by Bill Singer
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, David Lloyd Barber submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of David Lloyd Barber, Respondent (AWC 20110291629, February 5, 2013).
Barber entered the securities industry in 1987, and by 2007, he had joined Raymond James & Associates, Inc., until his termination on September 12, 2011, for borrowing funds from firm customers and maintaining an undisclosed outside business activity. The AWC asserts that Barber had no prior disciplinary history.
Undisclosed Outside Business Activity
Bill Singer
The AWC alleges that on January 12, 2009, Barber filed articles of organization with the CaliforniaSecretary of State to form Glenbrook Avocados, a California limited liability company. The purpose of Glenbrook Avocados was “to sell fresh produce and to provide consulting services;” and Barber was the sole manager with the exclusive right to manage the business of Glenbrook Avocados.
NASD Rule 3030 and FINRA Rule 3270 prohibit associated persons from engaging in outside business activities “OBA”) absent having provided prior written notice to the member firm. The AWC asserts that Barber had failed to provide to Raymond James the requisite prompt written OBA notice in violation of NASD Rule 3030 and FINRA Rules 3270 and 2010.
Borrowing
The AWC alleges that between January 2009 and July 2011, Barber received five loans totaling $867,000 from three Raymond James customers – individuals with whom Barber had been personal friends with before they opened their accounts with Barber at Raymond James. The loans at issue are:
The loans were accomplished via wire transfers from the customers’ Raymond James brokerage account into a Glenbrook Avocados checking account; and, thereafter, the AWC alleges that Barber moved the funds to his personal checking account and paid personal expenses. The AWC asserts that Barber repaid Customer1 ‘s loan on September 1,2011, and repaid Customer2 and Customer3′s loans on January 5,2012. Notwithstanding, the AWC alleges that the loans constituted violations of NASD Rule 2370 and FINRA Rules 3240 and 2010.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Barber a $25,000 fine and a four-month suspension from association with any FINRA member in any capacity.
Bill Singer‘s Comment
To Barber’s credit, he fully repaid all the customer loans and appears to have done so before FINRA started its investigation. Moreover, there is no allegation in the AWC that any of Barber’s customers at Raymond James were wrongly solicited to invest in his avocado business and/or that they sustained damages as a result. As is often the case in these FINRA settlements, there may be more facts and factors involved than made their way into the AWC (or, just as possible, what we see is the whole story); nonetheless, I can only go with what is stated in the official FINRA document. I’m not sure that the alleged violations when viewed within the totality of circumstances required both a hefty $25,000 fine and a four-month suspension; however, Barber entered into that settlement and we’ll just leave it at that.
OBA
In Barber we have someone in the avocado consulting business who unintentionally makes guacamole of his career. One of his missteps involved the old OBA. As always, let’s start with the applicable current FINRA OBA rule:
FINRA 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).
You wouldn’t think that such a simple prerequisite as providing prior written notice to the member would trip us so many folks, but it does. Industry outsiders may wrongly perceive that the motivation behind such non-disclosure is nefarious with the intent to conceal all sorts of shenanigans from both the employer member firm and the regulators. Often — okay, yeah, quite often — that’s likely the reason for not telling the firm about the OBA. On the other hand, very often the non-disclosure arises out of a lack of awareness: the registered person just doesn’t view the cited conduct as a “business” activity; or was engaged in the OBA before joining the firm and the need to disclose just never got recognized; or the firm was aware of the OBA through numerous conversations and communications but the required “written” notice just never got sent in the proper form.
Few compliance issues are ever so hermetically sealed as to result in a single, isolated regulatory violation; which may well explain the reluctance of many brokerage firms to permit OBAs. When a firm approves a registered person’s proposed OBA, the unexpected and the unanticipated can come home to roost with a vengeance; and, accordingly, those uncertainties also explain why FINRA and other regulators focus on OBA violations. What a registered person sees as a modest avocado consulting business with absolutely no connection to his securities industry job can easily result in all sorts of lawsuits alleging apparent or actual authority to act on behalf of the brokerage firm — replete with astronomical demands for damages accompanied by outlandish allegations. And even if the case is so much garbage, the brokerage firm may still need to peel off a lot of large denomination bills to pay a defense lawyer and to also deal with the ensuing regulatory demands for explanations.
READ additional “Street Sweeper” OBA cases:
Borrowing
Since the onset of the Great Recession, registered persons have been financially hit along with the rest of the population, and financial pressures have not discriminated among large or small firms. Amidst a souring economy, the loss of commission business, and the closing of firms and branches, whether employed at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, UBS, or smaller firms, the need for cash pushed many brokers to the limit and prompted arrangements with customers to borrow money. The legacy of those ongoing hard times will likely keep this violation on the front burner at FINRA for years to come.
In Barber you don’t have loans going directly to a registered person — they are technically wired into the account of an LLC. Those loans came from Raymond James customers but those lenders were apparently friends of the stockbroker before the brokerage relationship. Finally, all the loans were repaid in full and done so without FINRA’s prompting. Even with all those favorable considerations, the borrowing ran afoul of FINRA’s rules. Again, let’s go to the full-text of the current FINRA Borrowing Rule:
FINRA Rule 3240: Borrowing From or Lending to Customers
(a) Permissible Lending Arrangements; Conditions
No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless:
(1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member;
(2) the borrowing or lending arrangement meets one of the following conditions:
(A) the customer is a member of such person’s immediate family;
(B) the customer (i) is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business and (ii) is acting in the course of such business;
(C) the customer and the registered person are both registered persons of the same member;
(D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship; or
(E) the lending arrangement is based on a business relationship outside of the broker-customer relationship; and
(3) the requirements of paragraph (b) of this Rule are satisfied.
(b) Notification and Approval
(1) The registered person shall notify the member of the borrowing or lending arrangements described in paragraphs (a)(2)(C), (D), and (E) above prior to entering into such arrangements and the member shall pre-approve in writing such arrangements. The registered person shall also notify the member and the member shall pre-approve in writing any modifications to such arrangements, including any extension of the duration of such arrangements.
(2) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(A) above, a member’s written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements.
(3) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(B) above, a member’s written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person’s representation that the terms of the loan meet the above-described standards.
(c) Definition of Immediate Family
The term “immediate family” means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.\
Supplementary Material:
.01 Record Retention. For purposes of paragraph (b)(1) of this Rule, members shall preserve the written pre-approval for at least three years after the date that the borrowing or lending arrangement has terminated or for at least three years after the registered person’s association with the member has terminated.