An opportunity presents itself for you to get involved in some business deal outside of your broker-dealer. The way you see it, your role won't be particularly active. In fact, other than setting up a corporation or limited liability company, you're probably not going to be doing much beyond some routine office management and, hopefully, cashing some paychecks. In the back of your mind, however, something is gnawing at you. Maybe you're supposed to notify your employer before moving forward? Naaah, this is only a few hours a week and it's all pretty low-key and passive. Not the kind of thing you have to notify your brokerage firm about or get its approval; and, after all, you asked around the branch and the water-cooler lawyers all said that it's no one's business when it comes to your outside business. You could have run it by an industry lawyer for a few hundred bucks but ultimately decided it wasn't worth the legal fees. Consider this recent case in which the lack of notification to the firm proved disastrous.
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, James Rosebrough submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James Rosebrough, Respondent (AWC #2013038263201, February 23, 2015).
In 2001, Rosebrough entered the securities industry and through 2015 he was employed with four FINRA member firms. During the times relevant to this matter, he was registered with LPL Financial LLC. The AWC asserts that he had no prior disciplinary history in the securities industry
The Condo LLC
The AWC asserts that in July 2011, Rosebrough and a colleague were operating their brokerage and an insurance business from an office condominium complex. In order to purchase the premises from which they were conducting business, the colleagues formed a limited liability company (the "LLC"). The AWC asserts that Rosebrough was a partner of the LLC, and his duties included collecting and depositing rent and paying bills; and, further, since the LLC's inception, Rosebrough had received about $3,500 in income from this business.
The Residential LLC
In February 2013, Rosebrough and an LPL customer purportedly formed another LLC for the purpose of acquiring and renting a single family residence. Rosebrough was a partner of this second LLC, and he was listed in the Articles of Organization as "Manager," whose duties included collecting rent, paying bills and coordinating maintenance of the property.
By The Rules
Many registered persons engage in other professions and careers; and such Outside Business Activities ("OBA") typically requires prior written notice to your employer and obtaining the firm's approval. 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).
FINRA alleged that Rosebrough failed to provide prior written notice to LPL about his OBA involving either of the LLCs.. FINRA further alleged thatin 2012, Rosebrough completed an annual LPL questionnaire and falsely answered "NO" to a question about whether he had engaged in an OBA. Finally, the regulator alleged that Rosebrough only first notified LPL of the OBAs in July 2013.
Price of Non-Compliance
According to online FINRA BrokerCheck records as of March 2, 2015, LPL "Discharged" Rosebrough on September 5, 2013, based upon allegations that: