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Nathaniel Palmer of BPM.com Interviews Andrea Kramer About the Dodd-Frank Act

Nathaniel Palmer: Thank you for tuning in. Today we are joined by Andrea Kramer, one of the keynote speakers at our upcoming BPM in Banking, Finance and Insurance conference.

Andrea has a very distinguished background so I am going to take just a moment to tell you about her. She is a is one of the world’s most respected authorities on Dodd-Frank and is a partner in the international law firm of McDermott Will & Emery and head of its Financial Products, Trading and Derivatives Group.

She testified in a historic joint hearing of the Senate Committee on Finance and the House Committee on Ways and Means on Derivatives Tax Reform and has earned the distinction as one of the 50 Most Influential Women Lawyers in America.

She is the author of the leading and definitive guide to financial products law and taxation as well as many other published works on Dodd-Frank compliance.

Andrea, thank you for joining us today.

Andrea Kramer: Well, thank you very much Nathaniel.

Palmer: It's our pleasure. Andrea, while most of our audience will be familiar with Dodd-Frank, could you just start off and give us a quick overview on what this means for the financial services industry?

Kramer: Well the question that you just asked me, I could probably take about two weeks to answer. So I am going to try to boil it down into something bite-sized which is Dodd-Frank is so enormous, the implications to the financial services industry are so broad, that it has reaches in all parts of banks, insurance companies, and investment advisors. One of the things that Dodd-Frank means is, it means a compliance nightmare. If we try to compare Dodd-Frank with Sarbanes-Oxley, which I am sure most everybody is painfully aware of, SOX was only sixty-six pages long but Dodd-Frank is eight hundred and forty nine pages long and so that is the framework, the skeleton for rule-making and studies for which we've been seeing decisions coming out, rules coming out for the last four years. And so, it has compliance issues with respect to dealing with your costumers, it has compliance issues with respect to dealing with your regulators and it’s intended to make our financial markets safer.

Palmer: Given the enormity of it, what kind of changes does this mean for organizational processes, and in particular does it require segmenting and encapsulating parts of the business or is it something that would be approached more holistically?

Kramer: Well I think that historically many of the financial service industry participants have done a lot of their tracking, if you will, in segments and one of the issues now is that with real time obligations for reporting in many situations plus the need to report transactions to the regulators, the need to have a sense of what is happening from an organizational stand point becomes much more important.

Palmer: So, is it really about business transformation or is it more about detailed incremental changes at the process level?

Kramer: I think that it’s going to depend on the institution and what their appetite for change is but it could very well be transformational in some regards. For example, in dealing with costumers or clients who are using the financial markets if they are trading in the markets, the banks or the securities or commodities firm that deal with them have obligations for reporting real time and nobody has been set up to do this. And so, it requires enormous investment in systems. You will also then have your own internal risk management and record keeping reporting as well. What we are seeing is, in my working with my clients, a team of employees and consultants who are rolling up their sleeves and are really working very hard. The issue is to what you do about from the transformational side, one of the big issues that we have is that the rules themselves are coming out piecemeal and so people don't have the opportunity to step back and think about how the rules could affect them, they’re just working as fast as they can to meet various compliance deadlines.

Palmer: You know that was really interesting point. I think that is one that's really misunderstood. There's a notion that it's not all there, that the rules are coming out incrementally. How has is that changed the way that these organizations manage the risk?

Kramer: Part of it is that if you don’t have a big piece of the rule making finalized, there is a reluctance to try to get up to speed to comply because you don't want to be following proposed rules that can change. And so what we had was, Dodd-Frank has been on the books now for four years and the very first year, what happened is nobody wanted to do anything because they wanted to see what the rules were. And some of the key rules, some of the real rules that turn the whole system on, weren't even proposed for two years. And so now in the fourth year we’re at the point were just about everybody knows what they need to do and what they should have been doing. But the real challenge is not wanting to make an investment in a system that turns out you have to change what you thought you were going to do. So we still have about a third of the rules, a quarter of the rules in some areas that have not even been proposed yet.

Palmer: You would think that we've been down this road before, there are few industries that are as regulated as banking, finance and insurance, but this is in many ways new territory. Can you talk a little about why this is different than the regulation that this industry has faced in the past?

Kramer: So Sarbanes-Oxley, where people were working on this around the clock and wringing their hands with sixteen rule-makings, six studies, Dodd-Frank is two hundred and forty rule-makings and about seventy studies. And so what does this do is that it crops up in ways that people don't expect. So Dodd-Frank has sixteen titles and each one of the titles is really stand-alone / different, material. And so, it could affect these businesses, it could affect their credit cards, their gift cards, it can affect the products that they buy; for example if we just look outside into the manufacturing - the conflict minerals, where did they get the gold they put in their products or some of the other materials that are used. What do they have to report to the SEC, who can borrow money? How do they treat their officers and directors, what about their executive’s compensation? Many of these issues are driven by Dodd-Frank in a way that makes it just so mammoth that it touches so many parts of these businesses.

Palmer: So really it's not just the top level, immediate transactional issues, it's really the downstream activities and need for transparency into the supporting activities that is so critical.

Kramer: Yes, absolutely.

Palmer: And I would imagine to implement them, and to kind of expand on that thought, you have operational processes that are in place and you have new rules that are coming in. So it’s not a manner of simply being prepared to deal with the rules that are in place but being able to adapt quickly as these new rules come into play or it also even the interpretations of these rules?

Kramer: It's both, because the systems are not in place. And the cost to track things that these organizations did not need to track before is an enormous expense. So they want to get it right and they want to be making sure that it both meets the needs of the regulators but also meets their business needs.

Palmer: And following the financial crisis of 2008 era which gave rise to Dodd-Frank, we saw a total change of the landscape of banking, financial and insurance institutions through M&A, though those that didn't survive, those that were forced into mergers.

And back in the pre-meltdown era, we saw M&A driven by buying best practices and processes. That’s something that we have on our radar being a BPM-focused organization. We're looking for where business process as an asset, really is pronounced in business activity. Are you seeing that as part of this move or is it simply a matter of acquiescence, that if they can’t keep up that they are shuttering.

Kramer: I think it's a really a combination because again it depends on whether you look at whether it is an opportunity. If you look at the Dodd-Frank, and the BPM compliance obligations as an obligation burden or if you look at it as an opportunity and I think that the organizations that are faster, able to do things quicker, who have BPM in place and just need to be bolting on more of it if you will, in more processes and in different business lines or areas like that, it's going to make a big difference.

Palmer: And for those organizations, particularly the community banks and the regional banking systems, what advice would you give them today when comes to BPM?

Kramer: I would say that for those who have not made the investment, it's time to do so and for those who that feel that the investment is too great then that they may be thinking about being the next merger candidate or having a restructuring. Because I think that we’re just seeing the change in the organizations who are able to play in a Dodd-Frank, post Dodd-Frank environment are really the ones that can meet the obligations that are imposed on them from all of the different reaches and touches of Dodd-Frank and so they really do need to have a BPM structure in place.

Palmer: Great. Andrea, thank you very much for joining us today.

Kramer: Well thank you very much and I look forward to participating in the conference.

 

Andrea S. Kramer is a partner in the international law firm of McDermott Will & Emery LLP. She is the head of McDermott's Financial Products, Trading and Derivatives Group, and is a member of its Global Renewable Energy, Emissions and New Products Group and its International Dispute Avoidance and Resolution Group.

Andrea S. Kramer
Partner, McDermott Will & Emery

Nathaniel Palmer is a Principal and Chief BPM Architect with SRA International, as well as the co-author of ten books on BPM and process improvement, including "The X-Economy" (2001) and the “BPMN 2.0 Handbook” (2010). Prior to his current role he worked for BPR pioneer Jim Champy, and has spent nearly two decades in the field of process modeling and workflow design.

Nathan Palmer
VP & CTO, Business Process Management

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