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The New Regulatory Focus in Financial Services: Texting

Prudential. Cetera. Allstate. Thrivent. Modern Woodmen of America. They’ve all recently empowered their massive field force of advisors and agents to text clients and prospects.
As the trend continues to accelerate, regulators are watching with increasing scrutiny.
FINRA released Regulatory Notice 17-18 last year, which reaffirmed the requirement that financial services companies archive business-related texts in the same way that they would email or written communication, as required by SEC Rules 17-a3 and 17a-4, and FINRA Rules 4511 and 2010.
This essentially means that regardless of your company policy, an audit of your advisors’ texting activities could be requested.
It’s not just FINRA and the SEC. According to an August 2017 study by the Institute of Legal Reform, litigation of the Telephone Consumer Protection Act (TCPA), a law that regulates commercial text messaging, has increased by 46 percent since July 2015; of that number, nearly 36 percent of all TCPA litigation target the financial services industry.
The consequences of this can be severe: Liability under the TCPA ranges from $500 to $1,500 per text message, which can quickly add up given the volume of texts and the size of most advisory sales teams.
A growing number of regulatory actions regarding advisor texting in just the last two years should put all compliance leaders on high alert. Here are some examples.

  • In May, FINRA fined and suspended an advisor who sent hundreds of texts about securities to a person who was statutorily disqualified from the brokerage industry, without seeking or receiving his firm’s prior written approval. This prevented the firm from supervising those communications.
  • FINRA fined and suspended a Texas-based broker for unapproved securities-related communications with two customers via text, in violation of the firm’s policy. The firm did not capture, review or retain the broker’s text communications.
  • FINRA fined a Georgia-based firm $1.5 million for, in part, failing to archive approximately 1 million texts sent using firm-issued mobile devices. Evidently, the firm had a “no texting” policy that several employees violated.
  • That same month, a New York-based advisor was fined and temporarily suspended for using a mobile device to text customers without the firm’s knowledge. The firm did not review or retain any of the text messages.
  • A New York-based advisor was fined and given a 60-day suspension for sending business-related texts to a customer on a non-firm-issued smartphone, in violation of the firm’s policies. As a result, the firm was not able to supervise or archive those communications.
  • Additionally, the SEC alleged an investment advisor sent false and misleading text messages to induce a client to make a risky transaction.

With this heightened focus on non-compliant texting, it’s only a matter of time before regulators begin enacting penalties on larger and larger financial services companies. Forward-thinking firms must invest in compliant texting technologies, such as Hearsay Relate, now to prepare for the inevitable – while also making sure current compliance and supervisory processes remain as efficient as possible.
Disclaimer: The material available on this blog is for informational purposes only and not for the purpose of providing legal advice.

Christopher Fernandes

Christopher Fernandes joined Hearsay in 2015 and is responsible for the company’s legal affairs including commercial, compliance, regulatory and privacy matters. Chris earned his J.D. from Santa Clara University and B.A. from the University of Chicago.

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