It’s a Shield, Not a Sword

Businesses on the wrong side of the law often feel as if they’d been bludgeoned by instruments of jurisprudence, bearing a distinct scarlet letter from the administration of executive-based (re: administrative) and judicial-based (re: State/Federal Court) actions. Gone are the days of quiet settlements, and second chances: regulators in all industries increasingly look for large and small regulatory violations alike. Playing defense is more important than ever before. Creating a “culture of compliance” is a blunt phrase, the efficacy of which is up there with “it’s always in the last place you look”

However, the conflict between allocating resources to a cost-side employees rather than its revenue-facing employees need not be well-documented to be understood. The latter, representing the traders, brokers, engineers, product ideators, and strategists, often find themselves directly juxtaposed with the former, those who attempt to minimize costs: lawyers, compliance, finance, accounting, and a host of other others preventing commercial ills.

Attempting to turn a cost-minimizing function into one of profit maximization is not only misguided, it’s fundamentally dangerous. It would be quite difficult for an accountant, lawyer, or compliance officer (“Risk Reducers”) to prove how much money they saved the company because of things that didn’t happen (often to the chagrin of these individuals when year-end raises and bonuses are announced). Those that do attempt to commercialize their safety net might find it missing when it’s most important: when a potential regulatory infraction occurs.

This is, of course, intended to prove a single point: Compliance is a Shield, not a Sword. The programs and processes you introduce are designed to safeguard you from the significant tail-risks on the cost side of your commercial equation, not capture you margin on your productivity side, or use for the threatening of fellow market participants.

compliance word graph

Figure 1, above, represents a standard distributed model of a firm’s risk/reward (which I’ve modeled as normally distributed and directly correlated, that is 1 unit of risk = 1 unit of reward or loss). The Marginal Revenue (“A”), gained by attempting to monetize your “Risk Reducers,” is always significantly outweighed by the Marginal Cost (“B”). Specificity of numbers asides, the chart illustrates a basic premise, regardless of the level of kurtosis: Protecting all you do have with your “Risk Reducers” is far more important than using them as a weapon to gain a marginal advantage: Swords may fight debt, but shields save equity.


Compliance 101

The word “compliance” used to elicit chuckles and groans from management as recently as the mid 2000s. The word itself, which originated in the 1640s, colloquially signaled a career arc with a negative trajectory and, for many, brought to mind professionals plying their trades in damp, dark corners of offices vacated by revenue generating staff. The explosion of (and focus on) regulations have outstripped demand for compliance jobs, a result of the increase in complexity and volume of regulations following the financial crisis and impropriety that sent the economy into a tailspin. Indeed, the very word itself has staged a comeback for the ages.

compliance word graph

The promulgation and implementation of the Dodd-Frank Act and its associated requirements cut sharply across institutions large and small alike. At a base level, regulations and rules are an additional cost imposed on any business. Some are necessary (without which we’d have pure anarchy) and some are unnecessary (without which we’d have efficiency), they increase the costs of operating a firm both internally and externally. The rules put in place following the financial collapse of 2008 have imposed extraordinary costs on small and large businesses alike across the entire of the financial services sector.

The labor shortage in financial services compliance has led to difficult choices when a firm is unable to in-house such work: (1) pay tens of thousands, hundreds of thousands, or even millions of dollars to external consultants on a regular basis, or (2) roll the dice of non-compliance. Note: The CFTC and SEC alone collected $3.14 Billion and $4.20 Billion in civil penalties alone in its 2015 fiscal year. Honeymoon periods in place during the creation of these regulations are now ending, and the chance of penalty on a noncompliant entity is nearly guaranteed. Regulators are swifter and keener to enforcing many of the rules that have been implemented over the past seven years. Firms must grapple with rules and regulators at:

  1. Government institutions (CFTC, SEC)
  2. Quasi-governmental agencies (NFA, FINRA)
  3. Self-regulatory organizations (CME, ICE)
  4. Financial services supply chain requirements (Clearing firms, ISV’s, and a host of private enterprises)

This cost of compliance is accelerating, much to the delight of external consultants. At Ascent, we find this cost prohibitive for businesses attempting to compete honestly, and our goal is to decrease the cost of compliance. By lowering barriers to entry for the financial services marketplace, competition will flourish. This, in turn, lowers the cost of financial services for all. Ascent, at its baseline, is creating a platform solution that will help you streamline your compliance requirements and workflows and give you back the competitive edge blunted by the regulatory gavel.

As we undertake this journey to disrupt the existing model of compliance services, we invite you to comment, contact, disagree, cheer, or ideate via the comments below, or via our website at The cost of compliance is causing businesses to shut their doors. This is something we find unacceptable. A more competitive marketplace with more consumer surplus is beneficial for all parties involved.

Ascent Technologies Inc.: Compliance. Simplified.