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Avoid E-mail Audit Headaches

Technology can prevent last-minute scrambling to assemble e-mail records for examiners.

Bill Winterberg, 04/14/2011

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Few advisors would look forward to the prospect of an SEC examination. But such examinations are a necessary aspect of operating a business where fiduciary standards require advisors to deliver financial advice in the best interest of their clients. To its credit, the SEC provides a detailed list of requested items typically a week or two in advance of an audit and asks that most, if not all, records be delivered electronically in PDF and Excel formatted files.

One examination request that may seem innocuous is the delivery of all e-mails for the inspection period, which often consists of one or two years. However, what may seem like a simple request for e-mail messages can lead to a costly and time-consuming ordeal, as the advisor and firm employees attempt to retrieve significant amounts of data from their systems. Here is some guidance on what e-mail records need to be delivered and how to do it in an efficient manner.

Record Delivery
Rule 204-2 of the Investment Advisers Act of 1940 does not explicitly reference e-mail in the definition of books and records that must be maintained by an advisor. However, Section 204 of the 1940 Act does state that "every investment adviser who makes use of the mails or of any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser" must furnish copies of those records at any time upon request by the Commission.

The term "records" is broadly defined in Section 3(a)(37) of the Securities Exchange Act of 1934 as "accounts, correspondence, memorandums, tapes, discs, papers, books, and other documents or transcribed information of any type, whether expressed in ordinary or machine language." With such a broad definition, advisers may never be certain whether or not e-mails will be subject to review until they receive an Information Request List in advance of an SEC examination.

This was the case for Coral Gables, Fla.-based Evensky & Katz Wealth Management, which recently completed an SEC examination. I spoke with Mena Bielow-McAfee, chief compliance officer for Evensky & Katz, about the firm's recent experience with e-mail requests.

"The SEC did not ask us for all of our e-mails," said Bielow-McAfee. Instead, examiners selected 20 clients at random and requested all of their related correspondence, including e-mails. Since the firm copies all e-mails exchanged with clients into its Junxure CRM software, Bielow-McAfee said she was able to print them along with other client meeting notes and documents to PDF files and deliver them electronically to examiners.

There are a number of ways e-mail records can be delivered to examiners, including .PST [Personal STore] files created by Microsoft Outlook, .EML [E-mail] files including message attachments used by Microsoft Outlook Express, PDF files, and more. A spokeswoman at the SEC declined to comment on the specific format examiners would accept for e-mail record delivery.

Bill Winterberg, CFP, is a technology and operations consultant to independent financial advisors. His comments on technology have been featured in a variety of financial industry publications. You can view more information about Bill and see his schedule of upcoming speaking engagements at his Web site, FPPad.com.
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