Text Message and SMS Compliance Rules for Financial Advisors

Your clients value transparent communication. So in addition to phone calls and emails, you may rely on text messages to stay connected. While test messages are a quick and convenient way to check in with clients, it’s important to tread carefully to avoid compliance violations. Developing a text messaging compliance strategy can help you avoid missteps and keep the lines of communication with clients open.

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Text Messaging Compliance Rules for Financial Advisors

Several regulations govern client-advisor communications, including messages sent via text. These regulations aim to address compliance concerns surrounding archiving and recordkeeping, as well as client data protection and privacy. Here are some of the most important rules to be familiar with as you develop your text message compliance policy.

The Investment Advisers Act of 1940 (Rule 204-2)

The Investment Advisers Act of 1940 details the books and records that registered investment advisors (RIAs) must maintain¹. The list extends to text messages, which must be stored for a minimum of five years. Here are more specific guidelines on how archiving is handled for compliance under Section 204-2 of the rule²:

• For the first two years, written and digital records of text message communications must be stored in your principal office.
• Archived records must be originals.
• You can move records to a secure, but still easily accessible, location for the remaining three years.

Rule 204-2 also requires advisors to ensure that archived records can’t be altered in any way, or deleted. If your firm is subject to a regulatory review or compliance audit, you should be prepared to provide access to your text message archives.

SEC Rule 17a-4

SEC Rule 17a-4 requires broker-dealers to maintain certain business records for a set period³. Under this rule, advisors must:

• Retain all business-related electronic communications, including text messages with clients.
• Maintain those records for a minimum of three years, with the first two in a location that’s easily accessible.
• Store messages in a secure format that cannot be erased or altered (WORM format).

The rule covers communications sent using third-party messaging apps. For example, if you use Redtail CRM, you may use the Redtail Speak feature to send compliant SMS and MMS messages to clients⁴.

While Rule 204-2 and Rule 17a-4 sound similar, they differ in who they apply to and what’s required. Rule 204-2 prescribes a narrower scope for RIAs, in terms of which text message records must be maintained. The window for maintaining those records is also shorter than what’s expected of broker-dealers under Rule 17a-4.

FINRA Rule 4511

FINRA Rule 4511 enforces the recordkeeping requirements for broker-dealers set forth by SEC Rule 17a-4⁵. This rule requires advisors to:

• Preserve the records mandated by Rule 17a-4.
• Ensure that these records are stored in a manner that’s compliant with Rule 17a-4.
• Observe the minimum period for recordkeeping required by the SEC.

If your firm is a FINRA member, this rule applies to you for text messaging compliance.

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act was passed in 1999, in part to institute reforms in the financial services industry and in part to protect consumer privacy⁶. If you are a “financial institution” with customers, then you’re covered by this rule. The Act defines a financial institution as an entity that engages in activities related to financial services, including:

providing financial, investment or economic advisory services. These activities cover services offered by credit counselors, financial planners, tax preparers, accountants, and investment advisors.

Under the Act, a consumer’s “nonpublic personal information” (NPI) is protected. That includes any personally identifiable information you collect about your clients, excluding information that’s otherwise publicly available.

In the context of text messaging compliance, the Act requires financial institutions to give their customers or clients notice of their privacy rights. This notice must state how client data is used and whether it’s shared with any third parties. Clients must have the ability to opt out of sharing. You must also have an SMS archiving policy in place.

Consequences of Text Message Noncompliance for Financial Advisors

Noncompliance with regulatory requirements can have profound consequences for your advisory business. Some of the possibilities for failing to observe text messaging compliance include:

• Fines: The SEC can and does impose fines on investment advisors who fail to maintain proper communication records⁷. Those fines can be quite steep, sometimes totaling millions of dollars.
• Brand disruption: Clients may be drawn to your firm because you have an established firm with a positive image. If your brand reputation suffers because you’re subject to fines for noncompliance, that could drive prospective clients away or have some of your current clients searching for a new advisor to work with.
• Liability issues: Noncompliance could lead to a lawsuit if clients decide to sue you for privacy violations or other perceived wrongdoing. Not only could that have a significant financial impact if you have to retain attorneys or pay out settlements, but it can also further harm your brand image.

Aside from those impacts, you may be subject to increased oversight from regulators. The rate at which you’re audited or your firm is subject to a compliance review could increase. The more time you spend addressing compliance concerns, the less time you have to serve your clients.

How to Develop a Text Messaging Compliance Policy

Including a specific provision for text and SMS messaging in your compliance policy is essential if you use these channels to communicate. Here are some tips for creating a policy that addresses text communications:

• Identify what needs to be archived. Clearly spell out in your policy which types of messages must be saved. You can also point out which types of messages would not meet compliance requirements and should be avoided.
• Educate your employees. Unless you’re running a one-person firm, you’ll need to share your compliance policy with your team. They should be aware of which types of text communications need to be saved and any internal rules you want to impose on when texts can be sent to clients.
• Use a compliant archiving solution. Compliance solutions can take the stress out of ensuring that your firm is checking all the boxes for text messaging archiving. We’ve already mentioned Redtail Speak, but that’s just one option. As you compare solutions, look at how texts are captured and stored to ensure compliance and what you’ll pay.

Once you have your compliance system in place, take time to stress test it. Conduct regular reviews or audits to make sure that you’re capturing the data you’re required to, and that your storage solution is both accessible and secure.

Bottom Line

Text is a convenient way to stay in touch with clients, but you can’t afford to overlook compliance requirements. Crafting a clear policy for archiving and privacy protection can help you continue to communicate with clients via text, without putting your firm at risk.

Tips for Growing Your Advisory Business

• Communication is central to your marketing strategy. Email, direct mail and social media can help you stay connected with current clients while attracting new ones to your business. If you’re looking for a way to add another level to your outreach plan, you might consider partnering with an advisor marketing platform. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
• Compliance touches more than just business communications. Cybersecurity, for example, has been the subject of new rulemaking by the SEC. Artificial intelligence in the wealth management industry is receiving increasing scrutiny from regulators, though there are no firm rules in place just yet. Incorporating compliance solutions into your tech stack can help you stay up to date on changing trends and regulations.

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