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Clear precedent indicates that issuers and broker-dealers have a duty to reasonably supervise their employees to ensure compliance with securities regulations. See, e.g., 15 U.S.C. � 780(b)(4)(E). However, the scope of this duty has yet to be defined as it applies to circumstances involving the Internet and other electronic communications. Despite existing uncertainties, there are situations in which an issuer or broker-dealer can be held liable for the noncompliance of its employees. In fact, such liability may even extend as far as the firm president. It would therefore be prudent for issuers and broker-dealers to create an internal regulatory oversight committee designed to ensure electronic compliance with securities laws. The traditional scope of the duty to supervise was well articulated in a SEC interpretive release discussing the case of In re the Application of Gary Bryant, Securities and Exchange Commission, Release No. 32357 (May 24, 1993), available at 1993 SEC LEXIS 1347. In Bryant, the SEC observed the general rule that a firm has a duty to reasonably supervise its employees, and that a failure to establish firmwide procedures “is symptomatic of a failure to supervise reasonably.” Id. at 19. Firms must establish “mechanisms for ensuring compliance” and ensure that the firm’s structure integrates “specific controls or supervisory procedures designed to deter or detect misconduct.” Id. at 20. This duty to supervise also requires that the firm properly maintain an up-to-date procedures manual. See In re the Application of G.K. Scott & Co. Inc.,Securities and Exchange Commission, Release No. 33485 (Jan. 14, 1994), available at 1994 SEC LEXIS 155, 27. While it is important for a firm to implement a policy for supervising electronic compliance, the ultimate responsibility for such compliance generally lies with the firm’s president. See Bryant, supra, at 19. A president may, however, discharge his or her duty to ensure compliance by “reasonably delegating” compliance responsibilities to another member of the firm, provided that he or she does not know and should not know of any reason why that person’s performance would be inadequate. See Bryant, supra, at 19. The SEC has expressly stated that the duty of reasonable supervision is applicable to electronic contexts. Thus, in discharging its duty, a firm must be mindful of both legal and technological concerns. See Securities and Exchange Commission, Release No. 33-7288 (May 9, 1996), available at 1996 SEC LEXIS 1299, 14 (hereinafter 1996 Release). Firms should implement appropriate procedures designed to detect and deter improper conduct in connection with the communication of information. Id. The first step in accomplishing this task is for the firm to assemble an internal regulatory oversight committee (ROC) responsible for ensuring electronic compliance. The ROC should be primarily responsible for establishing a firmwide policy, applicable to all types of electronic communication, that originates within the firm. This includes, but is not limited to, bulletin boards, chat rooms, e-mails, web sites and Internet advertisements. The ROC must ensure that appropriate security measures are taken to prevent outside interference with compliance. Such measures might include configuration controls, personnel consulting, network monitoring, supervision of network access and control, and measures to protect confidential communications. Furthermore, the ROS should maintain an inventory of firm software, so that it may review all shrink-wrap licenses for security purposes. These policies should then be reduced to writing and inserted into the firm’s manual of compliance procedure. In addition to these security precautions, however, the ROC should also implement measures specifically concerning authorized network access by employees who conduct unauthorized, noncomplying online conduct. Examples of such measures might include the following: (1) uniform application of the firm’s public communications standards to the online setting; (2) adoption of a policy concerning the use of disclaimers; (3) compliance with SEC guidelines pertaining to the use of electronic communications and media; (4) prohibition of questionable practices, such as spamming, framing, or flaming; (5) implementation of an employee training program addressing online securities issues; and (6) a prohibition on employee noncompliance with the policies set forth in the online procedures manual. The policy should also address each type of electronic communication individually (i.e., web sites, e-mail, bulletin boards, etc.). As a final matter, it is critical for the ROC to ensure that all publicly available electronic information is kept current. While it may be easy to overlook the updating of old information, it is important to note that once something is posted on the Web, it stays there until taken off. Outdated press releases and other information can potentially form the basis of securities liability and should be routinely scrutinized for compliance. The duty to reasonably supervise continues into the electronic information age and must be executed with more than an appreciation of the relevant legal issues. An understanding of information technology is crucial to the successful implementation of these legal issues. Such implementation is best accomplished through the creation of an ROC consisting of individuals possessing knowledge of both compliance issues and the related technologies. Peter J. Fusco is an associate at Brown Raysman Millstein Felder & Steiner LLPin New York.

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