NASD and NYSE Request Comment on Joint Guidance Regarding Review and Supervision of Electronic Communications
PDF version Last week, NASD and NYSE (collectively, SROs) issued a joint request for comment on proposed Joint Guidance regarding the review and supervision of electronic communications. The proposed Joint Guidance sets forth principles for member firms to consider when developing supervisory systems and procedures for electronic communications. The Comment Period on the proposed Joint Guidance ends on July 13, 2007.
The proposed Joint Guidance indicates that, in the course of formulating the guidance, the SROs have consulted with industry experts in addition to drawing on their own experience in the area of electronic communication supervision. In addition, the SROs indicated that the proposed Joint Guidance does not specifically address every regulatory issue that may arise in connection with the supervision of electronic communications, and that policies and procedures may differ among member firms depending on their business model (e.g., size, structure, customer base, product mix).
The proposed Joint Guidance also states that member firms generally may decide by employing riskbased principles the extent to which the review of electronic communications, both internal and external, is necessary in accordance with the supervision of their business. In addition, however, the proposed Joint Guidance states that member firms must have policies and procedures for the review by a supervisor of employees’ incoming and outgoing electronic communications that are of a subject matter that require review under SRO rules and federal securities laws (e.g., communications regarding customer complaints and regarding the content of a research report). The proposed Joint Guidance also notes that electronic communications related to a member firm’s business are subject to the member firm’s overall supervisory and review procedures, and also are subject to SRO rule requirements specifically addressing communications with the public
In addition, the proposed Joint Guidance addresses a number of specific issues relating to the supervision and review of electronic communications:
Written Policies and Procedures
The proposed Joint Guidance states generally that an effective supervisory system starts with clear policies and procedures for the general use and supervision of electronic communications, both internal and external, which are updated to address new technologies. As an example, the proposed Joint Guidance notes that a general electronic communications policy written five years ago might not include policies governing employees’ use of technologies such as weblogs and podcasting to communicate with the public.
Types of Electronic Communications Requiring Review
The proposed Joint Guidance states that member firms are required to establish policies and procedures regarding the forms of electronic communications that they permit employees to use when conducting business with the public and to take reasonable steps to monitor for compliance with such policies and procedures. In addition, the proposed Joint Guidance states that, to the extent member firms prohibit certain types of communication media, consideration should be given to taking technological steps to block or otherwise regulate their external and internal use. The proposed Joint Guidance also states that, when a member firm permits the use of any technology, the member firm’s system of supervision should be reasonably designed to achieve compliance with applicable laws, rules, and regulations. With respect to internal communications, the proposed Joint Guidance states that, in reaching a riskbased assessment regarding the review of internal communications, member firms should give consideration to, for instance,
- Detecting when a member firm’s information barriers are not working to protect customer or issuer information
- Protecting against undue influence on research personnel contrary to SRO rules
- Segregating the member firm’s proprietary trading desk activity from all or part of the other operating areas of the member firm
Identification of the Person(s) Responsible for the Review of Electronic Communications
The proposed Joint Guidance states generally that member firms’ procedures should clearly identify the person(s) responsible for performing the reviews or electronic communications. In addition, the proposed Joint Guidance states that, in the course of supervising electronic communications, a supervisor/principal may delegate certain functions to persons who need not be registered, but that the supervisor/principal remains ultimately responsible for the performance of all necessary supervisory reviews. In this regard, the proposed Joint Guidance states that, where review functions are delegated, the procedures must provide a protocol to escalate regulatory issues to the designated supervisor or other appropriate department.
Method of Review for Correspondence
The proposed Joint Guidance states that member firms should develop review procedures that are both reasonably designed to achieve compliance with applicable securities laws, regulations, and SRO rules and appropriate for their business and structure, consistent with the principles set forth in the proposed Joint Guidance. In addition, the proposed Joint Guidance states that member firms should monitor for compliance with their supervisory procedures’ prescribed frequency, timeliness, and quantity parameters. The proposed Joint Guidance also provides that, regardless of the method used, member firms should alert their reviewers as to the issues to be raised and material to be examined, including acceptable content.
Additionally, the proposed Joint Guidance states that the manner and extent to which review tools are used is a determination to be made by each member firm based on its business model. The proposed joint guidance also indicates that member firms should identify and address any “loopholes” or other issues that may arise as the means of transmitting sensitive information “under the regulatory radar” become more sophisticated and difficult to capture. The proposed Joint Guidance also states that member firms may consider the following methods of review:
- Lexiconbased review of electronic correspondence (i.e., reviews based on sensitive words or phrases, the presence of which may signal problematic communications)
- Random review of electronic correspondence (i.e., reviews using a reasonable percentage sampling technique, whereby some percentage of the electronic communications generated by the member firm is reviewed)
- Combination of lexi-conbased and random reviews of electronic correspondence
Frequency of the Review of Correspondence
The proposed Joint Guidance states that the frequency of correspondence review may vary depending on the member firm’s business and that, for instance, the frequency of review should be related to the type of business conducted (i.e., the market sensitivity of the activity), the type of customers involved, the scope of the activities, the geographical location of the activities, the disciplinary record of covered persons, and the volume of the communications subject to review. In addition, the proposed Joint Guidance states that member firms should prescribe reasonable timeframes within which supervisors are expected to complete their reviews of correspondence—taking into consideration the type of review being conducted and the method of review being used—and that member firms should carefully consider the type of business their firm is conducting and the extent to which a review’s usefulness, in the context of that business, is diminished by the passage of time.
Documentation of the Review of Correspondence
The proposed Joint Guidance states that member firms must evidence their reviews, whether electronically or on paper, and be able to reasonably demonstrate that such reviews were conducted.
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
Ben A. Indek
John V. Ayanian
Mark D. Fitterman
Beth D. Kiesewetter