Your client texted. Now what? The compliance rules advisors better know

Today, a text from a client might seem harmless. Unfortunately, however, it could lead to serious compliance issues for advisors.

While the Securities and Exchange Commission (SEC) has eased up on off-channel communications enforcement, the Financial Industry Regulatory Authority (FINRA) continues to take action against financial professionals who use unauthorized channels to conduct business.

According to A. Valerie Mirko, partner and leader of Armstrong Teasdale’s Securities Regulation and Litigation practice, retention requirements haven’t changed for firms that are SEC-registered and/or FINRA-registered. Neither the SEC nor FINRA has amended their rulebooks.

“Even though there’s no longer an SEC sweep for off-channel communications, firms and advisors must still comply with its rules,” Mirko said.

Why texting on personal phones is risky

Many individuals prefer texting for both personal and business purposes, so advisors are likely to receive texts from clients. How to handle text communications varies depending on the firm.

“The challenge is when an advisor uses their personal phone to text and can’t preserve and audit those communications down the road,” explained Stephanie Behnke, principal, industry & market insights at Hi Marley.

Mirko echoes Behnke’s thoughts.

“The SEC and FINRA have been clear that anything discussing company business, especially including advice about securities or customer orders, must be preserved,” Mirko said.

Blaine Rogers, bad faith attorney and partner at Davis Levin Livingston, pointed out that even if an advisor does use their phone to text a client, they don’t have total freedom of speech or complete privacy.

“With any regulated business, advisors may be subject to firm retention and regulatory requirements regardless of the device they’re using,” Rogers explained.

Additionally, advisors should understand that deleting texts doesn’t necessarily make them disappear, as they may be recoverable.

“Even if a firm's written policy doesn't prohibit personal texting, that doesn't mean the practice is fully compliant either,” Rogers added.

After all, all business communications, even those on a representative’s personal device, including texting and WhatsApp messages, are subject to both the SEC and FINRA books and records rules.

“We tend to think of text messages as parts of oral conversation similar to phone calls, but the SEC and FINRA rules view email, text, WhatsApp messages, etc. as written communications subject to the record retention rules,” explained Claudette Druehl, partner at global law firm Reed Smith.

How to stay compliant

Fortunately, there are multiple platforms available to advisors and firms that allow for client texting while still meeting regulatory rules related to supervision and retention.

“Some platforms even allow advisors to use their own mobile number rather than having to generate a ‘text only’ phone number for client texts,” said Jason Steeno, president of CoreCap Investments and CoreCap Advisors.

If a firm isn’t using one of these platforms, it’s a good idea to implement one as soon as possible, and create policies related to it.

In the event a client insists on communicating via text and a firm doesn’t provide a platform that allows for compliance, there are a few options available.

“The first is a very non-elegant solution: screenshot the texts as they come in and email them to the firm email. This will ensure the communications are captured and reviewed by your firm,” Steeno explained.

The other option is to ask clients to send email instead. Depending on the situation and client, it might even make sense to stop working with them altogether.

“The relationship may not be worth it if a client puts an advisor’s entire business and career at risk,” Steeno said.

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