CCO Fined and Suspended For Missing Private Securities Transaction

June 14, 2016

Today's Blog is a warning to all compliance staff -- particularly to Chief Compliance Officers. You could be fined and suspended if you fail to navigate the treacherous waters of FINRA's outside business activities and private securities transactions rules. You may have thought nothing of having approved an outside activity; and you might have taken comfort from the fact that everything took place in writing before any actual outside conduct took place. You've got all the paperwork in your file. But what if you had approved a private securities transaction masquerading as an outside business activity? 

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, John N. Furkioti submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of John N. Furkioti, Respondent (AWC 2015046056402, May 26, 2016).

Furkioti was first registered in 2005 and by June 2013 he was registered with FINRA member firm First American Securities, Inc. ("FAS"), where he served as the firm's Chief Compliance Officer ("CCO") starting in April 2014. The AWC asserts that Furkioti had no prior disciplinary history.

OBA or PST ?

As FAS's CCO, Furkioti was required to review all proposed OBAs. As part of his review, he was charged with discerning whether a proposed OBA was, in fact, more properly characterized as a private securities transaction ("PST"). If Furkioti found that a requested OBA was, in fact, a PST, then he was obligated to determine whether to approve the PST. If Furkioti opted to approve the proposed PST, the CCO needed to ensure that:
  • FAS adequately supervised the rep's activities,
  • the PSTs were included in the FAS's books and records, and
  • proper documentation was maintained.

The Offering

The OBA versus PST issues were not merely academic puzzles for Furkioti because the AWC asserts that in March 2015, a registered rep identified only as "TB" was presented with an exclusive opportunity to sell debt units of a private offering (the "Offering"). As explained in the AWC, the Offering was being conducted by an entity owned by a FAS associated person (identified in the AWC only as "CP"). It was contemplated that in consideration of an 11.5% commission, TB would solicit FAS customers to purchase short-term or medium-term notes. The AWC asserts that from March 2015 through July 2015, TB sold $1.645 million in notes to 20 FAS customers and received $189,000 in commissions.

Some Bad Advice?

So, what could wrong with TB's proposed role in the Offering? Obviously a lot and, in fact, this mess mushroomed into quite the disaster for CCO Furkioti. The AWC concedes that CP had

instructed or advised TB that his participation in the Offering was an OBA, and not a PST subject to the requirements of NASD Rule 3040. TB heeded these instructions or advice, filled out the Firm's OBA form, and submitted the form to Furkioti for approval. In the OBA form, TB disclosed that: (1) the nature of the business was "private placements" (2) the business was investment-related, and (3) his position and duties were sales-related. In addition, Furkioti understood that TB would be compensated for the sales activity. Furkioti approved TB's request to participate in the Offering as an OBA, despite the obvious indications that TB's participation in the Offering constituted outside securities activities for compensation subject to NASD Rule 3040. Furkioti failed to adhere to the requirements of his Firm's WSPs that he evaluate TB's OBA request to determine whether the activity should more properly be considered outside securities

Bill Singer's Comment: Let's make sure that we're all on the same page with the facts. FAS associated person CP "instructed or advised" FAS registered rep TB that the Offering was not a PST but an OBA. I'm not exactly sure what the intent of the AWC was in raising the possibility that CP had "instructed" TB that the deal was only an OBA but that was the word chosen by FINRA Staff and it must be underscored. 

In apparent good faith and in reliance upon what may have been an "instruction" from CP, TB then fills out the requisite FAS OBA Form, which informed CCO Furkioti that the Offering is a private placement involving an investment business and that TB would act in a compensated sales capacity. Based upon those representations, Furkioti approved the proposed OBA.

It's nice that the AWC tries to load the facts against Furkioti by offering us the fairly conclusory assertion that there were "obvious indications" that the proposed OBA was a PST. Obvious to whom and why? It may have helped buttress FINRA's conclusion if the self-regulatory organization had identified the actual role of CP at FAS -- all that we are told is that he was an "associated" person. Did Furkioti speak with CP and, if so, what was the sum and substance of that conversation? Did TB convey to Furkioti the basis upon which CP had "instructed" him to characterize the deal as an OBA? Did TB indicate to FINRA during its investigation that he had reason to believe that CP was wrong or that the OBA should have been presented as a PST?

Ultimately, appears that Furkioti dropped the ball and that FINRA may well have had a strong case against him. On the other hand, unless Furkioti was a lawyer, we at least need to concede that the nuance between an OBA and a PST is not always readily apparent, even to skilled industry lawyers. Similarly, we need to factor in the purported instructions of CP and the form submitted by TB. Perhaps those factors only go to the issue of mitigation but they need to be given some weight.

Furkioti Resigns

Online FINRA BrokerCheck records as of June 14, 2016, indicate that Furkioti voluntarily resigned from FAS on April 1, 2016. FAS indicated that there were allegations of

Potential violation of NASD rule 3040, and FINRA rules 3110 and 2010 pertaining to the United RL offering

FINRA Spells It Out

The AWC asserts that as a result of Furkioti's alleged failure to identify the purported OBA as a PST, FAS failed to carry the transactions on its books and records and its CCO did not supervise the activity.  FINRA asserted that Furkioti's conduct constituted violations of NASD Rule 3040, FINRA Rule 3110; and FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Furkioti a deferred fine of $10,000 and a one-month suspension from associating with any FINRA registered firm in a principal capacity. The fine shall be due and payable either immediately upon reassociation with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.

Bill Singer's Comment

I would have like some additional information in the AWC as to whether what is referenced in Furkioti's BrokerCheck file as the "United RL offering" resulted in any customer complaints or lawsuits. As presented, the regulatory settlement strikes me as a bit ticky-tacky because I remain unconvinced that Furkioti engaged in bad faith or was wrong in relying upon the analysis of associated person CP, who I suspect may not have been a mere bystander at FAS but, perhaps, someone with influence. If my suspicion is erroneous, then that would alter my concerns about this case. If my suspicion is, in fact, misplaced, then FINRA must bear some responsibility for raising the role of CP without adequately explaining what he actually did at or for FAS.

The current FINRA rule governing PSTs:

FINRA Rule 3280. 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.

(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.

(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.

(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.

(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 NASD Rule 3050, transactions among immediate family members (as defined in FINRA Rule 5130), 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.