Regulatory Reality

Oct 29 2009   5:23PM GMT

Regulatory compliance bits and bytes

David Schneier David Schneier Profile: David Schneier

Many years ago I found myself in one of those awkward moments where I needed to pay for something but didn’t have enough cash on hand to cover the bill. Rather than do the smart thing and find an ATM I instead elected to rip through my car and dig up all of the change that had been accumulating over the months and miles. After about five minutes and some disturbing encounters (food can morph into some bizarre forms when left under a car seat for too long) I somehow managed to come up with enough change to cover the shortfall. It’s amazing what you can pull together when you scavenge around and piece together disparate parts into one coordinated effort.

And so it goes with this week’s post. Here are some nuggets that I’ve gathered over time:

Policy and procedure: I was talking to a client today about password reset lengths. Turns out for one of their products they changed the password frequency to expire after 1,000 days. Their logic was that it was low risk because the application didn’t store NPPI and the security was really only necessary to ensure proper segregation of duties. So I asked them if they had a password policy (they did) and if so were they in compliance with the policy (they weren’t). After a momentary silence, their quiet reply was “good point.” Being the auditor that I am I couldn’t help point out that the worst thing any institution could do was to deviate from a documented policy or procedure, regardless of the reason. Once an examiner discovers something like that, they figure it’s an indication of related issues and wind up digging a bit deeper. Document what it is you do and than make sure you’re doing it; while it may seem simple enough, you’d be surprised how many companies fail on that point.

Pandemic planning: There’s still heightened concern regarding the swine flu and my industry continues to beat the drum about needing to have a pandemic response plan in place. While it’s a valid point, I’ve been polling my clients over the past few months regarding their first hand experiences with the flu epidemic. Only a few have been confronted with any legitimate outbreaks and none of them have experienced an absentee rate that required unusual planning or intervention. While I’m not advocating that a pandemic response plan is superfluous, I am questioning my peers who are pushing this as a top of the list agenda item. For my money I’d rather spend time making sure that a properly vetted and tested business continuity plan is in place and spend less time and effort getting caught up in the hype.

SOX: Banks that are required to be SOX compliant need to take some time to make sure that they’re thinking things through. GLBA is a fairly rigorous and encompassing regulation and extends deeply into a financial institution’s infrastructure. To a certain extent, it serves to drive a bank’s general controls framework, be it informal or otherwise, and as a byproduct goes a long way towards establishing controls typically associated with SOX. So when I encounter clients who are tackling SOX as if though it’s its own separate set of requirements I throw up the caution flag and try and force a reset. While it may be true that larger institutions need to extend significantly from GLBA to controls around financial reporting within the infrastructure, that would only represent a subset. Before doing anything different, the bank should bring in someone who has experience working with both SOX and GLBA to identify the (many) commonalities and produce a consolidated framework so that efficiencies are both identified and realized.

Year-end activities: In my last post I discussed how there’s an uptick in services work this time of year when many banks and credit unions remember that they still need to conduct a wide range of audits and assessments in support of GLBA/NCUA regulations. If you spend some time reading through FFIEC guidance (seriously, it’s not nearly as dry and boring as you might think) there are multiple references to “your most recent audit or assessment.” For those of you who think that the need to conduct this work is suggested rather than required, consider how it looks to your examiner(s) when they discover that your most recent risk assessment was either conducted several years ago or not at all. Do you really think it reflects well on your institution that you haven’t taken a serious look at the myriad risk factors swirling about your infrastructure for any considerable length of time? In a day and age when new threats emerge almost daily if not hourly how can you justify neglecting such a critical task? The examiners expect a current set of reports not only because it’s required but also because it’s a clear indication of solid management and oversight activities.

And on a final note, I’d like to share this link to the FDIC website. You’ll find a video message from Chairman Bair on the current state of both the FDIC and the banking industry. It’s really more of a “happy recap” (with all due respect to Mets fans) of similar messages she’s released over the last year. But I think it’s worth your time (about four minutes total) to hear it for yourself and gain a sense of calm about the security of your own deposits. And for those of you who might think I’m keeping to some sort of schedule regarding Sheila Bair references, as long as she keeps doing the right things I’m going to keep bringing her name up.

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