With new devices making it easier than ever for brokerages to communicate with customers via e-mail, instant messages or text messages, the Financial Industry Regulatory Authority has issued detailed guidance on the review and supervision of electronic communications that mutual fund executives might want to take notice of, as well.
Basically, all communications must be documented and recorded, firms must give their brokers and reps principle-based guidance on what is permitted in electronic communications, and they must supervise these communications and be able to monitor them.
Originally, FINRA required firms to review all correspondence of their registered reps pertaining to the solicitation or execution of any securities transactions before sending them out. But in 1998, recognizing the growing proliferation of e-mail and how this requirement was becoming difficult, FINRA amended its rules to allow brokerages to have the option of designing supervisory review procedures for correspondence with the public that are appropriate to the individual member's business model.
The new guidelines require firms to have the ability to monitor all electronic communications used by the firm and its associates to conduct business, including e-mail, text and instant messaging, blogs, podcasts, message boards and e-faxes, and even work-related messages sent from personal accounts.
Unless a firm can supervise, receive and retain work-related messages sent from an employee's own electronic device, or posted onto a public message board, they must prohibit such communications, FINRA suggests
If a firm permits its employees to communicate with customers through non-member e-mail accounts such as Hotmail, Gmail, AOL or Yahoo, the member is required to supervise and retain those communications.
These safeguards are intended to prevent leaking of confidential, proprietary and inside information; private securities transactions; customer complaints; front-running; and rumor-spreading, the notice said.
Brokerages are also advised to used lexicon-based reviews of messages, that is, the ability to detect sensitive words or phrases, and to periodically review the lexicon's efficacy.
"Firms are reminded they have an obligation to ensure that their use of electronic communications media enables them to make and keep records," the FINRA notice states. "The guidance neither creates new supervisory requirements nor requires the review of every communication. Rather, it sets forth principles that firms should consider in developing supervisory systems and procedures for electronic communications."
Compliance experts seem to be in agreement that employees should be reminded of the differences between their public and private personas. Sometimes an outsider can't tell the difference, especially when it pertains to electronic communications.
A recent Associated Press-Ipsos poll found that 20% of Americans take their laptops with them on vacation, and 80% bring along their cell phones. About one in five people polled said they check in with work, check messages and/or do some work while on vacation.
Creating clear policies and procedures can help employers establish where the boundaries are and how to deal with those who clearly cross the line.
Last June, FINRA asked for public comments regarding the review and supervision of electronic communications. FINRA received 16 comments, with the majority being in favor of the guidance.
Most of those who commented said they considered the proposed guidance to be balanced, flexible and technologically neutral, and said it reflects best practices already integrated by many firms.
One commenter disagreed with the classification of text messaging as a form of electronic communication requiring supervision. The notice said a firm's obligation to supervise electronic communication is based on the content and audience of the message, not the electronic form of the communication.
Wireless, handheld devices are becoming common in the business world as companies and professionals increasingly rely on them, but the decision to use these devices should not be taken lightly, said Denis Sullivan, senior manager of Nokia Enterprise Solutions.
"Don't deploy something you can't manage," Sullivan said at The National Investment Company Service Association's October Technology Summit 2007 in Las Vegas.
"The level of business velocity dictates that we have to change our philosophy," Dean Wenzl, director of IT infrastructure and brokered services for Russell Investments, said at the same conference. "We need to be able to move from intrusion protection to intrusion prevention."
E-mail, phone calls and instant messages are replacing older forms of communication, making recordkeeping and electronic supervision more important than ever.
"FINRA expects members to prohibit, through policies and procedures, communications with the public for business purposes from employees' own electronic devices, unless the member is capable of supervising, receiving and retaining such communications," the notice states.
And firms are advised not just to periodically monitor communications. "Under limited circumstances, members should consider having their legal and/or compliance departments re-review e-mails that have already been reviewed by line supervisors and their delegates in certain situations," the FINRA notice said.
Such actions might be necessary when specific problems have been identified at a branch office resulting in a registered representative becoming the subject of an internal investigation. Likewise, increased monitoring may be justified in the case of an employee who has a disciplinary history or is subject to special supervision.
A recent study by Boston-based records management company Iron Mountain found that 65% of public and private organizations don't have a corporate records management program and risk heavy fines and loss of brand equity through non-compliance with state and federal regulations.
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