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Bar Group Seeks SEC Guidance on Adviser E-Mail Retention

A committee of the New York City bar association, out of concern with the way the SEC staff has implemented the investment adviser record retention rules, has asked the Commission to provide guidance on the duty of investment advisers to retain and produce e-mail. While acknowledging that the staff may be preparing written guidance on this subject, the committee on investment management said that the significant issues surrounding e-mail retention and production should be addressed through the SEC rulemaking process. The committee also urged the SEC to act promptly, because it believes that it is fundamentally unfair to ask investment advisers to make the large financial commitments necessary to comply with their record retention and production duties while the area is rife with ambiguities.

Investment Advisers Act Rule 204-2 requires advisers to retain records, communications and other types of information. Over the last several years, the SEC staff, through the inspection and enforcement process, has informally applied the rule to e-mail. In doing so, the bar committee said that ambiguities have been created regarding an adviser's obligations to store and produce e-mail. The intersection of these ambiguous requirements, coupled with the incredible growth of business e-mail, has raised a host of difficult compliance issues for investment advisers.

According to the committee, two main issues require the SEC's immediate attention. First, there is great uncertainty among advisers about how to comply with the retention requirements as applied to e-mail. Second, there is a need to clarify the scope of e-mail production in response to SEC staff inspection requests.

On the first point, the staff has indicated that advisers that do not retain all e-mail must implement procedures reasonably designed to ensure that required information is retained. Many advisers, however, still feel compelled to keep all e-mail communications for five years for fear that inspectors will either deem the adviser's procedures unreasonable or insist on absolute certainty that all required records have not been deleted. Maintaining all of a firm's e-mail for five years, however, is becoming increasingly burdensome. This difficult situation could be eased by a formal statement from the SEC that reasonable procedures will satisfy an adviser's retention requirement with respect to e-mail and by providing guidance on the types of procedures the Commission would view as reasonable.

Further, given how financially burdensome it would be to review every e-mail individually prior to deletion, the bar committee submits that the Commission should clarify that reasonable procedures need not include individual review. The committee also believes that reasonable retention procedures should permit the deletion of e-mail that has been filtered out of a recipient's e-mail box by a recognized filtering program. Regular deletion of junk e-mail would help to lighten the burden of retaining e-mail.

The committee also noted that the uncertainty surrounding e-mail retention is even greater for investment advisers that are also registered as broker-dealers. These advisers must not only comply with the Advisers Act and its rules, but they must also satisfy the e-mail retention requirements imposed both by the 1934 Act and its rules and by the SROs to which they belong, such as the New York Stock Exchange or the NASD. According to the committee, this tripartite system only compounds the difficulty these advisers face in comprehending their e-mail retention obligations. The committee asked the SEC to standardize these requirements so that advisers that are also broker-dealers are not subject to varying e-mail retention regimes.

Adding to the confusion over what e-mail must be retained is Investment Advisers Act Rule 204-2(a)(7), which requires the retention of certain types of written communications. Many in the advisory industry have long interpreted Rule 204-2(a)(7) to apply only to communications between an investment advisory firm and third parties, not to internal documents. It appears, however, that some of the staff in the Office of Compliance Inspections and Examinations have taken the position that Rule 204-2(a)(7) also applies to communications among a firm's employees. Given the large volume of e-mail traffic sent among employees every day, complying with the staff's position would impose a significant burden on the resources of many advisory firms. In view of the fact that Rule 204-2(a)(7) speaks only of communications received and sent by an investment adviser, not of communications within a firm, the committee urged the SEC to affirm the long-standing industry interpretation that the rule applies only to communications with third parties.

In the committee's view, the second area in need of immediate regulatory attention is that of e-mail production. The committee noted that SEC inspectors now routinely request that an adviser promptly produce all firm e-mail, or all e-mail sent or received by certain individuals in an electronically searchable format. These requests raise the dual issues of the SEC's authority to inspect all adviser records and whether the Commission can require all records to be produced in a specific format.

Section 204 of the Advisers Act authorizes the SEC to require by rule that investment advisers retain records that it deems necessary to protect investors and to inspect the records it requires investment advisers to retain. If the Commission believes that Rule 204-2 is not broad enough in its scope, the committee said that it should promulgate new rules. Creating law through the inspection and enforcement process violates administrative law and subjects investment advisers to ad hoc requests that create expensive uncertainty, according to the committee.

The committee, noting that only certain records are required to be kept in a particular electronic format, pointed out that Rule 204-2(g) provides that required records maintained electronically must be arranged in a way that permits easy access and location. This requirement does not apply to records that are not required to be retained.

Because of the considerable expense that can be incurred in converting saved electronic records from a format that was never intended to be searchable into a searchable format, the committee submitted that advisory firms may, until required to do otherwise by rule, produce non-required electronic records to the staff in any format or medium. The committee reiterated that only Commission action will settle these e-mail production questions with certainty.