WealthManagement Magazine

SEC Approves Rules that Would Allow E-mail

The SEC gave the industry a big gift for New Year's. On Dec. 31, after lengthy negotiations that took more than 15 months, the SEC approved the NYSE's new rule on broker/client correspondence. The upshot: Brokers can now send E-mail to their clients without having to get prior approval by a supervisor.The new rule eliminates an NYSE requirement that, with certain exceptions, every piece of outgoing

The SEC gave the industry a big gift for New Year's. On Dec. 31, after lengthy negotiations that took more than 15 months, the SEC approved the NYSE's new rule on broker/client correspondence. The upshot: Brokers can now send E-mail to their clients without having to get prior approval by a supervisor.

The new rule eliminates an NYSE requirement that, with certain exceptions, every piece of outgoing correspondence from a broker to a client be reviewed first by a manager. Instead, firms now can spot check a certain percentage of a broker's mail--whether on paper or electronic--under a new standard of "reasonable supervision." A firm now can "consider the complaint and overall disciplinary history (if any) of a registered representative" in establishing the amount of supervision that would be "appropriate for each representative," according to the SEC's release.

Regulators are telling firms to "use your judgment as to what is reasonable, given the total mix of facts and circumstances, but there is no one numerical standard," notes Kenneth Spirer, Merrill Lynch's first vice president and assistant general counsel and the chairman of the Security Industry Association's Technology Regulatory Committee.

The NASD has never required that all outgoing correspondence be reviewed. Rather, it requires prior approval just in two categories--a solicitation for an order, or an execution of a trade.

Brokers won't see an immediate change from this new rule, Spirer cautions. At press time in January, the NYSE was about to mail an informational memo to all of its member firms, giving guidance as to how the new rule is to be implemented. The firms "have to have written policies and supervisory procedures in place," Spirer says, "so unless they have been anticipating this action and are ready to go, they still have to read the release carefully and make sure they meet all of the elements of the rule change."

Included in that is a requirement that the firms institute training for all of their E-mail users and document that training. Spirer notes that such training sessions could count toward meeting continuing education standards.

Every piece of incoming, hard-copy correspondence from clients still has to be reviewed by a supervisor because of concerns expressed by the SEC that complai nts could be suppressed, checks could be diverted, or securities sent in the mail could be lost or stolen.

"But that's been standard all along; it doesn't impose any new burden on the firms," Spirer says.

With outgoing mail to clients, prior approval still will be required for "each advertisement, market letter, sales literature, or other similar communication which is generally distributed or made available to customers or the public," the SEC's release states.

The SEC's release also takes into consideration the fact that many reps now have home computers and communicate via AOL or CompuServe, and notes that an NYSE Informational Memo "states that the Exchange expects members to prohibit communications with the public from employees' home computers or through third-party computer systems unless the firm is capable of monitoring those communications."

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