October 22, 2014
FINRA has this thing about registered representatives engaging in so-called "Outside Business Activities" ("OBA"). Frankly, I don't agree with certain aspects of the FINRA's OBA Rule. None of which is to suggest -- even remotely -- that the ultimate goal of the OBA Rule isn't valid. In my opinion, there is great merit in having a broker-dealer aware of the OBA of its registered staff -- and there are many compelling circumstances when a proposed OBA should be denied or restricted. On the other hand, since FINRA is a self-regulatory organization ("SRO") that limits voting for its elected offices and rule proposals to its member firms, the legitimate needs and concerns of the hundreds of thousands of disenfranchised registered individuals must be given fair consideration by the SRO. Unfortunately, too much of what's involved in policing the OBA issue comes off as FINRA siding with management/employer against labor/employee and depicts the SRO as a tool of management. Consider this case, for example.
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, Matthew King Absher submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Matthew King Absher, Respondent (AWC 2013038446701, October 3, 2014).
Absher was first registered in 2009 and on April 23, 2010, was registered with FINRA member firm New England Securities.
The Inactive Company And Construction Biz
The AWC asserts that from April 2010 to November 2011, Absher served as a director of an inactive "but still registered company he incorporated for day trading;" and from June 2013 to September 2013, he served as president of a company that provided containers for construction sites.
The AWC alleges that in his capacities as director and president of the two companies, Absher failed to provide prior written notice to FINRA member firm New England about his "outside business activities," and in the case of his directorship of the inactive company, he "inaccurately answered four New England questionnaires about that outside business activity."
FINRA Conduct 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).
According to online FINRA records as of October 10, 2014, METLIFE [sic]"Discharged" Absher on September 16, 2013, based upon allegations that:
REGISTERED REPRESENTATIVE DID NOT FOLLOW COMPANY POLICY WITH RESPECT TO THE DISCLOSURE OF OUTSIDE BUSINESS ACTIVITIES.
FINRA deemed Absher's conduct in violation of NASD Rule 3030, FINRA Rule 3270, and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Absher a $5,000 fine and a 60-day suspension in all capacities from association with any FINRA member firm.
Bill Singer's Comment
A $5,000 fine? Not exactly sure why that substantial amount is even remotely appropriate given the published facts in this case. Similarly, on that same basis, a two month suspension strikes me as so over-the-top that the sanctions come off a punitive. On the other hand -- and this is an important point that largely undermines my high dudgeon -- Absher voluntarily entered into this settlement with FINRA and if he is okay with the fine and suspension, then that's that.
Of course, I am one of those obstinate bastards who doesn't often take "no" for an answer; so, in that spirit, permit me to chew and gnaw a bit on the fleshy parts of this AWC.
If we examine the language of FINRA's OBA Rule 3270, we note that the prohibition is not actually against "outside business" but, more pointedly, "outside business activity." To underscore that point, we merely need to note that Rule 3270 notes the context "as a result of any business activity. . ." and also removes so-called "passive investments" from the ambit of the proscribed conduct. Passive, in my lexicon, further suggests a state of relative lack of activity.
It does not appear that Respondent Absher is an attorney and the AWC implies that he represented himself during the negotiations involving his alleged regulatory misconduct. If I had represented Absher, I would have challenged FINRA's charge in the AWC about the "inactive, but still registered company." I mean, you know, if the company is "inactive," then isn't there a fair question as to whether Absher engaged in an outside business "activity" that needed to be disclosed? After all, acting and preparing to act are two different things.
Yes, I understand that there are two-parts to the AWC's charges against Absher and that the OBA Rule specifically restricts conduct as a "director" or "officer" (the latter would cover Absher's role as "president" of the construction business). Consequently, FINRA may indeed have Absher dead to rights on that second charge.
The OBA violation for the "inactive company he incorporated for day trading" is a troubling allegation, however, because:
- the company was inactive; and
- FINRA asserts that the company was incorporated to engage in "day trading" but oddly fails to disclose whether any such trading actually occurred or if the company actually engaged in any business.
FINRA and its predecessor NASD have had a history of antagonism to the old SOES trading and the more recent day trading manifestations. There are, admittedly, legitimate regulatory concerns when it comes to day trading but in Absher's case, we have no assertion that he violated any day trading rules or even opened the doors for his business. Consequently, I'm not quite sure that I understand why he was charged with being the director of a company that was preparing to engage in a business. If the company was actively engaged in a business and Absher was a director, then that's another issue.
As such, even if I grant FINRA its right to go after Absher for his role as President of the active, construction-related company, that still does not off-set my concern about also charging him with what looks like the "preparation" to engage in a business. If I have misinterpreted the true status of FINRA's day trading business charge, then that is on the SRO for the inarticulate nature of the AWC. My old high school English teacher used to admonish the class "Say what you mean, don't mean what you say." I would say to FINRA that the AWC should have been better drafted to say exactly what the SRO meant to allege: had Absher's company engaged in day trading but then became inactive; or, to the contrary, did Absher's company intend to engage in day trading but never crossed that threshold?
How does that old Beatles song go? OBA-di OBA-da . . . and something about "happy ever after in the marketplace"?