Both independent broker-dealers and brokerage companies are dedicating a significant amount of resources to comply with the myriad of SEC and FINRA regulations to capture text messages, record voice calls, and other mobile content relating to their “business as such”.
These regulations work in conjunction with stricter federal securities laws, which ultimately makes compliance uniquely difficult to achieve in this line of work. But as never-ending as the compliance process is, broker-dealers are advised to brace themselves for new and more nuanced regulations expected to roll out soon, this time coming from the state governments.
Why Did State Legislators decide to Implement Stricter Broker Standards?
According to multiple media reports, state legislators and regulators have begun the process of implementing their own broker conduct rules since the U.S. Department of Labor (DOL) decided not to defend the Obama-era fiduciary rule expansion, while led the Fifth Circuit Court to vacate the rule in mid-2018, officially killing it.
These state-level initiatives come as the SEC finalizes its own national-level broker conduct requirements, which are expected to be released in summer 2019. This new SEC rule, as per the Wall Street Journal, would allow “leeway for certain types of pay incentives as long as they are disclosed to a customer, while banning others, such as high-pressure sales contests.”
Many state officials deemed this new SEC rule as the watered-down version of the DOL fiduciary rule and will not uphold broker-dealers in the same level of conduct standard as investment advisors. As a result, many state governments are initiating legislation that will raise the investment advice standard in their respective jurisdictions.
Among the states considering measures are:
- Maryland
- Nevada
- New York
- New Jersey
What is DOL Fiduciary Rule?
The DOL fiduciary rule is a standard that requires broker-dealers to act in the best interest of their clients and put their clients’ interest above their own. It was supposed to deter any potential conflict of interest and states that all fees and commissions for retirement plans and retirement planning advice must be clearly disclosed in dollar form to clients.
The fiduciary rule bears a much higher level of accountability for broker-dealers as well as for investment advisers, compared to the Suitability Rule, which allows broker-dealers to recommend specific investments as long as it meets their client’s defined need and objective.
The fiduciary rule, on the other hand, would not only require any financial salesperson to find “suitable” investments” but also ensure that those investments will meet their client’s best interest. In effect, this new rule would eliminate the brokerage-commission model widely used in the industry.
Because of this, the new regulation met adverse reaction from brokers and financial planners. According to reports, the DOL fiduciary rule would burden the financial industry with an estimated $2.4 billion per year in compliance expenses. It was also reported that registered representatives that conduct 401(k) advising might also have been forced out of business due to the new compliance aspect of the regulation.
How These State-Based Rules Impact The Text Archiving Obligations of Broker-Dealers?
As more states issue their own versions of the fiduciary rules, one of the biggest potential problems is how complicated the books and records obligations of the broker-dealers can become with even more regulation.
According to Securities Industry and Financial Markets Association (SIFMA) and Financial Services Institute, the state-based fiduciary rules cannot be imposed because this would require their reps and brokers to maintain additional books and records – including records of archived text messages relating to the investment advisory of the business – a violation of the 1996 National Securities Markets Improvement Act.
Conclusion
With each state enforcing their own fiduciary rule, broker-dealers, as well as investment advisors and insurance companies will most likely be forced to overhaul their recordkeeping procedures, as well as review their practices when capturing and recording text messages, voice calls, chats, and other mobile communications with their clients.
This could cost a significant amount of time and effort, especially for large financial companies operating interstate, leading to more confusion and leaving them more vulnerable to penalties and litigation.
In order to remain at the safe side, at least an aspect of archiving business correspondences, broker-dealers are advised to adopt an “archive all” strategy, and utilize an enterprise-grade mobile archiving solution so that any mobile SMS or voice calls that contain any traces of investment advice will be captured and recorded, which should help support their case if they get involved in a litigation for not complying with “best interest” rules of the state.
The TeleMessage Mobile Archiver effectively addresses compliance, regulatory, eDiscovery response requirements and reduces risks across the financial industry. TeleMessage captures and records mobile SMS, MMS, voice calls, social media, and WhatsApp Chats from corporate or BYOD mobile phones, and flags any content or messages that indicate suspicious activities as well. Messages are securely and reliably retained within TeleMessage servers or forwarded to an archiving data storage vendor of your choice.
Our mobile archiving products securely capture content from mobile carriers and mobile devices for a variety of ownership models (BYOD, CYOD, and employer-issued). With our multiple archiving methods, you can always find the right tools or blend for your text message archiving and voice call recording requirements:
TeleMessage offers cross-carrier and international mobile text and calls archiving for Corporate and BYOD phones. Visit our website at www.telemessage.com to learn more about our mobile archiving products today.
){kind=link}