Under Scrutiny, Firms Tighten E-Mail Use

Ignites
Article published on May 10, 2005

By Chris Frankie

Industry lawyers and compliance professionals are putting the clampdown on e-mail practices in a bid to limit firms’ regulatory exposure.

What is acceptable to include in e-mail, how to categorize and store them and when to use other means of communication are some of the issues with which industry lawyers and compliance staffs are grappling.

E-mail, of course, has played an important role in uncovering the fund trading scandal and has provided regulators with the smoking gun they needed to make their cases. Further, some of the e-mails have been highly damaging to firms’ reputations. In one particular example, a Janus executive’s e-mail showed his willingness to overlook the firm’s policy on market timing simply to collect assets.

John Shields, a Boston-based director in the financial and insurance services practice at Navigant Consulting, says regulators’ changing views about the status of e-mail have forced firms to reevaluate their e-mail policies. Many industry lawyers had argued that e-mails should not be considered under the SEC’s books and records rule, which requires firms to retain certain communications.

Now that it is apparent that that argument is a losing one, firms have regrouped and are mounting new lines of defenses.

“There is certainly a heightened sense and awareness to not only what goes through e-mail and instant messaging, but also a lot more interest into how to categorize e-mails,” Shields says.

Firms are “admonishing” their employees that e-mails should not be viewed in the same way as a phone conversation or face-to-face chat. The danger of using handheld electronic devices and e-mail when discussing important compliance matters is that those communications are open to regulators’ interpretations.

Stephanie Monaco, a partner in the securities regulation and enforcement group of law firm Crowell & Moring, agrees, saying a lot of e-mails are open to “misconstructions.”

Executives should “go back to the old ways” whenever possible, picking up the phone to have a conversation or taking a quick walk down the hall to convey the message personally, she says.

“E-mail has experienced its last useful life and the smarter thing is to start going back to communicating with each other,” she says.

It is not an attempt to “hide the truth,” she says, but rather an effort to stave off a potential problem that could arise from an SEC examiner's reading something into an e-mail that was not intended.

Monaco says another way to head off potential problems with the SEC is to clearly label communications between executives and legal counsel as privileged. Despite the fact that e-mail between top executives and legal counsel should be a clear indicator that the communication could be privileged, Monaco says she clearly marks each e-mail as such.

She also recommends that clients direct all e-mail from counsel to a folder designated as privileged communications.

Mike Malloy, partner at law firm Drinker, Biddle & Reath, says if executives must use e-mail, there are a number of steps they should take to ensure they are not asking for trouble inadvertently. Speaking at a compliance conference last month, Malloy suggested that every executive pretend each e-mail is written on official company letterhead.

However, Malloy urges industry professionals to do away with e-mail if at all possible. “Nobody should use e-mail anymore,” he said. “When I see things going out in e-mails I just cringe. Use faxes, use phones.”

Having incriminating e-mails by top executives displayed by regulators such as New York attorney general Eliot Spitzer is a huge motivational factor for firms to revamp their policies, but e-mail isn’t going away.

Ropes & Gray partner Greg Sheehan says there hasn’t been a wholesale movement away from the corporate use of e-mail because it is so “pervasive,” but the industry is in a period of transition.

He says firms are taking two different approaches. One is to train employees and provide guidance as to the proper use of e-mail and the types of things that shouldn’t be included in such communications.

The other, more judgmental, approach is to allow executives to determine what items are all right to include and what should be classified under attorney-client privilege.

“Everybody I know is concerned about this,” Sheehan says. “Anytime anybody puts pen to paper or fingers to keyboard, you have got to assume it’s a permanent record.”

Firms want to avoid “hanging themselves” through e-mail the way several scandal-tainted firms did. Many are taking steps to try and ensure they aren’t “laying a ticking time bomb,” he says.

While the heightened regulatory environment hasn’t had a chilling effect on the use of e-mail, it been more “cumbersome and makes everyone’s head swell,” Sheehan says.