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Outside Business Activities and Away Account Cost Stockbroker $7,500 and Four Months on the Bench
February 20, 2019
In furtherance of a regulatory settlement, FINRA fined and suspended a registered representative for allegedly failing to provide his employer firms with prior written notice of two outside business activities and an away brokerage account. Not exactly earth-shattering news, but given the frequency with which such violations occur and are sanctioned, now is as good a time as any to highlight the issues and consequences.
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, Thomas J. Lisa, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Thomas J. Lisa, Jr., Respondent (FINRA AWC 2017052426601, February 15, 2019).
http://www.finra.org/sites/default/files/fda_documents/2017054989701
%20Thomas%20J.%20Lisa%2C%20Jr.%20CRD%202992701%20AWC%20va%20.pdf
%20Thomas%20J.%20Lisa%2C%20Jr.%20CRD%202992701%20AWC%20va%20.pdf
The AWC asserts that Lisa was first registered in 1998; and from April 2012 to August 2015, he was registered with FINRA member firm Forefront Capital Markets LLC; and from August 2015 to July 2017, he was registered with FINRA member firm Wilmington Capital Securities, LLC. The AWC notes that "Lisa does not have any disciplinary history with the Securities and Exchange
Commission, any state securities regulator, FINRA, or any other self-regulatory
organization."
The Rulebook
FINRA 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 Rule 3280 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 Rule 3280. 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).
VISIT the BrokeAndBroker.com Blog "OBA" Cases Archive
http://www.brokeandbroker.com/index.php?a=topic&topic=oba
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PDF Copy of Bill Singer, Esq.'s OBA Rule Analysis
http://brokeandbroker.com/PDF/Rule3270OBAAnalysis.pdf
http://brokeandbroker.com/PDF/Rule3270OBAAnalysis.pdf
2012 - 2017: Sole Officer of Two Businesses
The AWC asserts that between the five-year span of June 2012 and July 2017, Lisa was the sole officer/owner of businesses identified in the settlement document only as "AI" and "BW." Allegedly, AI was formed in May 2005 and dissolved in September 2016; and BW was formed in September 2016. The AWC alleges that Lisa did not provide his employers Forefront or Wilmington with prior written notice of his role with AI or BW in violation of FINRA Rules 3270 and 2010.
The AWC asserts that:
[B]y Uniform Termination Notice for Securities Industry Registration ("Form U5") dated July 19, 2017, Wilmington reported to FINRA that it terminated Lisa's registration based on its conclusion that Lisa controlled an outside business entity, which had not been previously reported to the firm as required.
Away Account
The AWC asserts that in September 2016, Lisa opened and maintained a brokerage account away from member firm Wilmington without first notifying that employer in writing, in violation of NASD Rule 3050(c) and FINRA Rule
2010.
NASD CONDUCT RULE 3050. Transactions for or by Associated Persons(effective through April 2, 2017)(a) Determine Adverse InterestA member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.(b) Obligations of Executing MemberWhere an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).(c) Obligations of Associated Persons Concerning an Account with a MemberA person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial InstitutionA person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.(f) Exemption for Transactions in Investment Company Shares and Unit Investment TrustsThe provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.FINRA Rule 3210. Accounts At Other Broker-Dealers and Financial Institutions(a) No person associated with a member ("employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member ("executing member"), or at any other financial institution, any account in which securities transactions can be effected and in which the associated person has a beneficial interest.(b) Any associated person, prior to opening or otherwise establishing an account subject to this Rule, shall notify in writing the executing member, or other financial institution, of his or her association with the employer member.(c) An executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to this Rule.***Supplementary Material***.01 Account Opened Prior to Association With Employer Member. If the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, shall obtain the written consent of the employer member to maintain the account and shall notify in writing the executing member or other financial institution of his or her association with the employer member..02 Related and Other Persons. For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by: (a) the spouse of the associated person; (b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person; (c) any other related individual over whose account the associated person has control; or (d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account..03 Transactions and Accounts Not Subject To This Rule. The requirements of this Rule shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts..04 Accounts At a Financial Institution Other Than a Member. With respect to an account subject to this Rule at a financial institution other than a member, the employer member shall consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account..05 Other Financial Institution. For purposes of this Rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act, domestic or foreign non-member broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Lisa a $7,500 fine and a four-month suspension from associating with any FINRA member firm in any capacity.
Although the AWC asserts that AI and BW were formed, there is no recitation in the settlement document as to whether those entities ever actually opened and engaged in any business activities. That is an important distinction because FINRA's OBA Rule by its own definition is not regulating a mere "Outside Business" but "Outside Business Activities." As I have noted in my ongoing commentary about NASD and FINRA OBA rules, there are often exceptions made when a business is only "preparing" to engage in activities but does not realize such goals. READ: https://www.finra.org/sites/default/files/18-08_Bill-Singer_comment.pdf
I concede that FINRA's OBA Rule anticipates the disclosure of a registered representative's becoming an "employee, independent contractor, sole proprietor, officer, director or partner of another person . . .;" however, I also note that the rule that qualifies those predicate roles: "as a result of any business activity outside the scope of the relationship with his or her member firm." Consequently, in the absence of "any business activity" I do not believe that FINRA's OBA Rule should be deemed operative. Regardless of my views and interpretations, it is obvious that FINRA would not likely concur in my analysis of the rule -- but FINRA has not clarified the manner in which it distinguishes between mere preparation to engage in a business versus actually embarking upon regulated activity.
Concurring FINRA Arbitrator Pens Impassioned Rationale For Expungement In the Matter of the Arbitration Between Walter E. Ryan, Claimant, v. Wells Fargo Advisors, LLC, Respondent (FINRA Arbitration Decision )