Regulators expect both offsite and onsite monitoring of offices and employees due to the heightened risk inherent in remote arrangements. The work-at-home orders issued by the States in response to the pandemic have created supervision challenges for firms. While some consider the present state the “new normal,” no one really knows how and when this will all progress.
In this week’s Oyster Stew podcast, Oyster CEO Buddy Doyle and experts Patrick M. Dennis, Polly Cordle and Jeffrey Hiller discuss remote supervision, and what that means in the current pandemic workplace, as well as some general best practices firms should consider. Topics include email review, trade surveillance, central supervision processes, training and roll-out, and remote supervision tactics.
Transcript provided by Temi transcript services
Oyster: Welcome to this week’s serving of Oyster Stew, a mix of financial services, commentary and insights. Each week we’ll discuss what is happening in the industry based on what we see as we work with regulators and clients. We hope you come away with the knowledge and tools to help you make the best decisions for your firm’s future.
In today’s podcast, our host Oyster CEO Buddy Doyle is joined by General Counsel Patrick Dennis and Managing Directors Polly Cordle and Jeffrey Hiller. They will be talking about remote supervision and what that means in the current pandemic workplace, as well as some general best practices firms should consider.
Buddy Doyle: Welcome everybody. I’m Buddy Doyle, Chief Executive Officer of Oyster Consulting and today we’re going to be talking about remote supervision. Joining me today from Oyster Consulting is Jeffrey Hiller, Patrick Dennis and Polly Cordle. We’re really excited to have this team together here to give you some insight into some of the things that we’ve learned over time about how to conduct an effective remote supervision program. Jeffrey, you recently wrote a blog on the topic for Oyster. Maybe you could get us started here with just a few quick thoughts on things that firms should consider in the remote supervision world. Given that we’re all sort of in a remote world right now.
Jeffrey Hiller: Sure. The SEC has long held that investment advisors and broker-dealers are required to reasonably supervise their employees in order to prevent and detect violations of securities laws. Moreover, the SEC has emphasized that when you have remote supervision over branch offices, that they are required to have particularly vigilant supervision because those remote offices lend themselves to less oversight. And so it’s important that you focus on them.
Buddy Doyle: Patrick, I know you’ve been Chief Compliance Officer of a registered investment advisor that’s not only in a different city, but in a different state. You’ve had some challenges obviously with the six hours in the car to go see them, but I would like to understand from you maybe a little bit about your history as a remote CCO, and some of the things that you’ve observed that can be helpful.
Patrick Dennis: Hi, thanks Buddy. I was a remote CCO for an investment advisor firm with about a billion dollars under management. I also was a remote supervisor for a broker-dealer, maybe 12 hours the other direction, with remote supervision as well. I think that the best way that I can deal with remote supervision issues and find out what’s going on at the firm is to review emails very, very intently. One firm was only one person, so it was fairly easy, and I talked to them almost every day. The broker-dealer was 12 reps and frankly, if you can review a hundred percent of those emails, you know a lot about what’s going on in the firm. And you may know a lot more than some of the people that are sitting next to folks because registered reps tend to always forget that a hundred percent of their emails are being monitored. So it is one way to really understand what is going on at the firm – what’s happening, what people are doing, the kinds of activities they’re engaged in – because it’s all out there.
Buddy Doyle: And certainly email review is a great way to understand what people are communicating to their clients. And internally and boy, we could probably do an entire podcast or series of podcasts on email reviews and all the things that, certainly in the broker-dealer, that FINRA expects to happen in a email surveillance program. And maybe we should do that. But Jeffrey, you may have a few thoughts on email review and the approach to that.
Jeffrey Hiller: I think that Patrick makes a very, very good point. What I would emphasize is that all of these types of monitoring and oversight that we discuss during the course of this podcast need to be documented. If you make a call, make a note, if you’re reviewing emails, initial them or record them. So, I think Patrick’s points are very important and you just need to make sure that you record those and are able to demonstrate that you’ve done it.
Buddy Doyle: And Polly, I know you not only as an internal person ran a remote supervision desk that monitored people, not only in a different city or different state, but different countries as well. But could you maybe give us a little input into some of your experiences and maybe tie into the theme that Jeffrey brought up of making good notes and good documentation?
Polly Cordle: Sure, Buddy. When we set up central supervision at my previous firm, we were kind of setting it up for the first time for a really large broker-dealer and IA, and so we were trying to figure out what is the best way to approach this. One of the things that we did was we really, really spent a lot of time training the supervisors, making them understand what their responsibilities were. One of those responsibilities was documentation. We built a separate system just to log the escalations that they sent back to the branches and the responses that they got, that gave us trending, it let us know which branches needed more supervision. I couldn’t agree more on the email point. Email to me is exactly where you’re going to see everything that’s happening. And so we spent a lot of time in email review, but we also had a really robust trade surveillance system that would give us information about accounts and trades and let us see where the red flag activity might be with our clients so that we could focus the branches, the financial advisors in those areas. And sometimes even the financial advisor doesn’t know that there’s a red flag happening with so much going on day-to-day. Especially in today’s environment, sometimes even they are not aware that there’s a red flag happening. So escalating things back to the branch and yes, absolutely documenting everything that we did.
Buddy Doyle: So Polly, I know you’ve also, as a consultant, helped other organizations implement a central supervision process pretty recently, and I’m curious. I know there was a lot of time spent training the supervisors in that one as well, but maybe can you talk a little bit about some of the ways that you managed the roll-out to the field?
Polly Cordle: Well, you know, it’s an interesting roll-out when you first put central supervision in place. People aren’t really sure, especially the branch managers, how they fit into that grand scheme, and so I think it’s important to make sure that you’re communicating with them that they’re still an integral part of the supervision system, that they play an important role because they’re really what we call boots on the ground. So they’re in there, they see who’s coming in and out of the office, who’s having meetings, that sort of thing. So really communication, even in the roll-out of a central supervision department, is really, really important. Making sure your supervisors are trained? Absolutely. We touched on that, but then making sure the branches understand that just because they’re going to look at email or trading activity remotely doesn’t negate the importance of seeing who’s coming in and out of the office, seeing the looks on clients’ faces when they’re coming in and out of the office. There’s a lot to be said about a client’s demeanor when they come in the office. You can tell if they’re happy or unhappy. Are we heading into some sort of tense situation? That’s an important role, too, and you can pick up on some of that in email, but sometimes it’s really important to have the person face-to-face.
Buddy Doyle: Jeffrey, I know another component of understanding what’s happening out there in the world, and you have a particular experience and knowledge base in forensic testing and understanding the activity that’s actually taking place. How does that fit into a remote environment?
Jeffrey Hiller: There are many things that you can do that have been suggested through literature and SEC letters such as reviewing customer files, correspondence, advertisements. Some had suggested that you have recorded phone calls. That’s sort of a two-edged sword because on the one hand you may not want to recall them because then you have to maintain them as a book and record. But on the flip side, in a situation such as this where there’s sort of unique circumstances, you may want to consider that. And also, reaching out to clients is important to get their feedback directly.
Buddy Doyle: Recording phone calls always makes me feel queasy because if you’ve ever had a regulatory inquiry where you have to go through and transcribe trading des, phone calls over the course of months for a hundred-person trading desk. Patrick?
Well I was just going to say if anybody’s interested in doing recorded lines or think that’s a good idea I’d be happy to talk to them because, unfortunately, both as a regulator with the SEC and enforcement and other places and after the fact, I listened to a lot of these recorded lines, listened to the give and take. And unfortunately, it’s never quite as clear as people seem to remember it. One side certainly remembers, “Oh absolutely, this is what they said,” and the other side is, “Oh no, that’s what they said.” And you listen to these things and you clearly understand why there’s some confusion or some disagreement because it has never been nearly as clear as people seem to think it is. So I’m sort of opposed to a recording lines because I’ve never found them to be terribly helpful. And then frankly, they’d spend a lot of time and effort with maintenance, making sure you back them up and all those sorts of things that make people crazy, and you end up with recorded lines and recordings that never are clearly as definitive about certain matters as people would expect.
So, jumping off of phone calls, at one point in my career I did central supervision, but it was 2000 2001, and we didn’t have some of the tools and technology that we have today. I’ll tell you at Oyster one of the big things that we’ve been doing, we’ve had a platform for many years to do video conferencing and video chats in it. It really is, to me, a helpful tool. But Patrick, can you talk a little bit about some of the ways that we use video to get maybe more connected with our team?
Patrick Dennis: Sure, Buddy, thanks. We’ve used that since March 16th or thereabouts, when all of this took place. Almost every call I’ve been on has been a video or a Skype call or Zoom, or GoTo meeting, or whatever system you want to use. But for me it really actually feels very strange to just be on a conference call on my phone and not looking at people on a screen. That gets a little tedious at times, but it really is a good way to sort of check in with people, figure out what’s going on in their lives, how they’re doing and things like that. I get a little concerned when people don’t want a video or never want a video. They always want to be on their phone. You kind of wonder, why is that? I understand there are days that some of us don’t necessarily want to get out of our pajamas and things like that, but it concerns me when people don’t. I think I would do the same thing with registered reps and things in a supervisory situation. If everybody’s working from home, I kind of want to make sure that they’re still there and doing well, and all of those sorts of things. It’s one of the things that we’ve used very, very extensively, even before the Corona virus impacted everybody the way it has. But we will continue to do it, and I think it’s become whatever they now are terming “the new normal” or “the new temporary,” but I think it’s a great way to communicate and get on board with folks.
Jeffrey Hiller: The SEC recently said that technology has outpaced the federal securities laws, but they were still bound by the principles of the federal securities laws. And so I think it’s a really important point that Patrick makes, that we use this technology and new technology, and if something doesn’t work, then you change it. But that’s how you learn what is effective oversight.
Buddy Doyle: Technology and innovation have always outpaced regulation and there’s always been some price to pay as a result of that for the innovators. I think in addition to video, which allows me to see how disappointed people are in what I just said, I think there are other tools that we get out of these platforms . I know Polly has had a very effective process in place to remotely monitor branch locations. Polly, can you maybe talk a little bit about the ways to use the technology tools to go beyond reading body language to other ways to maybe use some of the tools?
Polly Cordle: As a CCO for a regional broker-dealer and investment advisor, we put in place a program that was a little different than what you usually see with branch interactions at most firms, and that program looked at small samplings of things throughout the year. Rather than doing a review of the branch once a year, we were doing tiny reviews of all of our branches monthly. One of the things that I really find fascinating about the branch audit platforms that we usually see, is we allow someone to
do something wrong for 364 days of the year, and then they get a letter that says, “Hey, you’re doing it wrong. Change it,” and then they go through a process of changing it. And so for more than a year, you’re doing it wrong before you change that process. I felt like, as a CCO, I really wanted to be involved and know exactly what went on in each of my branches all the time. And if something was going wrong, I wanted the maximum amount of time it could go wrong to be 30 days.
So we looked at every little bit of their business, just a small sampling monthly, and it gave us something to build our total relationship with the branch. Then we also had regular meetings with them, and I can’t say enough for whether it’s video or phone call, regular interaction. Patrick mentioned talking to his client daily. When I’ve had outsourced CCO relationships through Oyster, I try to be onsite if I can on a regular basis, particularly if they’re local. I try to be there weekly. I really want them to feel like I’m part of their team, not an outsourced resource. I think that’s important because it builds a level of trust. Constant meetings when I was not able to be local with them.
I would have regular meetings with each branch and regular meetings with all the branches, so that we were constantly talking about whatever was going on, whatever we were seeing in compliance, whatever the regulatory news was, and documenting all of that. I felt like my branch managers were very much in the know about the industry at all times and they knew exactly what was going on at the firm, and they established a relationship with me where they would call me if something was going wrong right at the beginning. And that was important to me.
Buddy Doyle: That’s an interesting point that you’re making, Polly. There is a distinction, I think, to be made between remote supervision by an internal team who has employees of the firm, who are all sitting together in one city, monitoring an entire country or region of the country. And then there is the outsourced components where, as an outsource provider, we have to work a little harder to feel like we’re part of the team because we are outsiders – and there’s benefits to that. There’s risks to that, and we have to deal with both sides of that. I think that goes into the fact that when you go remote, (and we all went remote, it was forced upon us) not all of us went remote, but a lot of firms that go remote, you do have to change your tactics to a certain extent because you can’t just walk around from desk to desk and check it out and see how people are doing.
I used to have a habit of walking around the office at 10 o’clock and at two o’clock every day. My “ten-and-two,” just sort of check how things are going and the pulse of the firm, and all that kind of stuff. In a consulting firm, the busier we are, the less buzz there is because everybody’s out at clients. I do think that it is important to have different techniques and different tools to go along with those techniques. Jeffrey, I want to kind of bring it back to you from a regulatory perspective, and with your SEC background and Patrick’s SEC background, on the things that you want to make sure you cover in your remote supervision around documenting your notes, other things you might want to consider.
Jeffrey Hiller: Sure. I would point out that we have a lot of good checklists that we use to make sure that we touch all the required bases. But I think that during the course of this sort of new normal, you have to make sure in evidence that you have reviewed customer files, you review correspondence. Hopefully you have remote access to certain areas, so you have remote access to email and can monitor it, even when people aren’t aware you’re monitoring it. And then again, look for ways that you can meet with somebody one-on-one through video or other ways to ensure compliance.
Buddy Doyle: Patrick, any thoughts?
Patrick Dennis: I would expect that regulators would be expecting greater amount of supervision and a greater amount of documentation because if it’s not documented, it didn’t happen. We know that. Actually, I’m in the regulatory universe, but now that folks are all remote and trying to do this, it makes it even more important to document everything, and do it thoroughly and completely, because it really is the only way you’re going to be able to prove that you supervised and knew what was going on at your firm. If you don’t document it, you have no choice but to explain that you kind of tried to do things and whatever, but it didn’t work. You need to document it. I think that the importance of documentation is even greater now that we’re trying to do all this remotely in the current environment.
Jeffrey Hiller: Thanks. I agree with Patrick, and the SEC requirements are that you reasonably supervise with a view to prevent and detect violations and during the course of this sort of new normal. What we find out is reasonable may take us awhile, so we shouldn’t be afraid of implementing programs, and if they’re not effective, to move on to something else that may be more effective. But each day I would record that.
Buddy Doyle: Polly, any final thoughts for the group in response to what Jeffrey and Patrick just said?
Polly Cordle: Yes, Buddy, as you know I have done outsource CCO and I am currently the manager of our Solutions platform, which is the software that we offer to help people document and track their compliance program. Certainly what we’ve seen with firms who’ve gone onto that software is that they are much more in-tune with what their policies actually say they’re going to do, and they’re able to stick to a schedule because the software tells them to stick to a schedule. It makes it a whole lot easier to remember when things have to be done if someone’s telling you it’s time for them to be done. And so we’ve seen a lot of success. There are firms that go onto the software and tracking their compliance program, documenting their compliance program and doing all the things that we’ve talked about here, really being able to keep their finger on the pulse of what’s going on in their firm through a software platform that kind of tracks and documents for them.
Buddy Doyle: Well, thank you all for your time today and the sharing of your experiences here at Oyster and at your prior firms. It’s really great to hear folks talk about challenging the way that you’ve done things in the past to deal with the current times and future. It is very important to make sure that you track your issues to closure in a remote supervision world. It’s easy for for folks to kind of duck and weave issues if you’re not careful. But if you have any questions, any concerns, any thoughts that you would like to share, or if you would like to hear from us in a future podcast about a specific topic, please feel free to reach out and let us know.
Oyster: Thanks again for listening to the Oyster Stew podcast. Don’t forget to subscribe so we can continue to bring you resources to help you make the best decisions for your firm. If you’re struggling with a topic and you’d like us to do a podcast on it, or you’d like a free consultation, feel free to reach out to us at (804) 965-5400 or by visiting our website at www.oysterllc.com.