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FINRA Conduct Rule 3270. Outside Business Activities of Registered PersonsNo 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).
NASD Rule 3040. Private Securities Transactions of an Associated Person(a) ApplicabilityNo 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 NoticePrior 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 submit the notice before you undertake any PST activity -- not after you begin or contemporaneous with your activity; and
- it 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.You must also focus on the required content of your written notice:
- 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.Too many folks get cute is in trying to avoid disclosing that they already received selling compensation --- which is a problem because you were not 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 CompensationIn 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.
(e) DefinitionsFor 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.
FINRA Rule 2150. Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts(a) Improper UseNo member or person associated with a member shall make improper use of a customer's securities or funds.(b) Prohibition Against GuaranteesNo member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.(c) Sharing in Accounts; Extent Permissible
(1)(A) Except as provided in paragraph (c)(2), no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if:
(i) such person associated with a member obtains prior written authorization from the member employing the associated person;(ii) such member or person associated with a member obtains prior written authorization from the customer; and(iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
(B) Exempt from the direct proportionate share limitation of paragraph (c)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
(2) Notwithstanding the prohibition of paragraph (c)(1), a member or person associated with a member that is acting as an investment adviser may receive compensation based on a share in profits or gains in an account if:
(A) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person;(B) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and(C) all of the conditions in Rule 205-3 of the Investment Advisers Act (as the same may be amended from time to time) are satisfied.
*** Supplementary Material ***.01 Inapplicability of Rule to Certain Guarantees. For purposes of paragraph (b) of this Rule, a "guarantee" that is extended to all holders of a particular security by an issuer as part of that security generally would not be subject to the prohibition against guarantees..02 Permissible Reimbursement by Member of Certain Losses. Nothing in this Rule shall preclude a member, but not an associated person of the member, from determining on an after-the-fact basis, to reimburse a customer for transaction losses; provided, however, that the member shall comply with all reporting requirements that may be applicable to such payment. For example, if the payment can reasonably be construed as a settlement, the member shall report the payment as a settlement under the applicable reporting requirement(s). In addition, nothing in this Rule shall preclude a member, but not an associated person of the member, from correcting a bona fide error. This Supplementary Material .02 does not apply to an associated person of a member because of the concern that any such payment may conceal individual misconduct..03 Record Retention. For purposes of paragraph (c) of this Rule, members shall preserve the required written authorization(s) for at least six years after the date the account is closed..04 Applicability of Other Rules to Sharing Arrangements. Members and associated persons should be aware that participation in a sharing arrangement permitted under paragraph (c) of this Rule does not affect the applicability of other FINRA rules, including paragraph (b) of this Rule, FINRA Rule 3270 and NASD Rules 3040 and 3050, to such sharing arrangement.
NASD Rule 3050. Transactions for or by Associated Persons(a) Determine Adverse InterestA member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.(b) Obligations of Executing MemberWhere an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a MemberA person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial InstitutionA person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.
(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.(f) Exemption for Transactions in Investment Company Shares and Unit Investment TrustsThe provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.
THE AGENT WAS PERMITTED TO RESIGN AFTER INFORMATION WAS OBTAINED INDICATING THAT THE AGENT WAS INVOLVED IN AN UNAPPROVED OUTSIDE BUSINESS ACTIVITY FOR WHICH HE HAD SOLICIATED [sic] AT LEAST ONE INVESTOR.
I INVENTED TECHNOLOGY AND PRESENTED IT. TECHNOLOGY AWARENESS GREW AND ATTRACTED A NON-AFFILIATED INVESTOR. I NOTIFIED MY OSJ AND REPORTED MY INVOLVEMENT ON MY U4. MY BROKER DEALER HAD A KNOWN ACCEPTANCE TO THIS CIRCUMSTANCE BUT DID NOT APPROVE OR DISAPPROVE THE ACTIVITY FOR 8 MONTHS FINALLY DISAPPROVING THE ACTIVITY FORCING ME TO RESIGN.