In 2020, the Securities Exchange Commission (SEC) issued its first penalty related solely to advisors text messaging with clients. Since then, the SEC has commenced over 35 enforcement actions against firms in respect of record-keeping violations related to instant messaging between advisors and clients, and has imposed fines of more than $2.5 billion in respect of these breaches.1 Canadian regulators aren't usually too far behind its American counterparts, so it's anticipated that this infraction will be an area of investigation and enforcement for CIRO in 2024 and 2025.

This blog explains the reason why regulators are concerned about advisors' use of unauthorized channels of communication with clients, and provides advice on how to manage clients who insist on using instant messaging to communicate with their advisors.

With the shift to remote work in 2020, advisors have increasingly used text messaging and other third party platforms such as iMessage, WhatsApp, Facebook Messenger, and WeChat to communicate with their clients. Many advisors suggest that their use of these platforms is about providing efficient and prompt service to their clients, who often insist on these more convenient methods of communication over e-mails or telephone calls. Other advisors have justified their use of texting as it creates an open channel of dialogue with their clients and builds stronger relationships. However, while these methods of communication are more convenient or good for business development, their use may come at a significant risk to advisors' licences as they constitute breaches of CIRO's rules and dealers' internal policies.

Why do regulators and dealers prohibit the use of these platforms? The main reason is that off-channel communications are not on the dealer's system and therefore cannot be monitored, preserved or recorded. If a client complained about the advisor, the failure to preserve these communications interrupts the audit trail, preventing the dealer and regulator from (dis)proving the client's complaint.2

Another reason is that instant messaging poses potential security risks and may increase the client's exposure to fraud. There is no way for the dealer to secure these instant messages because they are not sent through the dealer's platform, and are only as secure at the client's cellphone, which we know is not secure at all. Cellphones can be lost, stolen, or even have its data intercepted by fraudsters through sophisticated scams such as SIM card swaps (even sophisticated organizations that prioritize security, such as the Securities Exchange Commission are vulnerable to these kind of attacks – click here to read more about the recent fraud perpetrated against the SEC). Texting with clients—particularly more vulnerable clients, such as seniors—may set their expectations that it is reasonable for their dealer to ask for confidential information via text message. So when clients receive phishing texts from a fraudster asking for their private information (i.e. online banking details), clients with whom the advisors were texting, may be more inclined to supply this information and fall victim to a fraud.

Beyond these reasons, there are other considerations why advisors should not text clients, including:

  1. Most dealers' policy manuals and CIRO's regulations3 require advisors to maintain a record of all communications exchanged with clients for at least seven years from the date the record is created. The failure to adhere to any such requirement is likely a breach of the advisor's employment or agency agreement, which could result in disciplinary measures.
  2. Without a proper paper trail, advisors may forget client instructions received, which could impede their ability to properly service their clients or worse, lead to mistakes in client accounts.
  3. Similarly, without a complete paper trail, advisors may not have the evidence necessary to defend themselves in a civil suit or regulatory investigation arising out of a client complaint.

If you need further data to convince yourself that texting with clients is a bad idea, see CIRO's recent 2022 decision, Re Sweeney, where the advisor admitted using the "unapproved third-party communication applications" WhatsApp and Signal Messenger to communicate with her clients, contrary to IIROC Rule 1400. While the advisor admitted to additional misconduct beyond the use of unauthorized third party platforms (which served to increase the sanction), CIRO imposed a fine of $50,000, costs of $15,000, and suspended Sweeney's registration for one month.

So while texting may be convenient for the client, it poses a host of unintended issues and consequences for advisors and dealers, and must be avoided. If the client initiates communication with a text message, the best practice is for the advisor to politely inform the client that their regulatory obligations do not permit the use of text messaging (or other third party platforms, as applicable), and all communications must be through telephone calls or e-mails. Should the client persist, the advisor should not respond to the client with a responding text message, but instead should respond with an email.

Ultimately, advisors must prioritize compliance with their regulatory obligations over their clients' preferred method of communication, prioritizing their licenses over client service. Otherwise, CIRO might e-mail the advisor (through their secure portal!), informing the advisor of an investigation into their infraction.

Footnotes

1. See, for instance, the fine imposed by the SEC against Wells Fargo for record-keeping violations in the amount of $125,000,000. See also the fines imposed by FINRA (the U.S. equivalent to CIRO) against two advisors, Mehlin and Kucish.

2. Record keeping requirements are mandated by National Instrument 31-103, Part 11, section 11.5.

3. See IIROC Rule 3803 and MFDA Rule 5.6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.