SEC rules to include online means

Investment brokers who communicate online with clients may be subject to email monitoring under rules approved by the Securities Exchange Commission that go into effect Sunday.

The surveillance provision is part of major amendments to the National Association of Securities Dealers Regulation rules for the supervision and review of correspondence with the public. Until now, all communication to investors or the media regarding securities or investment banking had to be preapproved by a broker's company, because firms are liable for that material.

However, the rules never specified whether it was permissible to use email to send advice to clients or transmit columns to publications, for example.

It is no surprise that the securities industry has been wary of letting employees post advice online or communicate digitally. For example, individuals have been sued by companies for using the Net's bulletin boards and electronic newsletters to allegedly manipulate stock prices.

But under rules passed December 31, investment firms now can implement more flexible polices to encourage the use of email for interacting with the outside world. However, National Association of Securities Dealers (NASD) members must write procedures for the review of incoming and outgoing electronic communication. When messages aren't prereviewed, firms must have a plan for "surveillance and follow-up to ensure that [its] procedures are implemented and adhered to," the SEC-approved rules state.

In addition, firms must monitor telecommuters: "NASD Regulation would expect members to prohibit correspondence with customers from employees' home computers or through third-party systems unless the firm is capable of monitoring such communications."

The New York Stock Exchange adopted identical rules, which went into effect in December.

The rules already have raised some privacy concerns. And at least one organization has asked the SEC to clarify the surveillance stipulation. The Electronic Messaging Association (EMA) is concerned about the reach of firms' home-monitoring policies.

"The question we pose is to what extent does the amendment require such restrictions on, and monitoring of, employee email at home?" EMA president James Bruce said in a letter to the SEC. "For example, would the amendment permit employers to comply by requiring employees to send to their employer copies of any electronic messages sent to, or received from, the public regarding the securities business?"

NASD and SEC officials say the provisions have caused some stir, and that some type of clarification can be expected. But the rule itself will not change.

"If an individual broker posts information online or communicates with clients via email, our member is responsible for that content," Larry Kosciulek, NASD's assistant director of investment company regulation, said today.

Michael Robinson, a spokesman for the NASD, added, "Whether you're talking about a hard copy, email, or smoke signals, this is not a new issue that correspondence needs to reviewed to make sure it's accurate, timely, and not misleading. At the end of the day, we do this to protect investors."