July 17, 2014
Some registered persons have trouble making ends meet, even with a full-time job as a stockbroker. Other folks just want more -- and they seek outside employment in order to bring in the extra bucks. Of all places, you'd sort of think that Wall Street would encourage that All-American entrepreneurial spirit. It does. Sort of. That is, provided you follow the rules, make the disclosures, and not hide what's up. Today's BrokeAndBroker.com Blog discusses a case where it doesn't seem that one stockbroker fully understood the rules of the OBA game.
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, Brian James DeVinney submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brian James DeVinney, Respondent (AWC 2013037749001, July 8, 2014).
In 1998, DeVinney entered the securities industry and after being registered with several FINRA member firms, in October 2011, he associated with Legend Equities Corporation. The AWC asserts that he had no prior disciplinary history in the securities industry.
RIA and Insurance Company
The AWC alleges that during that between:
- September 2012 and June 2013, DeVinney was employed as a registered investment advisory firm (the "RIA") Regional Vice President, and his duties included distributing fixed and fixed index annuities and life insurance to financial advisors and/or insurance agents. The AWC alleges that he received about $23,690 in compensation from the RIA;
- July 8, 2013 and July 25, 2013, DeVinney was also employed by a company which markets insurance products (including but not limited to Medicare Advantage plans) to independent agents and agencies, and sells Medicare Advantage plans directly to the public ( the "Insurance Company"). DeVinney's duties included general office work, recruiting agents to sell Medicare Advantage products and selling Medicare Advantage products to the public directly. The AWC alleges that DeVinney sold one insurance product while also registered with Legend and received about $1,640 in compensation from the Insurance Company.
A Matter Of Disclosure
During the above referenced times, Legend's policies and procedures allegedly required its registered representatives to provide prompt written notice disclosing all outside business activities ("OBA"). Further, the AWC asserts that Legend's Outside Business Activities Disclosure questionnaires reminded DeVinney of his disclosure obligations.
We Don't Like Surprises
The AWC asserts that on July 25, 2013, Legend filed a Uniform Termination Notice for Securities Industry Registration ("Form U-5") reporting DeVinney's termination, and alleging that the:
Firm has found evidence that suggests registered representative has been engaged in an undisclosed outside business activity. Firm has elected to terminate registered representative's registrations.
FINRA Starts Askin' Questions
In August 2013, FINRA sent a FINRA Rule 8210 demand for information and documents to DeVinney, whereby the regulator request information pertaining to compensation that he had received in connection with and approval of his OBA.
No I Didn't And Yes I Did
In his September 2013 response to FINRA, DeVinney:
- denied having received any OBA compensation before July 25, 2013; and
- claimed to have disclosed to Legend his OBA and, in fact, the firm had confirmed its receipt of same.
Thereafter, in a January 2014, submission to FINRA, DeVinney apparently produced documents that contradicted his earlier denials because those materials purportedly demonstrated that he had received $25,330 in compensation from the RIA and the Insurance Company prior to July 25, 2013.
Also, Legend's records and a statement from the firm's Compliance Administrator contradicted claimed OBA disclosure. Pointedly, the firm's Compliance Administrator merely confirmed that DeVinney had timely submitted the firm's disclosure documents in December 2012 and January 2013. Those disclosure materials did not, however, disclose the subject OBA.
Paying The Price
The AWC alleges that while associated with Legend, DeVinney engaged in three unapproved OBA, for which he received some $25,330 in compensation, in violation of FINRA Rules 3270 and 2010. Moreover, the AWC alleges that DeVinney failed to provide prompt written notice to Legend to engage in these outside activities, as required by FINRA Rule 3270. Additionally, the AWC alleges that DeVinney provided false and misleading written statements to FINRA, in violation of FINRA Rules 8210 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon DeVinney a $15,000 fine and a 14-month suspension from associating with any FINRA registered broker-dealer in any capacity.
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 an 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 OBA before joining the firm and the need to disclose just never got recognized. Sometimes the broker-dealer was aware of the 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 OBA. When a firm approves a registered person's proposed 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.
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.
.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)