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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.

E-mails During the Inspection Period
Not all firms are as fortunate as Evensky & Katz with respect to e-mail requests. Steelbridge Compliance, a Dallas-based compliance consulting firm to investment advisors, recently posted to its website an SEC Information Request List received by one of its client in February. Included in the list is a request for "e-mails during the inspection period" that covered all of 2009 and 2010. No additional details were provided, so one may assume that all e-mails, including both exchanges with clients and internal messages between employees, must be delivered to examiners.

Had the SEC requested all of Evensky & Katz's e-mails during its examination, Bielow-McAfee was prepared to deliver them as the firm uses e-mail archiving services from Portland, Ore.-based Smarsh, Inc. Every e-mail sent and received by firm employees is automatically copied to archive systems maintained by Smarsh through journaling capabilities of Microsoft Exchange Server. Message journaling eliminates the potential for e-mails to be omitted from the archive, as busy advisors can easily forget to drag-and-drop e-mails into their CRM or document management system.

Bielow-McAfee dreaded the thought of having to manually retrieve the firm's e-mails over the inspection period if Evensky & Katz did not use an e-mail archiving service.

"For the average month, we have 1.2 gigabytes of e-mail coming in and out of our firm. Can you imagine the volume of data that would have to be manually delivered for one or two years? It's outrageous," said Bielow-McAfee. 

Life Without Archiving
Without automated e-mail archiving, advisors and compliance professionals may resort to tedious procedures in order to generate a complete archive of the firm's e-mail. I spoke with Chris Lukauskas, IT Manager for Dallas-based Robertson, Griege & Thoele Financial Advisors, about alternative archiving techniques.

"Exchange administrators can use the ExMerge or Export-Mailbox tools, both of which are server-side utilities, to export all users' mailboxes to .PST files," Lukauskas said.

"However," he added, "ExMerge and Export-Mailbox won't capture e-mails that users have offloaded from the server by making their own PST files saved on their computer." In that event, administrators may need to access each employee's computer to retrieve PST files to create a complete e-mail archive.

Lukauskas advised, "Purchasing a compliant e-mail management and archiving system is the preferred practice to follow."

Efficient E-mail Delivery
Facing the potential task of manually retrieving multiple gigabytes worth of e-mails, advisors should seriously consider implementing an automated e-mail archiving system to facilitate compliance with an examiner's request. Today there are a number of solutions available that can be used to automate e-mail archiving and streamline the delivery process.

In addition to Smarsh, archiving services targeted to investment advisors include MailBanc, from Englewood, N.J.-based MarketCounsel, a business and regulatory compliance consulting firm; Message Archiver from Global Relay Communications Inc. of Vancouver, British Columbia; and PolicyBridge, from Westminster, Colo.-based Digital Info Security Company.

An additional benefit to using an e-mail archiving service is the ability to supervise employees' e-mail activity from a consolidated dashboard. For example, MailBanc Message Surveillance features a web-based dashboard that compliance officers can use to identify e-mails that may violate company compliance policies.

Advisors can define their own e-mail compliance policies as well as apply existing ones provided by MarketCounsel, including policies addressing potential discrimination, harassment, and even violence or drug use. E-mails are automatically scanned by MailBanc, and compliance officers can choose to quarantine problematic messages for review, whereupon messages are either approved or rejected before they are delivered to the intended recipients.

E-mail Best Practices
The quantity of records requested for an audit by SEC examiners is often very extensive. But the time it takes to satisfy the request can grow dramatically if it includes all of a firm's e-mails for the inspection period. Advisors who lack an automated e-mail archiving system face the daunting task of manually retrieving huge amounts of data potentially spread across multiple accounts. To reduce the burden of maintaining e-mail records subject to inspection, advisors should adopt robust e-mail management systems to automate message archiving and streamline the records delivery process.

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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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