Regulators today announced that they have fined five brokerage firms a combined $8.25 million for failing to adhere to record-keeping requirements. The fines were levied by the SEC and self-regulatory bodies NYSE and NASD.
Deutsche Bank Securities, Goldman, Sachs, Morgan Stanley, U.S. Bancorp Piper Jaffray and Salomon Smith Barney consented to the fine without admitting or denying the allegations. Each firm will pay a $1.65 million penalty to the U.S. Treasury.
The firms are charged with failing to keep and maintain records in accordance with regulations set forth in the Securities Exchange Act of 1934. Further, both NYSE and NASD regulations require firms to preserve any business-related electronic communications for three years. Firms must also keep e-mails and interoffice memos in an "accessible place" for the first two-years. Beyond that, NYSE Rule 342 and NASD Rule 3010 require firms to create a supervisory system to ensure compliance with NASD and NYSE regulations.
According to the SEC, the five firms had "inadequate procedures and systems to retain and make accessible e-mail communications."
Spokespersons for the various firms pointed out that there were no allegations of wrongdoing or obstruction associated with the investigation and subsequent fines. "There’s no accusation of the intent to hide or destroy anything. We need to work on our system of keeping records, that’s all," said a Morgan Stanley spokesperson. Piper Jaffray echoed this sentiment in a statement released today, in which they asserted that there was "no allegation or finding that Piper Jaffray’s email retention practices obstructed or impeded any investigation."
According to a spokesman for one of the regulatory agencies failing to retain communications was not entirely the problem. Some firms were able to recover older communications, but it was difficult to do so. "This is a firm issue," said the spokesperson. "The responsibility for keeping and maintaining these systems doesn’t fall on the brokers’ shoulders."
Each firm now has 90 days to put systems into place that will satisfy e-mail retention statutes and rules.
Piper Jaffray, the only firm to directly address the fines, defended their position in a statement, saying that it did keep "large volumes of e-mail," but that their retention and procedures "were deemed inadequate to meet the requirements of the rule." Piper Jaffray president and CEO Andrew Duff went on to defend the firm’s current practices. "We are confident that our current e-mail procedure and enhanced software fully meets all of the regulatory requirements for e-mail retention," says Duff.
E-mail retention has been a growing issue confronting the industry. The SIA sees several problems surrounding the issue. The SIA has drawn attention to the ambiguity in The Securities and Exchange Commission’s record keeping rules regarding e-mail. Current rules dictate that records are to be kept if they relate to the firm’s "business as such." Whether a particular e-mail falls into this category is a matter of some debate. The SIA also points out that rules requiring firms to retain internal e-mails do not exist.
There are technological hurdles to be overcome as well. The SIA points out that e-mail servers have a limited capacity for storage, requiring the development of a new e-mail transfer and storage system. This, says the SIA, "is the equivalent of dumping Niagara Falls into your kitchen sink."
In a statement released today SIA senior vice president Stuart Kaswell said he hoped the settlement "paves the way for a final resolution to the record keeping challenges that are currently confronting the industry."
