Father Promotes Son's Business And Wrinkle Cream

November 19, 2014

We got this registered person who is acting as the CFO of his son's company and is also promoting an anti-wrinkle cream.  How do those two roles combine into a FINRA regulatory matter? For one thing, there are aspects of an undisclosed private securities transaction; and, for another thing, it seems that we may have an undisclosed outside business activity.

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, Donald L. Bratten submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Donald L. Bratten, Respondent (AWC #2013037765701, November 11, 2014).

Respondent Bratten has been in the securities industry since 1988 and from January 2013 through August 2013 was registered with FINRA member firm Stifel, Nicolaus & Company, Inc. The AWC asserts that he had no prior disciplinary history. 

PST

The AWC alleges that without Stifel's knowledge or approval, Respondent Bratten engaged in a private securities transaction ("PST") around July 9, 2013,  when he solicited two Stifel customers to invest in a company that was purportedly founded by his son and another individual who was a South Korean national.  In furtherance of the solicitation, Bratten caused one of the customer s to transfer $220,325 from the customer's Stifel account to the customer's outside bank account. Further, Bratten allegedly signed the July 10, 2013, Purchase Agreement as the the company's Chief Financial Officer.

SIDE BAR: Why did the AWC make a point that the other founder of the company was a "South Korean national?" Frankly, I have no idea. 

A Regulatory Wrinkle

Starting April 18, 2013, without disclosure to Stifel, Respondent Bratten became a salesperson for a company that markets anti-wrinkle cream. Bratten's name is purportedly displayed on the company's website and on a second website that he created to advertise the product. FINRA deemed Bratten's conduct to constitute an outside business activity ("OBA").

Away We Go

According to FINRA's online BrokerCheck as of November 17, 2014, on August 2, 2013, Stifel "Discharged" him based upon allegations that:

VIOLATION OF FIRM POLICIES AND INDUSTRY RULES, INCLUDING FAILING TO DISCLOSE OUTSIDE BUSINESS ACTIVITIES AND SOLICITING INVESTMENTS OUTSIDE OF THE FIRM.

FINRA asserted that Bratten's PST constituted a violation of NASD Rule 3040 and FINRA Rule 2010; and that his OBA conduct constituted violations of FINRA Rules 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Bratten a $10,000 fine due upon re-association with any FINRA member firm, and a four-month suspension from association with any member firm in any capacity. 

Bill Singer's Comment

Anytime a regulatory violation is known by its acronym - OBA or PST, for example - that's a tip-off that this is a problem area being closely watched by regulators. Of course, the more cynical among us would also suggest that regulators loves these speed traps because it's a regular source of fines.

FINRA 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 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).