e-discovery 2.0

It’s no surprise that the first industry to be heavily regulated regarding social media use was the financial services industry. The predominant factor that drove regulators to address the viral qualities of social media was the fiduciary nature of investing that accompanies securities, coupled with the potential detrimental financial impact these offerings could have on investors.

Although there is no explicit language in FINRA’s Regulatory Notices 10-06 (January 2010) or 11-30 (August 2011) requiring archival, the record keeping component of the notices necessitate social media archiving in most cases due to the sheer volume of data produced on social media sites. Melanie Kalemba, Vice President of Business Development at SocialWare in Austin, Texas states:

“Our clients in the financial industry have led the way, they have paved the road for other industries, making social media usage less daunting. Best practices for monitoring third-party content, record keeping responsibilities, and compliance programs are available and developed for other industries to learn from. The template is made.”

eDiscovery and Privacy Implications. Privacy laws are an important aspect of social media use that impact discoverability. Discovery and privacy represent layers of the Rubik’s cube in the ever-changing and complex social media environment. No longer are social media cases only personal injury suits or HR incidents, although those are plentiful. For example, in Largent v. Reed the court ruled that information posted by a party on their personal Facebook page was discoverable and ordered the plaintiff to provide user name and password to enable the production of the information. In granting the motion to compel the Defendant’s login credentials, Judge Walsh acknowledged that Facebook has privacy settings, and that users must take “affirmative steps” to keep their information private. However, his ruling determined that no social media privacy privilege exists: “No court has recognized such a privilege, and neither will we.” He further reiterated his ruling by adding, “[o]nly the uninitiated or foolish could believe that Facebook is an online lockbox of secrets.”

Then there are the new cases emerging over social media account ownership which affect privacy and discoverability. In the recently filed Phonedog v. Kravitz, 11-03474 (N.D. Cal.; Nov. 8, 2011), the lines between the “professional” versus the “private” user are becoming increasingly blurred. This case also raises questions about proprietary client lists, valuations on followers, and trade secrets  – all of which are further complicated when there is no social media policy in place. The financial services industry has been successful in implementing effective social media policies along with technology to comply with agency mandates – not only because they were forced to by regulation, but because they have developed best practices that essentially incorporate social media into their document retention policies and information governance infrastructures.

Regulatory Framework. Adding another Rubik’s layer are the multitude of regulatory and compliance issues that many industries face. The most active and vocal regulators for guidance in the US on social media have been FINRA, the SEC and the FTC. FINRA initiated guidance to the financial services industry, and earlier this month the SEC issued their alert. The SEC’s exam alert to registered investment advisers issued on January 4, 2012 was not meant to be a comprehensive summary for compliance related to the use of social media. Instead, it lays out staff observations of three major categories: third party content, record keeping and compliance – expounding on FINRA’s notice.

Last year the FTC issued an extremely well done Preliminary FTC Staff Report on Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers.  Three main components are central to the report. The first is a call for all companies to build privacy and security mechanisms into new products – considering the possible negative ramifications at the outset, avoiding social media and privacy issues as an afterthought. The FTC has cleverly coined the notion, “Privacy by Design.” Second, “Just-In-Time” is a concept about notice and encourages companies to communicate with the public in a simple way that prompts them to make informed decisions about their data in terms that are clear and that require an affirmative action (i.e., checking a box). Finally, the FTC calls for greater transparency around data collection, use and retention. The FTC asserts that consumers have a right to know what kind of data companies collect, and should have access to the sensitivity and intended use of that data. The FTC’s report is intended to inform policymakers, including Congress, as they legislate on privacy – and to motivate companies to self-regulate and develop best practices. 

David Shonka, Principal Deputy General Counsel at the FTC in Washington, D.C., warns, “There is a real tension between the situations where a company needs to collect data about a transaction versus the liabilities associated with keeping unneeded data due to privacy concerns. Generally, archiving everything is a mistake.” Shonka arguably reinforces the case for instituting an intelligent archive, whether a company is regulated or not;  an archive that is selective about what it ingests based on content, and that has an appropriate deletion cycle applied to defined data types/content according to a policy. This will ensure expiry of private consumer information in a timely manner, but retains the benefits of retrieval for a defined period if necessary.

The Non-Regulated Use Case­. When will comprehensive social media policies, retention and monitoring become more prevalent in the non-regulated sectors? In the case of FINRA and the SEC, regulations were issued to the financial industry. In the case of the FTC, guidance had been given to companies regarding how to avoid false advertisement and protect consumer privacy. The two are not dissimilar in effect. Both require a social media policy, monitoring, auditing, technology, and training. While there is no clear mandate to archive social media if you are in a non-regulated industry, this can’t be too far away. This is evidenced by companies that have already implemented social media monitoring systems for reasons like brand promotion/protection, or healthcare companies that deal with highly sensitive information. If social media is replacing email, and social media is essentially another form of electronic evidence, why would social media not be part of the integral document retention/expiry procedures within an organization?

Content-based monitoring and archiving is possible with technology available today, as the financial sector has demonstrated. Debbi Corej, who is a compliance expert for the financial sector and has successfully implemented an intensive social media program, says it perfectly: “How do you get to yes? Yes you can use social media, but in a compliant way.” The answer can be found at LegalTech New York – January 30 @ 2:00pm.

In the first settlement of its kind, FINRA settled with the SEC on October 27, 2011 due to allegations over a 2008 incident where a regional Kansas City office of FINRA doctored documents.  The alleged doctored documents were from three internal staff meetings, where information was either edited or deleted and then provided to the SEC with the “inaccurate and incomplete” changes. Mary Shapiro, currently the Chairman of the SEC, is in an interesting spot as she was Chief Executive of FINRA at the time of the alleged wrongdoing.  She apparently had no direct involvement with the decision to take action against FINRA.

The motives for doctoring the documents are unclear, and so is whether or not the alterations of the documents led to any material damage other than FINRA’s diminished credibility.  Ironically, the SEC has had its own struggles in recent months with a slew of articles published in various newspapers highlighting their own challenges with document retention and the improper destruction of documents. Both of these scenarios have been called to light by whistleblowers within their respective agencies.

These antics certainly pose the question: Is it a good use of taxpayer money to have regulatory agencies fighting each other over document retention and record keeping practices? The answer is probably no. But the first question begs the second: If they don’t do it, who will?  While information management is not the sexiest part of the SEC and FINRA’s responsibilities, it certainly is an important one and the foundation of their information intelligence.  Without proper document retention and information governance, the probability of connecting the dots to discover insider trading or other malfeasance is low.  Moreover, in order for agencies to retain credibility they need to be able to locate documents with ease and speed and those documents must be truthful and accurate.

Because FINRA is a self-regulatory firm for securities and is overseen by the SEC, it seems appropriate that they investigate matters like the one at hand.  According to the SEC, the 2008 incident is the third instance in the past eight years where an employee of FINRA, or its predecessor, the National Association of Security Dealers, has provided altered or misleading documents to the SEC.  It remains to be seen if this is intentional on the part of FINRA to conceal undesirable facts or to promote an item on their agenda, or if in fact they are simply negligent with regard to their record keeping policies.  Either way, it is a problem for the SEC and the government in general as it undermines agency credibility and compromises the ability to intelligently leverage information.   This settlement also does no favors for FINRA at a time when they aim to expand their 4,600 base of supervisory authority to include 10,000 more investment advisory firms.

So, what can be done about this behavior and the risks it poses? Corporations and governments are facing the same issues that information governance poses due to the data explosion and the growing complexity of data sources today.  At a minimum, there needs to be a policy in place that governs how data, regardless of form, is handled and disposed of in the information lifecycle.  It also makes sense to form an audit committee within the government that can inspect and assess the information management practices of each agency, as well as serve as a  third party mediator between agencies when these challenges arise.  This is a good idea for two reasons.  One, agencies can focus on their responsibilities instead of getting sidetracked with issues they are not expert in, like document retention or record management.  Next, this problem has reached a point that it’s necessary to appoint an independent group to audit the government due to the data explosion and pace of technology today.  We have the SEC and FINRA to watch the financial industry and provide us with assurance that business is being conducted in a lawful manner.  We don’t need the SEC or FINRA to take up document retention as another responsibility, as there are other professionals that can do that more effectively and independently.

While expansion of government is not the goal of forming yet another committee, this committee could potentially free up agencies to do more of the work they are charged with.  This would also promote standardization across agencies and regulatory bodies, which would be a giant step in the right direction as data volumes grow.  The actions that resulted in this settlement were remedial in nature.  FINRA took decisive action to air a podcast about document integrity and scheduled an agency-wide town hall meeting addressing the same for all current and new employees.  They also hired an independent outside consultant to provide additional staff training on document retention and integrity.  This will be a continual educational process for the private and public sector, and employee training and auditing the process will be the lynchpins for success.  The element of deflection is also at work here, as the SEC is not a model example of best practices for document retention and the moment.

The SEC is working through allegations of document destruction, FINRA is accused of document doctoring, but all these assertions circle back to the central theme of having a document retention policy and compliance with that policy.  This naturally leads to the need for education and training, and the ultimate auditing of the process for compliance.  In this rare case of watchdog bites watchdog, three points become clear: 1) The SEC has a higher and best use other than policing these issues; 2) information management has reached a point that it requires a separate and independent body to monitor and regulate allegations of misconduct; and 3) sometimes it takes a dog biting a dog to truly illustrate the magnitude of a problem.

Is your organization among those that have jumped with both feet into the world of social media?

Recent survey results confirm that social media use is on the rise for almost all organizations across the globe.  This is particularly the case in the financial services industry.  A recent industry survey confirms that nearly two-thirds of all asset managers are actively using social media for marketing purposes.

Despite its increasing popularity and ubiquity, the securities industry is experiencing growing pains with social media.  Just like other industries, financial services providers are struggling with applying notions of information governance to these non-traditional forms of communication.  Indeed, with social media becoming an increasingly important data source for both business and legal purposes, it behooves enterprises to develop an information governance strategy with respect to this data.  The best practices being followed in this regard by financial services companies should be paradigmatic for organizations across the board.

Social Media Challenges for Financial Services Companies

Many financial services companies are experiencing difficulty supervising or retaining social media communications as required by FINRA Regulatory Notice 10-06.  A landmark regulation, FINRA 10-06 was promulgated last year to protect investors from false or misleading claims made on social networking sites.  To comply with this regulation, securities firms must develop protocols that enable them to supervise and retain social media content and ensure conformity by their representatives.

It is no secret that social media communications continue to bedevil securities firms.  Indeed, 63% of surveyed asset managers reported that “regulatory recordkeeping” remains their greatest challenge with respect to social media.  And as more firms move toward social media marketing, the number of financial services companies experiencing difficulty with retention is also likely to increase.

The challenges firms are experiencing with social media are not limited to retention.  They also include the need to properly supervise social media communications.  This was acknowledged by FINRA chairman and chief executive Richard Ketchum at an industry event this past June.  Among other social media issues, Ketchum explained that firms have questioned how they can most effectively supervise their employees’ use of smart phones and tablet computers that can access company sites.  In response to these matters, FINRA just issued Regulatory Notice 11-39 to help clarify several lingering questions regarding retention and supervision.

Best Practices for Addressing the Challenges of Social Media

Given the complexity of these issues, regulated enterprises need to know what best practices can be followed to ensure compliance with pertinent FINRA and SEC regulations.  While there are perhaps many steps that could be implemented, three stand out as indispensable for firms.

The first is that firms should develop a global plan for how they will engage in social media marketing.  This initial step is particularly important for groups that are just now exploring the use of social media to communicate with investors.  Having a plan in place that maps out investor contact and communication strategy, provides for required supervision of firm representatives, and accounts for compliance with regulatory requirements is essential for securities firms.  Failing to take these steps could result in fines, suspensions or worse.

The next step involves educating and training employees regarding the firm’s social media plan.  This should include instruction regarding what content may be posted to social networking sites and the internal process for doing so.  Policies that describe the consequences for deviating from the firm’s social media plan should also be clearly delineated.  Those policies should detail the legal repercussions – civil and criminal – for both the employee and the firm for social media missteps.

Third, firms can employ technology to ensure compliance with their social media plan.  Indeed, FINRA 10-06 specifically emphasizes the importance of deploying technological “systems” to facilitate conformity with the regulation’s “Recordkeeping Responsibilities” requirement.  Those “systems” include archiving software and other technology tools.  With the right tools in place, firms can perform a cost-effective supervisory review of content to help ensure compliance with corporate policy and regulatory bodies.  Moreover, an effective “system” will implement legal holds and efficiently retrieve archived social media content in response to legal and regulatory requests.  All of this enables a company to establish the reasonableness of its retention and eDiscovery processes and demonstrate compliance with relevant SEC and FINRA regulations.

By following these steps and other best practices, financial services companies can begin to reasonably address the challenges of social media.  Knowing that those challenges are being dealt with in an effective manner will enable firms to confidently engage in social media marketing – and reap the financial benefits of doing so.

Part I of this series discussed a number of approaches for reducing electronic discovery costs.  One of the approaches is to implement a document retention policy.  The popularity of document retention policies increased in the early part of the decade with the passage of new financial regulation, such as Sarbanes-Oaxley.  Data retention policy popularity has now increased again with the passage of the FRCP and the recognition of the challenge of electronic discovery costs.  How effective, though, are document retention policies in reducing electronic discovery costs?  Do they solve the electronic discovery cost problem?

It is certainly true that any policy that enforces the deletion of documents that might otherwise be discoverable should reduce electronic discovery costs.  Thus, document retention policies, just like enforced mailbox size limits, can absolutely help reduce e-discovery costs.  However, implementing a retention policy is not easy.  A recent article in the New York Law Journal by Adam Rosman is very insightful in this regard when he says, “the rub is implementation.”   Mr. Rosman outlines a conversation between a hypothetical company’s Associate General Counsel and the CTO that demonstrates that the major challenge with retention policies is not designing one.  Rather, the challenge is implementing a policy that effectively balances the needs for litigation readiness and e-discovery, regulatory compliance and knowledge management and can be cost-effectively enforced throughout a company’s IT organization and user community.  Given this, it’s not surprising that a 2006 study by Nextpage and CXO research found that “while two-thirds of the companies surveyed have a document retention policy in effect, almost half of them don’t actively enforce it” and why 39% of respondents cited implementing a standard policy and 34% percent said user compliance were major weaknesses in implementing retention policies.

Because of these implementation challenges, retention policies are not a quick way to reduce your e-discovery costs.  They are also not going to reduce enough data to solve an organization’s e-discovery cost “problem.”  First, due to the implementation challenges, retention policies are not going to delete all the electronically stored information (ESI) they should.  Second, HIPAA, Sarbanes-Oaxley (SOX) and FINRA regulations require that many documents must be retained for several years.  Finally, business users will demand many exceptions: emails, loose files, collaboration content, financial records, contracts, etc. that they want to save beyond the retention period for important business reasons.  As a result, even companies with retention policies are going to have a substantial and growing amount of discoverable ESI and the electronic discovery costs that go with that.

Document retention policies thus are a bit like taking vitamins.  They are likely going to help reduce the amount of time you are sick – although you’ll probably find some “studies” that say they do help and some that don’t.  But when you get sick, they aren’t going to make you better.  For that, you need a remedy that directly targets the specific problem.  Similarly, document retention policies, and you can say the same thing about all information management solutions to e-discovery, will help reduce e-discovery costs, but they won’t solve the e-discovery cost problem.  Specific e-discovery solutions are necessary to do that.  We’ll discuss many of these specific e-discovery solutions in the next set of posts in this series.