Communicating with clients is a must for financial advisers – and unsurprisingly the options for maintaining said communication seem to be ever-expanding.
In addition, client expectations for communication are shifting. Although 90% of clients prefer texts over phone calls, 45% of advisers still use phone calls as their primary means of contacting clients while 30% of advisers use email.
On the other hand, advisers who embrace newer forms of communication run the risk of compliance errors, especially as the Securities and Exchanges Commission (SEC) is increasingly focused on registered investment adviser (RIA) off-channel communication. Let’s explore how advisers can stay compliant with SEC regulations while also maintaining client relationships via digital platforms.
The SEC’s focus on RIA off-channel communications
In July of 2022, RIA giant Morgan Stanley announced it would be paying roughly $200 million in fines to the SEC for failing to monitor employee communications on platforms such as WhatsApp. And Morgan Stanley isn’t the only bank forced to pay up – JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. have been hit with $2 billion in related fines in the last year alone.
The SEC followed those fines with a string of letters to various U.S.-based firms, requesting information on which apps and devices employees use for official firm business.
What can financial advisers learn from these recent actions by the SEC? RIAs hoping to avoid such penalties must address communication policies and practices within their firms – while also increasing security and revisiting archival methods.
Five best practices for off-channel communications with RIA clients
Archiving compliance requirements are set at a high bar for financial professionals handling vital personal documents. These five best practices will help your RIA firm monitor and archive communications in accordance with federal and state regulations.
1. Know the rules
According to SEC Rule 204-2 of the Investment Advisers Act of 1940 (also known as the Books and Records rule), firms must provide true, accurate and current records for the major categories below:
- Business and financial accounts.
- Investment advice and transactions in client accounts.
- Client communications and recommendations.
- Records that document your authority to conduct business in client accounts.
- Advertising and performance records.
- Violations of the Code of Ethics rule.
- Registration and client disclosure documents.
- Solicitor arrangements.
- Political contributions.
- Custody of client assets.
- Proxy voting on behalf of clients.
- Policies and procedures adopted and implemented under compliance program rule.
This means all client-facing communications, regardless of which platform they occur within, must be properly recorded and archived.
2. Understand the difference between backup and archiving
Although often used interchangeably, backup and archival systems have different purposes for advisory firms. Backup protects your data with a copy of the data in case it’s lost due to device failure or other disaster.
Archiving is designed for long-term storage of data and is used for compliance purposes. Typically, archival involves moving data off the primary storage device so it can be accessed at a later time and can’t be overwritten.
The Books and Records rule states all RIA firms must maintain and preserve their required books and records for no less than five years and must be readily accessible for the most recent two years of the five-year period. This makes communication archiving crucial to your firm’s processes.
3. Develop policies and procedures for all employees
Your RIA firm must have written policies and procedures regarding communication compliance. This includes:
- Implementing written policies and procedures reasonably designed to prevent violation by the firm’s employees.
- Conducting an annual review (at minimum) of the adequacy and effectiveness of the policies and procedures in place.
- Designating a chief compliance officer (CCO) to administer the policies and procedures.
Although policies and procedures are pertinent to every member of your organization, responsibility of ensuring compliance and annual review ultimately falls to your CCO.
4. Embrace monitoring-friendly technology
Rather than trying to monitor a slew of different communication platforms throughout your advisory firm, you may wish to choose a few pre-approved messaging services your employees can use to speak with clients.
Several technology companies are working to fill the gap in this space, offering compliance-friendly apps created specifically for advisers. For example, Snappy Kraken’s new tool for texting, Convos, offers a monitoring-friendly alternative to apps like WhatsApp or Facebook Messenger.
5. Keep all information updated and secure
It’s imperative to review your RIA firm’s archiving policies frequently, including during your annual review process. As part of these reviews, RIAs should update policies with any new rules for compliance and revisit any specific policies created by the firm to improve your processes.
Additionally, if you are updating equipment of any kind, make sure your current system works with your backup solutions. Outdated backup drives can cause many issues if they are not compatible with all your systems.
With proper monitoring of RIA off-channel communication, your firm can keep in regular contact with clients without risking regulatory fines.
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.