Commodities Biz Turns Into Outside Business Nightmare For FINRA Broker

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, Donahue Edwin Jones  submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Donahue Edwin Jones, Respondent (AWC 2011029647202, March 15, 2013).

Jones entered the securities industry in 1986 and during the relevant period from May 5, 2010, through October 6, 2011, he was registered with FINRA broker-dealer Capital Financial Services, Inc. ("CFS"). The AWC asserts that Jones had no prior formal disciplinary action.

No OBA

From June 1993 until May 2010, Jones was a registered representative and principal of Okoboji Financial Services, Inc., a FINRA broker-dealer and an introducing commodities broker with the National Futures Association ("NFA") through which Jones conducted securities and commodities business. Because of Okoboji's dual memberships, Jones' commodities business at Okoboji was not deemed an impermissible FINRA outside business activity ("OBA").

No More Two For One

On May 28, 2010, Okoboji ceased operations, but on May 5, 2010, Jones had already become a registered representative of CFS.

Ahhh . . . now for the compliance and regulatory wrinkle!

CFS did not have a commodities-brokerage business.  Apparently in consideration of that fact, on April 19, 2010, Jones and another former Okoboji representative established Lakes Investments. Inc., which also became an NFA introducing commodities broker. Jones was an officer and director of Lakes Investments since its incorporation, and compensated by the firm as an independent contractor.

So, Jones is now registered at FINRA member firm CFS, where he can engage in securities transactions; however, Jones is now also registered with non-FINRA member firm Lakes Investments, where he can engage in commodities transactions. The problem is that from CFS's perspective, Jones' role at Lakes Investments is a disclosable OBA.

When NO Should Be YES

According to the AWC, Jones did not timely disclose his involvement with Lakes Investments to CFS. On August 17, 2010, Jones completed a CFS Representative Questionnaire and responded "NO" to the query asking whether he was  ''currently engaged in any other business (OBA) either as a proprietor, partner, officer, director, employee, trustee, agent, or otherwise."  

Not Quite Timely

On September 15, 2011, Jones answered the OBA question on the CFS Representative Questionnaire with a "YES" by identifying his involvement with Lakes Investments.  Jones subsequently provided CFS with additional information about Lakes Investments. 

SIDE BAR: On a FINRA online document as of March 20, 2013, CFS indicated that Jones had been Permitted To Resign on October 6, 2011, based upon allegations of:

FAILURE TO FOLLOW FIRM PROCEDURES; OPERATING AN UNDISCLOSED, SECURITIES-RELATED OUTSIDE BUSINESS ACTIVITY

FINRA Steps In

The AWC asserts that from May 5, 2010 through October 6, 2011, Jones engaged in a commodities-brokerage business that was separate from CFS and outside the scope of his duties with CFS; and that he did not disclose this OBA to CFS in writing until September 15,2011, in violation of NASD Conduct Rule 3030 (for conduct on or before December 14, 2010) and FINRA Rule 3270 (for conduct on or after December 15,2010).

• AWC
• Outside Business Activity
• OBA
• Commodities
• FINRA
• Bill Singer
• BrokeAndBroker