Text Messaging in Wealth Management: What Advisors Should Be Aware of

From codes of conduct to privacy protocols, there’s no shortage of rules and regulations that financial advising and wealth management firms must comply with. Some of these regulations include specific language around records retention, including electronic records such as emails and text messages.

If your firm is considering using texts for either client-facing or internal communications, be sure to familiarize yourself with the following regulations:

• The Investment Advisers Act of 1940: Enforced by the SEC, 17 CFR § 275.204-2 of the Investment Advisers Act defines which books and records investment advisors must maintain, including journals, general ledgers, financial statements and any records pertaining to corporate governance. The Act applies to records stored on both traditional and digital media and stipulates that firms must retain these written records, including text messages, for no less than five years (the first two in the firm’s principal office and the remaining three in an easily accessible location).
• Markets in Financial Instruments Directive II (MiFID II): MiFID II is a regulatory framework in the European Union aimed at enhancing investor protection and market transparency. Under this directive, investment firms, wealth management entities and other financial firms are required to record and retain all communications related to the reception, transmission and execution of client orders — including those that take place over text — for a minimum of five years.

  In addition to its retention requirements, MiFID II mandates that firms must notify clients that they will be recorded, store all recordings in a format that ensures their accuracy and integrity and produce those recordings upon request from regulatory authorities or clients.

• FINRA Rule 4511: Part of the Financial Industry Regulatory Authority’s (FINRA) framework, FINRA Rule 4511 is a recordkeeping framework specifically for broker-dealers. Rule 4511 requires broker-dealers to create and maintain accurate books and records in conformity with applicable securities laws and regulations, including those set forth by the Securities and Exchange Act of 1934. Under this role, broker-dealers must store all books and records, including SMS communications, in either paper form or in an electronic recordkeeping system for a minimum of six years.

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• SEC Rule 17a-4: Closely related to Rule 4511, SEC Rule 17a-4 requires broker-dealers to retain all transaction and general business records for no less than six years. The SEC amended Rule 17a-4 in 2022 to state that firms can use electronic recordkeeping systems to preserve required records. This amendment also waived the WORM (write once, read many) requirement, provided firms use an electronic recordkeeping system that maintains a complete time-stamped audit trail.
• FCA SYSC 9.1.1: SYSC 9.1.1 is a provision within the Systems and Controls section of the Financial Conduct Authority’s (FCA) Handbook. Specific to the UK, SYSC 9.1.1 mandates that regulated firms, including financial advisory firms, maintain records of all services, activities and transactions — including written and electronic communications — for at least five years.

Failure to comply with these and other regulations could lead to severe financial, civil or even criminal penalties. For evidence of this, look no further than the $1.1 billion in fines the SEC levied against 16 Wall Street firms in 2022 for violating recordkeeping provisions. To avoid this potential outcome, it’s imperative that financial advisory, investment and wealth management firms invest in text message archiving solutions and create custom data retention policies.

Whether you’re considering using text messages to communicate with clients, colleagues or even for marketing purposes, there are a few best practices you can follow to help ensure regulatory compliance:

• Develop clear policies: The first step to using text-based communications in any capacity in your firm is to define clear policies, procedures and protocols pertaining to appropriate conduct and usage. Be sure to design these policies around industry regulations and applicable laws, as well as your firm’s own internal compliance framework.
• Secure client consent: Obtain explicit consent from your clients before communicating with them over text, making sure to notify them that all interactions will be recorded and to inform them of their privacy rights. This transparency will not only support compliance efforts and mitigate legal risk, but can also strengthen your client relationships.
• Invest in an archiving platform: Most regulations specify that firms must retain records using electronic recordkeeping systems, such as an archiving platform. Such platforms are capable of automatically capturing and securely storing electronic communications and making them easily searchable for future reference. When comparing potential solutions, look for a platform that specifically supports text message archiving for financial advisors or other similar financial services firms. For tips on what to look for in an archiving solution, skip ahead to the next section of this article.
• Set custom data retention policies: As we mentioned, it’s important to create custom data retention policies that align with various laws and regulations. Such a policy should define everything from what text message data you need to retain and what format you need to keep it in to how long you need to store it for and how to properly dispose of it once the retention period ends. You may set different policies in accordance with different regulations — for example, one data set may have a five-year retention period, while another might have a six-year period. You can even include user access controls and permissions when creating these policies to reinforce SMS data security.

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• Implement robust security measures: Certain regulations include specific requirements about how to secure text message data, especially any messages containing client information. To meet these requirements, make sure to invest in an archiving solution that leverages data encryption, custom access permissions and immutable storage to prevent bad actors from accessing and tampering with text message records.
• Provide comprehensive training: Provide extensive training to financial advisors and other staff on the proper use of text messages in the workplace, emphasizing compliance considerations. Education is key to fostering a culture of awareness and responsibility amongst your team and ensuring policy adherence.
• Monitor text communications: Establish a systematic process for monitoring and supervising both client-facing and internal text message communications. This process should include a regularly scheduled review and audit of text-based interactions to ensure ongoing compliance, which allows for proactive issue identification and resolution.
• Maintain detailed compliance records: Keep detailed records of your firm’s compliance efforts, documenting all policies, staff training sessions, monitoring activities and any corrective actions taken to address non-compliance. This documentation will serve as a crucial resource during audits or regulatory examinations.

There’s no shortage of text message archiving solutions for financial advisors on the market today. When comparing your options, be sure to look for the following:

• Support for a wide range of devices, carriers, ownership models, messaging formats (SMS, MMS, RCS) and messaging platforms (iMessage, WhatsApp, Signal)
• The ability to set custom access controls to restrict access to certain records based on user permissions
• Message threading to see all text-based communications (including any multimedia attachments) in chronological order
• Audit logs to see who has viewed, searched or accessed text message records

Ready to start your search for a text message archiving solution? Download our free eBook to discover key considerations when choosing a platform and questions to ask when comparing vendors.