An irreverent Wall Street Blog
by Bill Singer
 
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Written: October 22, 2014

FINRA has this thing about registered representatives engaging in so-called "Outside Business Activities" ("OBA"). Frankly, I don't agree with certain aspects of the FINRA's OBA Rule. None of which is to suggest -- even remotely -- that the ultimate goal of the OBA Rule isn't valid. In my opinion, there is great merit in having a broker-dealer aware of the OBA of its registered staff -- and there are many compelling circumstances when a proposed OBA should be denied or restricted. On the other hand, since FINRA is a self-regulatory organization ("SRO") that limits voting for its elected offices and rule proposals to its member firms, the legitimate needs and concerns of the hundreds of thousands of disenfranchised registered individuals must be given fair consideration by the SRO. Unfortunately, too much of what's involved in policing the OBA issue comes off as FINRA siding with management/employer against labor/employee and depicts the SRO as a tool of management. Consider this case, for example.

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, Matthew King Absher submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Matthew King Absher, Respondent (AWC  2013038446701, October 3, 2014).

Absher was first registered in 2009 and on April 23, 2010, was registered with FINRA member firm New England Securities.

The Inactive Company And Construction Biz

The AWC asserts that from April 2010 to November 2011, Absher served as a director of an inactive "but still registered company he incorporated for day trading;" and from June 2013 to September 2013, he served as president of a company that provided containers for construction sites.

The AWC alleges that in his capacities as director and president of the two companies, Absher failed to provide prior written notice to FINRA member firm New England about his "outside business activities," and in the case of his directorship of the inactive company, he "inaccurately answered four New England questionnaires about that outside business activity."

FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons

No 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).

According to online FINRA records as of October 10, 2014, METLIFE [sic]“Discharged” Absher on September 16, 2013, based upon allegations that:

REGISTERED REPRESENTATIVE DID NOT FOLLOW COMPANY POLICY WITH RESPECT TO THE DISCLOSURE OF OUTSIDE BUSINESS ACTIVITIES.

FINRA deemed Absher's conduct in violation of NASD Rule 3030, FINRA Rule 3270, and FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Absher a $5,000 fine and a 60-day suspension in all capacities from association with any FINRA member firm.


Bill Singer's Comment

A $5,000 fine?  Not exactly sure why that substantial amount is even remotely appropriate given the published facts in this case.  Similarly, on that same basis, a two month suspension strikes me as so over-the-top that the sanctions come off a punitive. On the other hand -- and this is an important point that largely undermines my high dudgeon -- Absher voluntarily entered into this settlement with FINRA and if he is okay with the fine and suspension, then that's that.

Of course, I am one of those obstinate bastards who doesn't often take "no" for an answer; so, in that spirit, permit me to chew and gnaw a bit on the fleshy parts of this AWC.  

If we examine the language of FINRA's OBA Rule 3270, we note that the prohibition is not actually against "outside business" but, more pointedly, "outside business activity." To underscore that point, we merely need to note that Rule 3270 notes the context "as a result of any business activity. . ." and also removes so-called "passive investments" from the ambit of the proscribed conduct.  Passive, in my lexicon, further suggests a state of relative lack of activity.

It does not appear that Respondent Absher is an attorney and the AWC implies that he represented himself during the negotiations involving his alleged regulatory misconduct. If I had represented Absher, I would have challenged FINRA's charge in the AWC about the "inactive, but still registered company."  I mean, you know, if the company is "inactive," then isn't there a fair question as to whether Absher engaged in an outside business "activity" that needed to be disclosed?  After all, acting and preparing to act are two different things.

Yes, I understand that there are two-parts to the AWC's charges against Absher and that the OBA Rule specifically restricts conduct as a "director" or "officer" (the latter would cover Absher's role as "president" of the construction business). Consequently, FINRA may indeed have Absher dead to rights on that second charge.

The OBA violation for the "inactive company he incorporated for day trading" is a troubling allegation, however, because:
  1. the company was inactive; and
  2. FINRA asserts that the company was incorporated to engage in "day trading" but oddly fails to disclose whether any such trading actually occurred or if the company actually engaged in any business.
FINRA and its predecessor NASD have had a history of antagonism to the old SOES trading and the more recent day trading manifestations.  There are, admittedly, legitimate regulatory concerns when it comes to day trading but in Absher's case, we have no assertion that he violated any day trading rules or even opened the doors for his business. Consequently, I'm not quite sure that I understand why he was charged with being the director of a company that was preparing to engage in a business.  If the company was actively engaged in a business and Absher was a director, then that's another issue.

As such, even if I grant FINRA its right to go after Absher for his role as President of the active, construction-related company, that still does not off-set my concern about also charging him with what looks like the "preparation" to engage in a business.  If I have misinterpreted the true status of FINRA's day trading business charge, then that is on the SRO for the inarticulate nature of the AWC.  My old high school English teacher used to admonish the class "Say what you mean, don't mean what you say." I would say to FINRA that the AWC should have been better drafted to say exactly what the SRO meant to allege: had Absher's company engaged in day trading but then became inactive; or, to the contrary, did Absher's company intend to engage in day trading but never crossed that threshold?

How does that old Beatles song go?  OBA-di OBA-da . . . and something about "happy ever after in the marketplace"?


 

Written: October 21, 2014

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Written: October 20, 2014

Once upon a time, Wall Street's regulators seemed to view so-called "Failure To Supervise" matters as a last resort -- the final arrow in a quiver.  Whether benign neglect or a considered policy, those supervising the industry's stockbrokers and traders often erred on the side of caution when it came to reprimanding a top producer. As a result, a lot of what passed for supervision was fairly reminiscent of somnambulism. In the past few years, however, those folks who persist in sleepwalking through their compliance obligations have had a rude awakening before a host of unhappy regulators all too ready to fine and suspend them. Frankly, it's an overdue change in priorities and one that is necessary. Consider this recent case.

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, Roger S. Rathmell submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Roger S. Rathmell, Respondent (AWC 2013037137601, October 2, 2014).

In 1971, Rathmell entered the securities industry and first became registered in 1980 with Merrill Lynch, Pierce, Fenner & Smith Inc. The AWC asserts that he had no prior disciplinary history.

The Telephone Call

On October 26, 2011, at a time when Rathmell was an Administrative Manager of several Merrill Lynch branch offices, he received a telephone call from a customer, who complained that registered representative Greg Campbell had engaged in unauthorized activity in the customer’s IRA and personal brokerage accounts. On that same day and after the call, the customer sent an email to Rathmell describing the unauthorized activity – and asserting that loans had been taken in his name using his securities as collateral; and that his address of record was changed.

Merrill Lynch's policies and procedures required that Rathmell, who supervised Campbell, report this customer's complaint via the firm’s computerized system within three days of receipt. The AWC alleges that Rathmell failed to timely file the required report.

In Case You Were Wondering

Following Campbell’s October 29, 2011, departure, Merrill Lynch filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") that stated the termination was “Voluntary,” and did not reference any customer complaints.

A Tick-Tock SIDE BAR: In case you didn't catch the operative dates, the customer complaint came in on October 26th and Campbell headed for the door on October 29th. The lag-time between those two events was three days -- the exact time span in which Rathmell was supposed to enter into Merrill Lynch's computer system his report of the customer's complaint.  Whether Campbell gamed the clock or whether Rathmell believed that the registered rep's resignation pre-empted the need to file the report is not discussed in the AWC.

Second Complaint (After Campbell Left)

About seven months after Campbell's departure from Merrill Lynch, Rathmell received a written complaint on May 25, 2012, from another of Campbell’s customers alleging unauthorized withdrawals and loans.  Additionally, this customer alleged that he had not been receiving account statements. The AWC asserts that again failed to timely report this second customer complaint.

The AWC asserts that as a result of Rathmell’s untimely disclosures of the customer complaints, his employer Merrill Lynch did not report the allegations to FINRA until October 26, 2012, in violation of FINRA Rule 4530(a)’s requirement of timely reporting within 30 calendar days of notice.

A Costly Failure

Online FINRA records as of October 9, 2014, assert that Merrill Lynch “Discharged” Rathmell on October 17, 2012 based upon allegations of:

FAILURE TO TIMELY ELEVATE A COMPLIANCE MATTER AND TO REPORT CLIENT COMPLAINTS

By failing to promptly report the two written customer complaints to appropriate Firm personnel, Rathmell violated FINRA Rules 4530(c) and 2010. In accordance with the terms of the AWC, FINRA imposed upon Rathmell a $10,000 fine and a six-month suspension in any capacity from association with any FINRA member firm.

Bill Singer's Comment

No big deal, you may say. Rathmell maybe didn't recognize the need to file an in-house notice about two customer complaints, you might add. Anyway, Campbell left three days after the first complaint and was gone for some seven months by the time the second customer complained -- geez, Bill, cut Rathmell some slack. Two isolated customer complaints and one didn't even involve a current employee under Rathmell's supervision.

Now, do me a favor, consider these additional facts:

From May 2008 to October 2011, Merrill Lynch Registered Representative Greg Campbell misappropriated over $1.7 million in customers’ funds; and, after leaving the Merrill Lynch, he tacked on another $500,000 in misappropriations at his new firm.  Although not identified in the Rathmell AWC, online FINRA records disclose that Campbell was registered with LPL Financial LLC from October 28, 2011, until his termination on October 31, 2012, when LPL discovered he had been misappropriating customers’ funds. Those FINRA records disclose that:

From May 2008 through October 2012, Campbell misappropriated over $2 million in funds from customers at Merrill Lynch and LPL, including elderly customers and members of Campbell's family. Most of the misappropriated funds were converted by Campbell for his personal use; some of the misappropriated funds were transferred between customers' accounts to replace converted funds. Campbell's conduct violated FINRA Rules 2150 and 2010 and NASD Rules 2330 and 2110.

FINRA imposed upon Campbell an industry Bar. In the Matter of Greg J. Campbell, Respondent (AWC 2012034193201, March 15, 2013).

Although the Rathmel AWC  may get lost in the shuffle as a somewhat mundane failure-to-supervise case, in fact, in-house supervision (so-called "Compliance") is an important component of Wall Street's self-policing. The consequences of sleepwalking through your duties or not timely reporting problems can have devastating consequences. If -- and I grant you that it's a big if --- Rathmell had timely submitted his in-house report about the October 26, 2011, customer complaint, that complaint may have -- and, yeah, that "may" is another big may -- been included on Campbell's FormU5. If the October 26, 2011, customer complaint was disclosed on Campbell's Form U5, then LPL may have -- and, here we go again with a second "may" that proved to be another big "may" --  investigated Campbell's background and been more attentive to his conduct during his post-October 29, 2011, tenure with LPL.  

Why do I make such a big deal about those ifs and mays? FINRA asserted that Campbell ripped off his LPL customers to the tune of  $500,000 (which was in addition to the $1.2 million he had previously misappropriated from Merrill Lynch customers. Making the consequences even worse, consider the circumstances of one of the customers defrauded by Campbell (as set forth in the Campbell AWC):

Customer HK is 85 years old and currently suffers from dementia. He opened a brokerage account with Campbell in July 2006. Campbell opened an LMA for HK in March 2009 without HK's knowledge or consent. From August 2009 through October 2011, Campbell converted over $930,000 from HK's LMA to an account at JPMorgan Chase Bank servicing a home-equity line of credit maintained by Campbell. In addition, Campbell effectuated unauthorized transfers totaling over $112,000 from HK's LMA to the LMA of Customer PC.  To conceal his activities, Campbell had HK's account statements delivered "care of Customer PC, who is of no relation to HK.

 

 
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