If you're running a mutual fund company and worried about what regulators might start to expect of you to maintain "transparency" in your operations, you might take a sneak peek at hedge funds.
They are stepping up their spending on archiving of Blackberry messages, general e-mail, Bloomberg messages, instant messages and other new forms of online communication, according to Bob Guilbert, managing director of Eze Castle Integration, a Boston consulting firm which conducted a study of 223 funds in the last half of 2010. The data was released last week.
The increase in spending on the archiving of messages comes in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act, which is now being transformed into formal rules by federal regulators, says, for instance, that:
"Each organization shall maintain records of all activities related to the business of the facility, including a complete audit trail in a form and manner that is acceptable to the [Securities and Exchange] Commission; and for a period of not less than 5 years."
As a result, investment firms are seeking technology that uses an archiving technology known generically as the WORM format, as in write-once, read-many. This is because it is a disciplined method of recording information, according to Mary Beth Hamilton, director of marketing for Eze Castle Integration, which acts as an information technology consultant to hedge funds, private equity firms and other investment companies. Original information gets written only once to a storage device, but can be read as many times as needed.
Mutual funds are required under existing Securities and Exchange Commission rules to retain records for specified periods of time. For example, the SEC requires a mutual fund to retain the information obtained about a customer for five years after the date an account is closed.
Storehouse Services
The Eze Castle survey found that an archiving system from Global Relay is the most widely used by hedge funds and other so-called alternative investment firms.
In the survey, 61% of users of software for archiving e-mail and instant messages said they rely on message capturing by Global Relay, a Vancouver, Canada, provider of e-mail archiving and compliance products and services. Other widely used products include Symantec Enterprise Vault (7%) and Iron Mountain Digital Record Center (5%). Other providers included Advisor Mail, FrontBridge, i365, Intradyn, Message One and Seccas.
Global Relay's archiving functions are provided to mutual funds as an online service called Message Archiver, from a St. Louis, Mo., company called Cloud Commerce.
Mutual funds' traffic in email and instant messages is stored for future use in complying with regulations, internal or external audits and legal proceedings.
The Message Archiver keeps tamper-proof copies of messages in long-term storage, with access as needed from remote computers.
The storehouse takes in all company e-mail, including attachments, instant messages, online faxes, BlackBerry text messages, Bloomberg messages, Reuters messages and other financial communications. AOL, MSN, Yahoo and Jabber instant messages are captured.
A separate Vancouver provider, PageFreezer, last week also launched an online system for capturing social media and blog activity used by brokers and investment advisors, for compliance purposes.
The PageFreezer "cloud" service will capture every aspect of a social media site: blogs and the comments within them, including Twitter feeds, Facebook notes and LinkedIn recommendations.
Phone Impetus
The need to capture more forms of electronic communication is evolving, Guilbert and Hamilton said, as financial firms start to make use of social media such as Facebook and LinkedIn.
But a much bigger impetus for capturing messages is coming from the widespread use of smart phones and computer tablets by investment firms. This is particularly the case with hedge funds trying to track results and interact with customers, around the clock, Guilbert said.
According to survey results, BlackBerry devices remain the top choice among alternative investment firms. Approximately 95% of respondents claim to be BlackBerry users, according to Eze Castle.
At the time of the survey, Apple, Windows Mobile and Android users were "few and far between," getting use by 10%, 3% and 1%, respectively, of respondents.
But Guilbert said Apple's iPhones and smart phones based on the Android operating system from Google have been picking up share this year.
About 8% of respondents indicated they used more than one provider for mobile communications.
BlackBerry has more than 36 million devices in use globally, and about half of those are enterprise-connected, Eze Castle noted. BlackBerry's dominance is based on secure and reliable routing, centralized device management capabilities and ease of use for e-mailing, Eze said.
The key concern about Apple iPhones and iPads as well as similar phones and tablets is security of the communications.
The company said mutual fund and other investment firms can apply these steps to such devices:
* Install firewall and anti-virus software
* Use mobile device management software to centralize information.
* Install an encrypted mobile "virtual private network" client for a secure connection between the end user's device and the corporate network.
Best Practices
The Dodd-Frank Wall Street Reform Act and institutional investors also are pressuring firms to increase transparency of operations, risk management processes and reporting capabilities, Eze Castle said.
Dodd-Frank requires firms to identify and minimize sources of operational risk, through appropriate controls and procedures as well as automated systems. They also must establish and maintain emergency procedures, backup facilities and a plan for disaster recovery that allow for the timely recovery and resumption of operations.
And investors, burned by the disappearance of Lehman Brothers and other counterparts in the 2008-2009 global financial crisis, are insisting on knowing what's going on in the funds they place money with. Before a disaster occurs.
"The investors of the world want to see the operational systems in place, for best practices," by investment firms, Hamilton said.
