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, Kahauanu Lake Kai submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kahauanu Lake Kai,Respondent (AWC 2011026684201, August 9, 2012).
Kai was first registered in 2005 with Edward D. Jones & Co., L.P. ("EDJ"), until his February 16, 2011, termination . In April 2010, while registered with the EDJ, Kai disclosed his involvement as a member in Great Pacific Holdings, LLC ("GPH"), a real estate business venture established by him and another individual. Kai stated that his responsibilities in connection with this outside business activity included retrieving mail, depositing checks from rental properties, and disbursing funds to investors. Pursuant to Kai's request and his recitation of the extent of his affiliation, EDJ approved this outside business activity.
According to the AWC, Kai sort of left something out. For example, allegedly, he did not disclose that he also would be soliciting investments in GPH. That activity not only altered his role at GPH but may well have constituted engaging in private securities transactions, for which separate approval is required.
During the relevant time, EDJ's Compliance Manualand Written Supervisory Procedures Manualprohibited its representatives from:
- recommending or selling any security, insurance product or other investment opportunity, including promissory notes, not approved by the firm; or
- raising money or participating in the raising of money for any company, individual or venture without the firm's written consent.
Typically, representatives were permitted to maintain only passive investment interests; and were pointedly prohibited from involvement in selling or promoting ventures to others, holding management positions or addressing prospective investors.
From June 2010 through September 2010, the AWC alleges that Kai solicited four EDJ customers to invest in GPH without giving the firm prior written notice of the proposed transactions and his proposed role. The four customers invested $150,000 in the form of promissory notes, which were never approved by the firm.
By engaging in private securities transactions without giving EDJ prior written notification, and recommending and selling unapproved investments, the AWC alleged that Kai violated NASD Rule 3040 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Kai a $5,000 fine and a four-month suspension from association in any capacity with any FINRA member
As "Street Sweeper" has noted in past articles, the worlds of Outside Business Activities ("OBA") and Private Securities Transactions ("PST") often collide - and with painful regulatory consequences. Sometimes what you think is merely an OBA morphs into a PST; and sometimes the PST requires more of your attention than you anticipated and, voila!, you get sucked into the business and it rises to the level of an OBA.
Anytime a regulatory violation is known by its acronym - OBA or PST, for example - that's a tip-off that this is a problem area being closely watched by regulators. Of course, the more cynical among us would also suggest that regulators loves these speed traps because it's a regular source of fines.
Given the recent pressures of the Great Recession many registered persons found themselves in need of or enticed by the possibility of extra income from the sale of product away from their employer FINRA member firm. This attraction was as likely to bedazzle those at indie firms such as LPL, at discount firms such as Charles Schwab, or at any major player the likes of JP Morgan, Morgan StanleySmith Barney, Merrill Lynch, or Wells Fargo. If you feel compelled to engage in OBA or PST, make sure to follow industry rules/regulations and to abide by your employer's in-house requirements. Otherwise, you could be paying dollars out of your own pocket while you're sitting on the sidelines.