August 13, 2014
At first glance, it probably seemed like a good idea. Start up a little business on the side. As the business progressed, pull down some salary. As things started to hum, go out an bring in some investors. Unfortunately, in the end, what one entrepreneurial stockbroker brought in was a bit of unwelcome FINRA regulation.
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 Ray Taylor submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of David Ray Taylor, Respondent (AWC 2012033574301, August 4, 2014).
Taylor was first registered in 2000 and from September 8, 2000, through August 6, 2012, he was registered with Farmers Financial Solutions, LLC The AWC asserts that he had no prior relevant disciplinary history.
An Insurance Sales Solution
In March 2011, Taylor and his business partner formed Interactive Performance Solutions LLC ("IPS") in order to develop sales-tracking software that they hoped to sell to insurance agents. Taylor was IPS's President and by October 2011, he was compensated via expense reimbursements. By January 2012, Taylor received a salary from IPS.
The AWC asserts that between September 1, 2011 and July 30, 2012, Taylor entered into eight transaction whereby he sold $395,000 worth of IPS membership units to six investors.
A Matter Of Solutions
Online FINRA records as of August 8, 2014, disclose that Farmers Financial Solutions, LLC permitted Taylor to resign on August 2, 2012 based upon allegations that:
RR ENGAGED IN PRIVATE SECURITIES TRANSACTION WITHOUT PRIOR APPROVAL OF THE FIRM
FINRA asserts that by acting as an officer and receiving compensation in connection with an outside business activity without providing prior written notice to his firm, Taylor violated FINRA Rules 3270 and 2010. Further, by participating in the eight cited transactions without giving prior notice to Farmers Financials Solutions, FINRA deemed those sales to constitute improper private securities transactions ("PSTs") in violation of NASD Rule 3040 and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Taylor a $10,000 fine and a 6-month suspension from association with all FINRA members 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 the PST or outside business activities ("OBAs"). 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 PST or OBA before joining the firm and the need to disclose just never got recognized. Sometimes the broker-dealer was aware of the PST or OBA through numerous conversations and communications but the required "written" notice just never got sent in the proper form.
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.
NASD Conduct Rule 3040:
Private Securities Transactions of an Associated Person
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.
Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
(c) Transactions for Compensation
(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:
(A) approves the person's participation in the proposed transaction; or
(B) disapproves the person's participation in the proposed transaction.
(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.
(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.
(d) Transactions Not for Compensation
In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
For purposes of this Rule, the following terms shall have the stated meanings:
(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.