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A Little Biz On The Side Gets Rep Fined And Suspended
October 14, 2015
Maybe things are a tad quiet on the broker-dealer front and you're thinking of doing something with your extra time? You have that insurance office but, gee, lately, the customers aren't exactly breaking down the doors. Maybe a little real estate on the side? Maybe invest in a small, local biz? You're a clever guy with an entrepreneurial interest. Why sit around doing nothing when you can branch out and do even more? Alas, the road to Hell is often paved with such good intentions. Read about a recent FINRA regulatory settlement.
Case In Point
Schomberg was
first registered in 2001 with FINRA member firm State Farm VP Management Corp.,
where he allegedly worked as an independent contractor. Separately, he was also
a licensed insurance agent with State Farm VP's insurance affiliate. The AWC
asserts that "following an audit conducted by State Farm VP's insurance
affiliate, the Firm terminated Schomburg's securities registrations" due to business practice concerns."
The AWC asserts that Schomburg had no prior relevant
disciplinary history in the securities industry.
Private
Securities Transactions
The AWC asserts
that without providing his firm with the requisite prior written notice,
in:
- May 2006, Schomburg invested $10,000 in a limited liability company formed for the purpose of investing in a medical appliance enterprise. In return for his investment, Schomburg received a 4.35% ownership interest with voting rights and he expected to share in profits; and
- early October 2006, Schomburg invested $2,500 in a Texas-based bank opening a location near his office, for which he received 250 common shares and warrants entitling him to purchase an additional 100 shares under certain circumstances.
By failing to give
the requisite notice of his personal investments to State Farm, Schomburg
allegedly violated NASD Rules 3040 and 2110.
Outside
Business Activities
Further, the AWC
alleges that in November 2010, without providing his firm with the requisite written
notice, Schomburg created a limited liability company for the purpose
of holding and developing certain real property into an office building that
would house his office and offer the remaining space for lease. Schomburg was the
sole owner, manager and member of of the company and around November 2010, he
purchased land and began developing a building design. Additionally, the AWC
asserts that he established a bank account and obtained a federal tax
identification number in the name of the company. Thereafter, in June 2013,
Schomburg purportedly sold the realty and purchased a fully-developed
commercial office property -- thereafter, in August 2013, he filed a
certificate of amendment with the Texas Secretary of State changing the
company's name.
By failing to give the requisite
notice of his outside business activities to State Farm, Schomburg allegedly violated NASD Rule 3030 (for misconduct before December 15,2010),
FINRA Rule 3270 (for misconduct beginning December 15,2010), and FINRA
Rule 2010.
SIDE BAR: 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 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).
Forgery
Finally, the AWC
alleges from about May 2006 to 2008, Schomburg forged the signatures of
insurance customers on numerous insurance forms in order to expedite the
handling of their policies and/or policy payments. The AWC concedes that
Schomburg's purported "forgeries" occurred "with the customers'
knowledge and authorization as an accommodation when it was inconvenient for
his customers to sign the documents themselves.: In addition, from approximately 2008 to July
2012, Schomburg permitted his insurance employees to forge the signatures of
insurance customers on numerous insurance forms, including policy applications,
agent transfer forms and PAC forms, for similar reasons.
By forging, and
permitting the employees of his insurance agency to forge,
insurance
customer signatures on numerous insurance forms, Schomburg
allegedly violated NASD Rule 2110 (for conduct before December 15, 2008) and
FINRA Rule 2010 (for conduct on or after December
15, 2008).
Paying
The Price
In accordance with
the terms of the AWC, FINRA imposed upon Schomburg a $15,000 fine and a
six-month suspension from association with any FINRA-regulated broker-dealer in
any capacity.