What Would Hillary Do? FINRA Cites AOL Email Account And Gold / Bank Investments

May 27, 2015

If Hillary Clinton could use a personal server for her emails, why can't a registered representative use an AOL email account? Then there's the whole other issue about why a registered representative needs permission to personally invest in deals away from his or her firm. Consider this recent case in which the use of a personal email address and personal investments becomes a regulatory issue for FINRA.

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, Philip Tavella submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Philip Tavella, Respondent (AWC  #2013037138803, May 18, 2015).

In 2004, Tavella first became registered with FINRA member firm Investacorp., where he remained until his December 31, 2012, resignation.  

Email Policy

The AWC asserts that on March 31, 2008, and August 16, 2011, Tavella certified that he would exclusively use his Investacorp-issued email account to conduct firm business and would comply with the firm's prohibition against using a personal email account for firm-related business.

AOL Account

The AWC asserts that between March 31, 2008, and December 31, 2012, Tavella utilized a personal AOL email account to conduct Investacorp-related business. FINRA deemed such use as causing the firm to fail to comply with its recordkeeping obligations, and, accordingly, the self-regulatory organization alleged that Tavella violated NASD Rule 2110 (March 31, 2008 through December 14, 2008) and FINRA Rule 2010 (December 15, 2008 through December 31, 2012), as well as NASD Rule 3110 (March 31, 2008 through December 4, 2011) and FINRA Rule 4511 (December 5, 2011 through December 31, 2012).

Gold Deal

The AWC alleges that on December 10, 2011, Tavella signed a Memorandum of Understanding ("MOU") to invest in certain gold transactions. In furtherance of the MOU, on December 19, 2011, Tavella wired $100,000 from his personal bank account to a bank account controlled by the individual soliciting the MOU.

Bank Instrument

On December 15, 2011, Tavella also signed a Non-Recourse Monetization Agreement to invest in a cash-backed bank instrument. In furtherance of that agreement, on December 19, 2011, Tavella wired $100,000 from his personal bank account to a bank account controlled by the soliciting entity.


FINRA deemed both the gold investment and the bank instrument investments to constitute Private Securities Transactions ("PSTs") and found that Tavella had participated in both PSTs witliout giving prior written notice of such transactions to Investacorp or obtaining the firm's approval, in violation of NASD Rule 3040 and FINRA Rule 2010.

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Tavella a $5,000 fine and a  45-calendar-day suspension in all capacities. 

Bill Singer's Comment

Many registered reps are likely under the impression that the PST Rule only applies to a transaction in which a customer has made the investment -- which was not the case in Tavella. Moreover, many reps may believe that the PST Rule only applies when they are paid selling compensation -- which does not appear to have been paid to Tavellawho personally invested in the gold and bank instrument deals.

Let's examine FINRA's PST Rule and make sure that we understand what's required. Note my commentary after each section:

NASD 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.

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: 
  1. you must submit the notice before you undertake any PST activity -- not after you begin or contemporaneous with your activity; and
  2. 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:
  • 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 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.

(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.

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.

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