At the PERE CFOs and COOs Forum in New York in May, there were two back-to-back panel sessions relating to the examinations of real estate and other private fund managers by the US Securities and Exchange Commission (SEC). At one of those sessions, one panelist alerted delegates to one area of a firm’s operations that was coming under greater scrutiny by the SEC: email. The admonition drew a collective gasp from the audience. After the session, one placement agent told PERE, “That was the scariest panel I’ve ever attended,” due in no small part to the email warning.
Emails, however, are not a new aspect of SEC examinations – in fact, the SEC has always been able to look at emails as part of the examination process – typically messages to and from a senior executive during a specified period of time. Many, if not most, real estate managers, simply have not been aware of this fact. Frightening, I know.
It is also important to note that the SEC has not made a deliberate decision to make email more of a focus during their examinations. Rather, the agency may be spending more time looking at a company’s emails these days because of the types of issues that they are investigating with a particular firm. Often, these issues can be detected over an email chain. Some issues that could be the focus of an SEC exam include conflicts of interest, allocation of investment opportunities; fees and expenses; and whether relationships with third-party service providers really are at arm’s length.
At the same time, the SEC has become more targeted in its examination process. The agency’s inspectors now typically do a fair amount of work before they make their site visits, and typically will look at a manager’s Form ADV, website and news articles to get a sense of what areas to focus on during the examination. In some cases, the exam is prompted based on risk factors that the SEC has identified, such as aberrant investment performance.
Moreover, the types of email requests that the SEC had done in the past were said to have generated a lot of paper but not a lot of information. More recently, the Commission has been improving its data analytics, allowing its inspectors to do email searches using particular keywords or the name of a specific investment or individual. So not only is the SEC paying more attention to email, they are getting better at finding the emails they need.
If I haven’t yet made you nervous, then perhaps it is better you hear it directly from a regulatory lawyer, because who better to make a person nervous than a regulatory lawyer? Meet Elizabeth Shea Fries, a partner at law firm Goodwin Procter, who has the following words for you: “Email is dangerous, because it lives.” Moreover, it does not live only in your company’s email system but in the email systems of any recipient of your electronic messages, and chances are, you don’t know how long those systems hold onto emails. In other words, once you press ‘send,’ you pretty much lose control over that email message.
But the longevity of an email is one thing; how the SEC interprets that email is another. Two friends may use sarcasm or inside jokes that will be obvious to each other in an email exchange. However, it may not be obvious to the SEC inspector that reads those emails. In some cases, humor or shorthand between friends could potentially be misconstrued as wrongdoing.
In general, email should be used for more official, formal communications. For more casual, conversational-type exchanges, Fries advises taking the discussion offline and she notes that problems are often best resolved in real time conversation rather than email.
And in the event that the SEC does want your emails, you need to be careful what you hand over to inspectors, she adds. For example, certain correspondence on legal matters is subject to attorney-client or other privilege. Managers can prepare a ‘privilege log,’ and hold back correspondence to or from counsel that qualifies for privilege. Keeping a log allows such emails not to be turned over to the SEC, and also protects the privilege against other parties in the future.
In short, with more SEC eyeballs going over emails, it is advisable that people use email less and generally be more discriminating about their usage. In the future, SEC inspectors are only going to become more sophisticated in their abilities to quickly scan and screen emails for potential issues. In most cases, people aren’t doing anything wrong, but as you already well know, much can be misinterpreted over email. So now is the time to change your email habits – or else.