Jerome Lussan CEO of Laven Partners participated on a panel alongside Janaya Moscony (President of SEC3/CCO3 Compliance Services), Barry Champney (CCO at Vanderbilt Securities), Michael Isaac (CCO at Stadion Money Management) and moderator David Nash (Vice-President of Compliance Science) on the management of a crisis. With the increase in regulations the advent of a crisis that may be devastating for a financial service provider are ever more present. Jerome questioned the level of preparedness and what could go into a crisis management strategy.
Preliminary thoughts
- A crisis will happen at some point. Humans are notoriously poor at preparing for a crisis.
- For example – generally 25% of CFO’s claim that they are insufficiently prepared for cyber or malicious attacks (terrorism and tampering). 10% only state that they are well prepared. However 50% of financial services’ CFO’s said they were under prepared for a cyber-attack and 30% state insufficient preparedness for a malicious attack (Deloitte’s second quarter 2015 CFO Signals survey ).
- A crisis can be thought about, and prepared for.
- Various crisis have ‘killed’ businesses.
- Crisis simulation should be conducted or prepared for. This will reveal an organisation’s blind spots and will stress-test existing protocols.
To illustrate the potential for preparation Jerome used a simple case of insider trading accusation in which although the accused were innocent and any investigations were dropped, this crisis cost them their business, jobs and reputation. Here are a few collective thoughts derived from this awful experience.
Management steps
1. Have a Plan
This should include clear objectives, consideration of the risks, the likelihood of the identified risks occurring and the damage that would arise if the risks did occur. Further this must consider the specific actions that should be taken to initiate the crisis plan and should make reference to whom needs to be informed in different scenarios.
Background: The facts were simple, a mining company contacted an asset manager about a potential issue as yet unannounced, thus making the person receiving the information an insider. That person could not participate but offered to help introduce other market participants which was cleared with the CCO. They contacted an asset manager who was interested and without revealing the name of the issuer said a broker would be in touch. Unbeknown to the initiator of this contact, the other asset manager had a short position on the same company. In fact, that asset manager had two co-CIOs and the one that was not part of the call, acting separately, increased his short position, but not by much and the position was not huge anyway. The broker did indeed make a call about the issue, and the issue was eventually announced and the shares of the company dipped but not materially, nonetheless causing a profit to be made. That lead to the insider dealing investigation with reported police raids and searches. The firm and the accused endured plenty of delays during the investigation and it was near impossible to clear their names properly. This was much reported and the events took place between 2012 and 2015.
Application: Had the accused planned for such an accusation would their lives have been better? This is not obvious and purely speculative but what follows are some thoughts on what could have been done with preparation:
- Plan for that call from the regulator or that arrest…
- Can you name the lawyers you would wish to call?
- Will lawyers have the required market know-how and expertise to prepare the right response?
- Will you need an expert/consultant?
- Know the limits of what you may need to identify? What information can you share according to what relevant laws? Every crisis in the financial industry will have common traits and can be assessed in advance.
- Make sure your advisors know you, the lack of trust can be an issue when trying to convince someone of your facts under time pressure?
- Consider how open you can be to the regulator or know if you should remain silent?
- Have a step plan that includes these considerations as you may need to act quickly without much thinking time, you may also need to delegate some parts of that plan and it will be easier to share a well prepared written plan.
2. Identify a spokesperson
If it is possible that an identified risk could lead to press coverage or social media attention, then a spokesperson should be identified and a preparatory statement could be drafted or the right PR agency could be contacted instantly if already selected. This could severely limit any public damage that will probably lead to redemptions.
Such spokesperson could also be the one to contact all relevant parties to ensure that in an incidence, all the relevant concerns of clients or counter-parties are addressed. The plan would acknowledge the different parties that would be effected if different areas of the business where to face a crisis situation. Reassurance might buy crucial time and bring salvation to a business.
3. Social Media
This is linked to the spokesperson and the media generally, but social media is treacherous and fast… It is now a large concern in the instance of a crisis and information can be spread so quickly though social media in an uncontrolled manner. Much of a firm’s reputation can be assessed online through social media channels and therefore it is important to both maintain updates online and to monitor how other parties are using media coverage so that any negative coverage is already known about and not brought to your attention at an unsuitable manner or time.
Part of a plan would include knowing how to deal with illegitimate posts? How some may be removed if malicious or defamatory? How to respond to them and how quickly?
Every firm as a social media profile and this must be remembered. The profiling will also not be easy to remove in case where it is negative. What is your plan on that and would you know who to call?
4. Be honest and open
Subject to what information can be shared (see above) portraying transparency to both clients and to the regulator demonstrates a level of trustworthiness that is essential to maintain in a crisis situation. If trust is not lost from clients during such a situation, then the likelihood is that they will continue the working relationship whilst the firm is in its recovery stages following a crisis. This could prove essential to the continuing success of a firm.
Honesty may also work in convincing a commercial regulator during an investigation that they have caught the wrong guy. The blood thirstiness and excitement of a potential conviction needed to deter bad actors may be subdued if they realise early on that they have a conscientious market participant. Part of the plan could include ways to demonstrate compliance without necessarily having to rely on the matter at hand. For instance in the case of insider dealing, could a person immediately evidence how seriously they take this through policies, training and evidence of what they do when they receive insider information?
In the UK it is good to maintain a co-operative relationship with the regulator. Recognising that the information that had been requested could affect the course of events we would advise that the client should be as open and transparent with the regulator as necessary as to ensure that the regulator was aware that there had been no wrongdoing on the part of the client so long as this is vetted by legal counsel (see above).
One part of any plan is to keep records efficient electronically on all actions taken by a person. In the case of insider trading, records of telephone conversation that are easy to access could be helpful. This can be tested as part of the plan. Evidencing email communications can be done through the use of software designed to find the relevant emails through key word searches. This can also be part of the arsenal of the compliance officer and thus can be planned…
5. Keep employees informed
Maintaining an informed workforce ensures that the correct information is circulated and avoids negative rumours. An informed employee will also feel entrusted and this can help to maintain their commitment during difficult times. Again this is subject to legal counsel’s view of what information can be shared, thus the importance to work that out early in the plan.
A good team that gathers to help can save a business from ruins and should be part of larger discussion groups during the planning process. Perhaps a yearly reminder of who would be expected to do what in the case of a crisis would help. This is not different to the utilisation of a business continuity plan, but I have not seen many designed to cater for a situation linked to a crisis, such as one that would follow an accusation of insider dealing or other form of regulatory attention.
6. Communications with customers and suppliers/ Update Early and Often
The more that your outsourcers are aware of your current crisis situation then the more opportunity that you give them to be flexible to adapt to any needs that your business may have in crisis mode. Again this maintains an important level of trust, essential to maintaining a working relationship. It is very important that any crisis situation that may be going on is learnt of through the firm rather than any negative attention that it may subsequently receive.
This would work at different levels in the case of a fund scenario, you would want the plan to include the board of the fund and what they can do to at least avoid a panicked exit from the fund. Would they consider suspending redemptions too to deal with the passing crisis? How would they act on the basis of whose advice? Would they have a link to the fund’s lawyers or auditors? Would those names be useful to add into a plan?
The same holds true for the insurance group that may cover the fund or the asset manager or both, or any key principals. How soon should they be informed according to the insurance contract? This should be noted and reviewed regularly as part of the plan.
Conclusion
There is much one can do to prepare for a crisis and one never does enough. In the words of Benjamin Franklin, “by failing to prepare, you are preparing to fail.”
Jerome’s point of view was summarised as follows when the floor agreed with the view that no compliance officer really has enough time to deal with planning for the unexpected when they are so busy with day to day compliance. Jerome noted that it is funny how we all struggle to find time to do things fully, yet looking at history we can see that there is “always time to make mistakes”…
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