The SEC and Destruction of Documents: A Call for Standardization

The Financial Times recently reported that the SEC may have destroyed over 9,000 documents related to the legal investigations of various financial groups, including SAC Capital, Bernard Madoff and Goldman Sachs. Sen. Charles Grassley (R-IA) is quoted as saying “If these charges are true, the agency needs to explain why it destroyed documents, how many documents it

destroyed over what time frame, and to what extent its actions were consistent with the law.” Apparently this is not the first time that the SEC’s actions have been scrutinized. According to the article, Sen. Grassley “has repeatedly questioned the agency’s enforcement actions and procedures.” While it is unclear how or why the SEC destroyed the documents, the accusations are alarming, especially during this time of economic turmoil. Moreover, there is a hint of irony to the story in that the organization responsible for holding financial organizations accountable for their services is unable to account for its own actions. Herein lies the one of the problems with the financial and securities regulation sector in general – no best practices, guidelines, or standards exist to guide these organizations in the management of their investigative records, that is, evidence collected and created by investigators and litigators. It is clear that large amounts of evidence, in all forms and formats, are placing strains on financial and securities organizations. Within the financial and securities regulator community there is no established set of best practices or international standard that guides these organizations on how best to manage their investigative records. Such a document may provide the necessary guidance for these organizations to, among other actions, offer best case management practice, establish the necessary measures for proper chain of custody needed to protect the authenticity of the document, and determine appropriate retention and disposition periods. Following an established set of guidelines, best practices, and/or international standards instills a level of accountability among any organization’s community and peer institutions. This documentation should also lead to the creation of internal documentation by each organization, such as policies and procedures, leading to the education of staff to better manage their records, the creation of necessary units or departments to handle the flow of evidence within the organization, and, most importantly, the support of senior management (or at the very least senior management sign off on the documentation). The unfortunate attention that the SEC has received highlights the need for a set of best practices, guidelines, and/or international standards for financial and securities regulators. A recent project conducted by the author as part of CiFER entitled “Guidelines for Managing Records Created in the Investigative and Litigation Process” resulted in a White Paper proposing an initial set of guidelines for these organizations. These guidelines merge legal and recordkeeping requirements, drawing on a variety of sources such as academic literature, legal requirements, interviews with individuals for several and securities organizations, and relevant documentation. By adopting these recommendations, financial and security regulators will strengthen the management of their investigative records. These practices will enable regulatory organization to more effectively and efficiently respond to legal challenges and be able to better justify their actions when they come under close scrutiny by external groups, banzai sports center such as the Congressional Committee led by Sen. Grassley. The proposed Guidelines may be found on CiFER’s website: buy kamagra online Donald C. Force August 23, 2011

Risk of Outsourcing IT Functions

The recent computer glitch at Barclays Bank in the UK prevented customers from withdrawing money from cash machines and brought down telephone and internet banking services. While the reasons for this glitch are yet unknown, this case is not an isolated incident in the banking industry. Just a month before the system failure at Barclays Bank, DBS Bank in Singapore encountered a system failure resulting in a 7 hour downtime in machine, internet and mobile banking services inflatable fullcourt press games. An investigation revealed that this was largely a human error. IBM engineers did not abide by correct procedures in changing a faulty cable to the bank’s storage system four times. The system shut down to protect data, resulting in a disruption of banking services. IBM is DBS’ network vendor since 2002. While outsourcing of IT services is nothing new and allows for financial institutions to focus on their core functions, some financial institutions may need to be reminded that outsourcing is not a strategy to transfer their risks to a third party. Outsourcing does not negate their responsibility in meeting regulatory requirements kids inflatable toys. The Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory body rebuked DBS for not putting in place a technology risk management framework of its mainframe storage network and imposed an additional $230 million of regulatory capital for operational risks. MAS also requested DBS to conduct an internal review of its system, to diversify its risk exposure so that it does not become overly reliant on a single service provider and to assess the

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ability of service providers in meeting the banks’ service level standards. The MAS, in a strongly worded press release, said “MAS takes a serious view of this incident. We expect all financial institutions to put in place a robust technology risk management framework that will ensure the reliability, resiliency and speedy recoverability of the institution’s IT systems and infrastructure, whether outsourced or in-house. We have recently written to the CEOs of all financial institutions to remind them of this. MAS will not hesitate to take appropriate supervisory action against any financial institution which fails to meet the standards set in the Internet Banking and Technology Risk Management Guidelines.” The bottom line: compare prizes pool slides it pays for financial institutions to keep a close eye on technology risk as in addition to business losses from system outages, toy helicopter with camera there can be regulatory fines tunnels gonflable. Elaine Goh, CiFER Research Team

JP Morgan Fine: We Might have Seen it Coming

It may seem strange to say that we might have seen the JP Morgan fine concerning client money coming. Following the collapse of Lehman Brother's, the FSA fired a warning shot off it's bow in a Dear Compliance Officer letter in March 2009 in which it stated, "Recent firm visits suggest that many firms do not have the appropriate trust acknowledgements in place. Where these are placed on file, we found instances where the documentation had not been executed

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in the name of the relevant bank or with appropriate authority on behalf of the relevant bank. Creating and operating these accounts are of paramount importance in establishing trust status for the benefit of the underlying client, the purpose of which again is only apparent on insolvency. . . In periods of market turbulence, we would anticipate that firms would conduct due diligence more frequently. We are reminding firms to document their due diligence." The reason that the FSA has become so exercized about a so-called “administrative error” is that this particular error has been implicated in global economic crisis; namely, poor trust documentation surrounding the process of rehypothecation – the process by which a dealer lends out collateral posted by a client to another counterparty. Rehypothecation of client assets was one of the “dominant drivers of contagion” during the financial crisis, amplifying the market turmoil in the wake of the Lehman Brothers collapse according to the the Senior Supervisors’ Group (SSG). The body, consisting of financial regulators from the US, Japan, Germany, France, the UK, Canada and Switzerland, made the assertion in its Risk Management Lessons from the Global Banking Crisis of 2008 report. The authors noted that, following the bankruptcy of Lehman Brothers International Europe, clients that had elected to allow the dealer to rehypothecate their assets found themselves caught in the bankruptcy as mere unsecured creditors to the estate, rather than having their assets preserved in segregated customer accounts. As a result, counterparties that should not have been significantly affected by the collapse of the dealer found their assets trapped in the insolvency, shrinking their funding base and dragging a host of additional institutions into a precarious fiscal position, further deepening the crisis. Lehman Brother’s administrators PricewaterhouseCoopers confirmed that more than $40 billion in hedge fund collateral had been swallowed in the collapse. Custody of assets and rehypothecation practices were dominant drivers of contagion, transmitting liquidity risks to other firms. The loss of rehypothecated assets and the “freezing” of custody assets created alarm in the hedge fund community and led to an outflow of positions from similar accounts at other firms. Some firms’ use of liquidity from rehypothecated assets to finance proprietary positions also exacerbated funding stresses, the authors concluded. At the heart of the problem lay a failure to keep accurate and complete trust documentation. Given this latest move by the FSA, risk managers are warned to establish regular checks on the quality of this type of documentation. Dr. Victoria Lemieux, CiFER