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Best Practices Compliance Software Insider Trading MNPI & Enterprise Conflicts

The StarCompliance Guide to Control Room Compliance Software

Do you have the control room software you need to keep up with evolving compliance regulations? In this week’s StarBlog, StarCompliance CEO Jennifer Sun discusses in-depth how to find the right control room compliance solution

For financial institutions with both public and private sides, compliance by way of control room isn’t a new concept. The control room serves as a compliance management solution to efficiently monitor multiple information streams across an increasing number of communication sources. A tall order by any account, made even taller as firms grow.

This is because with growth comes an increasing amount of sensitive information, particularly material nonpublic information (MNPI), making it nearly impossible for control room officers to organize, record, and analyze data through traditional methods like spreadsheets and emails. Also, as firms grow and the quantity of deal-related information increases, compliance officers must seek out more efficient solutions to protect their firms from regulatory trouble in an increasingly complex environment. Control room compliance software is one such solution that can scale control room management exponentially.

Finding the right compliance software, however, is no small task. The ideal solutions should integrate with all existing systems to compile deal-related information into a central platform, simplifying data analysis and assisting in the conflict management process for the control room. No longer will the compliance team be left rifling through piles of information from multiple sources. Instead, a central system allows compliance to quickly ascertain whether a problem exists and relay this information to all necessary parties, lowering the firm’s risk. In other words, decisions become much smarter, faster, and more strategic.

Regulators provide little direction on the topic of market abuse, stating only the need to have “adequate policies and procedures in place to prevent and detect insider trading.” How that monitoring happens is up to chief compliance officers and other firm leadership, but the decision should be made based on the type and volume of activity for your firm. If your firm is growing and expanding into new service areas, as many are today, and the new activity results in a higher volume of MNPI, it’s likely you need control room compliance software with advanced capabilities for automating compliance functions.

Such activity could include:

  • Building relationships with private equity
  • Offering wealth or asset management services
  • Assisting with mergers and acquisition advisory
  • Providing acquisition financing options
  • Expanding the general scope of activity

Remember that the deal landscape is only growing increasingly complex. If it hasn’t yet, your firm will likely see an influx of deals or an expansion of services soon that will bring even more MPNI and other sensitive information to your door. You’ll need a means of compiling, analyzing, and disseminating this data to meet regulatory requirements and ensure that each deal goes through seamlessly.

Any financial institution seeking a better approach to the compliance function typically finds itself with an investment decision: Do you buy control room compliance software or build it in-house The answer will vary greatly from one organization to the next, but it’s important to start with a few key considerations before arriving at a final decision:

1. The Cost To Build
In-house compliance software development is no small undertaking. To get a better understanding of just how much time and money would go into the task, analyze the total cost of ownership by breaking it down into four key categories:

  • Software
  • Hardware
  • Labor
  • Redundancy

Remember, the expenses associated with building custom compliance software won’t end with installation. After development, for example, you’ll continue to incur labor and data center costs to keep the system up and running. And the “redundancy” consideration means you’ll need to ensure adequate coverage for any of the above areas if something becomes unavailable.

2. The Cost To Buy
On the surface, the cost of buying may appear more economical, especially for small firms with fewer resources. This can certainly be true, but it is still important to make sure you’re aware of any fees beyond the subscription price to make sure you’ve budgeted correctly. For example, you’ll want to ensure that updates are included in the subscription price so you won’t have to pay more each time the vendor upgrades the software. Typical vendor fees outside of the subscription cost include:

  • One-time implementation fees
  • Annual licensing fees
  • Data hosting fees

3. Ownership Vs. Freedom

Cost is an important element to consider when weighing the build-versus-buy software decision, but you also need to think beyond the logistical concerns to determine what buying or building will mean for your organization at large. Building means your firm will have ownership. With ownership comes total control over compliance software, and you can adapt the solution to meet your specific needs. What’s more, having team members on staff with full knowledge of the software provides a great deal of flexibility and responsiveness to make changes whenever necessary.

Ownership, however, also comes at a cost: accountability. Should the team overlook certain functionalities during development, the onus is on the organization to fill the gap. This could leave a control room waiting months for access to these functionalities in the compliance management system, opening up a firm to risk.Then, of course, staffing can come with a hefty price tag, as it takes a very targeted skill set to maintain and adapt proprietary systems. You must invest in talent to ensure everything comes off without a hitch.

When choosing to purchase compliance software, on the other hand, financial institutions gain freedom. The responsibility is no longer on the organization but on the vendor to continually update and improve its product offerings and staff a team with an understanding of the system. Should a problem arise, the vendor is on the line to troubleshoot a solution. Purchasing compliance software also comes with the added bonus of community feedback. What other institutions say about the solution helps drive the product roadmap, bringing about new use cases, features, and functionalities—many of which may never have been on your radar and could prove beneficial to your business. As with any business decision, take into account the pros and cons of building vs. buying software to ensure the solution makes sense for your organization.

Whether you’ve decided to build or buy control room compliance software, the next step is to ensure the software can integrate with the existing systems at your firm to bring each piece of deal-related information into one central view. With so much information passing through a firm, the control room should serve as the nexus through which it all passes. The software in that control room should automatically stream information from the following sources so compliance officers don’t have to sort through massive amounts of disconnected data on their own:

1. Watch And Restricted Lists
These are basic means of monitoring for market abuse. The key is to have real-time aggregation of relevant data into these lists so that compliance knows exactly when bankers, traders, salespeople, or research analysts gain MNPI.

2. Other Timely Deal Data
Control room officers must also stay up-to-date on information such as new deals and the players involved (internal or external), deal team member activity, wall crossing requests, and any other deal-related information.

3. Wall-Crossing Approvals
Part of a compliance team’s job is to ensure proper barriers are in place between deal-side employees and those who work with security transactions to ensure MNPI isn’t shared where it shouldn’t be. These barriers are often physical in an office setting, with different departments on different floors, but as many employees are working remotely today, compliance teams must create digital barriers as well.

4. Employee Conflicts Of Interest Data
Many firms have employee conflicts of interest monitoring software in place. When that data integrates closely with the control room, it gives compliance teams an easier way to connect the dots between employee trade-related data and deal team activity.

As deal-related activity is on the rise and firms must handle the increasingly complex flow of MPNI and other deal data, the integration between the above streams and the control room can provide control room officers with fuller oversight via one centralized view. With that comprehensive picture, officers can further automate the compliance function to gain even greater accuracy and efficiency in the following ways:

1. Compile A Real-Time View Of MNPI
While compliance automation software can integrate information from existing systems, it can also provide employees an easier way to self-report and update projects with any MNPI or other related information as it happens. Compliance officers can immediately see these updates flow into the control room in real time.

2. Build Ideal Deal Teams
When building deal teams, compliance officers must take a number of factors to take into account: employee skills, experience, availability, and the types of deals they’ll be handling. As deals grow in number and complexity, this task only becomes more time-consuming for compliance teams. Control room compliance software, however, can pull all of this information together automatically. With a simple way to view all deal details, compliance officers can easily stay apprised of any potential conflicts and determine the best fit for deal teams.

3. Manage The Flow Of Information
Control room teams are no stranger to managing information barriers. In the past this was done manually—a labor-intensive task with great room for human error, increasing the chances of a financial institution running into regulatory issues. With compliance automation software, the task of creating and managing information barriers is, for the most part, taken out of the compliance team’s hands. Software can help create digital barriers by integrating with HR applications to assign employees to categories and determine the structure around them; few questions then remain about who knows what about any given deal, as compliance teams can quickly see which employees are working on which projects. It then becomes that much easier to restrict access to data and prevent the misuse of MNPI.

As the financial industry continues to evolve and grow rapidly, financial institutions need to equip their control rooms with systems that can capture, aggregate, and filter all deal-related activities into a single source of truth. Control room compliance software enables compliance to scale oversight and keep firms and employees out of regulatory hot water while making more informed decisions based on the most recent and relevant data.

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