Ep.2: Tech Trends: Bitcoin, AI, & Electronic Communication

Intro (00:00):

This is Adviser Intelligence, the podcast for investment advisers and financial institutions. In each episode, attorneys from your investment management and securities team break down compliance, regulation, and risk into practical insights that help you stay exam ready and ahead of what’s next. This podcast is brought to you by Stark & Stark.

Joseph Antonakakis, Esq. (00:29):

Hello and welcome to episode two of the Adviser Intelligence Podcast by Stark and Stark. My name is Joseph Antonakakis.

Stephen Galletto, Esq. (00:38):

I am still Steven Galletto.

Jeffrey Lang, Esq. (00:40):

And I’m Jeff Lang.

Joseph Antonakakis, Esq. (00:40):

And today we’re going to talk about technology trends for investment advisers, broker dealers, financial institutions, things like everyone’s favorite, artificial intelligence, texting and electronic communications, both internally and among a firm with their clients, and also Bitcoin. I think we should start, in my opinion, with artificial intelligence. And the reason why is because I, as I’m sure you are as well, am having conversations pretty much every day with clients who are saying, “What do I need to do to make sure I’m using artificial intelligence tools appropriately? What types of tools are out there?” I mean, Steve, can you give us a couple examples of not specific names of tools, but tools that your clients are using and what may be appropriate use of those tools?

Stephen Galletto, Esq. (01:32):

Sure. And the questions are all over the place. There’s a lot of questions you should ask before you engage any new vendor. Certainly any service provider that’s creating an electronic record for you. You should obviously understand exactly what your roles and your responsibilities are from a compliance standpoint, right? Not only are you doing vendor due diligence on the vendors you’re working with, you also need to be mindful. If you’re using specific tools to create a summary of a client conversation, is it creating a full transcript of that conversation? Are you getting a video of the actual meeting with the client as well?

Joseph Antonakakis, Esq. (02:16):

Well, let’s pause for a second and just describe what these tools are.

Stephen Galletto, Esq. (02:20):

Sure.

Joseph Antonakakis, Esq. (02:20):

Because this is probably the one that I see the most when I’m talking with clients. These, what they call the note takers. And they’re like sitting in on a call. It’s an AI tool. It’s what I’m going to call listening in. And-

Stephen Galletto, Esq. (02:35):

Do you find it rude when a client just has a note taker on your Zoom?

Joseph Antonakakis, Esq. (02:40):

I absolutely do.

Stephen Galletto, Esq. (02:41):

Right.

Joseph Antonakakis, Esq. (02:42):

And that being said, I think this brings up a good point, which is if an AI note taker is in a Zoom with an attorney, what does that do to the attorney-client privilege?

Stephen Galletto, Esq. (02:50):

I don’t think it disrupts the actual privilege, to do you?

Jeffrey Lang, Esq. (02:54):

I don’t think it does.

Stephen Galletto, Esq. (02:55):

Jeff doesn’t.

Joseph Antonakakis, Esq. (02:55):

I don’t know. I was talking to Michael Donahue about it. He had some opinions just saying-

Stephen Galletto, Esq. (02:59):

Our listeners have no idea who Michael Donahue is.

Joseph Antonakakis, Esq. (03:02):

You’re right. Unless it’s somebody who works at Stark & Stock.

Stephen Galletto, Esq. (03:05):

A little behind the curtain guys. Michael Donahue is the firm’s managing partner. You probably haven’t met with him, dealt with him. And if you have, it’s probably because you did something really wrong. But yes, these tools, when they’re used on the legal side, there’s a lot of implications. We need a lot of approvals before we can start using these tools on our side. If we’re creating that record, does that disrupt the attorney-client privilege? I do not think so.

Jeffrey Lang, Esq. (03:32):

I don’t think so.

Stephen Galletto, Esq. (03:33):

Right. Certainly on our side. If a client’s using the tools on their side, does it create a disruption of that attorney-client privilege? It depends on what you’re doing with it. If you are saving that audio file or video file of your meeting with your attorney in a general repository that everyone has access to, you might as well be passing around an email you got from your attorney completely and disrupting the attorney-client privilege and giving yourself zero protection.

Joseph Antonakakis, Esq. (04:00):

Taking that concept of attorney client privilege, the idea there is privacy and confidentiality. And that applies not forgetting attorneys for a second, but for investment advisers and their clients.

Stephen Galletto, Esq. (04:11):

Reg SP.

Joseph Antonakakis, Esq. (04:12):

Reg SP.

Stephen Galletto, Esq. (04:13):

Policy. Privacy policy.

Joseph Antonakakis, Esq. (04:14):

Tell us

Stephen Galletto, Esq. (04:15):

About- Privacy policy.

Joseph Antonakakis, Esq. (04:16):

Tell us about how Reg SP and privacy and confidentiality applies to not just these note takers, but also other generative AI tools like that.

Stephen Galletto, Esq. (04:24):

You’re looking at me, Joe, but I’m pretty sure that’s a question for Jeff.

Jeffrey Lang, Esq. (04:27):

Well, there’s a few things going on there. One is, is the tool such that it is operating in a contained universe. It’s not part of the large language learning model. So the information is contained and will not be shared. So you can count on your information remaining confidential when it’s used in the tool.

Joseph Antonakakis, Esq. (04:49):

And

Jeffrey Lang, Esq. (04:50):

That’s something you’re going to discover in the due diligence process. That should be asked and answered before you even start using the AI tool. And then as far as using it with your client, you’re going to get some kind of acknowledgement from the client and usually the tool offers it that indicates that the client is okay with being recorded or transcribed by the tool.

Stephen Galletto, Esq. (05:12):

There definitely needs to be a process at the outset if you’re going to be using one of these tools to record a conversation where you’re notifying the client.

Jeffrey Lang, Esq. (05:19):

Right.

Stephen Galletto, Esq. (05:20):

Different states have different laws regarding like a wiretapping type … Consent.

Joseph Antonakakis, Esq. (05:29):

Some states are one party jurisdictions where only-

Stephen Galletto, Esq. (05:31):

New Jersey is a one party consent. Where if I know I’m recording the conversation, you don’t need to know that if you’re in Colorado.

Joseph Antonakakis, Esq. (05:40):

Yeah, right. Other jurisdictions may have

Stephen Galletto, Esq. (05:42):

It depends upon the parties that are involved. If you’re recording across state lines, it gets very tricky. Inform everyone upfront. That’s the safest way to do it.

Joseph Antonakakis, Esq. (05:51):

I think that’s a good rule of thumb is just anytime you’re getting on the line with someone and you’re using one of these note taking tools, pausing and saying, “Hey, by the way, I’m using one of these tools. Is it okay with you? ”

Stephen Galletto, Esq. (06:02):

That’s right.

Joseph Antonakakis, Esq. (06:03):

And if they say no, obviously abiding by their wishes.

Stephen Galletto, Esq. (06:06):

There’s ways to do that through Zoom and Teams as well where people are clicking a button okaying that the conversation’s being recorded. So that’s an easy way to get that squared away.

Joseph Antonakakis, Esq. (06:16):

Let me ask you one last question about artificial intelligence tools. Is if you’re an investment adviser, can you just use these tools willy-nilly or is there something you should put in place that outlines appropriate use? Jeff, you’re shaking your head.

Stephen Galletto, Esq. (06:30):

I think you shook his head because you said willy-nilly. How do you use anything willy-nilly?

Joseph Antonakakis, Esq. (06:38):

Well, you use something willy-nilly

Stephen Galletto, Esq. (06:40):

Or- Is it like willy-bully?

Jeffrey Lang, Esq. (06:41):

Well, I’ll tell you how you use it willy-nilly. Is it like Louis-Lillie? Here’s an example of using it willy-nilly. My firm has approved me to use it for just AI note-taking, but I say, “Hey, why don’t I put this portfolio in there instead and put it through AI and see what AI has to say about my investments?” That’s taking my use of my AI tool to a completely different level and invoking a completely different set of policies and procedures that I have to wrap around that type of usage.

Joseph Antonakakis, Esq. (07:10):

You just hit the nail on the head at what I was getting at, which is having an artificial intelligence policy in place where the firm outlines and says, “Here’s what you’re allowed to do with AI tools, note taking, you can use it when it’s a closed environment and so on and so forth, and here’s how you’re not allowed to use it. No private and confidential information and so on and so forth. And here’s what we do with the records, how we maintain records.

Stephen Galletto, Esq. (07:36):

So there’s going to be authorized AI tools because the firm needs to go through its full due diligence vetting process, right? The agreement with that AI vendor needs to be reviewed and approved by compliance, possibly by an attorney as well, making sure that certain confidentiality standards are met. The process for vetting and approving and making sure that you’re dealing with a closed system or an open system, whether certain information can be used in this space or not, is all important and really should not be left to the individual investment adviser to determine.

Joseph Antonakakis, Esq. (08:12):

It’s all part of the vendor due diligence that you mentioned.

Stephen Galletto, Esq. (08:15):

Correct. Correct. So this really does need to be a compliance question internally within the investment advisory firm space.

Joseph Antonakakis, Esq. (08:22):

And you could always, I don’t know, send a message to somebody who’s your compliance person, whether it’s a third party compliance person or internally and ask them about what the firm’s policy may be. Speaking of sending messages to folks-

Stephen Galletto, Esq. (08:35):

You better not be segueing into text messaging.

Joseph Antonakakis, Esq. (08:38):

I’m absolutely segueing into text messaging.

Stephen Galletto, Esq. (08:40):

You could not have telegraphed that better.

Joseph Antonakakis, Esq. (08:42):

I know. This has been a hyper aggressive area of SEC scrutiny.

Stephen Galletto, Esq. (08:46):

Mostly on the broker dealer side so far.

Joseph Antonakakis, Esq. (08:48):

So far. And the question I get from a lot of people when we’re talking about texting is, what’s the big deal? If somebody texts me, this is how people want to communicate, why can’t I just respond back and tell them I’m going to meet them at KC Prime?

Stephen Galletto, Esq. (09:04):

Books and records.

Jeffrey Lang, Esq. (09:05):

Yep. And even beyond that, just think off channel communication. Think about this. If I’m going to use something like email or even texting for communication, I want to make sure I’m using a compliant platform that allows me to review, monitor, and retain my communications like most people’s email platforms. If you’re going to use texting platforms, if you’re going to use social media for interactive purposes, they must comply. The modalities that you use, they need to comply with this review, monitoring, and retention standard.

Joseph Antonakakis, Esq. (09:45):

And anything that appears within that standard or that exists within that standard is on channel and anything that exists outside of that is off channel.

Jeffrey Lang, Esq. (09:54):

Off channel. So think about it this way. We don’t have a compliant platform to monitor, review, and retain that communication.

Joseph Antonakakis, Esq. (10:04):

And what are some examples?

Stephen Galletto, Esq. (10:06):

So using your personal email address, like a Gmail or Yahoo or something like that, or if you’re Jeff aol.com. Right. Right.

Jeffrey Lang, Esq. (10:14):

You’ve got mail.

Joseph Antonakakis, Esq. (10:16):

Yeah. Personal email. Texting. Texting using your personal phone number. If it’s not monitored and archived in some way.

Stephen Galletto, Esq. (10:23):

I get a lot of questions from advisers asking, “Is the SEC going to come into my office and demand to see my personal cell phone? Are they going to ask for my investment adviser reps, my service folks to tender their personal cell phones to see if there’s any communications between them and clients of the firm?” So far, I haven’t seen that, but quite honestly, if there’s a subpoena that asks for or demands, they can request that.

Jeffrey Lang, Esq. (10:52):

That’s right. The practical answer is this. As Steve was saying, it could potentially be in bounds. You can’t rule it out. The next question that comes up is, well, what’s likely to bring up that text? What’s likely to make them go looking for it? Well, it’s when they see some other thread that clues them in like there might be a text. So for example, they’re looking at your emails, which they often do, and they’re seeing an email that references a texting string. So right there, they’re going to say, “Okay, looks like we might have some texting activity.” Or another great example is a client complaint comes in and the complaint comes in through texting or in the complaint it says, “Hey, I’m following up on a text I sent you last week.” And there you go. You’ve opened the door to the potential of having to look at these off channel modalities.

Joseph Antonakakis, Esq. (11:45):

If you’re an adviser and you text your clients, obviously that should be on channel.

Stephen Galletto, Esq. (11:52):

It needs to be investment advisory related. It needs to be service related.

Joseph Antonakakis, Esq. (11:56):

For sure.

Stephen Galletto, Esq. (11:56):

Again, a lot of advisers, again, you have a long enough relationship with your clients, you’re going to develop some friendships. That’s only natural, right? So if you’re having a conversation with a client who happens to be a friend or vice versa, a friend who happened to later become a client, does it mean all of your communications with this person now needs to be through my rep chat or one of those other apps that are out there to capture these text messages? No, it doesn’t. You can have a happy birthday text message. You can talk about the football game or the baseball game or whatever else is going on. You can talk about your family and your friends. That’s fine. As soon as it pivots to investment advisory related service, that’s when it needs to be on channel.

Joseph Antonakakis, Esq. (12:33):

And here’s one where I see people get mixed up the most. Communications, business related communications between employees of the firm. Correct. Those communications also need to be on channel. 100%.

(12:50):

People don’t realize that sometimes.

Stephen Galletto, Esq. (12:51):

If you’re a firm that uses Slack or another type of- Teams. Teams and another type of communication tool internally, right? You’re not using email. That is also subject to your books and records requirements. Those also need to be kept.

Joseph Antonakakis, Esq. (13:05):

That’s right. Can I shift gears for a second?

Stephen Galletto, Esq. (13:08):

I love shifting gears.

Joseph Antonakakis, Esq. (13:10):

Okay. We’re shifting gears to one of the newer tech trends that we’re starting to see with maybe 20 to 25% of our clients.

Stephen Galletto, Esq. (13:18):

Oh, do tell.

Joseph Antonakakis, Esq. (13:20):

Bitcoin. Yes. Bitcoin. Let me ask you guys a question because you’ve been doing it a lot longer than I have.

Stephen Galletto, Esq. (13:26):

Bitcoin?No, I have not been doing Bitcoin longer than you, Joe.

Joseph Antonakakis, Esq. (13:30):

That’s probably true.

Stephen Galletto, Esq. (13:31):

Yeah.

Joseph Antonakakis, Esq. (13:31):

Five years ago when you guys were dealing with investment advisers, what percentage of your clients were investing in Bitcoin for their clients. 01%. So pretty much nobody. Jeff?

Jeffrey Lang, Esq. (13:43):

Yeah, about the same.

Joseph Antonakakis, Esq. (13:45):

Today, what percentage of your clients do you anticipate are investing in Bitcoin or Bitcoin exchange traded products or something for their clients?

Stephen Galletto, Esq. (13:54):

50% or better.

Joseph Antonakakis, Esq. (13:56):

50%. That’s probably higher than what I see actually. I see maybe

(13:59):

A quarter to a third.

Jeffrey Lang, Esq. (14:00):

I was going to say about 25% to 30%.

Stephen Galletto, Esq. (14:03):

I’m seeing a lot of investment advisers moving towards an ETF Bitcoin option.

Joseph Antonakakis, Esq. (14:08):

Yeah. And some of them are doing it like on a discretionary basis where they say, “Okay, John, do you want-

Stephen Galletto, Esq. (14:13):

This is going to be part of the model. If you’re running a model and this is part of it, this is exactly how they fit that risk need in that model.”

Joseph Antonakakis, Esq. (14:21):

Right. It’s like, okay, you’re an aggressive investor. We’re going to put 5% of your assets in Bitcoin. Some people we also see doing it as like an accommodation. So they’re saying, if you come to us and you say, “I want to invest in a Bitcoin ETF, we’ll do it for you, but you have to sign this incredibly long acknowledgement drafted by my attorneys at Stark and Stark.” And by signing here, you’re acknowledging that you can potentially-

Stephen Galletto, Esq. (14:49):

Shoulder this loss.

Joseph Antonakakis, Esq. (14:50):

Precisely. Right. So talking about Bitcoin, we have, like we said, a larger percentage of people who are investing in it with great power comes great responsibility.

Stephen Galletto, Esq. (15:03):

You went Spider-Man.

Joseph Antonakakis, Esq. (15:04):

I went full Uncle Ben on that one.

Stephen Galletto, Esq. (15:06):

Okay, nice.

Joseph Antonakakis, Esq. (15:06):

And so what does somebody have to do? Like we talked about the acknowledgement, what else should somebody do to make sure that if they are integrating Bitcoin into client portfolios, they’re doing so in a compliant manner? Jeff?

Jeffrey Lang, Esq. (15:22):

They want to make sure that they’ve done full due diligence on the Bitcoin or Bitcoin related ETF product that they are going to implement. In other words, know the product thoroughly. And bear in mind also that if you’re going to put clients into this as a portion of the portfolio, even if you have discretion, you want to make sure that the client fully understands the nature and risk of the product and the type of risk they’re getting into and whether or not it is suitable for them. Simply having discretion and saying, “Gee, I want this in their portfolio.” It doesn’t fully cut it. You want to make sure that it’s explained to them. And then it’s also deciding, in terms of the portfolio, what level and what guardrail am I going to set around the limit of the use of the Bitcoin or cryptocurrency product?

Stephen Galletto, Esq. (16:12):

I would treat it like you would, like a private fund or some level of risk.

Jeffrey Lang, Esq. (16:17):

Right. So in other words, I’ve talked…That’s right. I’ve talked to people who said, “Well, I’m going to put it in the portfolio, but I’m going to keep a two or 3% guardrail around it.

Stephen Galletto, Esq. (16:26):

Right.

Jeffrey Lang, Esq. (16:27):

And that’s, I think, a very prudent step, unless of course you’ve got your strategy that you’ve put together that looks at it differently, but in terms of what I have seen in practicality thus far, that seems to be the approach that people take at this point. So today we’ve talked about three related and important things. All ties into technology, artificial intelligence, AI policy usage or AI tool usage, use of certain modalities of communication, email, texting, ramifications of that. We’ve also talked about use of cryptocurrency or cryptocurrency related products like crypto ETFs. So we hope you found this very useful. Again, the common theme here is these are all related to the current technology trends or current trends that we’re seeing among compliance issues presented. And I think these are three areas that are in early stages. And I think as the coming months probably unfold, we’re going to see a lot of developments here.

Stephen Galletto, Esq. (17:34):

Right. There’s been a lot of a huge uptick in the use of AI tools. This is where we currently stand. Everything we’ve relayed today on the podcast is where we stand as a law firm on these points and these issues. But please pay attention because we’re going to definitely have additional podcasts, additional conversations, additional content about things you should be paying attention to, things that you’re aware of. When the SEC starts actually auditing firms about these issues, we will certainly be providing guidance as to what the SEC is keying in on, how to better your policies, how to better streamline or limit your usage to avoid risks during SEC examinations. So appreciate everyone who’s listened. Please pay attention to the feed and any comments are more than welcome. Thanks.

Joseph Antonakakis, Esq. (18:28):

More to come.

Intro (18:31):

The Adviser Intelligence Podcast provides general information and commentary only. The content is not legal advice, nor does it create an attorney-client relationship. For more information about Stark & Stark services, please visit our website at www.stark-stark.com.