November 29, 2011
If you talk on the phone to your broker or financial analyst in the UK, the call is being recorded, whether he or she is on a landline or mobile. You can expect such requirements to be enacted in the U.S. and throughout the EU soon. It doesn’t matter what kind of phone the representative is using in Britain; as of two weeks ago the rules changed.
The Financial Services Authority (FSA) is the regulator of the financial services industry in the UK. In March of 2008 the FSA enacted a regulation known as COBS 11.8.10R to require all telephone conversations and electronic communications to be recorded to and from traders, brokers, or anyone engaging in financial transaction that were likely to result in a trade. At that time the rules exempted calls to and from mobiles. The requirements were incorporated within the Conduct of Business Sourcebook (or COBS) which sets forth practices for the investment world in the UK.
The regulation was amended in CP 10.7 in November 2010 removed the exemption to include cellular and went into effect on November 14, just two weeks ago.
This regulation has as its priority the prevention, deterrence, and detection of market abuse and to develop useable evidence for use in investigations and prosecutions.
The FSA believes its requirement will accomplish three main results:
In the original 2008 rule, firms were required to record
”relevant communications’ and keep them for six months. ‘Relevant communications’ refer to voice conversations and other electronic communications that involve the receipt of client orders and negotiating, agreeing and arranging transactions in the equity, bond and financial and commodity derivatives markets.“
The FSA noted that if any relevant conversation (from voice, SMS to IM) be received or commenced on private communication equipment, they would expect the call to be terminated immediately and the conversation diverted to a recorded business line.
The European Union is also considering similar legislation in (Article 12(1) of the Market Abuse Directive and Article 51(4) of the Markets in Financial Instruments Implementing Directive (MiFID).
These rules give Member States discretion to decide if investment firms have to record telephone conversations or electronic communications involving client orders. While many Member States have their own taping requirements, which can apply to fixed lines as well as mobile phones, regimes differ significantly across the European Union (EU).
In the United States, recording of telephone calls is used as a tool in many criminal investigations including financial crime. Britain however will apparently be the first country to use recorded telephone calls to support insider trading cases. On Wall Street, Federal prosecutors used court-ordered wiretaps in the case against Raj Rajaratnam, the founder of Galleon Group hedge fund. Listen to the wiretap recordings for the flavor of the government’s case and the value of recorded evidence in this investigation.
Mobile phones are becoming an increasingly important tool in trading, and thus compliance efforts are keeping pace with technology, to require documentation of all calls.
Last week I was in London and sat down with James Tagg, Chief Technology Officer of Truphone Ltd. This is a company whose primary business is the provisioning of a global virtual cellular network for primarily corporate clients to offer deeply discounted voice and data GSM services through the use of specially engineered SIM cards and an intricate supporting infrastructure and software for least cost routing and simplified phone number schemes. The company is also offering recording services for regulated financial sectors that is seamless to both the calling and called parties to a mobile conversation. See my interview with James Tagg.
There are several different recording solutions to comply with the FSA regulation but Truphone probably has one of the more sophisticated and elegant approaches. Every time the mobile places or receives a call, it sends out a signal, known by the acronym of Camel (which stands for Customized Application for Mobile network Enhanced Logic.) It is an Intelligent Network feature in GSM systems that enable users to carry personal services with them when roaming into other networks that support CAMEL. This feature also allows Truphone and other similar carriers to trigger digital recording equipment transparently whenever a call is placed or received.
Calls can also diverted through a recording system or branched to two different numbers: one for the called party and one to the actual recording equipment. These schemes are less preferable than building the mechanism directly into the network and may not provide superior voice recording quality, or more sophisticated options.
The digitized recordings will be kept on premises in a secure vault, or in a registered off-site facility that can demonstrate appropriate security for both the links to the site and the servers that actually store the audio. The intent is that FSA and other investigating agencies can have easy and direct access to the information contained within the conversations.
It should not matter what kind of handset the trader uses because the audio is captured remotely.
In order to comply with the FSA requirements, all businesses are providing special handsets to their employees. According to Jim Tagg, numbers can be exempted for personal and private calls, and those will not be recorded. So if you are a trader and want to register certain numbers, such as your wife, children, mum (that’s your mother in England) or your mistress (most often in France) or lovers (not your spouse) the exclusion can be easily accomplished so long as the identity of the terminating number can be established as non-business related.
It is expected that the EU will adopt similar rules. Norway already has the requirement, and Spain and Switzerland are considering similar measures. Companies will offer more technical sophistication in this area, including GPS in order to match a phone’s location with applicable regulations. One company, Compliant Phones is already working with Vodafone to provide international transparent service to its customers at reduced rates, much like Truphone.
The FSA requires call recordings to be kept for six months, but it is suggested that calls be retained for five years. I think it is fair to suggest that these recording rules will be expanded to include SMS, IM, and social media sites such as Twitter, Facebook and LinkedIn, and will also extend to tablets.
If you are a trader in the United States, get ready, because it is only a matter of time before these regulations and laws become part of our landscape. And if you routinely place trades on the phone, know that everything you say will be recorded. If these requirements had been in place in 2003, likely Martha Stewart, would have paid much closer attention and perhaps the outcome would have been entirely different!
The SEC and FINRA regulations already require financial service companies to review electronic messages of employees. The Financial Industry Regulatory Authority is the largest independent regulator for all securities firms doing business in the United States. They watch nearly 5,000 brokerage firms, more than 163,000 branch offices and in excess of 635,000 registered securities representatives. Their mission is to protect investors by maintaining the fairness of the U.S. capital markets.
The content of mobile messaging just as other forms of electronic communications, are subject to electronic discovery rules. The U.S. Supreme Court in 2006 modified the Federal Rules of Civil Procedure to insure the ability to gain electronic discovery of messages. States are likewise moving in this same direction, as the Wisconsin Supreme Court did in 2010.
Organizations must manage electronically stored information (ESI) for litigation, which is in essence similar to the rules that will affect brokerage houses and certain financial institutions.
Similar proposals have already been made by the Commodity Futures Trading Commission pursuant to the Dodd-FrankWall Street Reform and Consumer Protection Act (DFA). These new recording requirements are already drawing fire from different groups such as electric power industry and the Commodity Markets Council, which is the industry body for the Commodity Traders in the U.S. The National Feed and Grain Association is also objecting to modification of the DFA.
Cellular conversations, instant messaging, SMS and use of social media are part of our daily communications and will be subject to recording and monitoring in the financial industry. Abuses and insider trading have driven the necessity for these rules and Wall Street should welcome the requirements. In my view they will hopefully result in a more even playing field for all investors and deter inside trading of information that can offer a financial advantage to certain investors. Vigorous prosecutions, utilizing such evidence, will be the best deterrent.