones here

*Not his real name. Withheld at his request.