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Cristina McEachern
Cristina McEachern
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e-mail Alert

E-mail communications are at the center of ongoing investigations into analyst/investment-banking conflicts of interest. As a result, new technology is hitting the market to help financial-services firms capture, store and retrieve electronic messages.

To: All Employees
CC: Compliance Dept.
From: CEO
Subject: All Messages Will Be Stored

Ongoing investigations and the explosion of electronic communications are spurring great demand for technology that can store, archive, monitor and retrieve these vital bits of information.

Just when bad looked like it couldn't get any worse, Wall Street, having weathered the Enron collapse, accounting controversies and lagging investor confidence, now finds more subpoenas hitting the Street.

The latest legal wrangling can be tracked back to the dot-com fall when many investors lost millions. Now, to make things even worse, conflicts of interest between analysts and investment-banking groups within firms have cast a shadow on the businesses and the reputations of some of the largest investment-banking concerns, most publicly Merrill Lynch.

Following a 10 month investigation into conflicts of interest between analysts and the investment-banking side, New York Attorney General Eliot Spitzer released e-mails written by some of Merrill's star analysts such as Henry Blodget, showing that they were recommending Internet stocks to the public while privately discussing their shortfalls. Spitzer examined thousands of internal Merrill e-mails and charged Merrill with misleading investors.

Under SEC Rule 17a-4 and NASD rules 3010 and 3110, financial-services firms are required to supervise and record all electronic communication between employees and clients. Under the regulations, the communications, which initially focused on e-mail and now have widened to include instant messaging, have to be preserved for a period of not less than six years, with the first two years in an easily accessible place. As the use of e-mail and instant messaging increases dramatically, the technology for storing, indexing, retrieving and reviewing those communications is becoming a must-have for financial-services firms. While firms already may have technology in place to comply with the regulations, the question becomes, can those messages be retrieved and monitored quickly and cost effectively?

As the Spitzer investigation continues, a number of other firms have also received subpoenas including Goldman Sachs, Salomon Smith Barney, Morgan Stanley, Credit Suisse First Boston, Bear Stearns and UBS PaineWebber. In the meantime, Merrill has already reached a settlement with the State Attorney General to pay $100 million and "enact significant new policies to further insulate securities-research analysis from any real or perceived undue influence from its investment-banking division," according to a Merrill statement.

In addition to adopting a new stock-rating system and analyst-compensation program, Merrill also says it will create a new system to monitor all electronic communications between bankers and stock analysts. While Merrill would not comment on the technology to be put in place to achieve this stipulation to the settlement, industry insiders say the firm is looking into technology to archive, store and monitor both e-mail and instant messaging within the firm.

As the probe into analyst conflicts of interest widens and Wall Street firms are under increasing scrutiny to actively capture, store, supervise and retrieve electronic communications, technology is playing a key role in this evolving area of compliance.

"Financial firms need to be able to monitor and manage communications externally, as well as internally, and to be able to retrieve things almost on a real-time basis," says Andy Nybo, senior analyst at the TowerGroup. "The most aggressive firms will be examining their current policies and procedures to figure out the best course of action going forward." Nybo adds that the urgency for technology to address these electronic-communication issues has been elevated with the recent Merrill case and the additional ongoing investigations.

Allan Rosenstein, a managing principal with the Technology Competency Group at Capco, concurs, "It's no small task to instantly produce two years of e-mail between two sets of employees, for example." He adds that, in the past, the common method for retrieving e-mails stored offline was to manually open up the archive and produce burned CDs with the desired information. "E-mail systems have archiving capabilities that spread out over time to disk and if firms weren't using some type of newer technology, they would have to open up the archive and use the tools that are part of the e-mail system to search for the appropriate communication," says Rosenstein.

This process becomes quite lengthy and time consuming with the increasing number of e-mails and the SEC's recent scrutiny in this area. "A lot of the newer technology allows firms to create the e-mail, in the first place, to be automatically indexed and archived," says Rosenstein. "The idea is to have a search engine for the e-mail, so instead of having to go back and open up the archive, a user can type in what they are looking for and bring up the appropriate e-mails much faster."

While financial-services firms may have had archives in place for years now to store the necessary e-mails in compliance with SEC and NASD regulation, indexing capabilities and electronic archiving, or online archiving, have made it more convenient to store, search and retrieve that information. "The regulator bodies are asking for these e-mails and everyone is saying 'This is harder than I thought it was going to be,'" says Rosenstein. "I suspect we'll see a larger scale adoption of these indexing and archiving technologies going forward."

"The increase in demand for this technology over the past three or four months has been incredible," says Mary Kay Roberto, vice president of Americas at KVS, a provider of content-archiving and management solutions. She points to two forces driving the increase - the SEC and the exploding volumes of electronic communications. "The SEC is probing more closely

and demanding more information, so firms have to show instead of tell what they're doing, they have to produce the information."

Roberto adds that with the volume of electronic communications growing at such a rapid pace, technology has to keep up. "The SEC is also putting more pressure on firms to monitor e-mails between employees within the company, the focus has turned internal as well as external and this explodes the volume of e-mail people have to deal with," she adds. "The solutions some firms had before might not be viable now that they're looking at millions of e-mails a day rather than thousands."

Roberto points out that e-mail usage has been growing at a rate of more than 50 percent per year. And according to Jupiter Media-Metrix research, the total minutes U.S. workers spend using instant-messaging applications from AOL, MSN and Yahoo increased 110 percent in 2001, with total minutes spent instant messaging reaching 4.9 billion during September.

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