Dismantling Data Silos Boosts Regulatory Compliance: Q&A

(As performance and client reporting teams — and other internal groups — gear up to comply with the SEC Marketing Rule, Form ADV, and Reg BI, they will welcome the end of data silos, says Rab Govil, CEO and founder of Naehas, a provider of customer engagement and compliance automation solutions. Govil, who has been an investor and founder in several marketing and software companies, recently answered questions from FTF News about silos and more. Naehas is also a sponsor of the FTF Performance Measurement & Client Reporting event taking place in NYC on Feb. 29th)

Q: First, could you please tell us how Naehas got started and what the name of the company means?

A: Naehas is a leading customer experience platform purposely built for financial services. We are always striving to create value for our customers. Our sole purpose for existing is to help financial services companies to deliver exceptional customer experiences. We do this by delivering personalized products, pricing, offers, disclosures, and customer communications faster and more efficiently while reducing risk.

I founded the company in 2006 and named it after my daughter, Neha.

Q: What are some of the essential first steps that firms need to take to address the pain points of the SEC Marketing Rule? What changes should a firm consider as far as the management and delivery of disclosure content? What about tracing and auditing the content? 

A: The SEC Marketing Rule introduces new challenges for U.S. financial market participants, particularly in the management and delivery of disclosure content, as well as the tracing and auditing of content in scope for the rule.

To effectively address these pain points, firms should consider the following essential first steps:

Centralized System of Record: This system serves as a single source of truth, reducing risk and ensuring consistency across all materials. A centralized repository simplifies the management and retrieval of disclosures, which is essential for maintaining compliance with the SEC Marketing Rule.

Lifecycle Management: Firms should implement a standardized approach to manage the entire lifecycle of disclosures, from creation to distribution and archiving. This includes establishing clear processes for drafting, reviewing, approving, updating, and retiring disclosure documents.

Auditability and Transparency: To maintain regulatory trust, solutions that offer complete auditability, traceability, and transparency are necessary. This means having systems in place that can track changes, approvals, and publication history, providing a clear audit trail for regulators.

Automation: Automating the deployment of disclosures across all channels can drive consistency and accuracy. Automation tools can help ensure that the correct version of a disclosure is used every time, reducing the risk of human error and non-compliance.

Speed to Market: Firms need to be agile, with the capability to swiftly revise and distribute disclosures to stay compliant with regulations.

Stakeholder Experience: Improving the experience of stakeholders involved in the disclosure change management process is also key. Automation and a unified user interface streamline workflows, reduce manual tasks, and enhance collaboration among compliance, marketing, legal, and other teams involved in the process.

Q: What kinds of IT, workflow, and data management changes would help performance measurement and client reporting teams to meet the firm’s SEC marketing rule requirements? 

A: The focus should be on enhancing compliance and efficiency through technological and procedural updates.

The SEC’s rule, which consolidates and updates previous advertising and cash solicitation rules, emphasizes the need for accurate and compliant presentation of performance results, the use of testimonials and endorsements, and the inclusion of hypothetical performance under certain conditions.

To align with these requirements, firms should consider the following changes:

• A Centralized Disclosure Library for disclosures ensures that all materials are accurate, compliant, and readily accessible;
• Governance and Controls are essential to maintain the accuracy and compliance of disclosures. This includes automating marketing and service disclosures.
• Disclosure Automation from collateral creation to proofing and publishing can greatly increase effectiveness and compliance. This step not only streamlines workflows but also reduces the cycle time for creating and approving disclosures, making the process more efficient; and
• Omni-channel Delivery ensures that disclosures are available across multiple channels with consistent branding and styling is crucial.

Q: Could you explain how Naehas integrates with client reporting platforms and systems? How do you work with firms that use their own systems to support client reporting?

A: The Naehas Disclosure Management solution integrates with client reporting platforms and systems to produce various client-facing materials such as company and product-related website content, marketing offers, product and service offerings, fund factsheets, pitch decks, and all other forms of client and performance reporting.

The integration process involves several key components and features:

• A Collaborative Platform that allows multiple stakeholders, including authors, reviewers, and approvers, to work together efficiently;
• Modular Content and Automation Tools that help reduce the time required to create, finalize, assemble, and deploy disclosures;
• Omnichannel Delivery for print, email, web, or mobile content that is automatically transformed to meet the requirements of different distribution channels;
• A Single Source of Truth to eliminate inconsistencies and maintenance issues at the channel level;
• Traceability & Analytics for auditability and improvement, which are crucial for regulatory trust and to reduce regulatory risk.

For firms that prefer to use their own systems, Naehas offers:

• Flexible and Configurable Capabilities tailored to integrate with existing technology stacks, including legacy and homegrown systems;
• No-Code Capability can be configured without IT or developer involvement and can help adapt the Naehas solution to existing workflows and systems;
• Best Practices and Regulations Built-In and
• Collaborative Workflows

Q: Another SEC requirement is the two-part Form ADV, which requires disparate data to be gathered for compliance. How difficult are the issues that firms encounter when complying with Form ADV? 

A: Complying with the Form ADV requires automating and consolidating financial information, advisor disciplinary history, products, pricing, advisor business practices, conflicts of interest, and operational data. This requires sophisticated systems capable of handling different data formats and structures.

Ensuring the accuracy and consistency of the collected data is paramount, as it involves validating the data against multiple sources and maintaining it over time, especially in dynamic environments where information changes frequently.

Integrating various systems for automating data collection and consolidation can be technically challenging and may require substantial IT resources.

The data collected must also be compliant with SEC regulations, adding a layer of complexity.

Given the sensitive nature of much of the required data, firms must also ensure that their data consolidation and automation practices adhere to strict security and privacy standards to protect client information.

Q: Yet another SEC rule, Regulation Best Interest (BI), is proving to be contentious among firms. Can you discuss the Compliance Obligation to establish, maintain and enforce, written policies and procedures? Are there other aspects that are burdensome?

A: Reg BI presents several disclosure challenges:

• Complexity of Disclosure Requirements: Reg BI requires firms to provide detailed disclosures about the nature and terms of their relationships with retail customers, including material fees and costs that apply to the customers’ transactions, holdings, and accounts. The complexity of these requirements can make it difficult for firms to ensure that all necessary information is disclosed clearly and concisely.
• Compliance Obligation: The Compliance Obligation mandates firms to establish, maintain, and enforce written policies and procedures designed to achieve compliance with the regulation. This is a significant challenge as it requires firms to develop and implement comprehensive systems and controls that can adapt to ongoing changes in the regulatory environment.
• Updating and Maintaining Disclosures: Firms must continuously update and maintain disclosures to reflect changes in services, fees, and policies. This dynamic aspect can be burdensome, especially for firms with a wide array of products and services. Dynamic data, personal information specific to the client's portfolio/relationship, distribution to all clients on time, capturing their acknowledgments, and making the information easy to comprehend using plain English are all critical to the entire disclosure workflow and distribution process. This is a resource-intensive process. Further, the data necessary for this process lives in multiple data silos with fragmented silo-specific processes/workflows.
• Training and Implementation: Ensuring that all personnel are adequately trained and understand the implications of Reg BI is another challenge. Firms must ensure that their employees can effectively communicate the required disclosures to clients.
• Documentation and Recordkeeping: Firms are required to document and keep records of the information disclosed to clients and the basis for recommendations made, which can be a resource-intensive process.
• Technology Integration: Many asset managers’ technology stacks are integrated with legacy and homegrown systems that may not work seamlessly together. Adding and enhancing new compliance requirements into these systems can be technically challenging and costly.

Q: What are some other aspects of Reg BI that can be burdensome for firms?

• Conflict of Interest Obligation: Firms must identify, disclose, and at a minimum mitigate, or eliminate conflicts of interest. This requires a thorough review of business practices and may necessitate significant changes to how firms operate.
• Care Obligation: Firms must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. This includes understanding the potential risks, rewards, and costs associated with the recommendation and considering these factors in the context of the customer's investment profile.
• Disclosure of Scope and Terms of Relationship: Firms must disclose the scope and terms of their relationship with the customer, including the capacity in which they are acting, fees, type and scope of services provided, and any limitations on the securities or investment strategies that may be recommended.
• Increased Legal and Remediation Costs: As firms navigate the complexities of Reg BI, there is a potential for increased legal and remediation costs due to non-compliance or errors in the implementation of the new rules.

Q: Lastly, are data silos within firms coming down? If so, why is this happening?

A: Yes, data silos that have traditionally hindered disclosure and compliance within firms are indeed coming down. This shift is happening due to several compelling reasons:

• Technological Advancements: The development of sophisticated data management and analytics tools is enabling the consolidation of data across various channels and departments;
• Increased Regulatory Pressure: As regulatory requirements grow more stringent and complex, firms are finding that integrated approaches to risk and compliance management are necessary. The link between data silos and security vulnerabilities has been underscored by surveys of IT, risk, compliance, and security professionals. Firms recognize that unified data management systems can more effectively mitigate these risks;
• Operational Efficiency and Risk Management: The consolidation and automation of data management, along with the application of A.I., not only improves operational efficiency but also enhances risk management practices. By breaking down data silos, firms can achieve a more comprehensive and accurate view of their risk posture;
• Competitive Advantage: Agility and adaptability are crucial in today's fast-paced business environment. Data silos inhibit these qualities by slowing down decision-making processes and reducing operational efficiency. Firms are increasingly aware that dismantling data silos can lead to improved customer experiences, faster time to market, and better overall performance. Reducing these silos enables asset and wealth management firms to address their client's demands for transparency and personalization. And, critically, this builds trust.
• Cultural Shifts: There's a growing recognition of the value of data as a shared organizational asset rather than something to be hoarded within departments. This cultural shift towards collaboration and transparency is facilitating the dismantling of data silos.

To effectively dismantle data silos, firms are taking steps such as adopting integrated data management platforms that can handle diverse data types and sources, fostering a culture of collaboration, investing in training and change management, and implementing data governance frameworks.