June 21, 2016

Anatomy of a Regulatory Change – Pt.4:
Data Impacts and Process Changes

By: Patrick Masi

So we've proactively monitored industry sources to see a regulatory change coming, and we've updated our operational practices so that our team knows how to deal with the changes to compliance procedures. We've done a lot to get this far, but things are about to get really technical, really fast - it's time to look at our producer data.

Did the regulatory change affect the quality of the data we have for our producers or reps? How are we going to update our data or processes?

Industry Best Practice

Synchronize credential data with the PDB

The PDB is the National Producer Database, comprised of information reported by the state departments of insurance. Industry participants who have the appropriate clearances are able to access this producer information in the form of a downloadable PDB Report, which is accepted as proof of licensure in lieu of a license copy in all insurance jurisdictions. Interacting with the PDB in a smooth, efficient manner is critical in our industry, since maintaining proof of licensure is an essential component of compliance.

The PDB is kept up-to-date by the states working with the NAIC. When producer data changes ? say, a license changes status from active to inactive ? a nightly procedure moves that data from the state department's own management system to the State Producer Licensing Database (SPLD), which is the state regulators nationwide database managed by the NAIC. This is then used to create the PDB using an FCRA compliance subset of the SPLD. The data changes are then reflected in the next report pulled by an industry participant.

This is a massive challenge, and unfortunately the data is not always what you might expect. Sometimes idiosyncrasies exist, such as a license expiration date being flip-flopped with the effective date. If you weren't aware of situations like that, well, you may get some pretty crazy data situations.

Carriers and agencies need a relatively sophisticated IT solution to make efficient and effective use of the PDB data, and ensure its accuracy to help with the business of authorizing producers to sell insurance products.

?Or for securities, Web CRD

Web CRD is a web-accessible application associated with the Central Registration Depository. The CRD is similar to the PDB, but operated by FINRA for US securities credentials. It holds broker- dealer and registered representatives' registrations, disclosures, employment history, professional experience, and exam and continuing education status. Firms view CRD as the trusted data source for the industry and leverage CRD data as part of managing their books and records requirements.

Today, the industry often remarks that Web CRD is "good enough", but there are a few main challenges that firms run in to including:

• Limited options for accessing data— there is an option for receiving a data feed from the CRD (called Web EFT), but that feed is only available to registered broker/dealer firms. Firms are only allowed to access data about reps that are actually registered with them and if you aren't a registered firm, then there are no data feed options, just the BrokerCheck website intended for securities consumers. This impacts the industry because carriers want to have access to rep data for sales authorization purposes, but today that's not available. In order to use FINRA information in sales authorization situations, the carrier would have to manually track a rep's registration information. In addition, firms would like to have data more readily available (i.e. advanced integration points like web services), but we'll get more in depth about that later.
• Lack of workflow for maintenance-related tasks— for example, if a firm would like to allow reps to report changes and thus initiate filings, this is not available through WebCRD. The firm would need additional technology (such as an internal build or outside vendor) to support that.
• Alerts and notifications for only a few events— solution providers like Vertafore have this for all necessary updates for the entire rep lifecycle. They're invaluable when it comes to the potential risks that firms face.
• More complete reporting— Web CRD has reporting capabilities, but they are standardized. Ad hoc reporting capabilities from solution providers are very helpful to firms to better assess where they need to focus their attention.

Data and Process Changes

Insurance Regulatory Changes

When a regulatory change affects the data that departments of insurance submit to the PDB, the nature of the change influences how much data we'll see changing in the PDB. Sometimes these changes touch every producer that sells in a state ? think of projects like the Producer Licensing Model Act conversion in the 2000's, which converted "Agent" and "Broker" licenses into "Producer" licenses (aside ? some industry systems that still haven't been brought into alignment with those changes from more than 15 years ago!)

So now the real fun begins. Whether it's a "simple" status code update, or a wholescale change to every license in a state, we now have to consume the information on a PDB report ? read it, translate it, and use it to update our own systems of record. Humans can easily manage this task for a single producer and a single report. It isn't too hard to read a PBD report and figure out what has to change has to be made in another system. The problem is that there are hundreds and hundreds of producers renewing licenses every hour, every day, all year long. There are more data updates than you should ever expect a licensing specialist to be able to keep up with manually. And that's just the planned changes for license renewals, not the changes that affect thousands of producers overnight due to a regulatory change.

So we need a system to do this for us.

but with securities regulatory changes, procedural changes are key.

When regulatory changes occur that affect the securities industry, data is maintained by the staff within firms filing updates on behalf of their registered individuals. Therefore, to ensure that broker dealers and reps are qualified, there are a number of ways that this process is handled:

1. The staff within firms access Web CRD report queues
2. Some firms download reports into their system via integration with Web EFT
3. Firms, their reps, and consumers access BrokerCheck on FINRA.org

Items that are kept track of include firm background and disclosure history, what products an individual rep can sell and where they can sell them, professional education and experience, and disclosure history. The Sircon solutions team completes database table updates, regression testing, then follow with customer communications about changes, etc. to keep our securities functionality up to date.

However, this is not the firm's greatest challenge in a regulatory change.

As opposed to insurance carriers and agencies, the bigger challenge usually comes from procedural and process changes needed to comply with a regulatory change instead of data changes. It's not an automated data update or translation, but the need for the firm to collect data from a rep or to process more registrations or amendments. If new necessary information is missing or new processes aren't implemented, it could introduce risk to the firm if their reps are selling products that they aren't authorized to sell. It could also cause processing issues such as trying to file an update using incorrect data, which would result in failures, errors, and rework.

As we said for insurance, an automated system that can help keep track of these necessary changes would ease the effort and reduce errors.

Keep Your System Translators Informed

If you've written a PDB data interpreter, it is likely to have some layer that translates between the PDB codes ? computer system interpretations of a license, line of authority, or other regulatory credential ? and the codes used by your system of record for producer information. When big regulatory changes occur, these translator layers almost always needed to be updated so that our nightly PDB report consumption continues correctly.

For Vertafore, this key step is part of the effort described by Holli earlier. The Sircon solutions Regulatory & Compliance Services team makes sure that our system interpreters are ready to understand the new information we're receiving from PDB so that it can be distributed first to other Sircon systems, and finally down to subscriber systems they are integrated with. It's a complex series of changes that all have to happen together, including database table updates, regression testing, customer communications about the changes and their timing, and more.

More than "Just" Data

It doesn't end there. When a regulatory code changes, updating your system of record for producer information with a clean, accurate copy of the PDB or Web CRD information is only half the battle. Updating your data and processes is important, but so are all those system elements that help us understand what the data means. These, of course, are the business and regulatory rules that govern your system's behavior ? chances are good that they are going to need some maintenance as well. This could include:

• Sales Authorization rules that let others systems know whether this producer has the right regulatory credentials to sell and service;
• Transaction rules that verify a regulatory transaction such as a license or registration application, license or registration renewal, appointment, appointment termination, and U4, U5, and BR filings are valid requests that match the state or FINRA rules for request processing, and
• Data Integrity rules that ensure that producer and rep data is resting in a valid state. For instance, certain appointment may be valid only if the producer or rep holds a certain license, registration, or line of authority.

You may have more rules than these. You may recognize the difficulty. If you do, you'll understand the value that the Sircon solutions team is providing by keeping all these rules and information up-to-date in your chosen system of record.

Do you have the latest data, procedures, and rules in place?

As you can see, understanding and interpreting the PDB and Web CRD's information isn't easy. Your system of record must hold the most accurate, up to date required information and you have to change processes accordingly. And depending on how extensive the change, an automated system can significantly ease this process. We've seen multiple firms and business struggle with mastering this process.

Stay tuned for our next post where we'll show you how to be "audit proof" and best manage your producer / advisor compliance. After all, how do you know that your processes are actually working?

Don't wait for audit failures and fines to find out that your information isn't correct.

Click here to subscribe to our blog and to make sure that you don't miss out on important industry events and regulatory updates!

---