SIDE BAR: So far, so good. In accordance with FINRA Rule 3270, Borneman provided prior written notice to Cambridge about his intention to engage in an OBA in the form of the LLC.
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.***Supplemental 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).
SIDE BAR: Ooops! Having complied with the notice obligations for the OBA, Borneman failed to comply with the prior notice requirements of FINRA's PST Rule. An outside business activity and a private securities transaction may, indeed, involve the same underlying business but you still need to submit two different notices under FINRA's regulatory scheme. Apparently, Borneman failed to submit any written notice of the PST. Although a member firm's "approval" is not contemplated in the OBA Rule, that is not the case for the PST Rule when the transaction involves 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 toparagraph (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.
RR ENGAGED IN A PRIVATE SECURITIES TRANSACTION WITH CLIENT WITHOUT RECEIVING APPROVAL FROM THE FIRM. THE FIRM WOULD NOT HAVE OTHERWISE PARTICIPATED IN THIS TRANSACTION, AND THERE IS NO INDICATION CLIENT FUNDS HELD BY THE FIRM WERE USED FOR THE TRANSACTION. THERE IS NO INDICATION RR RECEIVED ANY SELLING COMPENSATION FOR THE TRANSACTION.
(2) "Selling compensation" shall mean any compensation paid directly or indirectly fromwhatever 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 toacquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.