Securities Industry Outlook for 2008
Subprime Crisis Exposes Data Inadequacies | Finra Is Proving 'Principled' | IT Rising to Asset Servicing Challenges | Interdealer Platforms Point the Way | Turquoise Tests Known Strengths in New Arena | ATSs Gear Up for Global Fragmentation
Finra Is Proving 'Principled'
Electronic-records guidance offer an early look at SRO's regulatory approach
January 7, 2008
The Financial Industry Regulatory Authority's (Finra) final guidance on the review and supervision of electronic communications, including, for the first time, wireless handheld devices, may be an early indication that the self-regulatory organization (SRO) will heed its pledge to move toward a principles-based approach wherever possible.
The codified best practices, which were released on Dec. 7 and closely track a proposal issued in June, state that all types of communications technology fall under Finra's purview. Brokerage firms must preserve and perform reviews of all e-communications transmitted through employee desktops and handhelds, including e-mail, text messages, instant messages (IMs) and device-to-device messages.
Finra's oversight is based on the Securities and Exchange Commission's Rule 17a-4, which since 1938 has required broker-dealers to preserve business communications for a minimum of three years. The SEC in 1997 added an interpretation requiring the retention of business-related e-mails, and in 2003, Finra's predecessor SROs--NASD and the New York Stock Exchange's member-regulation functions--determined that IMs should be handled no differently than e-mails. But the issue of handhelds went unresolved, partly because the New York Stock Exchange never welcomed such devices on its trading floor.
Now, Finra says that its compliance reviews will include the devices, and if they are not monitored, disciplinary actions could result. Web-based e-mail and third-party communications systems are specifically identified in the guidance as "non-member e-mail platforms" that could raise compliance issues for member firms.
Regarding devices such as the BlackBerry from Waterloo, Ontario-based Research in Motion, Finra says: "Members should consider obtaining agreements from employees authorizing the member to access any such personal electronic communication devices. Members should also consider prohibiting, where appropriate, the use of [the] devices in ... locations where material non-public information can be accessed."
Slow to Comply
"The industry has been reluctant to embrace ... compliance measures to deal with the onslaught of electronic communications," notes Jeffrey Plotkin, a partner in New York law firm Day Pitney and former assistant regional administrator in the SEC's New York office. "It is Finra's way of saying that they are not happy with the way firms have failed to stay ahead of the curve. The industry needs to be given guidance and best practices."
But while Finra has broadened the scope of its coverage, "the guidance neither creates new supervisory requirements nor requires the review of every communication," says the SRO. "Rather, it sets forth principles that firms should consider in developing supervisory systems and procedures for electronic communications."
The guidelines generally allow firms the flexibility to design review procedures according to their size and business model, including whether the process will be automated, manual or a combination.
"It is guidance about a principle," says Elisse Walter, senior EVP of regulatory policy and programs at Finra. Walter emphasizes that such guidelines need to be distinguished from basic SEC requirements covering e-record-keeping, which are necessarily more specific. "There is tension in the industry," she says, involving the desire to have rules expressed as broader principles, while still spelling out what to do. "There is room for both types of standards," she says, including "high-level principles, and ways to give guidance via particular rules."
As an example of a purely principles-based rule, Walter cites NASD Rule 2110, which states that "a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade."
