From the November 30, 2004 issue of Ignites.com:

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Industry: Clearer E-Mail Retention Regs Needed
   By Alison Sahoo

The Investment Counsel Association of America is lobbying the SEC to
provide guidance to advisors on how it wants them to retain and store
e-mail.

In a letter dated November 19, ICAA executive director David Tittsworth
said the SEC's reliance on e-mail in its inspection process represents a
new practice that has raised substantial costs and confusions for
advisors.

"In light of several enforcement cases that have been brought during the
past year, we understand the SEC staff's desire to inspect investment
adviser e-mail," Tittsworth writes. "However, investment advisers have a
compelling and legitimate need to be notified and to understand what the
rules are before the SEC proceeds to engage in new practices that are
based on newly articulated expectations."

The letter is an extension of ongoing conversations about the issue
between the ICAA and the SEC, Tittsworth told Ignites.  "We just want to
know what the rules are," he says. "If you're an investment advisor and
trying to figure these issues out, it's only fair to know what the rules
are before making significant investments in technology or people to
comply with them. We need guidance."

The problem has arisen, Tittsworth notes, over the past 18 months since
SEC inspectors expanded their requests for e-mails in the wake of the
scandals.

Communications between firms and customers are subject to SEC books and
records rules that require companies to retain certain types of messages
for certain periods of time. How long a firm must retain the messages
depends on their subject matter. Since e-mail is a form of electronic
communication, it falls under the same rules.

But now, says Tittsworth, inspectors from the Office of Compliance
Inspectors and Examinations (OCIE) will routinely ask for all e-mail
that was sent and received by certain key executives during a certain
period.

That raises problems, he says, because many firms don't have the
technology in place to handle such requests.  Some, for example,  save
only e-mails that explicitly fall under the current regs. Others keep
all e-mail for backup purposes, but aren't able to easily retrieve
documents. A few print and save hard copies of required e-mails but
delete the rest.

Advisors are worried that if they're not able to produce all of their
historic e-mails, they'll be cited for enforcement action.  Derek
Meisner, an attorney with Kirkpatrick & Lockhart, says that concern is
heightened by the fact that nowadays, attorneys from the SEC's Division
of Enforcement routinely accompany OCIE inspection staff on
examinations.

But he says that failure to retain e-mails in and of itself is not
generally sufficient to justify enforcement interest.  "Rarely do you
see the Enforcement Division involved merely for failure to retain
e-mails," he says. "Usually failure to retain e-mails is almost a tag-on
charge to a larger, more substantive charge."

Failures to retain e-mails, says Meisner, are more frequently cited as
part of deficiency letters issued by OCIE inspection staff.  The firm
then has the opportunity to correct those problems before the case is
referred to enforcement.

Tittsworth says he'd like to see the SEC's response to his letter come
in the form of a rule that goes through an industry comment period, is
revised, and is then sent to the five commissioners for approval.

But he thinks it's more likely that the staff will issue guidance
because of their busy schedule. Over the past year, the SEC has issued
more than a dozen scandal-related rule proposals.

"My sense is that a number of people at the commission, both at the
commissioner and the staff level, agree with the proposition that this
is an area that needs guidance," says Tittsworth. "But their plate is so
full right now. This is just one of many hot topics."

Either way, service providers say they are profiting from regulator's
use of e-mail to monitor the industry. Laura Dubois, director of product
management at electronic storage specialist Permabit, says that both
regulations and litigation are driving demand for enhanced e-mail
storage solutions.

"There's been a shift away from the paper-based world to the electronic
world," she says. "E-mail is now the number one communication mechanism
and it's being used increasingly for contract negotiations and real
business. So customers want to keep a record of those exchanges."

Dubois says she's not seeing customers holding back on upgrading their
systems for lack of regulatory clarification. In fact, she says, they're
starting with enhanced e-mail systems, then moving on to other upgrades.

"Customers want to start with e-mail, then expand into other types of
record retention like MS Word, Excel, PDF and content management like
check imaging," she says. "E-mail is an easy place to start because it's
relatively contained and there is good precedent from the SEC on how
e-mails should be retained."

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