Financial probes put pressure on Wall Street to track messaging

Brokerages get proactive with IT as some are investigated for conflicts of interest

Possible conflicts of interest involving Wall Street stock research analysts are expected to put even more pressure on financial services firms to introduce e-mail and instant messaging surveillance and archival technology, according to brokerage executives and analysts.

"It will be a hot issue" this year, said Ravi Jethmal, vice president of compliance at Abel/Noser Corp., an institutional brokerage house located in New York.

Last week, the National Association of Securities Dealers Inc. (NASD) said it would widen its probe of allegedly shady deals in 1999 and 2000 concerning initial public offerings (IPO) launched by J.P. Morgan Chase & Co., Goldman Sachs & Co. and FleetBoston Financial Corp.'s Robertson Stephens Inc. unit. The investigations are related to brokers taking excessive commissions from favored investors who were given preferential treatment with IPOs.

Credit Suisse First Boston Corp. recently paid $100 million to settle charges with the U.S. Securities and Exchange Commission (SEC) and the NASD over allegations of similar IPO deals that were considered violations of securities regulations.

In January, Abel/Noser began using e-mail archiving and surveillance software in anticipation of the SEC focusing on more strict enforcement of Rule 17a-4, which covers electronic-communications storage requirements. The NASD, under its own Rule 2210 and Rule 3010, also requires firms to monitor and store communications with clients.

Under Scrutiny

By the Rules

Here's a brief summary of what NASD Rule 2210 and SEC Rule 17a-4(f) mean to Wall Street IT:

According to the SEC, when

Rule 17a-4

was originally adopted in 1939, it had a paper-only requirement for the initial retention of records.

In 1997, the SEC amended

paragraph (f) of Rule 17a-4

to allow broker-dealers to store records electronically (e.g., on optical disk or magnetic tape).


Andy Nybo, an analyst at Needham, Mass.-based TowerGroup, said firms that aren't currently using monitoring and compliance tools "would be well advised to have those tools in place."

"I think regulatory actions like [the NASD investigation] will steadily increase scrutiny on communications [that] investment firms have with their customers and will prompt more internal tracking and monitoring tools so people can try to prevent inappropriate behavior and catch it before it goes out to the general public," Nybo said.

Abel/Noser's software, from OTG Software Inc. in Rockville, Md., captures e-mail messages and attachments and then organizes and indexes them on a server.

Those e-mails can then be accessed via search capabilities in Microsoft Exchange or Lotus Notes, or through a Web browser. The product also allows firms to set up policies that can scan e-mail based on a lexicon of inappropriate words, such as discount or deal, and can determine how long e-mails are kept and when they should be purged.

Jeff Joyner, a network technician at Davenport & Co., a retail brokerage house in Richmond, Va., said his firm is currently rolling out software from OTG that will allow his compliance department to automatically take samplings of e-mail traffic across the company and review them using workstations. His compliance office used to hold off on e-mail compliance searches because it could take up to four hours to find a single document, Joyner said. Using the surveillance software, searches now take about five minutes.

The moves taken by Davenport were directly related to the SEC's guidelines, said Joyner. "Anytime you keep that type of data sitting around, it's just taking up extra resources. So it's not only a fiscal burden, but it costs us in man-hours involved in maintaining accessibility," Joyner said.

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Copyright © 2002 IDG Communications, Inc.

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