They say that no good deed goes unpunished. Sometimes those old sayings prove wise. In a recent FINRA regulatory settlement, we are confronted with allegations that a former Citigroup Global Markets investment banker was involved in humanitarian projects but he ran afoul of FINRA's Outside Business Activity Rule . . . or did he? Join with BrokeAndBroker.com Blog's publisher Bill Singer on a provocative exploration of this case.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, Brian P. Dunne submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brian P. Dunne, Respondent (AWC 2015048346801, August 1, 2016).From August 2015 until December 2015, Dunne was registered with FINRA member firm Citigroup Global Markets, Inc. ("CGMI"). The AWC asserts that he had no prior disciplinary history. Humanitarian Projects The AWC asserts that in 2013, Dunne was:
involved in founding a company, DV, which was intended to design, manage and implement humanitarian development projects and facilitate social impact investments in frontier and post-conflict markets. . .Further, the AWC alleges that from late 2014 to July of 2015, while purportedly pursuing a Masters of Business Administration, Asset Management and Investment Banking, Dunne also assisted in the preparation of "a grant proposal for aiding small villages in Guatemala on behalf of DV."
SIDE BAR: "Involved in founding." Frankly, that's a somewhat tortured turn of a phrase. I'm not sure that I necessarily appreciate whatever difference the AWC suggests exists between the acts of someone who founded a company versus someone who helped found a company versus someone merely "involved" in founding a company. Whatever FINRA perceives to be the critical distinction that warranted the qualification that Dunne was only "involved" in founding DV, there is no helpful explanation or guidance. Frankly, it may not be of any consequence but I was struck by the terminology. Moreover, I was also struck by the fairly unique description of DV's mission: humanitarian development projects and social impact investments. Anytime FINRA reduces the identity of a human being or entity to some initials, I take it as a personal challenge. Frankly, I love solving puzzles. After trying a few permutations by way of Google searches, I came upon a group of terms that yielded what seems to be the solution in the form of the third result: "Our Work - Development Ventures" (See Google Search). On the "About" website page for "Development Ventures" we find this language, in part:
Challenging uncertainties to pioneer advancement in development practiceDevelopment Ventures brings together a dedicated team of professionals experienced in designing, managing & implementing development projects and facilitating investments in frontier markets. With our team and our partners, Development Ventures works to combine innovative ideas with the results driven approach of the private sector, in order to develop new economic growth opportunities in the most challenging of environments. . .Additionally, on Development Ventures' "News" website page we find this headline:
Development Ventures & Partners Conduct a Rapid Market Appraisal with Guatemalan small-scale producers in off-grid communities.
Oddly, there is no reference to Brian Dunne that I can locate on the Development Ventures website. Maybe I haven't solved the hidden identity of "DV."Post-MBA Employment After Dunne had received his MBA, the AWC alleges that in July 2015, he began working as an investment banker for CGMI. Upon joining CGMI, Dunne allegedly did not notify CGMI of his association with DV. Notably, the AWC does not assert exactly what the nature of Dunne's alleged "association" with DV was as of July 2015.Brochure Editing About three months into his investment banking job, FINRA seems to have concluded that Dunne failed to follow industry and CGMI rules and policies. This is a verbatim quote from the relevant part of the AWC:
[I]n October 2015, while employed with CGMI, Dunne assisted in editing a brochure that DV planned to distribute at a social impact development conference, without first notifying CGMI. When CGMI compliance personnel noticed his activity and asked about his involvement with DV, Dunne initially did not provide CGMI with information and subsequently provided incomplete information.OBA Many registered persons engage in other professions and careers; and such Outside Business Activities ("OBA") typically require prior written notice to your employer and obtaining the firm's approval. Consider the following:
FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons No 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).Discharge Online FINRA BrokerCheck records as of August 3, 2016, disclose that CGMI "Discharged" Dunne on November 20, 2015, based upon:
allegations involving failure to disclose outside business activityFINRA Sanctions As a result of the conduct described above, Dunne violated FINRA Rules 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Dunne a $5,000 fine and a 15-business-day suspension from association with any FINRA member in any capacity. Bill Singer's Comment I'm not sure whether I should laugh at FINRA for what appears to be an absurd regulatory case and an over-the-top sanction; or, in contradistinction, should simply chastise the self-regulatory organization for failing to offer sufficient content and context to support what may be a proper regulatory case and appropriate sanction. Roles Let's start with FINRA's OBA Rule (Rule 3270), which prohibits a registered person from serving in various capacities. At the time of Dunne's alleged OBA violation, was he associated with "DV" as an:
[D]unne assisted in editing a brochure that DV planned to distribute at a social impact development conference . . .Anyone see anything . . . anything . . . in that above quote that asserts that Dunne was compensated or expected to be compensated by DV or any outside party for his assistance in editing a brochure? CGMI Investigation Then there is the whole thing about Dunne's conduct in response to an apparent in-house investigation by CGMI. This may be the firmest ground upon which the AWC stands. As the AWC puts it, initially, Dunne, did not provide his firm with information and, thereafter, only provided allegedly incomplete information. Okay, fine, now that sounds like a more proper basis for compliance and/or regulatory misconduct. The problem is that we don't know what Dunne did or did not "initially" provide to CGMI and we don't know what was ultimately deemed "incomplete" at the point in time when the firm concluded its investigation. Going by CGMI's comment on Dunne's BrokerCheck file, even the firm does not indicate that it concluded that the investment banker had engaged in OBA and had failed to timely disclose his activity. What CGMI posted on Dunne's BrokerCheck file is that he was discharged as a result of "allegations" about OBA -- and here we are, some eight-plus months after the firm posted that comment and there is no update or amendment from CGMI indicating that Dunne had, in fact, engaged in OBA. Conclusion I'm not saying that FINRA got anything wrong in this settlement and for all I know, the regulator may have Dunne dead to rights. Unfortunately, being right is just not enough when it comes to regulating Wall Street. What's equally important is for a regulator to present a compelling case and to do so with sufficient content and context so as to render its settlements intelligible and educational for the industry and investing public. That goal is not accomplished with this AWC. The AWC discloses that Dunne was represented by legal counsel. Moreover, as I frequently concede, if Dunne was happy to sign off on this settlement and to accept the sanctions, who the hell am I to criticize his decision? To be blunt, I only know what I read in the AWC. Having personally negotiated these agreements as both a former regulatory lawyer and as defense counsel, I know that in negotiating the final version of the settlement document, the end result ain't always pretty and often reflects the messiness of compromise. Even giving FINRA some benefit of the doubt and even allowing that this respondent signed off on the settlement, this AWC falls far short of the most minimal standards. Ultimately, it's hard to digest that Dunne winds up with a $5,000 fine and a 15-business-day suspension because of his efforts (perhaps desire?) to engage in some social good via helping to draft a brochure. Perhaps the whole venture is not as noble as it appears. Perhaps Dunne was not the goody-goody that I am inferring. If that's the case, then FINRA should have offered enough facts to set the record straight. As the record stands, I'm not sure why this case required a fine and suspension rather than a letter of caution or non-disclosable warning from FINRA.