Waste Treatment Biz Lands Stockbroker In FINRA Dumpster

July 3, 2014

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, Peter Saunders Paisley submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Peter Saunders Paisley, Respondent (AWC 2013038489801, June 26, 2014).

Paisley was first associated with FINRA member firm Princor Financial Services Corporation on February 15, 2011; and he voluntarily resigned from the firm on October 18, 2012.

Beginning in July 2011, the AWC alleges that Paisley began working on behalf of Elemental Resource Recovery LLC ("ERR"), which is characterized as a start-up industrial waste water treatment and consulting company. Among Paisley's duties were arranging sales/marketing meetings, and providing administrative/logistical support. 


Deeming his ERR activities to constitute an Outside Business Activity ("OBA"), the AWC asserts the under FINRA Rule 3270, Paisley was required to disclose his outside work to Pincor and obtain prior written permission before undertaking the subject activities. The AWC alleges that not only did Paisley failed to provide the required notice and obtain the necessary authorization, but in July 2012 he certified on Princor's annual compliance questionnaire that understood the OBA notice and approval protocol  Apparently in September 2012, Paisley disclosed the OBA to Princor. The AWC deemed his conduct to constitute a violation of FINRA Rules 3270 and 2010.

Pssst . . . it's also a PST

In June 2012, the AWC asserts that Paisley personally invested $200,000 into ERR in exchange for a 5% equity stake in the company. Deeming Paisley's investment to constitute a Private Securities Transaction ("PST"), the AWC asserted that Paisley had failed to comply with NASD Rule 3040's notice and approval requirements, and, accordingly, that his conduct constituted a violation of that rule and FINRA Rule 2010.

Cleaning Up The Mess

In accordance with the terms of the AWC, FINRA imposed upon Paisley a $10,000 fine and a 4-month suspension from association with any FINRA member firm in all capacities.

Bill Singer's Comment

You wouldn't think that such a simple prerequisite as providing prior written notice to your employer FINRA member firm would trip us so many folks, but it does. Industry outsiders may wrongly perceive that the motivation behind such non-disclosure is nefarious with the intent to conceal all sorts of shenanigans from both the employer member firm and the regulators. Often - okay, yeah, quite often - that's likely the reason for not telling the firm about the PST or the OBA. On the other hand, very often the non-disclosure arises out of a lack of awareness. Sometimes, the registered person just doesn't view the cited conduct as a "securities" or a "business" activity. Sometimes the registered person was engaged in the PST or OBA before joining the firm and the need to disclose just never got recognized. Sometimes the broker-dealer was aware of the PST or OBA through numerous conversations and communications but the required "written" notice just never got sent in the proper form.

Few compliance issues are ever so hermetically sealed as to result in a single, isolated regulatory violation or a one-cause-of-action civil lawsuit; which may well explain the reluctance of many brokerage firms to permit PSTs or OBAs. When a firm approves a registered person's proposed PST or OBA, the unexpected and the unanticipated can come home to roost with a vengeance; and, accordingly, those uncertainties also explain why FINRA and other regulators focus on these violations. 

What a registered person sees as a business venture with absolutely no connection to his securities industry job, can easily result in all sorts of lawsuits alleging apparent or actual authority to act on behalf of the brokerage firm - replete with astronomical demands for damages accompanied by outlandish allegations. And even if the case is so much garbage, the brokerage firm may still need to peel off a lot of large denomination bills to pay a defense lawyer and to also deal with the ensuing regulatory demands for explanations.

NASD Conduct Rule 3040: 

Private Securities Transactions of an Associated Person

(a) Applicability

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

(b) Written Notice

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person's participation in the proposed transaction; or

(B) disapproves the person's participation in the proposed transaction.

(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

(e) Definitions

For purposes of this Rule, the following terms shall have the stated meanings:

(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.

(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

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 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).