SEC, NYSE, NASD Fine Five Firms Total of $8.25 Million for Failure to Preserve E-Mail Communications
December 3, 2002 - The Securities and Exchange Commission, the New York Stock Exchange and NASD today announced joint actions against five broker-dealers for violations of record-keeping requirements concerning email communications. The firms consented to the imposition of fines totaling $8.25 million, along with a requirement to review their procedures to ensure compliance with record-keeping statutes and rules.
Each of the firms - Deutsche Bank Securities Inc.; Goldman, Sachs & Co.; Morgan Stanley & Co. Incorporated; Salomon Smith Barney Inc.; and U.S. Bancorp Piper Jaffray Inc. - consented, without admitting or denying the allegations, to findings that each:
- Violated Section 17(a) of the Securities Exchange Act of 1934, Rule 17a-4 under the Exchange Act, NYSE Rule 440 and NASD Rule 3110 by failing to preserve for a period of three years, and/or preserve in an accessible place for two years, electronic communications relating to the business of the firm, including interoffice memoranda and communications.
- Violated NYSE Rule 342 and NASD Rule 3010 by failing to establish, maintain and enforce a supervisory system to assure compliance with NASD and NYSE rules and the federal securities laws relating to retention of electronic communications.
The firms agreed to a penalty of a censure and fines totaling $8.25 million - $1.65 million per firm - to be paid to the U.S. Treasury, NYSE and NASD. The firms also agreed to review their procedures regarding the preservation of email communications for compliance with federal securities laws and the rules of the NYSE and NASD. Each firm agreed to inform each regulator, in writing, within 90 days that it has established systems and procedures reasonably designed to achieve compliance with the statute and rules relating to email retention.
The respondents' failure to preserve email communications andor to maintain them in an accessible place was discovered during investigations being conducted jointly and separately by the SEC, NYSE and NASD.
Some firms backed up email communications on tape or other media that was represented as part of a process designed as a disaster-recovery or business-continuity measure, or for another business purpose. However, these firms discarded or recycled and overwrote their back-up tapes and other media, often a year or less after back-up occurred.
Each firm had inadequate procedures and systems to retain and make accessible email communications. While some firms relied on employees to preserve copies of the email communications on the hard drives of their individual personal computers, there were no systems or procedures to ensure that employees did so.
In those instances in which the firms did retain email communications, those communications were often stored in an unorganized fashion on back-up tapes, other media, or on the hard drives of computers used by individual employees. In some instances, hard drives of computers preserving electronic mail communications were erased when individuals left the employment of the firm.
Although each firm had an obligation to preserve email communications pursuant to Section 17(a) of the Exchange Act and Rule 17a-4 thereunder, NYSE Rule 440, and NASD Rule 3110, during all or part of the period from 1999 to at least 2001, each of the firms failed to preserve for three years, and/or to preserve in an accessible place for two years, electronic communications (including interoffice memoranda and communications) that related to its business as a member of an exchange, broker or dealer.