Strategic Governance Solutions signs new clients and projects

I have not blogged for a couple of months as I have been swamped getting my new company off the ground. We have signed a couple of large deals and I have hired staff. One of the projects is a large eDiscovery tape remediation project for a major financial services firm. On this project I will be working with my business partner Index Engines. Another of our projects is to assist a large bank get its arms around its records management and eDiscovery challenges. On this project, we will providing a complete assessment and using IBM’s Content Analytics to analyze the bank’s live content.

Both of these clients require confidentiality, but I will be blogging about them anonymously as we move towards final results

Posted in eDiscovery, Records management | Tagged , , | Leave a comment

eDiscovery Sanctions on the rise

Per a new article in the Duke Law Review:

“E-discovery sanctions are at an all-time high. We identified 230 sanction awards in 401 cases involving motions for sanctions relating to the discovery of electronically stored information (ESI) in federal courts prior to January 1, 2010. We analyzed these cases for a variety of factors, including sanctioning court, sanctioning authority, sanctioned party, sanction type, and sanctioned misconduct. Our analysis indicates that although the annual number of e-discovery sanction cases is generally increasing, there has been a significant increase in both motions and awards since 2004. Motions for sanctions have been filed in all types of cases and all types of courts. The sanctions imposed against parties in many cases are severe, including dismissals, adverse jury instructions, and significant monetary awards. Sanctions against counsel, although uncommon, are on the rise. All the while, the safe harbor provisions of Rule 37(e) of the Federal Rules of Civil Procedure have provided little protection to parties or counsel.”

Posted in eDiscovery | Tagged | Leave a comment

The Mortgage Mess 2

Doug Cornelius, attorney and author of the blog Compliance Building, seems to have a conclusion similar to mine on the causes and likely outcome of the mortgage mess, i.e., the mess will be cleaned up but mortgage servicing processes and records management will require some serious retooling to make them compliant

Posted in Compliance, Records management | Tagged , | Leave a comment

Strategic Governance Solutions on ESIbytes podcast

Posted in eDiscovery, Records management | Tagged | Leave a comment

The Mortgage Mess: Information Governance was not the cause, but will likely be part of the solution

I have not blogged in a couple of months due to being swamped with the startup of my new company Strategic Governance Solutions, but the headlines of the past week about the abrupt, wholesale failure of the real estate foreclosure process is more than I can resist.

This is a crisis that has been a long time in the making, but there have been significant revelations about the depth and breadth of the problem In the past week. Bank of America, GMAC and JP Morgan Chase have all suspended foreclosure actions on the news that legal documents filed in support of foreclosure actions emanating from the leading ‘foreclosure mills’ are fatally flawed and may have been fraudulent. In the wake of these disclosures, Congress and a number of states Attorneys General have launched investigations into foreclosure practices. A few days ago, one of the nations largest title insurance firms stopping writing title insurance for foreclosed properties.

If this were simply a matter of crooked lawyers, paralegals and notaries from a hand-full of foreclosure mills ‘robo-signing’ fraudulent legal filings, a few disbarments or perjury convictions followed by perfecting the pleadings would be the end of the matter. Lawyers cutting corners is nothing new, but the ugly truth is that many of the 64 million mortgages in the Mortgage Electronic Registration System (MERS) many not be capable of have the titles for the underlying properties cleared. See, Peterson, Christopher Lewis, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System (October 5, 2009). University of Cincinnati Law Review, Vol. 78, No. 4, 2010. Available at SSRN:

The root of the problem is not that MERS or the banks have failed to maintain the information or records required to secure their interests for reasons of technological or records management incompetence. Rather, the banks and MERS made a conscious decision to avoid the state and country title recording fees because their desire to securitize and trade mortgages with the regularity and speed of the stock market was at odds with the centuries old practice of recording the changes in ownership in the county title recording offices. As Peterson details in his law review article, rectifying this problem will not be easy. First, the trail of ownership from origination through securitization of the mortgage may not be able to be reconstructed due to mortgage originators who no longer exist or poor record keeping on the part of the mortgage servicers or the trusts administering the Mortgage Backed Securities. Moreover, even if the paperwork can be reconstructed,some courts may still not accept that MERS has standing to foreclose in the more than 20 states that require a judicial proceeding to foreclose. This non trivial legal risk seems to be yet another “Black Swan” the Banking Risk Management and legal management community somehow failed to account for while being mesmerized by the prospect of saving a few hundred dollars in filing costs over the life of the mortgage.

I don’t know how this is going to turn out, but speculate that one way or another the courts and the regulators will find a way to prevent the unjust enrichment of deadbeat mortgagors by giving them title to properties they have defaulted on. At the same time, I doubt that many of the state legislatures and courts (who have the most direct control over foreclosure practices will permit the current MERS based system to continue to operate without significant changes. (indeed, just this morning JPMC announced that it stopped using MERS for most purposes back in 2007). The confluence of circumstances will make the banks rethink the risk of a MERS model which does not provide for local title recording and a real repository of the title along with the rest of the mortgage origination/servicing file so that both can be easily obtained and authenticated. I don’t expect these changes to come about because of an altruistic desire to improve the foreclosure process, but because ‘Mortgage-gate”, i.e., the revelation that many mortgages may not be worth the paper they are printed on, will kill the market for Mortgage Backed Securities absent the MBS buyers believing that the underlying assets can be foreclosed on in the event of default. With smart Hedge Funds and lawyers crawling all over the situation and looking for a payoff from someone with deep pockets, suddenly saving a few hundred dollars per mortgage by reducing expenditures for filings and servicing suddenly seems like a recipe for huge losses and the destruction of the Mortgage Backed Security business.

In the past the banking community has created shared archiving solutions that can be extended to provide the Records Management arm of MERS or other bank controlled mortgage servicers. For example, look at the banking community’s response to the Check 21 law. The banks understood that having a better electronic check image archive was not a competitive advantage, so most of the larger banks created Viewpointe to maintain their check archive. The Viewpointe archive now contains about 200 billion check images which are available not only to the banks, but to their checking customers as well. It’s not hard to imagine a similar solution for mortgage records. Most customers think it is a valuable service to have their check images available on line, expect they would feel the same way about their mortgage records. Given the relatively minimal cost of creating a proper archive vs, the risk of not being able to foreclose on properties in default, it is hard to image the banks will let this situation continue.

Posted in Compliance, Records management | Tagged , , | Leave a comment

The New Dodd-Frank Financial Reform Bill: Now comes the real work

Approximately one year since the release of the Obama administration’s Financial Reform Blueprint, the new baby bill has been born and will shortly be signed into law. Two excellent resources to understand the new bill ( a set of slides and a memo outlining the new law, both written by Davis, Polk & Wardell) were posted this morning on the Harvard Law School Forum on Corporate Governance and Financial Reform.

In response to critics who claimed that the new law left too much of the detail to regulatory rule making, Senator Dodd was quoted in this morning’s Washington Post as saying “What do they expect me to write, a 100,000-page bill? This is far beyond the capacity, the expertise, the knowledge of a Congress”. I think Dodd seriously undercounted the number of pages that will be generated to fill in the blanks. The Harvard Law forum estimates the new bill calls for 243 rule-makings and 67 studies. Perhaps we should rename the bill the Lawyers and Lobbyist’s Full Employment Act of 2010. Let the games begin.

Posted in Compliance | Tagged , | Leave a comment

New SEC Consolidated Audit Trail Requirements: Implications for Financial Services Firms and Vendors

As has been widely predicted by many observers, including yours truly, new financial industry records management requirements are about to be promulgated by federal regulators. When I wrote about this in April, I thought the catalyst for the new regulations was going to be the new omnibus financial reform bill now in its final throes in Congress. It turns out that a more pressing intervening event, the May 6, 2010 market crash, served to light a fire under the SEC. On May 26, the SEC released a proposed rule to create a consolidated audit trail for trading that calls for a real time, trade data repository to be managed by the SEC, and/or FINRA and its agents.

Overview of the proposed Consolidated Audit Trail requirements

The impetus for the new rule is based on the SEC’s belief that,

  • “(W)ith today’s fast, electronic and interconnected markets, there is a heightened need for a single uniform electronic cross-market order and execution tracking system that includes more information than is captured by the existing SRO audit trails, and in a uniform format.” (p17)

The scope of the rule:

  • “(W)ould require the consolidated audit trail to capture certain information about each order for an NMS security, including the identity of the customer placing the order and the routing, modification, cancellation or execution of the order, in real time. In effect, the proposal would create a time-stamped “electronic audit trail record or report” for every order, and each market participant that touches the order would be required to report information about certain reportable events, such as routing or execution of the order. “(p33)

While the first phase of the rule is limited to National Market Securities, the SEC plainly intends to expand its scope to virtually every variety of regulated equity and debt (including asset backed securities);

  • “The Commission ultimately intends for the consolidated audit trail to cover secondary market transactions in other securities, including equity securities that are not NMS securities, corporate bonds, municipal bonds, and asset- backed securities and other debt instruments; credit default swaps, equity swaps, and other security-based swaps; and any other products that may come under the Commission’s jurisdiction in the future. Further, the Commission preliminarily believes that it would be beneficial to provide for the possible expansion of the consolidated audit trail to include information on primary market transactions in NMS stocks and other equity securities that are not NMS stocks, as well as primary market transactions in debt securities.” (p50-51)

While not based solely on the SEC Broker Dealer Books and Records Act(SEC Rule 17a), the proposed rule is intended to work hand in hand with the Books and Records act:

  • “(T)he information would allow for better trend analysis and outlier identification. It also would improve pre-examination work and the asset verification process, and focus document requests, making the examination process more efficient for the Commission staff and the registrants subject to the process.” (p53)

The proposed Rule also moves the SEC and the rest of the regulatory community closer to its goal of full life time scrutiny of a debt or equity:

  • “The Commission preliminarily believes that the required execution information, in combination with the proposed information pertaining to order receipt or origination, modification, or cancellation, would provide regulators with a comprehensive, near real time view of all stages and all participants in the life of an order.” (p81)

In its proposed Rule, the SEC has left open the questions of who should run the Central Repository, precisely what data it should contain and in what format the data should be stored, but the following quote indicates that the Commission is thinking of the open XBRL format:

  • “The Commission has recently required that issuers report certain data in interactive data format such as XBRL.     This proposal does not specify any particular or required data format, but allows the SROs to select a data format. Should the Commission require that the data be transmitted or stored in any particular format? What are the relative merits of flat data files, relational data files, and interactive data files? What other formats should be considered? In what format can the SROs and their members efficiently transmit data? In what format would the data required in the proposal be most easily accessed.” (p93)

Finally, the SEC estimates the initial cost to develop the repository at $4 Billion with annual additional costs at $2.1 Billion. These costs are the estimates for all the exchanges and exchange members.

Implications for Financial Services firms

It’s no secret that financial services firms have information repositories that may charitably be described as ‘highly distributed’. A less charitable description would be a pile of “pick-up” sticks. At first glance, it would appear that implementing the CAT requirements might not be too difficult for them — if all they need to do is map their current trading systems to XBRL and send out a feed. However, a closer reading of the proposed rule reveals that the feed, in the short term, must integrate with Customer Relationship Management systems to provide a unique customer number to all trades and to the firm’s Human Resource systems to provide a unique ID number for all traders. This is going to be harder than it appears. Last year, I worked on a proposal for a Tier 1 FS firm to prepare it to comply with the FDIC’s new “Sweep Account” rules. This effort reminded me how difficult it is for most large FS firms – who are all the product of multiple acquisitions and mergers – to distill a single view of any customers account.

The downstream requirements of the proposed rule are even more daunting for the FS firms. If the rule is extended to all manner of debts and equities across their entire life, it will require FS firms to integrate at the customer, trader and servicing level, all of their systems. This is the holy grail of every FS CIO and one that it not currently within reach of any of them as far as I know. But this is a cloud with a silver lining; there is not a single FS firm that could not reduce its Information Technology complexity and costs if it built an IT framework around this level of integration. Moreover, if XBRL were used as the lingua franca of this framework, it would make merger and separation of business units, assets and systems much easier to accomplish.

Implications for Information Technology firms

This could and should be the next great gold rush for the firms that provide Information Technology to the Financial Services industry. The vendors that profited by the SEC’s extension of the Books and Records (17a 3-4) act to include all email and messaging systems used this event to create a substantial business around message archiving (e.g., Autonomy, Symantec, Iron Mountain and EMC). The proposed CAT rules are the most significant change to the Broker Dealer retention requirements since the 2003 amendment of 17a 3 and 4. The new CAT rules also call to mind the new business model which resulted from the SEC’s move to electronic filing, a move that resulted in the creation of the EDGAR system.

However, the largest implication of the proposed CAT rules for technology vendors is that it shoves the door open to a Cloud based system for managing and storing the complete life cycle history and artifacts associated with every type of regulated equity or debt instrument. This is huge – both symbolically and financially. The SEC estimates a cost of $4 Billion to establish the CAT system and annual upkeep of $2.1 Billion. Moreover, the SEC is clearly looking for an open system that will be integrated to and accessed by a large community of regulators, the regulated and perhaps third parties as well. If ever a set of requirements were custom made for a cloud solution, this is it.

So, who might be well advised to look at participating in this “bonanza”:

  • Cloud Providers: CAT would be a natural play for any cloud provider with experience building secure, scalable repositories wrapped in web services. The first player who comes to mind is Google. Google is now building private clouds for government – e.g. consider their recent deal teaming with CSC for the implementation of a cloud for Los Angeles County.
  • Enterprise Content Management Providers: IBM, EMC, Autonomy and Oracle all have the combination of:
    • large scale ECM systems
    • Compliance tool frameworks
    • the ability to consume XBRL in their middleware and Business Process Management tools
    • a large installed based among FS firms
  • Legal Publishers/Virtual Deal Room Providers/Archive Cloud Providers: Merrill, Donnelley, Bowne and Intralinks or IBM (with its new Lotus-live powered cloud and collaboration space), EDGAR Online (especially now that it has acquired XBRL leader UBMatrix), Iron Mountain and Viewpointe. What all of these vendors have in common is:
    • They manage large, secure clouds used by the FS industry ecosystem (regulators, regulated, lawyers and dealmakers).
    • A need to grow new revenues given the fallout from the financial crisis.
    • The ability, as crowd aggregators to leverage the ecosystem for significant ancillary revenue streams.
  • Government system integrators/AKA ‘Beltway Bandits”: These folks tend to focus on Defense/Intelligence deals, but CSC is very much a member of the Beltway Bandit club and, as noted above, they teamed with Google to provide the LA County Cloud.

What all of the technology providers should be doing right now is:

  • Develop a business plan around CAT requirements. The smart ones will come up with a plan that uses exploitation of ancillary revenue streams to reduce the costs to FINRA, the SEC and even the regulated entities. The players who are most adept at this are Google and the Legal Publishers.
  • Position themselves as a thought leaders in CAT (across the legal, regulatory, operational and technological domains) A toss up here, the large technology players have difficulty with business thought leadership and the large publishers are not the most adept at creating technology agendas that become large scale industry drivers.
  • Develop a sand box that becomes CAT headquarters for the major stakeholders in the new ecosystem. Here, if you look to either what Google regularly does via Google Labs, or what firms like UBMatrix did with XBRL, you can see how a sandbox can drive adoption of standards and platforms.

Implications for the Public

I am of the firm belief that one of the root causes of the financial crisis is the lack of transparency in financial transactions. The “Sell Side” used the obscurity to demand premium prices and hide risk. The regulators and their enablers in government used the obscurity to control their turf. An open, cloud based information base which can be integrated with every analytical and social networking tool in the infosphere will benefit the “Buy Side”, regulators and risk managers everywhere. This in turn will greatly benefit the public


Posted in Compliance, Records management | Tagged | Leave a comment