White Paper: Achieving Regulatory Compliance with FaceTime IMAuditor^™

Regulatory Compliance in Financial Services

The Securities and Exchange Commission (SEC) closely regulates the financial services industry in the United States of America and, in particular, the broker-dealer segment. The SEC's authority over broker-dealers was granted by Congress in the Securities and Exchange Act of 1934, as amended (the "'34 Act"). Section 17(a)(1) of the Exchange Act authorizes the SEC to promulgate rules and regulations, requiring broker-dealers to make and keep certain books and records as necessary or appropriate for the protection of investors. As a result, in 1939 the SEC adopted Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4).

The SEC, multiple self-regulatory organizations ("SROs") and the various State Securities Regulators share oversight responsibilities with respect to broker-dealers. However, the SEC has preeminence over the SROs and the various state securities regulators. At the same time, the SEC, through an act of Congress, has delegated responsibility for the day-to-day regulation of broker-dealers to the SROs, which includes, but is not limited to, the National Association of Securities Dealers Regulation, Inc. (the "NASDR") and the New York Stock Exchange (the "NYSE"). Earlier in 2003, the National Association of Securities Dealers (NASD) has announced that under federal law, its member firms must retain their IM records for at least three years. State securities regulators possess broad authority with respect to the examination, investigation, and enforcement of broker-dealer activities. However, the National Securities Markets Improvement Act of 1996 prohibits states from establishing books and records that differ from the SEC's rules. In other words, the states are restricted from placing additional record-keeping [which includes books and records] rules on broker-dealers.

In sum, the interests of federal authorities, SROs and the various states consist of multiple goals. These goals are carried out through the various laws, rules, and interpretations designed to protect the investor, prevent fraud and manipulation, protect financial solvency -- and to prevent and deter abusive practices that, though not amounting to fraud, nevertheless violate rules of custom and trade practices.

Books and Records

SEC Rule 17a-3 requires broker-dealers to make certain records available, including trade blotters, asset and liability ledgers, income ledgers, customer account ledgers, securities records, order tickets, trade confirmations, trial balances and various employment related documents. Rule 17a-4 specifies the manner and length of time that the records maintained by broker-dealers must be preserved. In combination, Rules 17a-3 and 17a-4 require broker-dealers to create and preserve a comprehensive record of all securities transactions that the broker-dealer effects and of the securities business in general. The SEC views these requirements as the primary means of monitoring compliance with the securities laws, including anti-fraud provisions and financial responsibility standards.

Initially, Rule 17a-4, when adopted in 1939, required broker-dealers to maintain records in paper form for the first two years of the specified retention period, and on microfilm thereafter.

Relevant SEC Releases

The 1997 Electronic Storage Media Release discussed the type of e-mail that needed to be retained, and at the same time, used the words "Internet" and "electronic systems" in addition to the word "e-mail" to describe electronic communications:

"The Commission understands that broker-dealers use e-mail and the Internet to communicate important information relating to the broker-dealer's business internally, to customers, and to the general public. The Commission is also aware that many broker-dealers use such electronic systems to communicate about issues unrelated to the business of the broker-dealer"

It would appear that the SEC recognized that technology would evolve from e-mail to other forms and methods of electronic communications, as the Internet evolved. The SEC addressed this issue by requiring, for record-keeping purposes, "the content and the audience of the electronic communication are determinative, and therefore broker-dealers retain only those e-mails and Internet communications (including inter-office communications) which relate to the broker-dealer's business as such."

A conclusion drawn from these statements and various SEC Releases is that the SROs should primarily be focused on the content and the audience when determining the supervisory requirements, and not merely on the method by which such communications are transmitted.

To this end, it is now more important than ever before to consider the latest innovations in technology that will benefit investors and broker-dealers with respect to maintaining the integrity and transparency of financial markets. Ultimately, the point of legitimizing communications is to preserve an audit trail and protect investor assets. With the overwhelming embrace by financial services firms of the FaceTime IMAuditor, there now exists a standard solution manage, archive, and review the communication medium of instant messaging.