IRVINE, Calif. — NASD and the
New York Stock Exchange this month released long-awaited guidance to brokerage firms on how to supervise electronic communications.
The NASD notice to members (No. 07-30) suggests that firms strictly control the use of personal communications devices by their registered representatives.
Brokerage firms long have struggled to supervise instant and text messaging by reps, as well as communications via such personal electronic devices as the BlackBerry and cell phones.
The proposal recommends that firms require brokers to obtain pre-approval for business-related use of any personal device. That includes requiring brokers to provide an annual “detailed business justification” for the device.
In addition, it recommends that firms consider obtaining agreements that allow them to access their brokers’ devices.
Existing rule interpretations already prohibit brokers from using electronic communications unless those communications are subject to supervisory and review procedures.
“I think they’re tightening up” some of those restrictions in the new proposal, said Howard Haykin, president of Compliance Solutions Inc., a New York-based compliance consulting firm.
He said that the guidelines are noteworthy in that they create a separate set of principles for supervising electronic information, not just communications in general.
The proposal avoids referencing any particular technology and instead focuses on risk based principles for supervising communications.
The self-regulatory organizations are asking for industry feedback on the proposed joint guidance by July 13.
The regulators are saying, “If you can’t control it, you better not be using it,” Mr. Haykin said. “It’s very probable these [guidelines] will be adopted.”
Complex problem
Instant and text messaging are particular trouble spots. Most firms already ban their use, observers say.
“Those forms of communications are difficult, if not impossible, to monitor,” said David Bellaire, general counsel at the Financial Services Institute Inc. in Atlanta, which represents independent broker-dealers.
“I don’t know an effective way to enforce ... prohibitions” against the use of certain technologies, he added.
Some firms allow outside e-mails if brokers send an automatic copy to the company system, said Victor Shier, owner of Broker Dealer Services LLC, a West Bend, Wis., compliance consulting firm.
Most firms also use software to search for problematic words or phrases in e-mails.
But even those systems have weaknesses.
Firms should keep those search terms up to date and confidential, and make sure their systems are identifying questionable communications, according to the notice. Supplemental random reviews might be needed, it added.
Search systems also might miss password-protected or encrypted documents, the notice warned.
Finally, the regulators warned that firms must be able to review electronic communications in all languages in which they conduct business, so internal auditors may need to obtain independent interpretations, the notice said.
But SRO examiners have the same problem, said Howard Spindel, owner of New York-based Integrated Management Solutions, a compliance consulting firm. They can’t rely on a firm to provide them with an interpretation of e-mails, he said.
Small firms might not always have the tools to track everything the way regulators may want, compliance consultants said.
“The biggest problem we’re going to have is that some of this [guidance] is going to be too much of a one-size-fits-all” approach, Mr. Spindel said.
The principles embodied in the guidelines are welcome but won’t end all the uncertainty, Mr. Haykin said. It’s ultimately up to regulators to decide if a firm is adequately supervising the variety of communications its reps use, he said.
But the guidelines shine a “bit more ... light on what [firms] should be doing,” Mr. Haykin added.
