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When Regulations Conflict – Who Wins?

Posted by Sean Cunniff, Investment Management research leader, Deloitte Services LP, on January 14, 2014

Several years ago, I was asked to revamp the application packages for several Individual Retirement Account (IRA) products. The package contained two separate customer agreements, one for the customer account and another for the IRA “wrapper.” These agreements were inconsistent in several ways. For example, one was written in the first person and one in the third person. More importantly, some of the legal language seemed inconsistent to me. I asked my compliance area for guidance and was told to revise the language as I saw fit and then send along to the appropriate teams for review. So, I did – and that was when things got interesting.

I first sent the revised and consolidated customer agreement to the compliance team focusing on brokerage and mutual fund issues for their review. They provided comments and I dutifully made the suggested changes. I then sent the updated version to the compliance team that reviewed anything relating to IRAs. This team crossed out many of the changes made in the brokerage and mutual fund team’s review, commenting that the original IRA agreement language was absolutely necessary. Trying to avoid an impasse, I called the brokerage and mutual fund compliance team to explain, but was promptly told their changes were non-negotiable. Not surprisingly at this point, the IRA compliance team likewise responded that any language related to their updates was also absolutely necessary.

To resolve the issue I called the parties together for a meeting. In short order I explained the conflict, asked the teams for guidance and sat back, hoping for a resolution. I then witnessed one of the more animated meetings of my professional career. Who knew compliance could be so exciting! These professionals passionately cared about resolving the issue, all parties wanting to do the right thing. The challenge was agreeing on exactly what that was. Both sides were concerned that the position of the other put them in potential conflict with regulations for which it was their job to see enforced.

After an intense and informed negotiation period that involved the legal and risk departments, the situation was eventually resolved to everyone’s satisfaction.

This example raises a couple of important issues for consideration for compliance officers:

  • In today’s multi-jurisdictional regulatory environment, conflicts between regulators are bound to arise.
  • Regulatory conflicts may not be readily apparent at firms with “siloed” compliance teams.

There are many ways to approach solving regulatory conflicts. The key is to be aware that these situations are likely to arise and to build a mechanism to identify them. The process may be as straightforward as devising a “conflicts checklist” and adding it to the compliance workflow. Such a process should also include the practice of getting the key players “around the table” to resolve any conflicts. The resolution should be memorialized in a “conflicts register” that documents exactly what was done and why. This register may provide guidance for future decisions, as well as documentation of the reasoning behind the decision. This “ounce of prevention” approach involves an up-front investment of resources. However, identifying and resolving conflicts before they can compound into a larger issue is likely to save a lot of time and heavy lifting in the long run. 

As used in this document, “Deloitte” means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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