Don’t Text and Trade: Regulators Crack Down on the Use of Improper Communication Channels
Registered reps beware: your personal device or messaging account is not the right place to conduct your business affairs, and regulators have made clear that they will not look the other way. In particular, the Financial Industry Regulatory Authority (“FINRA”) and member firms are cracking down on improper communication recordkeeping practices and the use of non-firm applications, including text messages, to communicate with clients.
On June 1, 2023, FINRA imposed a 15-month suspension and $15,000 fine on Delaina Kucish, a former Edward D. Jones & Co., L.P. (“Edward Jones”) broker for the use of text messages on a personal cell phone to transmit client documents to another individual at the firm. See Letter of Acceptance, Waiver, and Consent (“AWC”). The investigation was initiated after Edward Jones self-reported the conduct to FINRA.
According to FINRA, from February to July of 2021, Kucish, a 21-year industry veteran, used her personal cell phone to send unauthorized text messages containing client information, failed to disclose this to her firm, and misled investigators when questioned. Specifically, the AWC alleges that Kucish falsely denied her wrongdoing when investigated internally by Edward Jones, as well as in response to a FINRA inquiry. FINRA further alleges that, as a result of Kucish’s omissions, Edward Jones failed to preserve business-related text messages. Only in a second written response to FINRA did Kucish admit to sending client documents via personal cellphone text messages. Kucish was terminated from Edward Jones on April 3, 2023 and is no longer registered or associated with any FINRA member.
According to FINRA, Kucish’s refusal to acknowledge the unapproved communications and denial of the existence of such communications when questioned by Edward Jones violated FINRA Rule 2010, which requires brokers to observe high standards of commercial honor. FINRA further found that Kucish’s submission of a false written response to a FINRA information request violated FINRA Rule 8210, which requires brokers to respond truthfully to FINRA’s requests for information. FINRA also found this conduct to be an additional violation of Rule 2010.
In total, the regulator charged Kucish with violations of FINRA Rules 2010, 8210, and 4511, as well as Section 17(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-4(b)(4). FINRA further alleged that Kucish’s actions caused Edward Jones to violate multiple securities regulations including those requiring the preservation of business-related messages. Kucish’s use of an unauthorized texting channel prevented Edward Jones from preserving books and records, as required under Section 17(a) of the Securities Exchange Act of 1934, Exchange Act Rule 17a-4(b)(4), FINRA’s recordkeeping rule (Rule 4511), and FINRA’s broad rule against bad faith or unethical business practices (Rule 2010).
This is not the first matter of this nature for Edward Jones. According to a disclosure on his BrokerCheck report, former Edward Jones advisor Erick Krosky was terminated from the firm earlier this year for communicating with clients over text and admitting to deleting those messages after hearing of “an unannounced branch audit.”
Kucish’s Enhanced Sanctions
FINRA’s attention to text messaging is not new. In fact, in August 2022 alone, FINRA issued at least six AWCs relating to conduct including improper use of text messaging by individual registered representatives. Kucish’s suspension, however, is significantly longer than FINRA has typically imposed in these other unapproved texting enforcement actions. For example, in one of the August 2022 matters, a former Wells Fargo representative was suspended for 30 days and fined $10,000 for using a non-firm texting service to send business-related messages to customers, causing Wells Fargo to fail to maintain complete books and records. In another August 2022 AWC, another former Wells Fargo representative received a three-month suspension and a $7500 fine for similar conduct paired with exercising discretion in customer accounts without prior written authorization (which itself is a violation of NASD Rule 2510(b) and FINRA Rule 2010).
Kucish’s enhanced penalty is a clear statement from FINRA that, in addition to taking unauthorized texting very seriously, the failure to cooperate and be fully truthful with FINRA will not be tolerated. Registered representatives (and firms) under investigation by FINRA must take care to cooperate fully and completely, lest they find themselves in ever deeper trouble.
Regulatory Focus On Recordkeeping in Light of Modern Technology
At FINRA’s annual conference in May, United States Securities and Exchange Commission (“SEC”) Chair Gary Gensler emphasized the importance of the recordkeeping rules in monitoring for issues like insider trading or front-running customer trades. Gensler noted that employees may use off-channel communications, but those communications must be properly preserved and recorded. Specifically, Gensler indicated that “[p]eople can use whatever chat rooms or whatever communications channels that they find appropriate, but you have to capture that communication just as you did in earlier technologies and the like.”
In September 2022 alone, the SEC imposed more than $1 billion in fines against several large financial institutions for not capturing employees’ online messaging, and that number will undoubtedly continue to grow as the variety of messaging platforms and channels ever increases. Kusich’s AWC is only the most recent in a crackdown on texting at retail brokerage firms by FINRA and the SEC, both of which have been investigating individuals and firms for failing to preserve and maintain electronic communications. As such, firms must be vigilant about monitoring employee communications and having strong policies and procedures in place designed to detect the improper use of text messaging and other communication channels for communications with and about clients. The consequences of failing to do so could be significant.