The Value of Controlling the Regulator Relationship and Staying Ahead of Supervisory Priorities

It is business as usual. Markets have calmed, everyone has settled into working from home, and regulators are preparing, in a virtual and remote way, to start knocking on the doors of the regulated to assess what has been happening during the last six months.

Meanwhile, the Financial Times just wrote a fascinating article about the unusually frequent contact between James Gorman, the chief executive of Morgan Stanley, and Jay Clayton, the Chairman of the U.S. Securities and Exchange Commission. Clayton’s publicly available calendar shows 10 interactions since 2017, including one where he sought Gorman’s views on “areas of potential regulatory overlap/inefficiencies in the supervisory space.” Gorman’s main line to Clayton is in stark contrast to his competitors — his peers at Goldman, Citi, and JPMorgan had just one official interaction each with the SEC Chair in the last three years.

The FT article quotes a number of sources who seem negative about this regular connection, but Gorman is way ahead of his competitors here. The relatively small investment he is making in this proactive relationship demonstrates everything a modern regulator expects from the industry. Gorman is being highly cooperative and getting ahead of any issue or news about his bank by delivering it himself and controlling the message. He is also placing himself and his key team members in a position of influence, especially in regards to the way the bank and its competitors might be supervised in future. That is of huge benefit. 

It also means that the bank is insulating itself from any potential “misunderstanding” in the way it is supervised by the SEC; any escalating issue can quickly be clarified at the highest level if required. The Covid era has been characterized by calls for frequent, proactive, and cooperative interaction between regulators and the regulated. The relationship between Gorman and Clayton is a perfect example of this, shifting from potentially adversarial to more human and empathetic. The success of Gorman’s approach is reflective of his bank’s regulatory record, which is impressive, considering the scope and success of Morgan Stanley.  

Back across the Atlantic, the UK Financial Conduct Authority is limbering up to visit firms. As usual, its issue of Market Watch (No.63) is indicative of what they can expect. Inside information, and the handling of it in line with the Market Abuse Regulation, is high on the agenda. The increased incidence of capital raising, combined with alternative working arrangements, places greater emphasis on the right controls around market abuse, conduct, and conflict of interest management. Some of the priorities are made clear:

  • ensuring inside information is appropriately identified and handled by all in the information chain so it is not misused for insider dealing or commercial advantage
  • maintaining robust market surveillance and suspicious transaction and order reporting (STORs), accounting for market conditions and working from home 
  • identifying and managing conflicts of interest around capital raising

The FCA recommends reviewing the application of controls for restricting access to inside information on secure IT systems and how staff access to inside information can be supervised remotely. The regulator also highlights the use of the mandatory two-week holiday for front office staff as an appropriate control and suggests an update of market abuse training. These are all useful hints that can be used as credits to show eager supervisors when they start to examine in the months ahead. 

More controversially, the arduous task of updating the risk assessment is also raised. The FCA feels that reviewing risk assessments, in response to coronavirus, enables modification of surveillance systems so they are adequately calibrated to detect any heightened market abuse risks that have been recognized. 

The FCA also highlights its awareness that increased market volumes and volatility have caused a surge in the number of surveillance alerts. It asks that firms ensure their approach is tailored to the risks they are exposed to and does not diminish the effectiveness of their surveillance. This may include a retrospective review focusing on areas that are either a higher risk or may have been masked due to the volumes of alerts. 

We have been warned. This and other related topics, such as the mysterious decline in STORs in the UK, will be explored in detail during the next in our Modern Compliance Webinar Series, “Home Alone 2 — Compliance Best Practice and Essential Calibration for the Next Phase of WFH.” 

To learn more and register, please visit:

EU Home Alone 2 — Compliance Best Practice and Essential Calibration for the Next Phase of WFH

US Home Alone 2 — Compliance Best Practice and Essential Calibration for the Next Phase of WFH