How safe are your communications in the financial services industry? Hold your breath as we take you through the labyrinth of archiving communications within financial firms. We spotlight the indispensable need for documenting and archiving every single exchange.
But we don’t stop there. We delve into the significance of disclaimers and disclosures. And Casey and Tom discuss how the digital revolution has amplified the need for an easily searchable electronic trail and stringent compliance teams.
Get ready to be intrigued as we unravel the astounding rise in SEC (Securities and Exchange Commission) fines for slip-ups in messaging practices. We dissect real-life cases of financial firms suffering penalties for non-compliance. And we shed light on how older regulations put in place many years ago have been contemporized to mirror today’s industry landscape.
We wrap up the episode with an insightful discourse on how the SEC ensures adherence to standards and the various penalties it imposes for improper messaging practices. Whether you’re a novice or a seasoned pro in the financial services industry, this episode serves up a wealth of knowledge on compliance and the practice of archiving communications.
Links for Archiving Communications Episode #450
Transcript for “Archiving Communications – Episode #450”
Hi, this is Tom, and in episode 450, Casey and I pull back the curtain to talk a little bit about how “the sausage gets made” at our firm.
You see, we have to archive all of our conversations and communications here at the firm.
We don’t want to do it.
We have to do it.
Along those lines, every year during the summer, I get this renewal invoice for our archiving program and I cringe. Every year I really want to lay down and take a nap because it’s a giant bill and it’s got to be paid all at once.
And the software, the website, that we have to use, looks like it still runs on Windows 95, like a DOS program. It’s clunky, it’s difficult to navigate. Sometimes I wonder if it’s actually working. It is working, but it’s very, very hard to generate reports and to pull data out of the program. We’re in the process of moving to a new provider. As a result, we’re exporting all of our archive data going back to 2014, nearly 10 years.
I’ve got to be honest – I think I’d rather have a root canal than go through what I’ve been working on this summer. I’m going to say right now if someone listening to this podcast can come up with a simple way to archive our emails, our social media and communications, not just for us, but for everybody in the industry…that person would probably print money. That was the trigger for inspiring episode 450 of this podcast.
Welcome back to the podcast. This is Tom Mullooly.
Joining me today is newly minted CFP Casey Mullooly. Hello.
Happy to be here. Thanks for having me.
I’m glad you didn’t send me this message on LinkedIn.
Is this going to be archived? We do the transcriptions for the podcast, so I guess that’s pretty close.
It will be archived because we do a transcription of each podcast and then the website is archived. This is what we want to talk about today.
There are certain requirements for investment advisors and people who work at big banks or hedge funds, even in terms of, and your stockbroker too. Stockbrokers are included in that. There are communication requirements and requirements for documenting communications into our office. So, between employees of firms, and also between your broker or your advisor, or your banker and you, when they communicate with a client, they’re required to do so on official channels, which include email or snail mail.
I think those are really the two big channels and we’re seeing some examples of employees of banks and brokerage firms not follow those guidelines and they’re communicating with clients on unofficial channels like LinkedIn messaging or text messaging falls in that camp, and the SEC is starting to crack down on those communications via unofficial channels.
It’s kind of unusual to see how the industry has morphed over the years. Where we were told back in the 80s you should take notes. I’ll say that again, you “should” take notes, after each conversation. We didn’t have email at the time.
And if you send something (a letter), to a client, it was usually very formal. And you couldn’t send anything out without your branch manager’s approval. And he would normally send it to you know, as a broker, he would send it to the legal department – or the compliance person. The larger offices in the brokerage world would have a compliance person right on the location, but in many small offices they would have to send it to New York to get approval to send a letter out.
And that really blew my mind early on in my career. Because I had a lot of great ideas. I thought I had some good ideas to market good investment opportunities. But then I found that, hey, if I want to send something out to prospective clients – or even current clients – where I talk about a mutual fund that I thought would be very appropriate for them, you can’t send a letter telling someone to put money into a mutual fund – without a prospectus.
It’s a rule that goes back to the 1940s. You need to have a prospectus if you’re gonna talk about that. We need to have disclaimers and disclosures everywhere. I mean some of these brokerage statements that you get… people will come in… and they’ll have a brokerage statement from a well-known firm. And the last four pages are little tiny print of disclaimers and disclosures.
It’s overkill. It is overkill. The intent is that it’s for the investors…to protect the investors. But most of the time it just ends up confusing them, and getting tossed out in the garbage. But you know, like I said, it’s for the investors’ protection that those disclaimers need to be in there. The reason why these communications, whether it’s mail or email, need to be documented is because of it makes the examiner’s life easier. You know, if there is, if someone said something that they shouldn’t have, if there is, you know some…
Electronic trail or paper trail.
Right. So the idea is that you want it to be searchable. And you want to be able to find instances of wrongdoing by the broker or advisor or banker. You want to be able to search that and have it be easily findable.
Because in the “olden days,” when you were coming up, in the 80s and early 90s, it was you sent out maybe a couple letters per day. But nowadays we’re sending emails, internal messages, maybe hundreds per day. So the examiners want it to be easily searchable and accessible so they can try and find those needles in the haystack.
Think back to how the internet and electronic communication has emerged. In 1994, people were just starting to hear about AOL. Pretty much since then, brokers and advisors have been told “don’t have a website,” because there was no way your compliance team or your legal department could keep track of everything that’s being put out there.
We’re not even up to talking about text messages and instant messages and all of that stuff. Let’s just take baby steps and talk about websites. We have on our website…we’ve got 2,000 posts, we’ve got over 300 videos, we’ve got 400 podcasts. It’s a LOT of content and all has to be reviewed, it all has to be approved and it all has to be archived. Everything on our website is archived.
And quite frankly, it costs us a small fortune every year to do that. But there’s more, and I hinted at that a moment ago, talking about communication.
A client calls in. We have a 20 or 30 minute conversation.
The first thing that we need to do: take notes. Document it. Yeah, everything, describe it, what you talked about, what you how you felt about the conversation. We pop it into our CRM here just to make sure that everyone in the firm is able to see those notes. And that’s the first thing that we all do each morning when we come in. You know, if we miss something overnight, we go and read the notes to see who’s been talking to who, who called in, who emailed.
We review those things to make sure that we’re all on the same page – in case the person who they were dealing with isn’t available, so we can step in and hopefully provide a seamless service there for them.
Right. For instance, right now as we’re recording this, Tim is on his honeymoon. And, when Tim’s clients call in, or people that have been working with Tim, any one of us can pick up the phone and carry on the conversation. That’s the whole team approach. Now there are other advisors out there, who they may be part of the team – but they have their own clients. I don’t know what they do.
Right. With us, it’s all transparent. Everybody knows what everyone else is doing here. And I think that’s better, a better way to serve our clients. But all this stuff needs to be documented. And so every time we have a conversation with somebody, we have notes. Every time that we have an email conversation with someone, whether we get just one email or send an email out.
Yeah, that’s documented too. And archived. And we need to keep those records for five — seven(?), I think, it’s five years. But we need to keep records going back over time, you know, just to, just because everyone has to do that. Those are the SEC guidelines for record keeping and they’re pretty stringent. And again, I think that is for the investors, the clients’ best interest.
I don’t think people realize that that every time that we have a conversation with a client that’s that’s a rule in our business — there’s going to be notes that tell us what happened. And then we have a good chronological timeline, or reverse chronological timeline, of how the relationship has developed and what the focus is on. But also with the emails. Every single email – to or from – gets archived.
So I get, without exaggerating, well over 100 emails a day. A lot of them are junk.
Guess what? Archived.
Think about it you know when you’re going to to visit your doctor, you know it kind of builds on itself — what you’re talking about, the topics that you’re concerned about. Think about it like when, if you’re going to your doctor, he wants to know, or she wants to know, what you were sick with in the past — or what you came in with, in the past. And they keep those notes over time. The more notes they have, the more they talk to you. That’s a greater body of evidence. And that’s just you feel more comfortable with that person because they understand your situation.
And I think that that leads to what we talked about on the last podcast with trust and trusting your advisor. The more comfortable you feel, the more likely you are to have that trust with the advisor. So I think it all goes into serving our clients better and just providing the best service that we can.
So — two cringe points for me. And maybe for you too. One is when a friend becomes a client, and we’re used to texting. Or when a new client (or you know), any client asks “hey, what’s your cell phone number?” Or “hey, can I text that to you?” “Hey, I got this thing in the mail, can I text that to you?”
Normally if it’s among friends we would say, “of course, just take a screenshot and send it to me.”
Yeah, we can’t do that — not an official channel. It’s not an official channel, right.
We want to have that over an official channel. Because, like we’ve been saying, then it’s archived, then it’s searchable, then it’s documented.
It’s not just because we don’t want you to have our personal cell phone number or whatever, it’s because we want it to be documented and archived.
Well, to be fair, I don’t want to get texts about some investment going wrong at 10:30pm on a Saturday night. I’m asleep.
There needs to be some boundaries there as well. But also because it’s not an official channel.
Recently there were some pretty hefty fines passed down from the SEC and the Commodities Future Trading Commission to some some pretty major banks.
Among them, you know, Wells Fargo always seems to be in trouble these days.
These poor guys, you know what? Wells Fargo is a historic, old (usually) well-run organization.
But man, they have stepped in a bucket these last few years.
Yeah so the the total fines.
So these were. The SEC is doing exactly this. They’re looking into internal and external communications. And they’re really digging into messaging practices of these big banks, and the total fines for the SEC — just for these messaging probes — just crossed $2.5 billion dollars.
The most recent batch were, according to Bloomberg, and we will link this article in the show notes, the most recent batch of penalties was $260 million from the Commodities Futures Trading Commission and $289 million from the SEC. So this is major sums of money that these firms are being fined for not doing the right thing and archiving — or — not communicating over official channels.
And these are just the big brokerage firms. I mean, these are recognizable firms. Everybody listening to this podcast would know them.
They haven’t even gotten to the hedge funds, or the private equity firms.
Think about the business that those guys deal in. They want to get emerging stories before they emerge.
I can only imagine what their communication archives look like.
You know, the article I want to say “speculates,” but the article suggests – the SEC is really digging deep on this, these messaging, these improper messaging techniques, because it’s low hanging fruit for them. Everyone – most everyone – is is having these communications off the proper channels, so they’re able to go in there and pick off these instances of improper communication and slap them with a pretty hefty fine.
I think that crimes like insider trading are going to not go away permanently. But they’re going to diminish drastically.
If you think back to the 80s, nothing was written down. There would be an occasional memo – internal memo – about a deal that was happening. But everything was word of mouth or things that were said over the phone and not recorded.
There’s a lot of recording going on in our industry these days. And so a lot of deals got done just talking to people. Now the regulatory bodies can go in and they can say I want to see all the communication channels that you guys use. So do you use instant messenger? Do you use WhatsApp? Let me see your own personal cell phones. They’re starting to look through these for data, for information.
There are a lot of channels, a lot of ways that people can communicate. Now yes, the SEC is not asleep at the wheel. They’re waking up to the fact that, hey, there’s a lot of chatter that may be happening “offline,” offline in air quotes.
Right. And nowadays, with how fast information is moving, if you’re waiting to have a conversation with someone in person, you’re probably missing whatever edge you had.
So I agree with you there. I think we’re finally starting to see some of the rules and regulations catch up with what’s actually going on. I mean, we’ve seen that with them finally updating the social media policies and the advertising rules for investment advisors – just this past year.
Yeah, the rules and regulations we had to follow were written basically, I think, when websites first became a big thing in the late ’90s. Maybe the language was so outdated and it was hard to comply with these outdated rules. And finally they caught up and were able to loosen some of the rules and regulations. And now in a couple of years, those rules will probably be outdated and need to be rewritten. But it’s good to see, at least in some regard, that the regulatory bodies are catching up with everyone else now.
When websites started becoming more mainstream, we started seeing brokers and advisors use testimonials. Until about a year ago, that was a no-no.
In fact there’s probably a video somewhere in our archive where I said “hey, if you see an advisor that has testimonials on their website, run!” because that guy can’t play by the rules. But now, a little different. Now you can have testimonials, just kind of disclose it.
You have to disclose; more disclaimers.
We’ve been shot down a few times – through our compliance reviews – for using “promissory language” on websites and in letters that we’ve sent out to people. I think that most of the text that we use on our website and in our marketing materials is very heavily watered-down. To the point where I get mail at home – or I’ll go on advisors’ websites – and see what they say on these things. Honestly, I want to arrest these people because they shouldn’t be allowed to get away with saying some of the things that they’re saying.
Yeah, it doesn’t seem right.
I think it’s hard to get everyone to play by the rules. I think that’s just business. Everyone’s going to be looking for the best way to attract new clients. And sometimes that means over-promising or making somewhat misleading statements, I guess.
They may not be breaking rules, but bending a few.
Bending, towing the line. I think we would rather just avoid that. And believe in our product and our services here and let those speak for themselves.
And you know, maybe one day those guys will have some regulators breathing down their necks! I’m good with playing by the rules and making sure that we’re documenting everything that we need to be documenting and archiving this all. Because I would rather not get one of these big fines that the SEC seems dead-set on handing out.
I think that is going to wrap it up for this week’s episode of the Mullooly Asset Podcast.
Thanks, as always, for listening.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions and securities discussed in this podcast.