October 14, 2020
In today's featured FINRA regulatory settlement, we come across yet another in a seemingly endless line of so-called Outside Business Activities ("OBAs") cases. In fairness to FINRA, the OBA protocol is fairly straightforward: A registered rep who wants to engage in OBA is required to notify his employer. At that point, it's up to the employer to evaluate the proposed OBA and decide whether to allow it, deny it, or modify it. That much of the rule is about as simple as it gets. The larger question is what gives an employer or an industry's self-regulator the right to proscribe what outside activities an employee may engage in.
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, Yury Ivanou submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Yury Ivanou, Respondent (FINRA AWC 2018060629802)
The AWC alleges that Ivanou was first registered in in 2015 with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporated, where he remained until November 2018. The AWC asserts under Ivanou "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."
Five Apartment Rentals
The AWC alleges that between January 2017 and October 2018, Ivanou rented five apartments as short-term rentals, and purportedly advertised the units' availability via a third-party website. This rental activity allegedly produced about $400,000 in gross revenue for Ivanou.
SIDE BAR: FINRA Conduct Rule 3270: Outside Business Activities of Registered Persons states in pertinent part:
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 Rule 3280 shall be exempted from this requirement.
May 2017: ACC #1
The AWC alleges that on May 12, 2017, Ivanou completed an annual compliance certification ("ACC") on which he:
listed all outside business activities previously disclosed by the
representative and included a space for representatives to update that information,
including the business name and type, duties, hours spent, compensation type and
amount. Ivanou failed to identify his apartment rental business.
January 2018: Supervisor Directs Disclosure
Sometime in January 2018, the AWC alleges that a Merrill Lynch supervisor overhead Ivanou talking in the office about his rental activities; and, accordingly, the supervisor directed him to disclose same. In furtherance of the supervisor's instruction, however, the AWC alleges that
in submitting the outside business activity disclosure in January 2018, Ivanou
failed to accurately identify when his rental activities began, the number of apartments
for which he was receiving rental income, the frequency of the rental activity, and the
amount of compensation he had received. At the time of this submission, Ivanou also
made similar, additional representations to the firm about his outside business that were
June 2018: ACC #2
About six months after submitting the outside business activity("OBA") disclosure, in June 2018, Ivanou submitted his second allegedly incomplete/inaccurate ACC, which the AWC alleges only listed as an OBA:
his rental activity for the apartment where he resided and
failed to accurately disclose the income he had received. At the time he completed this
certification, Ivanou was receiving compensation from four other, undisclosed
apartments. Prior to his termination, Ivanou never corrected his prior disclosures.
In accordance with the terms of the AWC, FINRA found that Ivanou had violated FINRA Rules Rule 3270 and FINRA Rule 2010; and the self-regulator imposed upon Ivanou a $5,000 fine and a three-month suspension from association with any FINRA member firm in any capacity.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of October 14, 2020, indicate the Ivanou voluntarily resigned from Merrill Lynch on October 31, 2018, based upon allegations of:
Conduct including failure to adhere to Firm standards regarding selling away and failure to disclose participation in an outside business activity.
As I often note when commenting on a FINRA AWC, I don't know what I don't know and if the Respondent was satisfied with settling on the terms noted, it's not my place to criticize. Moreover, an AWC is often a "final draft" in which earlier allegations of other misconduct or additional references were deleted via the negotiation process.
That being said, the Ivanou AWC just doesn't sit comfortably with me. What I purposely omitted in the above presentation of AWC allegations was the specific reference to the acts and conduct at issue -- namely, what did Ivanou do as part of his OBA? This is what the AWC alleges:
Ivanou managed the rentals by communicating with guests, accepting reservations,
checking in guests upon their arrival, furnishing the rentals, purchasing supplies for the
apartments, taking linens to be laundered, and hiring cleaners to clean the apartments.
For FINRA, the issue in Ivanou is not so much what Ivanou did as part of his OBA but his failure to completely and accurately disclose those activities on two ACCs and on an OBA form used by Merrill Lynch. I get that concern and Ivanou's incomplete disclosure of his OBAs sort of justifies the imposition of a fine and a suspension. Considering that FINRA charged Ivanou with a violation of its Rule 2010, however, it's fair for us to ask what, exactly, did this Respondent do that rose to the level of violating this:
FINRA Rule 2010. STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
In January 2018, his Merrill Lynch supervisor heard him talking about his rental activities, so the employer can't claim to have been wholly blindsided about the OBA. Similarly, Ivanou did comply with the supervisor's directive and disclosed "his rental activity for the apartment where he resided . . ." Unfortunately, FINRA concluded that Ivanou did not accurately describe the date when he initiated rental activity or the number of apartment involved or his derived compensation.
But how did we even get to the point where Ivanou's non-disclosure of alleged OBA even became an issue? We started at Point A. We wound up at Point C. What exactly took place at Point B?
If we re-read the litany of Ivanou's alleged OBA conduct, we find that the AWC asserts that he engaged in the following non-disclosed activities:
- communicated with guests,
- accepted reservations,
- checked-in guests,
- furnished the units,
- bought apartment supplies,
- delivered linens for laundering, and
- hired cleaners.
Do any of those seven activities seem to involve any dishonor or inequity? More to the point, do any of those seven activities constitute an OBA that involves securities, securities transaction, or, frankly, anything that is remotely related to Ivanou's registered activities with Merrill Lynch?
Instead of renting apartments, let's imagine that Ivanou took a weekend job at a local pizza parlor where he communicated with customers ordering pizzas, took their orders, placed the orders, put the pizzas in a box, marked each box with the nature of the order and the customer's name, and then personally delivered the pizza to each customer. Is that an OBA? According Rule 3270 and FINRA's history of AWCs and Decisions, it sure as hell is.
The men and women who toil at FINRA's member firms had no say in drafting Rule 3270. They had not vote with which to elect any Governor on FINRA's Board. It's like that for each and every rule on the self regulator's books. The industry's employees are disenfranchised at FINRA. If those hundreds of thousands of employees had a say, I suspect that they would have urged more commonsense, more focus, more fairness in the drafting of the OBA Rule.
You may laugh at my pizza example. Laugh all you want. If you work at a FINRA member firm during the week and in a pizza parlor on weekends to support yourself during the COVID crisis, it could cost you $5,000 and three months of suspension. You want to supersize that order?