An irreverent Wall Street Blog
by Bill Singer

Flix Flam Flops For FINRA

September 29, 2014

There's something about the movie biz that attracts a lot of people. Hollywood. Box Office Stars. The whole glitz and glamour thing of the red carpet.  Underneath all that flash, however, it still take a lot of bucks to get a project from conception to the big screen. Some folks crunch the numbers and do their due diligence and take a calculated risk; others -- well, you know, sometimes you just get sucked into bright lights and action.  In a recent FINRA regulatory settlement, we see an example of what can go wrong when a stockbroker solicits his customers to get in on a flix deal. 

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, Derek Neal York submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Derek Neal York, Respondent (AWC# 2014039815901, September 18, 2014).

York entered the securities industry in June 2010 with Edward D. Jones & Co., LP, and, thereafter, was associated with MetLife Securities Inc. from May 2011 through April 2012, and then with LPL Financial LLC from March 2012 through October 2012. 

On The Big Screen

The AWC alleges that while registered with MetLife and LPL Financial, York solicited, respectively, three MetLife customers to invest a total of $410,000 and one LPL customer to invest $60,000 in a movie production company. Pursuant to the investment agreements, each customer was supposed to realize a 30% return on principal upon the initiation of principal photography for the movie involved in the specific production. 

The AWC asserts that York personally invested $155,000 in the production company and that a company he owned invested an additional $500,000.

The Reel Deal

The AWC asserts that York was paid a 5% referral fee on only two of the four investments (on the investment of one of the three MetLife customers and the LPL customer), for a total payment of $14,250.  Although he apparently expected to be paid on all four investments, it seems that the production company stiffed him.

The production company did not repay the investors.

Silent Films?

The AWC asserts that York's personal and company-owned investments and his solicitation of his customers' investments constituted his participation in a private securities transaction; and, further, that he failed to provide prior written notice of the transactions to his firms in violation of NASD Rule 3040 and FINRA Rule 2010. 

In 2009, the AWC alleges that York began operating a home maintenance and repair business, and served as the company's owner and sole employee. The AWC alleges that he continued that business during his associations with the three FINRA member firms cited above but failed to disclose that outside business activity to the firms in violation of NASD Rule 3030 and FINRA Rule 3270 and 2010. 

Flix Flam Flops

In accordance with the terms of the AWC, FINRA imposed upon York a Bar in all capacities from associating with any FINRA member firm. 

Bill Singer's Comment

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.  As BrokeAndBroker.com Blog 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.

FINRA Conduct Rule 3040. Private Securities Transactions of an Associated Person

(a) Applicability

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.

(b) Written Notice

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.

(e) Definitions

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.

FINRA Conduct 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).

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