Financial Regulation Blitz Spawns the Regulatory Liaison Officer

Just as the Sarbanes-Oxley Act ushered in the era of the chief compliance officer, the rapid pace of new regulations hitting the financial services industry is spawning a new executive position—the regulatory liaison officer.

For now, the new position is emerging mostly at the nation's largest financial institutions, but some say the specialized function may soon crop up at smaller firms or in other highly regulated industries, such as healthcare or defense.

In the current regulatory environment, banking and securities firms have recognized the need for more strategic management of their regulatory relationships, explains Peter Reynolds, director of governance, regulatory, and risk strategies at Deloitte & Touche. In response, large financial firms, including the 10 largest banks, are at various stages of creating a regulatory liaison officer (RLO) position—also sometimes referred to as the “regulatory affairs officer” or the “head of regulatory relations”—to run point on the firm's contact with regulators.

A big catalyst for the new position was the Dodd-Frank Act's requirement that banks considered “too big to fail” carry the “systemically important financial institutions” label and the enhanced supervision that designation brings, says Reynolds. “Firms began to realize that they needed to coordinate and funnel all these requests through some type of central individual or body,” Reynolds says.

The RLO is responsible for day-to-day management of relationships with regulators, including coordinating the examination process. The goal is to maintain a relationship of trust and transparency. This can foster a “benefit-of-the-doubt” scenario for the organization and lead to “more fruitful discussions with the regulators,” Reynolds says.

Other regulatory concerns are also driving adoption of the new corporate function, including the forthcoming proprietary trading limit of the Volcker Rule, Basel III's international capital standards for banks, and the increasing scope and activity of the Consumer Financial Protection Bureau.

The CLO's role is not to just answer questions from regulators and make sure they are getting the information they are asking for, but they also play a rule in working to influence regulations that are still being crafted, such as the Volcker Rule, and represent the company's interests in what future regulation should look like, similar to the efforts of lobbyists. Indeed, at some large banks the RLO will play a role in lobbying activities or oversee them and take the lead on comment letter submissions for pending rulemaking.

“Larger companies may realize that although their trade associations are quite helpful, it is just as helpful to have someone monitoring developments and doing what they can to change things with regulators and on Capital Hill,” says Haydn Richards, of the law firm Dykema's Financial Industry Group.

Another function is to coordinate the many relationships and touch points that a company has with several regulators, including: the Office of the Comptroller of the Currency, the Federal Reserve, state securities regulators, attorneys general, mortgage licensing entities, the Securities and Exchange Commission, Commodity Futures Trading Commission, international regulators, and, when it comes to money laundering and corruption issues, the State Department and Treasury Department. The RLO can make sure the firm is not duplicating efforts by having different divisions create the same reports for different regulatory agencies.

“There is good reason to designate one officer to be the person who really organizes the regulatory effort, who keeps the regulators up-to-date, and facilitates their examinations,” says James Kaplan of the law firm Quarles & Brady. “It is really quite a big job. The number of regulators we have now is mind blowing.”

Organizing all of these activities—from examinations to meetings to investigations—requires a senior-level officer to manage that process and workflow, he says. “You need to have somebody who is in charge of always interacting with regulators.”

The skills and background that companies are looking for when they hire an RLO vary greatly. Some firms have sought out experienced former regulators, while others have looked for those with experience in the financial sector with risk management and financial controls experience. “Relevant regulatory experience is almost mandatory for the organization to benefit from an understanding of how regulators think and respond to different matters of interest,” Reynolds says. In addition to being a good communicator, the right candidate has practical risk and control experience.

“There is good reason to designate one officer to be the person who really organizes the regulatory effort, who keeps the regulators up-to-date, and facilitates their examinations.”

—James Kaplan,

Partner,

Quarles & Brady

Instead of hiring a dedicated regulatory liaison officer, some banks have made the role a responsibility of existing executives, such as the general counsel, chief risk officer, the chief operating officer, or chief administrative officer, reporting into the CEO. “Very often, it gets tacked onto another job and appended to general counsel or the chief risk officer,” Kaplan says. He expects that, going forward, more firms will “carve it out and create a separate function.”

Some large banks have gone a step further than just creating a dedicated job and they've created a staffed regulatory liaison office, Reynolds says.

“Sometimes it is difficult to find the right match in a former regulator who will bolster a company's capabilities while also fitting the mindset of the company,” says Haydn Richards of the law firm Dykema's financial industry group. “You want somebody who can gauge and understand what the pressure points are at a particular agency, and who can step into the shoes of the regulators and understand what they will be looking for and why.”

Many of the regulatory liaison office's responsibilities have, traditionally, been part of other positions, says Gregg Breitbart, a partner at the law firm Kaufman Dolowich Voluck. This may no longer be an option. “The day-to-day business of compliance is really hard work,” he says. “It is difficult to find the time or perspective to step back and take a broader policy look at an organization's risk-management practices, especially as they relate to regulatory compliance and relations.”

An added skill set that is needed in an RLO is the ability to see trends in regulation and anticipate the potential for new requirements that could come down the pike, says Breitbart. He compares those skills to NFL Hall of Fame quarterback Joe Montana. “He had this ability to see the field and see things developing almost before they happened,” he says. “That's a great skill set.” A regulatory liaison officer similarly provides “an opportunity for organizations to identify regulator trends, get out in front of them, and in many cases to help shape those regulations.”

STRATEGIC APPROACH

The following is from a Deloitte & Touche report, “Navigating Regulatory Risk: The Role of the Regulatory Liaison Office.”

Central to the RL and their RLO's strategic approach is their ability to advise the organization on how current and proposed business activities will be affected by shifts in the regulatory landscape. In addition to understanding the impact of the business' strategy on the inherent regulatory risk of the organization, the RLO needs to understand the expectations from their regulators as to how the organization can mitigate that inherent risk. The RLO should be able to anticipate regulatory challenges based on the organization's strategy and risk appetite. In some instances, input from the RLO may help craft, change, or redirect the organization's approach.

To facilitate this forward-looking approach, the RLO should have the capacity to monitor and analyze regulatory developments and help determine what parts of the organization may be affected by new regulatory initiatives. To help perform this, the RLO should develop a strong network of internal and external contacts to gather intelligence regarding developing areas of interest on the U.S. and international regulatory agendas. Active networking with peers at other financial institutions and memberships in industry organizations are also effective ways to remain informed. This kind of active marketplace involvement will help identify emerging issues and determine the regulatory impact to the organization.

This proactive posture will allow time for targeted internal assessments of risk areas and the implementation of required changes before full-blown regulatory issues develop or regulatory changes occur. Depending upon the size of the institution, these efforts may need to be supported by both regional and country teams. Country teams will understand local regulations, allowing the RLO to achieve an aggregated view of regulatory change across markets, and what it means globally for an institution. This is essential for achieving a common approach to regulatory relationships and issues across the organization.

Source: Deloitte & Touche.

Why Separate From Compliance

Porting these regulatory liaison efforts into the compliance function may not be a perfect fit. “There is this tension when you have a compliance person dealing with regulators criticizing the compliance person's efforts, policies, or systems,” Breitbart says. “It can become personal. Having a separation of functions where somebody else on behalf of the organization can have those conversations and deal with them, potentially leads to more fruitful discussions and better overall relationships with the regulators.”

Kaplan also sees the need for the regulatory liaison office to be separate from traditional compliance duties. “The compliance officer is not well suited for this job,” he says. “The CCO is certainly the person the SEC looks to as the person who is supposed to be the internal guardian of compliance. That's a different role from the person who makes the trains run on time and organizes the whole regulatory effort.”

Kaplan expects that the RLO, as it comes into its own at financial firms, will eventually make the leap to other lines of business. He expects healthcare, with its own rising tide of regulations and privacy law requirements, is a likely candidate. He also thinks the education sector, given the influence the government has as a facilitator of student loans, is a ripe candidate.

Breitbart has a similar expectation. “Most of the basic concepts of the office are not things that are unique to the financial services industry,” he says. 

“It is surprising to me,” Breitbart adds, “that any firm would not have someone—whether you call it a regulatory liaison officer or somebody filling that function—who can be the primary contact person and gatekeeper of the flow of information and who can track the regulatory requests and the firm's responses.”