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, Keith J. Calil submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Keith J. Calil, Respondent (AWC September 5, 2012)
Calil first became registered In November 1992 as an Investment Company and Variable Contracts Products Representative; thereafter, from March 15, 2002 to September 20, 2010, he was registered with BestVest Investments, Ltd. The AWC asserts that he had no prior disciplinary history.
From January 7, 2009 to April 5, 2010, while registered with BestVest, Calil sold insurance company issued Equity Indexed Annuities ("EIAs") to 33 individuals, of which 30 were BestVest customers. Calil sold the EIAs without providing his firm with prompt written notice of the outside business activity ("OBA"). These EIA sales amounted to $3,384,408 for which Calil received $195, 674 compensation, in violation of NASD Conduct Rule 3030 and FINRA Rule 2010.
SIDE BAR: At the time of this case, NASD Conduct Rule 3030 was in effect but that is now superseded by FINRA Rule 3270.
NASD Conduct Rule 3030. Outside Business Activities of an Associated Person
No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement.
FINRA 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 priorwritten 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.
.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).
Fine And Suspension
In accordance with the terms of the AWC, FINRA imposed upon Calil a $5,000 fine and a four-month suspension from association with any FINRA member in any capacity.
EIA sales continue to attract the scrutiny of state regulators and FINRA, although many brokers complain that it's not about sincere regulation but merely a phony-baloney witch hunt whose only purpose is to generate money in the form of fines. Consumer advocates and regulators argue, quite to the contrary, that there is far too much fraud attendant to the sale of these products.
Among the more common areas of dispute are the terms of the purported guarantee - particular when a consumer complains that it didn't cover the full purchase price. Then there are all those screaming matches about undisclosed surrender charges and tax penalties imposed for cancellation. And, as if those issues weren't enough, there are the complaints about how the gain is calculated using the referenced index. Finally, even if the sales pitches were pristine and the representations on point, we have lots of regulatory cases alleging forged signatures and fabricated documents.
Regardless of your view on the EIA cases and the OBA violations, they're on the books and enforced. EIA and OBA violations are found all over Wall Street - at major firms such as Merrill Lynch, Wells Fargo, Morgan Stanley, and JP Morgan; and at indie/regionals such as LPL and Charles Schwab. Rather than an egregious consumer fraud, many of these EIA and OBA violations are little more than a financially beleaguered broker trying to earn a few extra bucks to pay off mounting bills. On the other hand, as FINRA correctly notes, the egregious violations often involve consumer fraud and can impose crippling liability upon the unknowing employer firm.
READ this additional "Street Sweeper" columns:
Stockbroker Fined And Suspended For Equity Indexed Annuities Sales
Broker's EIA Sales Earn FINRA Fine And Suspension
Broker Fined And Suspended For Equity Indexed Annuities and Whole Life Outside Business Activities