As the economy recovers from the Great Recession, a number of regulatory violations that had been somewhat dormant for the past few years are once again showing up on the radar screen. With increasing number of deals, we're also seeing rising numbers of enforcement actions involving misconduct attendant to selling those deals, among which is the perennial favorite Private Securities Transaction or PST. When a no-no has its own acronym, it's a good indication that it's a pretty common problem. Read about this recent PST settlement.
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, Jia Cai Lewin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jia Cai Lewin, Respondent (AWC #2012033813601, January 6, 2015).
In 2001, Lewin entered the securities industry and from 2007 through June 2012, was registered with FINRA member firm J.P. Morgan Securities LLC. The AWC asserts that Lewin had no prior relevant disciplinary history.
The AWC asserts that from January 2010 through October 2010, Lewin participated in three private securities transactions by soliciting at least one J.P. Morgan customer to invest approximately $6 million in three Chinese pharmaceutical-related companies. Lewin never informed JPM of her participation in her customer's investments in these companies.
On June 21, 2012, the firm purportedly initiated an internal review concerning securities marketed away from the firm by Lewin. During that investigation, the firm apparently determined that Lewin had used her personal email account to communicate with clients and, further, that various oral and written statements made by Lewin in response to investigators' queries were inconsistent with emails and documentation that had been discovered during the inquiry.
On August 24, 2012, Lewin voluntarily terminated her employment with JPM.
FINRA alleged that Lewin's conduct constituted a violation of NASD Rule 3040 and FINRA Rule 2010.In accordance with the terms of the AWC, FINRA imposed upon Lewin a $30,000 fine and a two-year suspension from association with any FINRA member firm in any capacity.
Bill Singer's Comment
Let's examine FINRA's PST Rule and make sure that we understand what's required. Note my commentary after each section:
FINRA Conduct Rule 3040. Private Securities Transactions of an Associated Person
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.
Bill Singer's Comment: "No" means "no." There is no nuance here at all. Associated persons are prohibited from participating in any PST EXCEPT as permitted under 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.
Bill Singer's Comment: The PST Rule's basic premise is that of prior notice. It is incumbent upon the associated person to provide prior written notice to his/her member firm. Two things here tend to trip a lot of folks up.
You must also focus on the required content of your written notice:
- First off, you must submit the notice before you undertake any PST activity -- not after you begin or contemporaneous with your activity.
- Second, it's must be written notice. That's doesn't mean via telephone or pursuant to a conversation in your boss's office. Trust me, this latter lapse is the killer -- yeah, you told your firm but now they're denying it and, worse, the Rule doesn't allow you to "tell" anything about the PST other than in written form.
- A detailed description of the proposed PST. Detailed does not mean something briefly written on a cocktail napkin. It doesn't mean the rough outline of the transaction. It calls for as much specifics as exist.
- Your proposed role must be set forth. If that role morphs over time, that's okay, but when you submit the prior written notice, you better make sure to accurately characterize what you understand your proposed role to be.
- Where too many folks get cute is in trying to avoid disclosing that they already received selling compensation --- which is a problem because you were supposed to be involved in any PST before you submitted a prior written notice to your firm. On top of that dilemma, you must disclose any anticipated selling compensation.
(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.
Bill Singer's Comment: PSTs involving your receipt or anticipated receipt of "compensation" not only require that you submit prior written notice but that you also receive prior notice approving or disapproving your proposed participation. If approved, the PST gets put on the firm's books and records, and you are supervised as if the deal were executed at the firm. If not approved, hey, you look pretty sharp and I'm sure you can figure out what that means.
(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.
Bill Singer's Comment: PSTs not involving your receipt or anticipated receipt of "compensation" not only require that you submit prior written notice but that you also receive prior notice acknowledging your proposed participation. Your firm may impose conditions upon your participation in this type of PST.
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.
Bill Singer's Comment: The definition of PST is quite broad and literally covers "any" securities transaction outside of your regular course of employment. When in doubt, ask for a lawyer's opinion. Note that "selling compensation" may consist of an indirect consideration in the form of compensation that may be paid from sources other than the proposed deal's principals. The consideration need not be limited to cash but may include profits, tax benefits, or expenses.