WASHINGTON — An effort to update rules on what records investment managers must keep is moving to the front burner at the Securities and Exchange Commission.
“These rules are in need of reform,” said Andrew Donohue, director of the SEC’s division of investment management, speaking at a conference sponsored by the Investment Adviser Association and IA Week, a publication for investment advisers, in Washington March 22-23.
The SEC’s record-keeping regulations are sorely in need of a facelift — at least according to investment managers. The regulations originally were adopted in 1961 — before the advent of the Internet and e-mail — and address processes that have long been replaced by electronic communications.
The rules are important because they spell out the kinds of information that investment managers are supposed to be able to provide to SEC investigators during company audits.
Review of the rules is important because the managers see it as an opportunity to encourage the SEC to more narrowly target the sorts of records they must keep, said Karen L. Barr, IAA general counsel, in an interview.
“Let’s not require (managers) to keep things because once in 10 million cases a particular item was used in an enforcement case,” Ms. Barr said. “If the end result is that they (the SEC) make you keep everything under the sun, that will not be a very happy result.”
As it stands, according to Ms. Barr, investment managers are really only required to keep e-mails that contain content currently required by the existing rule — such as records of securities purchases and sales.
But in response to a request for a show of hands during the conference, the vast majority of the audience of about 450 registrants — with about 300 of those chief compliance officers from investment management firms — indicated they kept all e-mails generated over company computers, including personal e-mail.
Ms. Barr said there are computer programs that can sort and retain e-mail by content to exclude personal correspondence. But she said investment advisers are concerned that the screening programs might not catch all relevant e-mail traffic. In addition, according to Ms. Barr, it’s cheaper to simply to use a program that “grabs and keeps” all e-mail.
“Everybody could benefit from clear e-mail guidance,” Mr. Donohue said in his remarks.
Compliance tool
According to the panelists during one conference session, the intercepted e-mails also come in handy because they provide a compliance tool for company executives.
Terrance O’Malley, an asset management attorney with the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, New York, said he advises investment firm executives to regularly scan the e-mail of “high-risk,” or upper echelon, employees.
Even if the scans, which sometimes uncover embarrassing personal communications, don’t catch e-mails that run afoul of SEC policy, the executives can show they have a process in place if the SEC subsequently finds e-mail traffic during an audit indicating some kind of wrongdoing.
“If something does happen, you can show you tried to do something,” Mr. O’Malley said. “Once in a while, you might find something,” added Mr. O’Malley. If it’s an “HR (human resources) issue, turn it over to HR.”
In a follow-up interview, Mr. O’Malley said a policy of scanning e-mails not only helps protect firms from SEC claims of inadequate internal controls but also puts employees on notice that their e-mail is subject to review. “Think about what you’re putting in there,” said Mr. O’Malley.
In other conference highlights, Gene Gohlke, SEC associate director, office of compliance inspections and examinations, said the new rule requiring advisers to review their compliance policies annually, part of the SEC’s new compliance program rule, should basically be part of a continuous process. While the SEC’s rules don’t specify how investment managers have to do the reviews, Mr. Gohlke said the reviews are intended to ensure a firm’s compliance program effectively prevents violations of the law.
“However you do it, you should document how you do it,” added Tracey Soehle, vice president, State Street Global Advisors, Boston.
