Regulatory Change Management: 75% Faster Updates Implemented

Regulatory Change Management: 75% Faster Updates Implemented

Executive Summary

Cornerstone Advisory Group, a leading RIA managing over $5 billion in assets, struggled to keep pace with the increasing volume and complexity of regulatory changes, leading to delayed implementation and potential compliance breaches. Golden Door Asset developed a centralized regulatory change management system leveraging AI to automatically identify new regulations, assess their impact, and assign tasks for swift implementation. This solution enabled Cornerstone to implement regulatory updates 75% faster, significantly minimizing compliance risk and ensuring timely adherence to evolving requirements.

The Challenge

Cornerstone Advisory Group, like many RIAs, faced a significant challenge in managing the ever-evolving regulatory landscape. Prior to implementing Golden Door Asset's solution, their compliance process was largely reactive and heavily reliant on manual efforts. Their Chief Compliance Officer (CCO) and compliance team spent an estimated 40 hours per week sifting through regulatory updates from various sources, including the SEC, FINRA, and state regulatory bodies.

This manual process was prone to errors and inefficiencies. Key regulations were sometimes overlooked, leading to potential non-compliance. For example, in early 2023, a significant amendment to Regulation Best Interest (Reg BI) regarding documentation requirements for recommendations almost slipped through the cracks. Had it not been for a chance discovery during a routine internal audit, Cornerstone could have faced a potential fine of up to $50,000 for each client instance where the documentation was inadequate.

Furthermore, the delay in implementing new regulations exposed Cornerstone to increased compliance risk. The average delay between a new regulation being issued and its full implementation was approximately 6 weeks. This delay not only increased the risk of non-compliance fines but also created operational inefficiencies as advisors scrambled to adapt to new requirements at the last minute. The time spent manually updating policies and procedures, estimated at over 120 hours per month across the firm's 25 advisors, also diverted valuable resources away from client service and business development. The cost of non-compliance, including potential fines, legal fees, and reputational damage, was estimated to be over $250,000 annually. This highlighted the critical need for a proactive and automated regulatory change management system.

The Approach

Golden Door Asset's approach to solving Cornerstone's regulatory compliance challenge involved creating a centralized and automated regulatory change management system. This solution was built around three core principles: proactive identification, efficient assessment, and streamlined implementation.

Proactive Identification: We leveraged Thomson Reuters Accelus Regulatory Intelligence, a leading provider of regulatory content, to continuously monitor regulatory updates from various sources. This data feed was integrated with our proprietary AI-powered engine, which automatically identifies new regulations relevant to Cornerstone's specific business activities and compliance obligations. The system categorizes regulations based on their potential impact on different departments and functions within the firm, such as investment management, trading, and client communication.

Efficient Assessment: Once a new regulation is identified, the system automatically assesses its potential impact on Cornerstone's existing policies, procedures, and systems. This assessment is based on a rules engine that maps regulatory requirements to specific operational processes and client interactions. The system generates a detailed impact analysis report, highlighting the areas that require modification and the steps needed to ensure compliance. The impact analysis includes an estimated cost of implementation based on the complexity of the change required, factoring in advisor time, system updates, and training costs.

Streamlined Implementation: The system then automatically assigns tasks to relevant personnel for implementation. Tasks are prioritized based on the urgency of the regulatory requirement and the potential impact of non-compliance. A workflow management system tracks the progress of each task, ensuring that all necessary steps are completed in a timely manner. The workflow management system includes built-in reminders and escalation procedures to prevent delays and ensure accountability. The entire process is documented in a centralized audit trail, providing a comprehensive record of all regulatory changes and their implementation status.

Our strategic thinking centered on the belief that AI and automation could significantly reduce the burden of regulatory compliance for RIAs. We aimed to shift Cornerstone from a reactive to a proactive approach, minimizing compliance risk and freeing up valuable resources for client service and business growth.

Technical Implementation

The technical implementation involved integrating several key components into a unified regulatory change management system:

1. Regulatory Intelligence Feed: We subscribed to Thomson Reuters Accelus Regulatory Intelligence, providing a comprehensive feed of regulatory updates from various sources, including the SEC, FINRA, state regulators, and international bodies. This feed delivers updates in real-time, ensuring that Cornerstone is immediately notified of any relevant changes.

2. AI-Powered Regulatory Change Engine: We developed a custom AI engine that analyzes the regulatory intelligence feed and identifies regulations relevant to Cornerstone's business activities. This engine uses natural language processing (NLP) and machine learning (ML) techniques to extract key information from regulatory documents, such as the scope of the regulation, the compliance deadline, and the specific requirements that must be met. The engine also categorizes regulations based on their potential impact on different departments and functions within the firm. The algorithm was trained on a historical dataset of over 10,000 regulatory filings and continuously learns from new data to improve its accuracy.

3. Impact Assessment Module: This module automatically assesses the potential impact of new regulations on Cornerstone's existing policies, procedures, and systems. It utilizes a rule-based engine that maps regulatory requirements to specific operational processes and client interactions. The engine considers factors such as the asset allocation models used by Cornerstone, the types of financial products offered, and the firm's client base. The output of the impact assessment module is a detailed report that highlights the areas that require modification and the steps needed to ensure compliance.

4. Workflow Management System: We integrated a workflow management system to track the progress of regulatory change implementation. This system automatically assigns tasks to relevant personnel, such as compliance officers, advisors, and IT staff. Tasks are prioritized based on the urgency of the regulatory requirement and the potential impact of non-compliance. The system sends automated reminders to task owners and escalates overdue tasks to ensure accountability.

5. Centralized Audit Trail: All regulatory changes and their implementation status are documented in a centralized audit trail. This provides a comprehensive record of all compliance activities, making it easier to demonstrate compliance to regulators and internal auditors. The audit trail includes information such as the date the regulation was identified, the impact assessment, the tasks assigned, and the date of completion. The audit trail adheres to SEC Rule 17a-4 requirements for recordkeeping.

The system runs on a secure cloud-based infrastructure, ensuring data security and accessibility. We used industry-standard encryption protocols to protect sensitive data. Regular penetration testing and vulnerability assessments are conducted to maintain the system's security posture.

Results & ROI

The implementation of Golden Door Asset's regulatory change management system delivered significant improvements in Cornerstone's compliance efficiency and risk management:

• Reduced Implementation Time: The average time to implement a new regulatory update decreased by 75%, from 6 weeks to 1.5 weeks. This faster implementation time significantly reduced the risk of non-compliance fines and reputational damage.
• Decreased Manual Effort: The time spent by the CCO and compliance team on regulatory monitoring and impact assessment decreased by 60%, freeing up valuable resources for other compliance activities, such as training and internal audits. Advisor time spent updating policies and procedures decreased by 50%, equivalent to a savings of 60 hours per month.
• Improved Accuracy: The system's AI-powered regulatory change engine significantly improved the accuracy of regulatory monitoring, reducing the risk of overlooking important changes. Before implementation, Cornerstone missed an average of 2 minor regulatory changes per quarter. After implementation, the system identified and flagged all relevant regulatory changes.
• Cost Savings: The reduced implementation time, decreased manual effort, and improved accuracy translated into significant cost savings for Cornerstone. We estimate that the system will save the firm over $150,000 annually in reduced compliance costs and minimized risk of fines.
• Enhanced Operational Efficiency: The streamlined implementation process improved operational efficiency, enabling Cornerstone to adapt quickly to new regulatory requirements and maintain its competitive edge. Advisor satisfaction increased due to reduced administrative burden.

Before the system, a specific FINRA rule change regarding cybersecurity assessments took Cornerstone approximately 8 weeks to fully implement across all advisors and client accounts. With the new system, the same process was completed in just 2 weeks.

Key Takeaways

1. Embrace Automation: Leverage AI and automation to streamline regulatory change management and reduce manual effort. Don't rely on manual processes; they are prone to errors and inefficiencies.
2. Centralize Regulatory Information: Create a centralized repository of regulatory information to ensure that all relevant stakeholders have access to the latest updates.
3. Develop a Proactive Approach: Shift from a reactive to a proactive approach by continuously monitoring regulatory changes and assessing their potential impact on your firm.
4. Prioritize Impact Assessment: Invest in tools and processes that can automatically assess the impact of new regulations on your policies, procedures, and systems.
5. Document Everything: Maintain a comprehensive audit trail of all regulatory changes and their implementation status to demonstrate compliance to regulators.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors automate complex compliance tasks and make data-driven decisions that improve client outcomes. Visit our tools to see how we can help your practice.