Regulators Go Paperless

By Maria Trombly | Securities Industry News | February 27, 2006

The Securities and Exchange Commission used to be choking on paper, but technology changed all that.

"We would sue a big company, and we would literally get truckloads of evidence boxes coming through the loading dock," says Corey Booth, the SEC's chief information officer and head of the office of information technology. By 2004, a huge backlog of paper documents had accumulated in the enforcement division, and the commission decided to institute a scanning project. "Now all that evidence is managed online," Booth says.

Such IT developments are part of a broad move by regulatory bodies to integrate advanced technology into their oversight responsibilities. Changes recently made or underway promise to streamline and transform the regulatory function.

At the SEC, chairman Christopher Cox instituted a voluntary program for public companies to submit their regulatory filings using extensible business reporting language (XBRL). "The interactive data that XBRL data tagging makes possible can help everyone in this room achieve many of your goals," Cox told the Securities Industry Association at its annual meeting last November, adding that "interactive data promises a reporting revolution, and the SEC intends to be at the forefront."

One piece of the SEC's drive to adopt new technology is a system that offers real workflow management to SEC examiners. "It will enable attorneys to manage the work product and get sign-offs from senior managers," Booth says.

The system will also do a better job of managing the financial aspects of cases. "That was a weakness we needed to fix," notes Booth. The workflow system is being built in-house from a combination of commercial and open-source technologies. Other IT innovations include an on-premises wireless network, which is currently in a pilot phase and is set to be expanded over the next 12 months. "We don't want to roll it out just because it's cool," Booth says. "We want to roll it out because there's an actual productivity improvement."

The SEC is also developing an off-premises wireless capability, which will help investigators be more productive in the field. Currently, the wireless option is the BlackBerry handheld device, made by Canada's Research in Motion. The devices offer quick access to e-mail, but they don't match all the functionality that an examiner could access remotely from a laptop through a wireless network.

From the top down, SEC officials are working on other ways to give SEC employees advanced tools. Cox told the SIA conference that interactive data can "completely eliminate" what he calls the "backbreaking, expensive, error-prone, natural resources-wasting task" of sifting through paper, text and HTML reports. "We [at the SEC] can completely eliminate this," he said. "It is so 20th century."

In fact, the voluntary XBRL filing program is part of a broader agency initiative to adopt the extensible markup language (XML), which is rapidly being accepted as the gold standard for Internet communications. The SEC is far from alone in its efforts to promote XML, and the Chinese stock exchanges already require corporate filings to be submitted in XBRL (see related story, "China's Exchanges Pave Way for Adopting XBRL").

"We use XML as the lingua franca not only for our filings but also for data interchange" with self-regulatory organizations, explains Booth. Corporate insiders are already filing information about their stock transactions in XML, he adds. This makes it easier for the SEC to process and analyze the data. "It is also interesting for external users who are able to process XML," he says.

With data available in electronic form, it makes sense to use automated analysis technologies to look for patterns and correlations. For example, automated risk-assessment tools permit the SEC to spot high-risk entities. Booth says: "We can then direct our review and examination and enforcement work in more efficient ways. The exchanges are in many ways far ahead of us on this, because for a long time they have been in the business of monitoring transactional information."

The NASD asks brokerages to file data via a "Web information request" in advance of on-site examinations. This allows examiners to focus their attention on areas where the firm is most active or which presents the most risk to investors.

NASD is currently testing a new surveillance system that analyzes the information collected from filings, other regulators, consumer complaints and clearing firms. The system will identify individuals, branches or firms that require special attention, according to NASD EVP Elise Walter.

This leads into the "Next Gen" program at the NASD, which will include risk-based reviews, remote oversight, and electronic filing.

At the New York Stock Exchange, the Star Matrix system (Securities Industry News, Oct. 31) has been upgraded with more analysis tools for examiners, says Thomas McNally, managing director for regulatory and corporate systems at the exchange. Star can be used for yearly exam scheduling, individual exam preparation, and to keep examiners up-to-date in the field.

The NYSE also has an electronic filing platform through which firms can file customer complaint reports and other information. Before the platform was put in place, firms reported complaints with batch filings on direct computer connections. The batches were processed overnight. "They had to wait until the next day to find out if everything went through," says McNally.

Back in 1997, McNally recalls, there were paper complaint reports filed by smaller firms. Today, only the public can still file complaints in writing (or by fax or through an online submission form). Brokers file all their complaint reports electronically.

"Now, you send it and we tell you within an hour if it's OK or not," McNally says. And that hour time frame is for the biggest firms, such as Merrill Lynch, he adds. Smaller firms will get a response back in minutes.

NYSE examiners get other productivity tools, such as a chat room that they can access remotely through wireless connections when out on site visits. They make the connection to that room--and other NYSE systems--though the NYSE's secure virtual private network.

"Two years ago, before this portal was put in place, you would gather all the information out in the field, and it would be housed in the laptop," says McNally. "Only at the end of the exam would anyone at the exchange, in the home office, be exposed to this information. Now you can upload it as you go and your exam director is looking at the same information you are."

The bottom line is that all this innovation will enable regulators to better execute their main responsibilities to the public. As Cox told the SIA: "All the technology we're planning for can only help the investor. The same technology that is driving global economic growth is contributing great new weapons to our arsenal for protecting investors."