Talk to enough Wall Street lawyers and you'll learn that certain regulatory issues seem to cycle in and out of fashion. Industry regulators publish annual notices setting forth their enforcement priorities and agendas for a given year, so, sometimes there is a task force in operation or an agenda targeting specific problem areas. For whatever reason, in 2015, I have noticed an increase in calls from potential clients who have problems with their alleged non-disclosure of both an outside business activity coupled with a private securities transaction. Consider this recent FINRA 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, Barry George Hartman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Barry George Hartman, Respondent (AWC 2015044671601, August 19, 2015).
In 1984, Hartman entered the industry and in 2002 he was registered with FINRA member firm FSC Securities Corporation, where he remained until his March 2015 termination. According to the AWC, Hartman had the following prior regulatory history:
In 2004, NASD (predecessor to FINRA) found that Hartman placed a telephone call to an insurance company regarding a variable annuity it had issued to a customer. In that telephone call, Hartman falsely identified himself as his prior branch manager without the branch manager's knowledge or authorization. In a Letter of Acceptance, Waiver and Consent, NASD found that Hartman thereby violated NASD Conduct Rule 2110 and imposed a 15-day suspension and $2,000 fine. (AWC No. C3B040009.)
Hartman's 2015 AWC alleges that between 2004 and March 2015, he served on the board of directors of a privately-held company but had not provided to FSC the requisite prior written notice of that activity. FINRA deemed his service on the board to constitute an undisclosed outside business activity ("OBA") in violation of NASD Rules 3030 and 2110, and FINRA Rule 3270 and 2010.
During the same 2004 - 2015 period cited in the paragraph above, the AWC further alleges that Hartman personally invested $450,000 in the privately-held company and also recommended that 13 FSC customers invest in the company - also, he referred those customers directly to the company. At no time did Hartman provide to FSC the requisite prior written notice of the cited activity and obtain his firm's approval. FINRA deemed Hartman's conduct to constitute engagement in a private securities transaction ("PST") in violation of NASD Rules 3040 and 2110, and FINRA Rule 2010.
According to online FINRA BrokerCheck records as of August 24,2015, FSC "Discharged" Hartman on March 5, 2015, based upon allegations that:
In accordance with the terms of the AWC, FINRA imposed upon Hartman a Bar from associating with any FINRA member.READ the BrokeAndBroker.com Blog Outside Business Activity ArchiveREAD the BrokeAndBroker.com Blog Private Securities Transactions Activity Archive
REGISTERED REPRESENTATIVE TERMINATED FOR VIOLATION OF FIRM POLICIES, TO INCLUDE, MR. HARTMAN'S PARTICIPATION IN AN UNDISCLOSED OUTSIDE BUSINESS ACTIVITY AND AN UNDISCLOSED PRIVATE SECURITIES TRANSACTION.