Stockbroker Charged With Outside Business Activity In Advisory Services Deal

August 7, 2014

For some folks, "No" is a nuanced word that presents a challenge. What can I do . . . how can I get them to change that to "Yes"? For others, "No" seems to be an invitation to do whatever it takes to get your way.  If you're lucky, your efforts at creativity win the day and earn you the praise and respect of your bosses and colleagues. If you fail, however, and your whole venture earns you little more than "what part of 'no' didn't you understand?", then you may also have to deal with a persnickety regulator.

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, David E. West submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of David E. West, Respondent (AWC 2011029524801, July 30, 2014).

In 1996, West first became registered. In 2006 he was registered with Stout Risius Ross Advisors, LLC, ("SRRBD"), a FINRA member broker-dealer, and he was also employed with the firm's parent Stout Risius Ross, Inc., ("SRR"), a financial advisory services firm. The AWC asserts that West had no prior disciplinary history.

The Bare Minimum

The AWC asserts that sometime starting in March 2011, West had several meetings with representatives from an equipment distribution company. Purportedly, West had hoped in persuade the company to hire SRR to provide financial advisory services. Although the company pursued such a relationship, SRR ultimately rejected the engagement because the company would not pay the minimum services fee.

The Pioneer Spirit

After his attempts to put the company and his firm together had failed, West created Pioneer Capital Advisors, LLC (which he also owned and controlled, and was the sole shareholder and employee) through which he provided to the company the services that SRR had declined to provide.  The AWC concedes that by offering advisory services to the company through Pioneer that he was "enhancing his relationship" with the company and hopefully facilitating a future financial engagement with himself and SRR. 

Going Steady

On July 9, 2011, acting on behalf of Pioneer, West executed an engagement letter to perform advisory services for the company. Thereafter, he traveled to the company's St. Louis, MO facilities in connection with the assignment. Overall, West and Pioneer would receive a total of $16,714.02 in advisory fees and expenses from the company. 

A Two-Fer

At this point, West sort of loses me - or at least his logic and/or thought pattern somewhat eludes me. He submits to SRR a reimbursement request for $569.29 in travel expenses for the trip he took to St. Louis pursuant to the Pioneer engagement letter.  SRR paid that expense. In fact, the company had separately paid to West that same travel expense pursuant to the engagement letter. It wound up as a double-dip.

What Part Of "NO" Didn't You Get?

Online FINRA records as of August 7, 2014, indicate that Stout Risius Ross Advisors had "Discharged" West on September 20, 2011, based upon allegations that he had:


From Bad To Worse

FINRA deemed that West had engaged in an outside business activity ("OBA") for compensation without providing written notice to his employing member firm. For violations of FINRA Rule 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon West a $5,000 fine and a one-month suspension from association with any FINRA member in all capacities.

Bill Singer's Comment

You wouldn't think that such a simple prerequisite as providing prior written notice to your employer FINRA member firm 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 an OBA. On the other hand, very often the non-disclosure arises out of a lack of awareness. Sometimes, the registered person just doesn't view the cited conduct as a "securities" or a "business" activity. Sometimes the registered person was engaged in the OBA before joining the firm and the need to disclose just never got recognized. Sometimes the broker-dealer 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 or a one-cause-of-action civil lawsuit; which may well explain the reluctance of many brokerage firms to permit OBA. 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 these violations. 

What a registered person sees as a business venture 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.

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)