LiveOffice Email Archiving & Compliance 101

Electronic Communications Compliance 101 Fundamentals to Regulatory Requirements Presented by Core Compliance & Legal Services, Inc. November 18, 2008 Slide 2

3 Introduction Definition and Scope of Electronic Communications Current Regulations SEC and FINRA Expectations How to Conduct Electronic Communications Review Slide 3

4 Definition of Electronic Communication Two types of communication: oral and written “Oral” means real-time communications to a live audience “Written” means any written, printed, or graphic (electronic) media Use of electronic devices and systems for transferring, processing, storing, displaying, analyzing, protecting, and disposing of information Source: 18 U.S.C. § 2510(12) (2007) Slide 4

5 Scope of Electronic Communication Regulators use the terms “electronic communications,” “e-mail” and “electronic correspondence” inter-changeably Includes: E-mail, E-faxes Web Sites Bloomberg Blogs, Chat Rooms, Instant Messaging Text Messaging Slide 5

6 How to Capture Electronic Communications E-mail E-faxes Instant and Text Messaging Blogs Chat Rooms Message Boards Slide 6

7 How to Capture Electronic Communications Web sites Regulation FD 18 U.S.C. § 2510(12)(a) does not include telephone conversations in the definition of electronic communications Oral communications are not within definition of written or graphic communications unless broadly disseminated (e.g. blast voice mail) Slide 7

8 Rules Governing Electronic Communications Communications with the Public (FINRA Rule 2210) Includes advertisements, sales literature, correspondence, institutional sales material, public appearances, and independently prepared reprints Must be fair & balanced, not false/misleading, not exaggerated/unwarranted, no material omissions, no projections/predictions Slide 8

9 Rules Governing Electronic Communications Institutional Sales Material and Correspondence (FINRA Rule 2211) Correspondence means any written or electronic message sent to one or more current retail customers and fewer than 25 prospective retail customers within any 30-day period Includes: Business cards, letterhead, written letters, form letters sent to existing customers, instant messages, and emails sent to less than 25 prospective customers within 30 days Slide 9

10 Rules Governing Electronic Communications Books and Records (FINRA Rule 3110) requires books and records to be made and kept in conformity with SEC Rules 17a-3 and 17a-4 Includes: Originals of everything received Copies of everything sent Received written customer complaints Communications supervision compliance records Duration: 3 years (first 2 in “easily accessible” place) Use of micro and electronic storage media permitted in non-erasable, non-rewritable format Format: “legible, true, complete and current” Slide 10

11 Rules Governing Electronic Communications Books and Records Requirements for Brokers and Dealers under Securities Exchange Act of 1934 Rules 17a-3 & 17a-4 (Cont.) Storage with Third Parties Permitted SEC Rule 17a-4(i) Third party vendor must file written undertaking with SEC, signed by duly authorized person Undertaking must include an SEC-required provision permitting examiners to access records Slide 11

12 Rules Governing Electronic Communications Books and Records to Be Maintained by Investment Advisers under Rule 204-2(a)(7) Includes: Originals of all written communications received and copies of all written communications sent by an IA Regarding recommendations, advice, funds, or placing an order Slide 12

13 Rules Governing Electronic Communications Books and Records to be maintained by Investment Advisers under Rule 204-2(e)-(g) Storage requirements: 5 years (first 2 years in an “easily accessible” place) General requirements: Arranged and indexed for easy location, access, and retrieval; Legible, true, and complete printout or copy of the record and the means to access, view, and print the records; and Keep a separately stored duplicate copy of the record in any permissible format. Slide 13

14 Rules Governing Electronic Communications Books and Records to be maintained by Investment Advisers under Rule 204-2(g)(3) Special requirements for electronic storage : Reasonably protect against loss, alteration, or destruction; Limit access to the records to properly authorized personnel and the Commission (including examiners and representatives); and Reasonably ensure that any reproduction of a hard copy original record that is stored electronically is complete, true, and legible when retrieved. Slide 14

15 Interpretive Releases on Electronic Communications Guidance on the Review and Supervision of Electronic Communications (NTM 07-59) Electronic communications requiring review : External (outside email platforms (e.g. Yahoo!), message boards, and e-faxes) Internal methods (e.g. inter-office MS Outlook) Suggested methods of review include: Lexicon-based Random-percentage sampling Combination method Slide 15

16 Interpretive Releases on Electronic Communications Guidance on the Review and Supervision of Electronic Communications (NTM 07-59) (Cont.) Include policies and procedures to address new and emerging technologies Include ongoing evaluation procedures to check for loopholes or problems Specify any additional reviews to address any loopholes or problems If using an automated tool or system, understand system limitations and specify any further reviews needed to address limitations Slide 16

17 Regulatory Expectations FINRA Expects Brokers and Dealers to: Apply flexible risk-based approach based on nature of individual business Consider the content of the e-mail or IM and who the e-mail or IM is directed towards (audience) Ensure records are “legible, true, complete, and current” Slide 17

18 Regulatory Expectations SEC Expects Investment Advisers to: Consider the nature of the firm's operations (risk-based) Have effective policies and procedures for electronic communication Capture, compile, maintain, and report relevant and timely information in e-mail and instant messages Expectation: Save everything Prevent, detect and correct violations Safeguard records from unauthorized access or destruction Slide 18

19 Recent Enforcement Actions Three General Deficiencies Found: Failure to retain required electronic communications Failure to timely produce electronic communications Failure to supervise electronic communications Cases/Hearings: Bear Stearns, Morgan Stanley, Banc of America U.S. Financial Investments censured and fined $40,000 Argosy Capital Securities censured and fined $10,000 Registered Principal fined additional $10,000 Chicago Investment Group, LLC fined $75,000 Registered Principal fined $15,000 Another Registered Principal fined $20,000 Slide 19

20 Questions? Please contact us if you have any additional questions Core Compliance & Legal Services, Inc. Tel: (619) 278-0020 Email: christina.rovira@corecls.com Website: www.corecls.com Slide 20

Email Compliance 101R. Anthony Seyboth11.18.08 Slide 21

Key Takeaways You need to understand: Requirements apply, regardless of firm size Types of communications you have Value of saving everything How to produce communications quickly Review, supervision and chain of custody procedures How to recover lost communications in the event of a disaster Slide 22

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