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The Telecom/IT Impact of Dodd-Frank
At the most recent conference of the Society of Telecommunications Consultants (stcconsultants.org), I was asked about the duties that the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) has placed on record retention and maintenance for entities (financial institutions and organizations) that work in the swap space. Given that the rules in the Act became effective on June 4, 2012, compliance is now law.
The law itself can be found at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. The preamble to the law says clearly that its purpose is "To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." It's the "for other purposes" which casts a giant shadow over the matter for conspiracy theorists, but I digress.
The shortest possible description of how Dodd-Frank affects telecommunications consultants and end users is that for the first time, in no uncertain terms, the law makes clear that records even remotely associated with the execution of a financial swap must be maintained for a year; this includes email, voicemail and instant messages. However, there's a bit more to it than just record maintenance.
Specifically, the new rules concern both reporting and recordings of "affected" transactions and the maintenance of those records for both "swap dealers" (SDs) and "major swap participants" (MSPs) that are registered with the Commodities Futures Trading Commission (CFTC). The duties imposed by the new regulations include those related to "risk management procedures; monitoring of trading to prevent violations of applicable position limits; diligent supervision, business continuity and disaster recovery, disclosure and the ability of regulators to obtain general information, and antitrust considerations."
In addition, the new regulations "establish conflicts-of interest requirements for SDs, MSPs, futures commission merchants (FCMs), and introducing brokers (IBs) with regard to firewalls between research and trading and between clearing and trading. Finally, these regulations also require each FCM, SD, and MSP to designate a chief compliance officer, prescribe qualifications and duties of the chief compliance officer, and require that the chief compliance officer prepare, certify, and furnish to the Commission an annual report containing an assessment of the registrant's compliance activities."
There are several key phrases here--most notably the duties and obligations of the chief compliance officer, who must provide an annual report, containing his/her own personal assessment of his/her employer's compliance activities.
In addition, and perhaps most critically, both swap dealers and major swap participants must record and maintain "full, complete and systematic business records, including records related to corporate governance, financial records, complaints and marketing and sales materials." Daily trading records must be kept for one year, along with all related records including related cash and forward transactions, according to Section 4s(g)(1) of the Commodity Exchange Act of 1936 (CEA) (available at http://www.law.cornell.edu/uscode/text/7/chapter-1).
Included in this group of "related records" are email, instant messages and recordings of telephone calls.
While transactions records do not have to kept in a single comprehensive file, such records must be maintained in complete, accurate and searchable databases by both parties to the transaction. Such records must also be available for inspection and disclosure.
An important side note is that the disclosure rules do not apply to a parent company of a registrant unless the parent company is also a swap dealer or major swap participant.
The takeaways are that complete records--both those directly and indirectly related to a transaction between swap dealers and major swap participants--must be maintained for a period of one year. These include email, instant messages and voicemail. This information must be stored and maintained in a searchable database.
According to industry legend, Bill Gates once said, in defense of the just-introduced IBM PC's 640KB usable RAM limit, "640K ought to be enough for anybody." Obviously, he never considered this volume of record storage. And, based on the horrific floods experienced in New Orleans and New York, let's hope that no one keeps these electronic records in the basement.