Though it may be the hottest communications technology to hit Wall Street since the advent of e-mail in the late '90s, regulators have a clear message about instant messaging: If you can't save it, store it and retrieve it, don't even think of using it.
"I think compliance is, on average, below what regulators would like to see," says Damon Kovelsky, a capital-markets research analyst with Financial Insights. The reason for that, he says, is twofold. First off, firms are still taking a wait-and-see approach to compliance as they anticipate more specific regulatory guidance in the near-term. Second, not wanting to deal with a messy situation, some are ignoring the fact that traders are using public instant-messaging services like Yahoo!, MSN and AOL, which are not suitable for secure and retrievable communications.
The regulations in question include the NASD's "Notice to Members" (03-33), which outlines the regulators' expectations of its member firms about IM usage. The notice clearly states that the "content and audience of each type of electronic communication determines the appropriate supervisory and record-keeping treatment." Those record-keeping treatments include the Securities and Exchange Commission rule 17a-4, which also specifies it is the content and not the medium that determines retention, as well as NASD rules 3010 and 3110.
Kovelsky says it's imperative for firms to stop their traders from using public IM services and move them to private systems. Those systems can be either homegrown or licensed from vendors like Reuters or Bloomberg. In addition to contracting with a private service, firms also need retention and storage services from vendors like Zantaz and Iron Mountain.
Stopping traders from using a public IM system, however, is a bit more complicated than just adding "please" to the end of the request. Kovelsky says IT personnel must block the service from traders' desktops by configuring the firm's firewall to prevent the IM java applet from being downloaded. The situation does have the potential to get a bit sticky, he says, if such a step also blocks traders from downloading legitimate applets with which they need to do business.
But there really is no choice in the matter, he advises, because firms cannot have traders using communications tools that do not yield a clear, sequential and retrievable audit trail. Furthermore, having a communications channel that employees know is untrackable is a temptation the firm can do without. "To think people will not take advantage of it is very naive," says Kovelsky.
Referring to the New York State attorney general who has been very active in probing misconduct in the securities industry, he adds, "You don't want Eliot coming by."
Randolph Kahn, Esq., founder of information-management consulting firm Kahn Consulting, agrees that there are ample technologies in the marketplace to help firms comply with the new regulations.
Kahn notes that IM retention is much different than e-mail retention. He explains that a company can internally save and store its e-mail communications more easily because those messages move through its servers. IM retention, however, requires the help of a third party that can store, bundle and return the messages back to the firm.
Even with that scenario, he says, unraveling a string of IM communications can be difficult. "With IM, there is rapid-fire, back-and-forth communication among a number of different individuals "Who they are and where they work may not be clear. Unless you can capture all of that, you will have e-mail-contextual problems times 10," says Kahn. "Additionally, not knowing who said what to whom in what order is germane and potentially damaging."
He adds that in today's regulatory environment doing nothing is not an option. "Being tomorrow's headline, for any institution, is something they don't want, and the amount of economic harm from bad press is far more damaging than any penalties meted out," says Kahn. "Also, while they are focusing on cleaning up the problem, they are not focusing on their core business."
Taking IM away from traders will not help them to focus on the business at hand, says Kovelsky, because the tool has become such a part of what they do. Rather, he says, the goal for firms is to switch from a public to a private forum, where compliance with regulations can be achieved while allowing the traders to continue communicating in the way they feel most comfortable.
"The worst thing you can do is stop them from doing something they like," says Kovelsky. "They are creatures of habit, and you need to keep offering them better tools for them to do their jobs."