Stockbroker Fired and Barred For Role With Privately Held Company
August 24, 2015
Talk to enough Wall Street lawyers and you'll
learn that certain regulatory issues seem to cycle in and out of fashion. Industry regulators publish annual
notices setting forth their enforcement priorities and agendas for a given
year, so, sometimes there is a task force in operation or an agenda targeting specific problem areas. For whatever reason, in 2015, I have noticed an increase in calls from
potential clients who have problems with their alleged
non-disclosure of both an outside business activity coupled with a
private securities transaction. Consider this recent FINRA settlement.
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, Barry George Hartman submitted a Letter of
Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Barry
George Hartman, Respondent (AWC 2015044671601,
August 19, 2015).
Prior History
In 1984, Hartman entered the industry and in 2002 he was registered with FINRA member firm FSC Securities Corporation, where he remained
until his March 2015 termination. According to the AWC, Hartman had the
following prior regulatory history:
In 2004, NASD (predecessor to FINRA) found that Hartman placed a telephone call to an insurance company regarding a variable annuity it had issued to a customer. In that telephone call, Hartman falsely identified himself as his prior branch manager without the branch manager's knowledge or authorization. In a Letter of Acceptance, Waiver and Consent, NASD found that Hartman thereby violated NASD Conduct Rule 2110 and imposed a 15-day suspension and $2,000 fine. (AWC No. C3B040009.)
On Board
Hartman's 2015 AWC alleges that between 2004 and March 2015,
he served on the board of directors of a privately-held company but had not
provided to FSC the requisite prior written notice of that activity. FINRA
deemed his service on the board to constitute an undisclosed outside business
activity ("OBA") in violation of NASD Rules 3030 and 2110, and FINRA Rule 3270
and 2010.
SIDE BAR: 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)
Investments
During the same 2004 - 2015 period cited in the paragraph above, the AWC further
alleges that Hartman personally invested $450,000 in the privately-held company
and also recommended that 13 FSC customers invest in the company - also, he referred those customers directly to the company. At no time did
Hartman provide to FSC the requisite prior written notice of the
cited activity and obtain his firm's approval. FINRA deemed Hartman's
conduct to constitute engagement in a private securities transaction ("PST") in
violation of NASD Rules 3040 and 2110, and FINRA Rule 2010.
SIDE BAR: Read the BrokeAndBroker.com PST Rule Analysis by Bill Singer
Sanctions
According to online FINRA BrokerCheck records as of August
24,2015, FSC "Discharged" Hartman on March 5, 2015, based upon allegations
that:
In accordance with the terms of the AWC, FINRA imposed upon Hartman a Bar from associating with any FINRA member.READ the BrokeAndBroker.com Blog Outside Business Activity ArchiveREAD the BrokeAndBroker.com Blog Private Securities Transactions Activity ArchiveREGISTERED REPRESENTATIVE TERMINATED FOR VIOLATION OF FIRM POLICIES, TO INCLUDE, MR. HARTMAN'S PARTICIPATION IN AN UNDISCLOSED OUTSIDE BUSINESS ACTIVITY AND AN UNDISCLOSED PRIVATE SECURITIES TRANSACTION.