Do your advisors use text messages to communicate with their clients? Most likely, the answer is yes. For SEC and FINRA regulated firms and advisors, it is imperative to understand that failure to comply with supervision and retention regulations can lead to disciplinary actions against firms and individual advisors.

In 2016, FINRA suspended and fined an advisor for using text messaging to communicate with a client. The use of text messaging violated the firm’s electronic communications policy and Written Supervisory Procedures (WSPs). The firm’s WSP required retention and supervision of all business-related electronic communications. Advisors were required to send all business communications through company-owned devices, accounts and applications, and weren’t allowed to use personal accounts or devices. However, the advisor used a personal smartphone to send text messages to a client. The failure to archive those communications put the firm at risk of recordkeeping rule violations and failure to supervise communication under FINRA Rule 3110. FINRA fined and suspended the individual for use of text messaging of a personal smartphone.

Risk Alert: Text Message Compliance Violations

Most regulated firms have WSPs that specify which types of electronic communication advisors may use. Generally, these policies focus on email communications, and unfortunately do not include all the communication channels their advisors use—including text messaging.

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In 2017, 77% of Americans own a smartphone. On their smartphones, advisors can choose from a wide variety of communication channels, including text, IM and social media.  Advisors are likely to choose whichever communication channel is preferable to their client, and statistics show many clients prefer text communication to email or phone calls. This is particularly important for the millennial demographic, because the net worth of the millennial generation is projected to increase from $4 trillion in 2015 to $20 trillion in 2030—making it the fastest growing advisor client demographic. Financial Planning notes the highest earning advisors are targeting millennials now. It is not realistic for firms to expect advisors will only use email to communicate with their clients.

Despite the proliferation of text messaging as the communication vehicle of choice, most member firms have not updated their WSPs to include text messaging. A firm may also mistakenly believe prohibiting text messaging in their policy is enough, but it’s not. If a firm’s advisors use a specific communications channel, the firm must archive and supervise it.

Best Practice: Firms Must Create WSPs that Capture All Communications

We recommend that a firm’s compliance team interviews and audits its advisors immediately. Ask advisors how they communicate with their clients. Also, look at your advisors’ social media pages. Are advisors advertising or posting information about their business on social media? Is it reasonable for a client to reach out to your advisors through their social media pages? Do advisors list their cell phone number on their website or on social media? If so, it’s likely clients will contact the advisor via text message.

Next, determine what checks and balances are in place to capture conversations and other content that your advisors share. Leverage your archiving solution to determine whether advisors use communication channels that are prohibited by your firm. The Archiving Platform from Smarsh can be used to automate the supervision process, when you implement lexicon-based reviews and random sampling to automatically search for specific policy violations. The lexicon policies can automatically find scenarios where an advisor offers a prospect or client their personal email address, phone number, or social media account to communicate. Lexicons may include phrases such as ‘text me’, ‘send info to my personal email’ or ‘direct message me on Facebook.’

Once your firm has conducted an audit of the communication channels your advisors use, it’s time to revisit your WSP. Does the WSP include a policy for all the communication channels your advisors are using? Do you capture those communications? Are those communications being reviewed under FINRA supervision rule 3110? Ensure your firm archives all communications, as required by rule 17(a)(4), as part of what we call an Archive Everything strategy.

Compliance: The Archive Everything Strategy

If your archive strategy only includes email archiving, then it’s imperative to upgrade to a solution that captures all the ways your advisors communicate. With the proliferation of smartphones, archiving everything is the only way to help protect your firm from regulatory violations. Archiving, monitoring and producing text, social media, and instant messages alongside email is core to an effective compliance program.

When your firm follows an Archive Everything philosophy, you can help prevent risk and comply with regulatory obligations.
 

Learn how you can use technology to solve your text message recordkeeping needs: Watch It Work: Text Message Archiving for Compliance.