Compliance
NYSE Regulation's Richard Ketchum ... And the Exchange's New Bull Market for Compliance | Electronic Recordkeeping: Still a Compliance Minefield | The Globe Has No Corners: As regulations converge, Asia opens up to foreign capital | Automation Can Overcome IPO Compliance Hurdles: For Broker-Dealers, Tech Savvy Pays | ZipLip Waits in the Wings |
Electronic Recordkeeping: Still a Compliance Minefield
September 1, 2005
Do you keep backups of your e-mails? If so, you could be in for a very nasty surprise.
Backups--usually tapes created daily and stored off-site for disaster recovery purposes--could put a financial firm in hot water if a judge or regulatory agency demands to see particular e-mails or instant messages. That's because backups were never intended for that type of searching.
Even companies that rely on a modern archiving system with real-time search and retrieval capabilities can run into trouble. For example, if that archive goes back three years but there are also ten-year-old tapes in a warehouse somewhere else, a court or regulatory agency can ask to see the contents of those tapes. And if the tapes are as disorganized as has been typical when financial industry regulators come calling, there could be a heavy price to pay.
This summer, for instance, Morgan Stanley was hit with a $1.58 billion judgment because it was not able to produce e-mails promptly. Usually, a defendant is presumed innocent until found guilty. But in this case, which was heard in Florida, the judge instructed the jury to assume that the firm was guilty because of its perceived foot-dragging in retrieving the messages. "It's absolutely huge," says Benjamin Catalano, an attorney at Dorsey & Whitney. "The judge viewed it as a stonewalling strategy on the part of Morgan Stanley."
The precedent in this case is limited by the fact that it was tried under Florida law, notes Catalano. However, such fines change the economics of compliance. "It becomes much more costly for noncompliance than in the past," he says. "Traditionally, if you lost a damaging e-mail, it was usually to your benefit."
Tape Troubles
One problem with backup tapes is that it's difficult to search for a particular message. Backup tapes are usually stored by date. Sometimes there's an index of the contents of each tape, but this index is usually just a summary and, as in the Morgan Stanley case, may not accurately reflect the actual contents. If a firm wanted to retrieve all messages containing "Martha Stewart," for example, it would have to pull all the tapes from the time period in question, load them one by one, and sift through the contents.
Tape backup warehouses are a "huge digital landfill," says Peter Mojica, VP of product management and strategy at archiving vendor AXS-One. "A lot of companies in the broker-dealer space are used to doing things the way they have for many years when it comes to backup."
At Toronto-based First Associates Investments, for example, IT staff have to retrieve backup tapes, restore them, and then send the data to whoever is requesting it. "It's very manual and not too easy," says information security officer Brian Erdelyi. "There's a lot of effort there."
First Associates is switching to an e-mail archiving system from Fortiva that uses a combination of tapes and disks. "We're starting to deploy it now and are working with our compliance department so we can get them set up to start reviewing messages," says Erdelyi.
In general, disks are good for data that must be recovered easily and quickly--such as the most recent two years' e-mails, which must be "readily accessible" under Securities and Exchange Commission regulations.
