Risk and compliance executives from every industry are busy bracing their corporations for life under the Dodd-Frank Act—but those hailing from Wall Street and the rest of the financial sector have a whole other level of preparing to do.
THE PANELISTS
The following executives participated in the Oct. 12 roundtable regarding the challenges brought on by a new regulatory landscape.
Caryl Athanasiu,
EVP, Head of ERM,
Wells Fargo & Company
Lee Augsburger,
SVP, Chief Ethics & Compliance Officer,
Prudential Financial, Inc.
Michael Barr,
Assistant Secretary for Financial Institutions,
Department of the Treasury
Gordon Burnes,
Vice President, Marketing,
OpenPages
Barbara Daniele,
General Counsel,
GE Capital
Tim Heine,
Managing Counsel,
American Express
Michael Helfer,
General Counsel and Corporate Secretary,
Citigroup
Nancy Jardini,
VP, Chief Compliance & Ethics Officer,
Fannie Mae
Stacie McGinn,
Deputy General Counsel,
Bank of America
John Muller,
VP of Legal, General Counsel,
PayPal
Mark Musi,
EVP, Chief Compliance & Ethics Officer,
BNY Mellon Corporation
Andy Navarrete,
Senior VP, Chief Counsel - National Lending,
Capital One
Michelle Oroschakoff,
Director of Compliance,
Morgan Stanley Smith Barney
James Roselle,
Associate General Counsel,
The Northern Trust Company
Joe Sabatini,
Managing Director, Head of Supervisory Relationship Mgmt.,
JPMorgan Chase
Julie Schechter,
General Counsel,
GE Capital
Felicia Wiggin,
SVP, Chief Compliance Officer,
CIT Group
Some of those legal, compliance, and risk executives from more than a dozen top financial firms gathered in New York on Oct. 12 to talk through the larger implications of the legislation during a roundtable hosted by Compliance Week and OpenPages. Michael Barr, assistant secretary for financial institutions at the U.S. Treasury, joined the roundtable to gather feedback from those who will have to meet the new regulations.
A running theme in the conversation was frustration with the ambiguity in the law as it is written and the latitude it gives federal regulators as they consider the practical application of the Act. “Companies are facing a lot of uncertainty with regard to the rulemaking coming out of Dodd-Frank,” said Gordon Burnes, OpenPages' vice president of marketing. While many have established specific systems to address the regulatory challenge, Burnes said they'll quickly have to follow up with new processes and procedures to handle the new reporting requirements as they are issued—which will likely challenge their existing infrastructure. “Like it or not, managing amidst change and uncertainty will be the rule, not the exception, for many years to come, until the hangover from this financial crisis wears off,” he said.
How financial firms respond to the legislation could have an outsized effect on the business. Caryl Athanasiu, head of compliance and enterprise risk management at Wells Fargo, summed up one unanimous concern among the attendees: “Dodd-Frank presents a huge amount of execution risk for the entire industry.”
Regulators are writing new rules to implement the Dodd-Frank Act now and are sorting out what bank and non-bank supervision will look like going forward. They are also putting the necessary organizations in place to carry out the law, including the Financial Stability Oversight Council, the Office of Financial Research, the Consumer Financial Protection Bureau (CFPB), and the Federal Insurance Office.
One looming question among participants is how supervision under the CFPB will work. Barr said the CFPB will have a supervisory department that will be structured similar to that of existing prudential regulators, but “will have both a bank supervision and non-bank supervision component so it has the ability to look across the financial services marketplace and impose consistent standards.” “The ability to have market-wide supervision is a significant and important tool in creating and enforcing a level playing field,” he said.
Principles vs. Rules
Barr added that regulators hope to move away from the banking supervision model that's been more focused on a check-the-box exercise with respect to consumer protection. “We want to move toward a supervisory apparatus that lines up more with the consumer risks in the system,” he said.
Still, roundtable participants were somewhat uneasy with the idea of a regulatory environment based more on a set of principles rather than concrete rules. Such an approach, they fear, could lead to uneven enforcement of the rules and could expose them to litigation. Stacie McGinn, deputy general counsel at Bank of America, said principles-based regulation and supervision could cause uncertainty and stifle innovation.
Others fear a siloed, punitive-minded regulatory process. “With each crisis, we move more toward a compliance environment and further away from a prudential supervisory orientation, from both a legislative and regulatory standpoint,” said Joseph Sabatini, head of the supervisory relationship management office for JPMorgan Chase. “We now have such a layered, regulatory compliance orientation with everybody looking at their own cell, we risk losing the firm-wide perspective of a seasoned supervisor,” he said.
Another worry: state regulators piling on their own sets of rules atop of any new federal regulations. That could put companies in the line of fire from state attorneys general and shareholder class-action lawsuits. “What would be truly nightmarish is having a new federal agency and new laws, and then having the states decide to double down, and we end up with 51 sets of rules,” said Barbara Daniele, general counsel for GE Capital. Another attendee wished for a uniform federal law to harmonize state law with respect to consumer disclosures.
Whistleblower Worries
Perhaps more than any other part of Dodd-Frank, roundtable attendees worried that new whistleblower protections offering cash for employee tips leading to enforcement actions (like the rules being considered by the Securities and Exchange Commission this week), might hamper internal compliance efforts and cause a corporate public relations nightmare by incenting employees to do an end-run around internal reporting mechanisms. “Even though we haven't had whistleblower issues historically, we're worried about it getting a lot of play. It's exactly opposite the self-identification and remediation culture we want to promote,” Anthanasiu said.
Lee Augsburger, chief ethics and compliance officer at Prudential, agreed. He said it isn't unthinkable to have a case where an employee receives $3 million of a $10 million fine settlement. In the SEC world today, he quipped, it's “hardly out of the realm of possibility.”
Compliance Structure
Financial services firms are also rethinking how they structure their compliance functions, to maximize their ability to respond to the new regulations. Most participants organize their compliance program by business line, but many also group them by legal entity as well. The new regulators created by the Dodd-Frank Act will force companies to reconsider how compliance functions across those legal entities.
Wells Fargo does both, Athanasiu said. “Our businesses have full accountability for managing their risks,” she said. “We then take an enterprise ‘compliance view' by program and by risk type. The two intersect; we can't do it just one way, or we could wind up missing things.”
Mark Musi, chief compliance officer at Medco Health Solutions (center), and Joe Sabatini, head of supervisory relationship management at JPMorgan Chase, listen intently while Wells Fargo EVP Caryl Athanasiu talks about execution risk under Dodd-Frank.
Andy Navarrete (center), senior VP, and chief counsel at Capital One, leans in to get a better take on the discussion. To his right sits Lee Augsburger of Prudential Financial; James Roselle of The Northern Trust Company sits on Navarrete's left.
Barbara Daniel, general counsel for GE Capital, discusses the possibility of more work once the rules are in place, while Joe Sabatini of JPMorgan Chase (left) and Tim Heine of American Express look on.
During a moment of levity, OpenPages Vice President of Marketing Gordon Burnes shares a laugh with panelists.
Capital One has set up a centralized project management office and senior executive steering committee responsible for overseeing the tracking, analysis, and implementation of the new regulations required under Dodd-Frank, says Andy Navarrete, chief counsel of national lending at Capital One. “We want to make sure our C-level executives are getting real-time reporting on what's going on and what resources are necessary,” he said. “What might otherwise take weeks of conversation to highlight and assess a potential risk area and determine what resources are necessary can now happen in a matter of days because that group is meeting so routinely.”
Not surprisingly, executives say their firms are spending more on compliance and risk, including testing and defensive spending. “We need a small army of staff just to manage all of our regulators and examiners on a day-to-day basis,” one participant noted. Another attendee said their firm was spending more on compliance and risk management that it ever had before.
One concern is that, because of the speed of implementation and rapid pace of change, companies will end up doing a lot of rework to comply with the new regulations. “We are taking the expected changes very seriously and preparing for new rules, but because we're doing it in the absence of knowing where the end game needs to be, it's inevitable there will be adjustments and re-work,” Daniele said.
Exactly how Dodd-Frank will affect the business models of financial services firms is still unclear. For instance, many executives worry that the fundamentals of risk-based pricing are coming under challenge.
Those in consumer-facing firms say changes in the regulatory landscape and resulting increased compliance effort and costs could cause companies to limit the products and services they offer. “Regulatory reform may drive more simplicity,” Athanasiu said. “Companies may not be able to offer as many products because of the increased costs and complexities of compliance.”
“Others see more focus on reducing operational complexity. For instance, American Express Managing Counsel Tim Heine says companies should consider taking an “almost maniacal focus on [operational] simplicity where product variation and complexity is not adding value to the customer.”
Every corner of the financial-services sector will be affected by the Dodd-Frank Act. That not only means huge changes to the way banks, brokers, and insurers do business; it also means changes to their internal systems and programs to address their new regulatory risks and comply with new rules to come in the months and years ahead. All of that is happening at a rapid-fire pace, as regulators scramble to erect new oversight bodies and write new rules under a congressionally mandated timetable. An overarching theme of the roundtable was that financial services executives understand that they need to make real reforms, but that they are also hoping to have a seat at the table and play a role in coming up with workable solutions.
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