Texting and AI: Two Critical Issues to Address in the Years to Come

By Thomas D. Giachetti, Esq. and Thomas Kellerman, Esq.

The SEC continued its aggressive examination and enforcement posture in 2024, including issues pertaining to marketing, off-channel electronic communications, cash balances, crypto, and artificial intelligence (AI). The current and potential issues on the enforcement horizon are myriad, and advisers must be prepared to address these issues during examinations. In this article, we will address two of these industry challenges: employee texting and AI. 

Texting

Business-related texting is correspondence under the Advisers Act and must be captured, retained, and monitored. 

There are three types of policies we see regarding the use of texting: 

1. Prohibition
2. Permitted from a personal device exclusively through use of a firm-designated texting application
3. Permitted from a firm-issued device

Regardless of the chosen policy, there must be a defined policy and subsequent compliance therewith must be monitored on an ongoing basis. The penalties have been significant so implementing a robust compliance program is crucial. 

Our recommendations are as follows: 

1. Address the use of personal devices with all employees and independent contractor reps periodically (no less than during the annual compliance meeting/training (with a corresponding written meeting agenda item and sign-in sheet that should be executed by each employee and retained by the firm).
2. If the firm holds regular firm-wide staff meetings, the use of personal devices should be an ongoing agenda item (with a copy of the agenda retained).
3. ALL employees and independent contractor reps should sign the corresponding applicable standard acknowledgement (i.e., texting is prohibited, with express limited exceptions) upon inception of employment and no less than annually thereafter (quarterly encouraged, based upon the ongoing SEC scrutiny).
4. However, if the firm, upon prior written approval, permits texting via use of a firm provided app installed on the employee’s/rep’s personal device or via a firm provided device (both permitting ongoing firm monitoring of such communications), then a corresponding different acknowledgment reflecting the same should be used.

Remember, as indicated above, policies and procedures are only effective if they are followed, including ongoing reinforcement of the firm’s policies (per the meetings and corresponding agendas referenced above). Permitting ongoing monitoring is only effective if you can demonstrate that actual monitoring has occurred in the same manner as the firm performs ongoing email monitoring. Maintain regular ongoing (recommended monthly) records of doing so, and that you have addressed any corresponding content concerns.

CAVEAT: Regardless of your policy and procedure, don’t be surprised if a regulator asks you to prove a negative: “How do you know that your employee is not texting?” or if they are using an app, “How do you know that your employee is only using the approved app?". Thus, implement, educate, and follow the policy and procedure per the above, and investigate and document any and all instances of actual or perceived violations or red flags.

Artificial Intelligence

We have seen a continued increase of investment advisers’ use of AI to transcribe client and internal meetings. Among other applications, AI features such as Zoom AI Companion, Microsoft Copilot, Jump, and Otter.ai (collectively, AI meeting assistants) can assist with drafting, transcribing, summarizing, and prompting action items based on conversation content in the respective application. For instance, certain applications can draft communications, generate transcriptions of conversations, identify points of agreement and disagreement of a discussion, and summarize action items. 

There are several SEC recordkeeping provisions that may be implicated by use of the AI. Rule 204-2 requires investment advisers to maintain certain records “relating to [their] investment advisory business.” Every registered investment adviser is required to keep true, accurate, and current books and records. The conservative approach at this juncture would be to adopt these AI meeting assistant transcripts into the firm's books and records if implicating a requirement under Rule 204-2. Once translated into written form, the SEC could consider the transcripts and summaries to be written communications regarding investment advice. Such transcripts and summaries should be kept in their original form, together with notes (if any) as to any corresponding inaccuracies produced by the AI content. 

Registered investment advisers are fiduciaries and should not use any information in conjunction with providing client services or communications that they do not reasonably believe are accurate. Thus, if the firm was to use the content of AI transcripts and/or summaries in conjunction with client services or communications that was incorrect, the onus would remain on the firm to demonstrate as to how it reasonably relied upon the content. It is inconsequential whether these transcripts and summaries make it into your CRM software or are maintained in the AI meeting assistants program. Regardless of whether the content is a meeting summary or list of action items, the transmission would likely constitute a communication for purposes of Rule 204-2 due to implicating an already established recordkeeping requirement.

Additionally, investment advisers have begun using generative AI (GenAI) as online search tools. GenAI is a developing technology that uses machine-learning techniques to provide AI tools that are capable of synthesizing, summarizing, and generating content. GenAI tools such as ChatGPT have become widely available and in some cases have been incorporated into other technologies, such as internet search engines. 

Although we are not endorsing the use of AI or GenAI, we strongly recommend that a written policy is adopted making clear the firm’s position regarding these tools (i.e., prohibit or permit under defined conditions). We recommend the policy is acknowledged by employees on no less than an annual basis (preferably quarterly). The policy should expressly prohibit sharing passwords with any AI tools. If the firm has determined to permit the use of GenAI, the firm should review how the application provider will protect the security of client nonpublic personal information (to the extent that the firm’s policy permits the use thereof in conjunction with GenAI, which we do not currently endorse), and the obligation to immediately notify the firm in the event of a breach. Seek a clear written representation from the provider, including, if possible, an obligation to defend, indemnify, and hold the firm harmless for violation thereof. Seek ongoing written confirmation (no less than annually) of such representation and continue to monitor for breaches. The application provider should also represent that it is not retaining the firm’s clients’ nonpublic personal information for training purposes and not selling the firm’s clients’ nonpublic personal information to any third parties. 

AI tools may be used as a starting point to create or optimize content or any personalized investment advice. To protect the investment adviser, we are advising that employees receive express permission from their chief compliance officer prior to use and document every time AI is used for investment advice (again, which we do not currently endorse). All input and output should be double-checked for accuracy and employees should run their own analysis separate and apart from the AI. The firm must follow a content compliance approval process before publishing.

Remember, compliance is not static. It is an ongoing process that must be reviewed, enhanced, and updated on an ongoing and continuous basis. 

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Thomas D. Giachetti is a senior shareholder and Thomas Kellerman is an associate of the Investment Management & Securities Practice Group of Stark & Stark, a 125+ attorney law firm representing  investment advisers serving clients throughout the U.S. and abroad. 

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