Instant messaging has become a popular means for financial advisers to communicate with clients. But now regulations governing electronic communications are prompting some financial services firms to shut down IM traffic until it can be tracked and stored like regular e-mail.
"There are a lot of firms that would like to use this technology [for business transactions]," said John R. Hewitt, an attorney at Mayer, Brown & Platt's New York office who advises investment banks and electronic brokerages. "[But] it's not an e-mail, it's not a telephone conversation, and no one quite knows how it's going to be interpreted."
The Securities and Exchange Commission and the National Association of Securities Dealers Inc. currently identify e-mail and IM traffic as communications with the public that must be monitored and saved by companies.
Hewitt said that the SEC, under new Chairman Harvey Pitt, is reviewing its guidance on the use of the Internet, "and indications are that the e-mail storage requirements may be made less burdensome." He added that instant messages "hopefully will be excluded entirely from the rule requirements."
But Thomas Weisel Partners LLC isn't waiting for the SEC's decision. The San Francisco-based merchant bank has blocked its employees from using America Online Inc.'s AOL Instant Messenger, Microsoft Corp.'s MSN Messenger and Yahoo Inc.'s Yahoo Messenger, the three most popular IM services on the market.
Pamela Housley, compliance manager at Thomas Weisel, said that the bank is installing IM technology from FaceTime Communications Inc. in Foster City, Calif., so that it can track message traffic internally. It's also considering IM tracking software from SRA International Inc. in Fairfax, Va., and Zantaz Inc. in Pleasanton, Calif., she said.
"Sure, it's a concern," Housley said in reference to the regulatory issue. "Instant messaging is an integral part of doing business. We're just trying to stay ahead of the curve." Housley added that she doesn't expect a softening of the regulations regarding IM traffic.
SEC officials didn't return calls by deadline seeking comment on the agency's position regarding IM.
Taking Next Step With Care
NASD is also considering the issue but hasn't decided how to proceed. "The question on the table is how the NASD is going to move forward on the matter," said association spokesman Tom Holloman. "We really aren't ready to go out publicly with how we stand on this yet."
The existing regulatory requirements place banks and brokerages in a tough spot, particularly as overall IM traffic continues to grow.
According to a study released last week by New York-based Jupiter Media Metrix Inc., use of IM for business purposes was up 110 percent in the U.S. during September, growing to 4.9 billion minutes from 2.3 billion minutes in the same month last year.
Should the SEC and NASD decide to stick with their current regulations, IM could become as cumbersome an issue as e-mail is today for financial services companies. Many securities firms have opted to save all e-mail traffic on WORM technology because of SEC rules that are written to protect consumers from being fed misleading or illegal information by their advisors.
WORM, an acronym for write once, read many, is an optical storage technology that allows users to write data onto a disk just once. After that, the data is permanent and can be read any number of times.
"The SEC has been pretty strict about monitoring conversations between investment counselors and their clients," said Larry Tabb, an analyst at Needham, Mass.-based TowerGroup.
Tabb said most financial services firms are complying with the SEC rules by shutting down IM traffic, since there aren't a lot of robust software applications available that can track and store the messages.
Kirk Oberliesen, director of institutional trading services at Blackwood Securities LLC in New York, said IM can be a great tool for communications among broker/dealers. "I use Yahoo IM and communicate to all my remote offices," he said. "Being required to track and store every message would be a huge burden."