When Guidance Is Really Rule-Making

July 12, 2007

Thanks for the calls and emails about my posting on the NASD/NYSE's proposed "guidance" for electronic communications. In response, let me clarify my point.

Yes --- I agree! --- the Notice to Members says that it is merely seeking to publish "guidance" about pre-existing electronic communication rules. It is NOT a new rule proposal, per se. However (and this is the point) you should all know by now the danger of a published regulatory guidance. If you don't, let me clarify the problem.

The regulator is required to submit a rule proposal to its membership for approval and also to the SEC. Politics sometimes forces proposed rules to be watered down. A cute trick around that fact is to write a somewhat vague rule and then "CLARIFY" what you, the regulator, "meant". That clarification or guideline then becomes binding (with some exceptions).

The proposed guidance is not as innocuous as it looks. It is proposing to essentially codify a whole list of do's and don't's -- which are couched in terms of "best practices." All well and fine; however, if you don't follow the guidance and it turns out that an employee misused his/her personal computer, PDA, iPhone, then the regulator will charge you for failing to supervise.

The problem is that notwithstanding the laudable goal of better protecting the public and overseeing our industry, we in the indie/regional BD community just can't continue to afford the costs of all this in-house monitoring. I sincerely believe that many of these proposals are intended to socially engineer smaller firms out of business by overwhelming them with expenses and use of non-revenue generating time. I mean, seriously, how many smaller firms can afford to purchase monitoring software AND designate someone to review a meaningful percentage of all covered communications -- IN ADDITION to all the other compliance obligations now imposed upon us?

Ultimately the regulators too frequently come under pressure because of abusive practices at larger firms and then decide that the entire membership must be chastized. The result is that Merrill or Smith Barney goes out and hires five new Compliance folks and installs an expensive computer system from one of its investment banking clients, and smaller firms collapse under the growing expense and salary.

Last I saw, the entire email crackdown began when LaBranche (a NY specialist firm!) refused to turn over to NYSE what it deemed to be "personal" emails, and Spitzer uncovered widespread fraud among wirehouses (which he corroborated through disclosing their internal email). Why can't the rules be drafted so as to first be applied to the miscreants and then see if there are other, more gradual ways to phase in the rule on a wider population?

Finally, if this is such a valid proposal, why doesn't Congress allocate funds to provide for the creation of a uniform monitoring system for electronic communications among all professions? Why must the cost of such regulation always be solely borne by the industry? (Of course that last bit is more than a little facetious --- only major industries that contribute big bucks to Capitol Hill get such government concessions).

You can read my full Guidance comment at http://www.rrbdlaw.com/brokeandbroker/index.php?a=blog&id=18

Bill Singer