February 4, 2015
It's often about crossing lines. At some point, you're only preparing to engage in a business; however, further ahead in time, you're actually engaged in that business. On Wall Street, the difference between intending to engage in an outside business activity and actually being deemed to have started that business is a dangerous line to cross. Consider this recent regulatory 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, Nnamdi B. Ejiogu submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Nnamdi B. Ejiogu, Respondent (AWC #20130387348, January 21, 2015).
In 2008, Ejiogu was first registered with FINRA member firm J.P. Morgan Securities LLC ("JPMS"). The AWC asserts that Ejiogu had no prior disciplinary history with the Securities and Exchange Commission, any state securities agency, FINRA or any other self-regulatory organization.
The AWC asserts that sometime in the Spring of 2013, Ejiogu and two other JPMS registered representatives developed the concept of a mobile phone application that would create a social network for live entertainment events. In furtherance of their business plan, in June 2013, the three registered representatives formed an LLC to develop the mobile phone application.
The AWC alleges that in June 2013 Ejiogu was the Chief Operating Officer ("COO") of the phone application business, had 25% ownership of the LLC, and was actively engaged in the development of the application and the self-regulatory organization deemed such activity to constitute an outside business activity ("OBA")
Finally, by September 2013, the AWC asserts that the three registered reps had raised about $40,000 from friends and family (none of whom was a JPMS customer) for the LLC and had deposited the funds into a bank account.
Oh Boy . . . OBA
Many registered persons are engaged in other professions and careers. In addition to typically requiring notice to your employer of such OBA and obtaining approval to pursue same, there are other ramifications inherent in holding down multiple jobs. Consider the following:
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).
A Matter Of Form
The AWC asserts that it was only on August 21, 2013, when Ejiogu first discussed his "proposed involvement in the LLC" with JPMS management, who then instructed him that his activities could be deemed an OBA, which would require the firm's prior approval. As such, the AWC asserts that management instructed Ejiogu to submit an internal OBA form for review and approval. The AWC alleges that pursuant to an October 2, 2013, email review, JPMS management discovered that Ejiogu and two other registered reps had, in fact, established an LLC and were engaged in what was believed to be active steps towards developing the application.
FINRA alleged that by acting as the LLC's CCO and failing to provide prior written notice of OBA, Ejiogu violated FINRA Rules 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Ejiogu a $5,000 fine and a one-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
Compliments to FINRA for not going overboard with the sanctions.