[18425]
January 18, 2005
TO: SEC RULES COMMITTEE No. 4-05
COMPLIANCE ADVISORY COMMITTEE No. 5-05
CHIEF COMPLIANCE OFFICER COMMITTEE No. 5-05
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 2-05
SMALL FUNDS MEMBERS No. 7-05
TECHNOLOGY ADVISORY COMMITTEE No. 2-05
INVESTMENT ADVISERS COMMITTEE No. 3-05
RE: SUMMARY OF MEETING WITH SEC STAFF ON E-MAIL COMMUNICATIONS
Last month, Institute staff and members met with representatives from the SEC’s
Division of Investment Management (IM) and Office of Compliance Inspections and
Examinations (OCIE) to discuss electronic communications. The substance of the meeting is
summarized below.
THE STAFF’S INTERPRETIVE GUIDANCE/ANTICIPATED RULE AMENDMENTS
IM staff is currently developing interpretive guidance under the Advisers Act relating to
electronic communications, which it plans to issue early this year. According to the staff, the
guidance is intended to clarify an adviser’s duties with respect to the monitoring, retention, and
production of electronic communications, particularly e-mail and instant messaging. We
discussed various approaches the staff might take in connection with this guidance and the
issues surrounding them. During the meeting, we encouraged the staff, to the extent practical,
to draft the interpretive guidance without reference to particular technologies (e.g., e-mail). This
would enable advisers to rely on the guidance as new technologies are developed or deployed
in the future (e.g., instant messaging).
IM staff informed us that, in addition to the interpretive guidance, the SEC expects to
address electronic communications when it proposes amendments to the recordkeeping rule
under the Advisers Act. This rulemaking initiative is on a slower track than the interpretive
guidance.
SURVEILLANCE/SUPERVISION
A significant area of concern to members that we raised with the staff relates to whether
an adviser must supervise and/or conduct surveillance of their employees’ e-mails.
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Surveillance of all e-mail communications is problematic for advisers due to the widespread use
of e-mail by employees for both for business and personal purposes. We noted that there is no
specific requirement under the federal securities laws that requires an adviser to supervise or
conduct surveillance of employee e-mails. In addition, the supervisory requirement in Section
203(e)(6) of the Advisers Act provides advisers with flexibility to determine how best to fulfill
their supervisory obligations. We recommended that the interpretive guidance affirm an
adviser’s ability to determine whether e-mail surveillance is an appropriate means by which to
ensure the adviser’s compliance with the Advisers Act.
ELECTRONIC MAINTENANCE OF RECORDS/UNDULY BURDENSOME E-MAIL REQUESTS
In keeping with prior public statements, the staff reiterated its view that it may examine
all records maintained by an adviser, regardless of whether or not they are required records
under Rule 204-2. We emphasized to the staff the difficulties and burdens experienced by
members in responding to broad e-mail requests, especially for e-mails that, for example, are
maintained on legacy systems or are not segregated based on whether they relate to business or
personal matters. We also emphasized that, as a consequence of the foregoing, advisers are
expending considerable resources in responding to these broad requests – resources that might
be better spent handling other matters.
OCIE staff told us that they are sensitive to these concerns and willing to reconsider, on
a case-by-case basis, requests for e-mails that may be unduly burdensome or time-consuming
for the adviser to produce. OCIE staff urged advisers, at the commencement of an inspection, to
discuss with their examiners any concerns they may have with e-mail production and
determine if an alternative approach can accommodate the examiners’ request without
impeding the inspection (e.g., a rolling schedule of production or alternative means of providing
the same information). If this effort is unsuccessful, the staff encouraged advisers to pursue
their concerns with more senior OCIE staff, first in the regional office and then, if necessary, in
the Washington, D.C. office.
ASSERTIONS OF PRIVILEGE
The staff indicated that it is recognizes advisers’ right to claim privilege in connection
with discrete records. To facilitate the staff’s consideration of an adviser’s assertion of privilege,
the staff encouraged advisers to be prepared to provide examiners with certain information
about the privileged communication (i.e., the recipient(s) and sender(s) of the communication;
its date; its general subject matter; and the privilege asserted). While the staff believes it is
preferable for advisers to maintain, on an ongoing basis, a privilege log that contains this
information, the staff indicated that the absence of such a log will not preclude the adviser’s
ability to assert privilege. The staff suggested that an adviser that does not maintain a privilege
log should be prepared to provide the examiners, on a timely basis and in a manner that does
not delay or impede the inspection, the information that would be included in such log.
The meeting also covered instances when privileged documents are inadvertently
provided to the staff. The staff expressed its willingness to consider a timely request from the
adviser for the return of the documents to allow the adviser to attempt to retain the documents’
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privileged status.
*
An adviser making such a request may be asked to provide the staff with a
letter of explanation and a signed affirmation that the adviser will not attempt to assert a “fruit
of the poisonous tree” defense in connection with the documents in the future. This affirmation
is intended to protect the SEC from an adviser alleging as a defense in any future proceeding
that, but for the SEC staff having had access to the privileged communication (the “poisonous
tree”), the SEC staff would not have been able to discover other allegedly incriminating
evidence (the poisonous tree’s fruit).
Members wishing to discuss electronic communications further should contact the
undersigned by phone (202-326-5825) or e-mail (tamara@ici.org).
Tamara K. Salmon
Senior Associate Counsel
* An adviser’s ability to effectively claim privilege on a document that was inadvertently provided to the staff will
ultimately be determined by a court of competent jurisdiction considering the issue and not by the Commission’s
staff.