The holiday rush is on, but this does not mean that the U.S. financial industry regulators FINRA and SEC have slowed down their efforts of ensuring that all registered investment advisers are complying with their text message archiving requirements.
Just recently, the SEC released a risk alert which notifies U.S. financial advisers and their personnel that they are tightening their monitoring efforts to those who use text messaging, instant messaging apps such as WhatsApp, and personal emails to communicate with their clients. They also named a new deputy director, Daniel Kahl, for the office overseeing this area of focus, the Office of Compliance Inspections and Examinations (OCIE).
The risk alert came after the OCIE conducted a limited-scope examination designed to obtain an understanding of the various forms of electronic messaging being used by advisers, the risk of such use, and the challenges in complying with certain recordkeeping provisions of the Advisers Act Rule 204-2.
According to their observations, many advisers did not conduct any testing or monitoring of their electronic communication to ensure compliance with their organization’s policies and procedures.
The regulator also provided some recommendations that should help financial companies and advisers to comply with their text message archiving requirements, including the following:
- Specifically prohibiting business use of apps and other technologies that can be readily misused by allowing an employee to send messages or otherwise communicate anonymously, allowing for automatic destruction of messages, or prohibiting third-party viewing or back-up.
- Where advisers permit the use of personally owned mobile devices for business purposes, adopting and implementing policies and procedures addressing such use with respect to, for example, social media, instant messaging, texting, personal email, personal websites, and information security.
- In the event that an employee receives an electronic message using a form of communication prohibited by the firm for business purposes, requiring in firm procedures that the employee move those messages to another electronic system that the adviser determines can be used in compliance with its books and records obligations, and including specific instructions to employees on how to do so.
- For advisers that permit use of social media, personal email, or personal websites for business purposes, contracting with software vendors to (i) monitor the social media posts, emails, or websites, (ii) archive such business communications to ensure compliance with record retention rules, and (iii) ensure that they have the capability to identify any changes to content and compare postings to a lexicon of keywords and phrases.
Emphasis on Consequences for Non-Compliance
SEC also advised member firms and advisers to include a statement in policies and procedures informing employees that violations may result in disciplinary actions or dismissal from service. Allowing them to use text messaging to communicate should come with archiving,and supervisory responsibilities which if they fail to comply with will lead them to face regulatory and legal actions.
Just recently, FINRA fined a firm $800,000 and required them to retain an independent consultant to review their Written Supervisory Policies (WSPs) after it failed to establish a reasonably-designed supervisory system with respect to numerous areas of its business. FINRA also found that the firm failed to retain and review business-related emails for representatives who disclosed personal email addresses that they used for firm business.
A firm was also barred from association with any FINRA member in all capacities and ordered to pay $961,781, plus interest, in restitution to customers. The sanctions were based on findings that the broker made false and misleading statements in connection with purchases and sales of securities, which violates the Section 10(b) of the Securities and Exchange Act of 1934, and Exchange Act Rule 10b-5, as well as FINRA Rules 2020 and 2010.
The findings also found that the broker caused his broker-dealer firm to fail their obligation to preserve customer emails, text messages, facsimiles, and account summaries that he created for and sent to some clients.
Conclusion
Now that the SEC is paying more focus on the use of text messaging, it is more imperative than ever for financial firms and advisers to refute the idea of “no-texting policy” and, instead, embrace the “archive everything strategy”.
In order to implement such strategy, firms should have a reliable text message archiving and voice call recording that can capture and record mobile SMS and phone calls so that they can monitor the conversations of their employees and flag any suspicious communications that breach any standards of both SEC and FINRA.
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