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FINRA Fines and Suspends Broker For Role As Real Estate Agent
August 1, 2016First, he gave prior written notice to his brokerage firm of his intent to engage in an outside business activity. The firm approved. Then, a few months later, the firm changed its mind because of "potential" conflicts and told the stockbroker to shut down the previously approved activity. Then all hell breaks loose.
Sometimes
you find analysis about the regulation of Wall Street in the most unexpected
places. Who knew that the seeming gibberish and nonsense from the Beatles'
"Hello Goodbye" were actually sage comments about FINRA's Outside
Business Activities Rule. Pointedly, the Fab Four
demonstrated their brilliant understanding of self regulation when they
admonished:
You say yes (I say yes) I say no (But I may mean no)You say stop (I can stay) and I say go go go (Till it's time to go), oh, oh noYou say goodbye and I say hello, hello helloI don't know why you say goodbye, I say hello, hello hello
Case
In Point
For
the purpose of proposing a settlement of rule violations alleged by the
Financial Industry Regulatory Authority ("FINRA"), without admitting
or denying the findings, prior to a regulatory hearing, and without an
adjudication of any issue, Dustin Cain Walsh submitted a Letter of Acceptance,
Waiver and Consent ("AWC"), which FINRA accepted. In the
Matter of Dustin Cain Walsh, Respondent (AWC
2015046660801, July 18, 2016).
In
2010, Walsh entered the securities industry when he associated with FINRA
member firm Scottrade, Inc. The AWC asserts that Walsh had no prior
disciplinary history with the Securities and Exchange Commission, FINRA, any
other self-regulatory organization or any state securities regulator.
September
2013 OBA Notice
The
AWC asserts that in September 2013, Walsh disclosed to Scottrade his intent to
serve as a real estate agent of a realty company described in the regulatory settlement
as "REP." Scottrade approved the outside business activity
("OBA").
Many
registered persons engage in other professions and careers; and such OBA typically require prior written notice to
your employer and obtaining the firm's approval. Consider the following:
FINRA Conduct Rule 3270. Outside Business Activities of Registered PersonsNo registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.*** Supplementary Material ***.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors,the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
Potential
Conflict
About
seven months after Scottrade had approved Walsh's OBA, the
AWC asserts that:
In April 2014, Walsh again disclosed to Scottrade his outside business activities as a real estate agent for REP. However, due to changes in the Firm's business, Scottrade informed Walsh that his outside business activities posed a potential conflict of interest, that his real estate activities were no longer approved and that his association with REP must cease. The Firm gave Walsh three months to wind-down his real estate activities.
U4
Amended (with fingers crossed?)
On
April 25, 2014, Walsh amended his the Uniform
Application for Securities Industry Registration or Transfer
("Form U4") to remove the previously approved real estate
agent OBA. Notwithstanding this timely amendment, however,
the AWC alleges that Walsh continued to engage in his real-estate agent OBA
after the three-month period elapsed.
Website
Footprints
On
June 26, 2015, Scottrade allegedly discovered that Walsh was still listed as a
real estate agent on REP's website. The AWC asserts
that:
From approximately June 2014 until June 2015, Walsh engaged in real estate activities and received compensation for his services on numerous occasions. During 2015, Walsh obtained approximately $20,000 from his unapproved real estate activities.
On
July 1, 2015, Scottrade purportedly reminded Walsh that his real estate agent
OBA was not approved and instructed him to cease his
participation immediately.
On
July 7, 2015, Scottrade discovered that Walsh's name appeared on three real
estate websites as a real estate agent.
On
July 14, 2015, Scottrade allegedly
:
- directed Walsh to remove his name from the three real estate websites,
- reminded him that his outside business activities had not been approved; and
- instructed him to cease his real estate activities immediately.
Real
Estate Closing
Scottrade
Employment Closing
According to
online FINRA BrokerCheck records as of August 1, 2016,
Scottrade "Discharged" Walsh on July 30, 2015, based upon allegations
that:
MR WALSH WAS DISCHARGED AFTER THE FIRM DETERMINED HE CONTINUED TO ENGAGE IN AN UNAPPROVED OUTSIDE BUSINESS ACTIVITY
FINRA
Sanctions
Let's
consider this AWC summary of FINRA's regulatory action against Walsh:
Between August 2014 and July 2015, Dustin Cain Walsh ("Walsh"), while registered with FINRA through an association with Scottrade, engaged in undisclosed outside business activities as a real estate agent after the Firm on multiple occasions expressly prohibited his participation in such activities, in violation of FINRA Rules 3270 and 2010.
In
consideration of the terms of the AWC, FINRA imposed upon Walsh a $5,000 fine
and a 45-calendar-day suspension from associating
with any FINRA-regulated broker-dealer in any capacity.
Bill Singer's
Comment
I do not see the name and signature of any lawyer on the final signatory
page of the AWC but solely note Walsh's signature: said
circumstances strongly implying that the Respondent represented himself in what
we term a pro se capacity. Walsh may have had
some legal counsel leading up to his execution of the settlement agreement but
I can only infer from what is set forth in the AWC. Why do I note this respondent's likely
self-representation? The main reason is that I am somewhat troubled by FINRA's
charging him with a violation of FINRA Rule 3270.
Before I explain the reason for my discomfort with the AWC,
please allow me to preface my explanation with this pre-emptive shot across the
bow of the many trolls, idiots, and self-promoting jerks who populate
cyberspace. Given the allegations in the AWC and given that Walsh signed off on settlement document,
there is little "wiggle room" when it comes to the virtually
inescapable conclusion that he lied, and apparently repeatedly, to Scottrade
about ceasing his OBA as a real estate agent. Under that circumstance, FINRA is
on firm ground charging this respondent with a violation of it Rule 2010. By
way of foolish exacerbation, Walsh also seems to have compounded his deception
about his ongoing OBA by amending his Form U4 to apparently remove a reference
to such activity -- as to why he was not also charged with an omission/comission
on the Form U4 is not explained in the AWC but may be a byproduct of settlement
negotiations.
Now, let's turn our attention to Rule 3270. What exactly does
FINRA's OBA Rule
address? By its specific terms, FINRA's OBA Rule requires a
registered person to provide
"prior written notice to the
member" of so-called OBAs. According to the AWC, Walsh provided the mandated "prior written notice" in September 2013.
Under
FINRA Rule 3270.01 ("Supplementary Material"), "upon receipt of
a written notice" a member firm is required to consider if the
"proposed" OBA interferes/compromises the firm's responsibilities or
could be viewed by customers/the public "as part of the member's
business." Following the mandated
member-firm review, the firm has the right to condition or limit the proposed
OBA (including prohibiting).
Rule 3270.01 comes into play upon receipt by the member firm of the
registered rep's prior written notice. The Supplementary Material envisions
that the member will consider the "proposed" OBA in order to
determine whether to give it a thumb's up, thumb's down, or an otherwise
qualified okay.
FINRA Rule 3270 is drafted solely in terms of submitting prior
notice and obtaining a "Yes," or "No," or qualified
approval. Once the member firm responds to the
rep's prior written notice, Rule 3270 is essentially complied with. There is no language in FINRA's OBA Rule that
grants the member firm the right to rescind any previously granted OBA approval or to unilaterally
declare that a "potential" conflict might exist and that the approval
must be rescinded. Go ahead and infer away and read into it all that you want about post-approval obligations but it's simply not in the OBA Rule. Pointedly, by its own terms, the
OBA Rule is a prospective rule contemplating putting the member firm on notice
of a proposed OBA and giving the firm the option to approve or deny. Once that
timeline is completed, there is nothing in the rule that addresses future or
ongoing compliance.
No . . .
and let me state that again: "NO," I am NOT stating that a member
firm does not have any legal right to rescind a previously granted OBA
approval. Many registered reps are likely "terminable at will"
employees and if a member firm wants to countermand a previously granted OBA
approval, presumably that decision can be presented to the rep as either agree
or you will be fired. There are also other aspects of FINRA's rulebook and federal/state securities laws that may impose ongoing regulatory and compliance obligations upon member firms when it comes to previously granted OBA approvals. Notwithstanding, FINRA's OBA Rule simply addresses prior notice and approval/denial/qualification.
By way of a hypothetical thought-piece, imagine a young person whose
grandfather had founded a real estate agency and whose father, mother and
sister work in that business. Imagine that this same young person fully intends
to remain in the family real estate biz but also wants to branch out and work as
a registered rep at FINRA member firms X or Y. In applying for a jobs at firms X and Y, the job applicant fully discloses in a prior written notice the
intent to engage in the OBA of a real estate agent in his family's biz. In response to the notice, the member firm Y indicates that it would approve the requested real estate agent OBA. Firm X is says it will review any OBA notice submitted by the applicant and decide at the time.
When FINRA member firm Y granted approval of the real estate agent OBA, however, it
knew that it was in discussions to acquire a real estate business but did not
disclose that to the job applicant and never raised that when it approved the
OBA. Also, Firm X had no interest whatsoever in entering the real estate sector. Could the job
applicant who would become Firm Y's registered rep sue that firm for fraud in
the inducement of the employment relationship if a few months after the
applicant started employment, the firm demanded that the registered rep
terminate the OBA with the family business?
In another variation on a theme, a veteran registered rep with a seven-figure
book of business is considering joining Firm X or Firm Y, both reputable firms
in the rep's community. Having barely survived the Great
Recession, the rep was contemplating leaving the FINRA member firm
community model and starting a Registered Investment Advisor. Similarly, the
rep was also considering joining a local real estate firm as a new agent in
order to better diversify future income and to avoid the disaster of solely
relying upon broker-dealer commissions in the years ahead.
During interviews
with Firm X and Firm Y, the veteran rep fully discloses his RIA and real estate plans. Based upon
representations from Firm Y that it will approve the rep's request for the real
estate agent OBA, the rep agrees to join that firm and abandons the RIA option. The rep submits the prior written
OBA notice and obtains approval -- only to learn several months later that the
employer perceived a "potential" conflict: not an "actual"
conflict but merely a possible one that had not yet arisen. If the rep quits in response to Firm Y's
demand for the cessation of all real estate agent OBA, is there a basis for a
civil lawsuit? Could the rep get a court injunction preventing Firm Y from
forcing him to cease the previously approved real estate agent activity? Would the doctrine of Promissory Estoppel come into play?
Now, let's
jump the shark and really go off the rails. Would FINRA bring a
Rule 2010 regulatory action against a member firm in terms for any "bad
faith" conduct during the hiring process and ensuing inception of
employment? Knowing that many registered reps might turn their lives (and that
of their families) upside down in order to jump at an opportunity with a new
member firm where they were being given permission to engage in a previously
disclosed OBA, is it sufficient for a member firm to cite merely
"potential" conflicts as a basis to rescind a previously granted OBA
permission?
Perhaps Walsh should have more
actively appealed his employer's decision. Perhaps Walsh should have hired a
lawyer to enjoin or sue his employer. Maybe he pursued both of those options to no avail. What Walsh should NOT have done, however,
is what he did: apparently agree to the OBA wind down, apparently make a somewhat
false amendment to his Form U4, and apparently lie to his employer about the
continuation of his OBA.
Did Walsh's conduct justify Scottrade's decision to
fire him? Ultimately, I accept the discretion of an employer to take the step
to terminate under the factors set forth in the AWC but I also allow that the fired employee may have some legal
recourse (unfortunately compromised by his decision to lie).
Does any of Walsh's conduct rise to the level of a regulatory violation? I would like to
say "no," but I am constrained by the alleged evidence of Walsh's
deceit in retaining ties to three real estate websites and attending a closing.
Still . . . given all the moving parts and the respondent's apparent pro se
representation, this settlement doesn't go down
smoothly.
Finally, one last comment about Walsh, separate and
distinct from the subject AWC. Online FINRA BrokerCheck
records as of August 1, 2016, disclose that on January 6, 2009, Walsh was granted a
Chapter 7 discharge in bankruptcy. Walsh's online "Broker Statement" for the
event explains that:
If you read as many BrokerCheck files as I do, you have become aware of a large number of bankruptcies fostered by the unprecedented financial collapse that began to pick up steam in 2008 and whose pain is still felt in many quarters. Similarly, nary a day passes when we don't read about the crushing burden of tuition debt on the shoulders of many young men and women.I WAS YOUNG AND DID NOT KNOW HOW TO SAVE OR SPEND MONEY WISELY. I WORKED ONE YEAR AT 18 YEARS OLD AND MADE 40K AND THE FOLLOWING YEAR I WENT BACK TO SCHOOL. THE YEAR I WENT BACK TO SCHOOL I DID NOT MAKE MORE THAN 12K, SO I WAS IN A LOT OF DEBT THAT I COULD NOT COVER
If
you find yourself forced to seek bankruptcy, I'm not sure that you want your
permanent record to depict you as young and stupid and unable to manage
your own money: not exactly recommendations to future financial services
industry clients. I respect Walsh's intention here to be open about how he got himself into a financial bind; however, a federal judge was convinced that Walsh's finances
warranted a discharge in bankruptcy, which was granted during the onset of the
Great Recession. That a federal court found merit in Walsh's petition for bankruptcy should be enough of an explanation.