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FROM THE SIA SHOW: Proactive Surveillance of E-mail Content

With the regulatory crackdown on e-mail retention and retrieval, brokerage firms are scrutinizing broker-to-customer communications for words that make promises or guarantees.

With the regulatory crackdown on e-mail retention and retrieval, brokerage firms are scrutinizing broker-to-customer communications for words that make promises or guarantees.

Today, ZipLip (booth #3400) will introduce a new feature, dubbed PreReview, that filters e-mail content before the messages are sent to prevent objectionable content from being included in the e-mail. The capability is integrated into ZipLip Unified Archival, which is ZipLip's multipurpose e-mail compliance product -- written in Java -- that off-loads attachments and performs legal discovery, among other functions.

Most archival systems installed on Wall Street filter content after it's been sent out and then save a copy to the archive, contends Kon Leong, president and chief executive officer of ZipLip, based in Mountain View, Calif. "If the horse has already left, isn't it too late to bolt the gate?" asks Leong. He explains that this occurs because a content filter is usually a separate application that sits next to the e-mail server at the gateway to a department or corporate firewall, and it doesn't talk to the archive.

The problem today for brokerage houses is that the archive will immediately register every e-mail that the e-mail server gateway spits out, says Leong. Even if the content filter blocks the e-mail, a copy will still be saved to the archive, he says. This is a problem because, if the firm is investigated, the Securities and Exchange Commission will ask for an explanation, and the brokerage firm will have to search the content filter to prove the e-mail was blocked.

To avoid this hassle, PreReview is integrated into Unified Archival so the archive functions as the content filter and can make the judgment of whether to save or not to save an e-mail. "The Unified Archival prevents that by being one complete product," says Leong, who believes this is a differentiating feature against competitors such as KVS and Legato.

ZipLip's archival product scans all e-mails and sends a message to the compliance officer alerting him of any red flags so he can review suspect e-mails before they are sent. "So it's stopped. It never gets recorded in the archive, so it never becomes a red flag for the SEC," says Leong.

While Matthew Beinfang, a senior analyst at TowerGroup agrees that "There is a value to being pro-active," he cautions that this this could turn into an onerous implementation. PreReview "is a great function, but the challenge is, how do you deploy a system like that and not detract from the business function -- the timeliness of e-mail," Beinfang says. Depending on how stringent a firm is with its content filtering, "The bucket of pending e-mails can balloon."

While he agrees there's a disadvantage to checking e-mails after they go out, Bienfang says a lot of brokerage firms ban e-mails of sales literature and tell their brokers not to solicit prospects via e-mail, so they address the issue through policy. "It's monitored on a good-faith basis with periodic checks. They take disciplinary action in the post-review if they catch it," says Beinfang. "It also gets back to what are the regulatory requirements," adds the analyst, who contends that firms are not required to perform e-mail surveillance under SEC Rule 17a-3 and 17a-4, which pertain to books-and-records retention, storage and retrieval. But under NASD Rule 22-10 and New York Stock Exchange Rules 342 and 440, there is a compliance review required for sales and marketing materials, advertisements and communications with the public.

ZipLip's Leong argues, however, that the SEC rule "talks about monitoring, and they require you to do a random sample and to select problematic words, and to have an audit trail that the compliance folks are watching and signing off on."

While the SEC rule may be open to interpretation, "Broker-dealers absolutely insist now on the pre-review capability," Leong asserts. "A lot of them are asking for it but are not aware that some of the vendors have it."

In a recent sale to Morgan Keegan, pre-review of e-mails was a "make-or-break factor in the buy decision," says ZipLip's CEO. "You catch the problem before it goes out and you lessen your liability," he stresses. <<< Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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