Posted by Peter Reynolds on February 19, 2015.
When a number of C-level compliance officers joined me recently for a discussion about their relationships with regulatory agencies, it was more than a meeting, it was an education. That’s because we had two regulators with us, and the give and take between them and among the other Compliance officers—the candor, and constructive input—could serve as a model for regulatory interactions all year round.
The occasion was Deloitte’s Cross-Industry Compliance Leadership Summit. Chief Compliance Officers from energy, healthcare, finance, retail, and other sectors all took part, as did Jim Sheehan from the New York State Attorney General’s office and Carlo di Florio, Chief Risk Officer of the Financial Industry Regulatory Authority (FINRA).
Di Florio said a company’s relationship style can have a palpable effect on the conduct of regulatory affairs. Some firms are very engaged in the regulatory relationship, working toward shared objectives, while others focus on the letter of the law. Regulators can tell the difference. “The easiest way to turn an exam into an enforcement action is to treat it like an enforcement action,” he said.
Sheehan noted that there are different kinds of agencies just as there are different kinds of companies. What he called “sector agencies” take a broad view and are more likely to work with companies toward long-term quality goals. What he called “case” or “project” agencies are more focused on building a strong case in a given moment. He advised that regulated companies should assess which camp their regulators fall into, and build strategies to suit.
Around the room, there were complementary positions on the best way for a regulated organization to show the right face to regulators. Some of the focused comments were: “In this environment, you want to have your most trustworthy individual in front of the regulator,” and “It’s also important for the person to have the proper gravitas.”
But others felt the relationship needed an anchor in the organization as a whole: “It’s not the credibility of the liaison, it’s the credibility of the firm,” another participant said. “Regulators pay attention to the people who set the tone – to the board and senior management. That’s the relationship. That’s the place where credibility and competence are going to be assessed. It’s fascinating to see which firms crystallize that tone and culture at the top and which firms mostly talk about it.”
Our summit participants noted other organizational behaviors they have found make a difference in their relationships with regulators. Some cited communication—not only to the regulatory agency, but internally, to align team members around the compliance mission. Another panelist noted that regulators take note of organizations that display an effective commitment to corporate social responsibility. “You notice the folks who really step up in that regard,” he said, “and you notice the folks who don’t.”
From his position in the New York AG’s office, where he serves as chief of the Charities Bureau, Sheehan offered five aphorisms he said regulated companies would benefit from remembering:
Sheehan also evoked the persistence of memory in regulatory institutions—and people. When an agency learns a lesson from one experience, he said, it’s likely to remember what it learned years later: “If an agency learned something in 1965, it’s still built into the culture.”
For example, he suggested, the ban on Thalidomide may have influenced U.S. regulators to resist the approval of anti-HIV drugs decades later—or difficulties tracking the relief funds it handed out after Hurricane Katrina in 2005 may have tempered the Department of Housing and Urban Development’s distribution of similar relief after Hurricane Sandy in 2012. “If you were to look at either of these behavior patterns in isolation, they wouldn’t make sense,” Sheehan said.
And because of tenure and pensions in state and federal agencies, he said, the people in authority tend to have long careers.
“They’re there for the long term and they never forget,” he said. “Every person has had the experience of being a young investigator and being lied to—of trusting someone and being burned.”
|Peter Reynolds is a director with Deloitte & Touche LLP|