Sometimes it's simply a misunderstanding: You didn't think that you had to disclose to your employer brokerage firm that you were serving as a director or officer of a company. Sometimes it's not a misunderstanding and, for whatever reason, you opted to hide your outside activity from your employer. Then again, sometimes you get caught and sometimes you don't. Frankly, I really don't give a damn if you get away with it because as a lawyer, I can't charge you an exorbitant retainer and astronomical hourly fees if you managed to avoid detection. As to those of you who got nailed by your employer and/or FINRA, how much justice can you afford?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, Michael A. Nahass submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael A. Nahass, Respondent (AWC 2015044765401, January 7, 2016). In 1995, Nahass first became registered and FINRA's online BrokerCheck records indicate this registration history:
9/2010 -3/2015 Arque Capital, Ltd. ("Arque") 7/2010 - 9/2010 Newbridge Securities Corporation ("Newbridge") 9/2009 - 6/2010 Purshe Kaplan Sterling Investments ("PKSI") 4/1995 - 6/2009 Morgan Stanley Smith Barney and predecessorsThe AWC asserts that Nahass had no prior disciplinary history. GOTL and TTC Roles The AWC asserts that in October 2009, Nahass became a director with Nevada corporation GOTL. In February 2012, GOTL completed a reverse merger with TTC, which became a holding company conducting business through its wholly owned subsidiary GOTL. Accordingly, TTC ceased its prior operations but continued GOTL's, which specialized in hydroponic equipment with proprietary indoor-agriculture technology. Following the reverse merger, Nahass continued as a TTC and GOTL Director through at least February 2015. From January 26, 2012 and February 9, 2012, Nahass also served as TTC's President, Secretary and Treasurer. For the fiscal year ended December 31, 2014, Nahass was compensated in the total of about $1,272,415 from TTC via cash and company stock. OBA The AWC asserts that Nahass failed to provide prompt written notice to his employer firms that he was engaging in outside business activities ("OBA") as a consequence of his GOTL directorship and his directorship and his service as TTC's President, Secretary, and Treasurer.
Side Bar: Many registered persons are engaged in other professions and careers; and in most cases, you are required to provide prior, written notice to your employer of such OBA. Although FINRA's OBA Rule doesn't require that the employer firm transmit an "approval' or "denial" to you of such disclosed OBA, the fact is that many member firms have in-house rules that prohibit such outside activities absent written approval or an approval imposing certain limits. Consequently, if you transmit notice of any OBA, make sure that you retain proof of the date and manner in which you transmitted that notice. Consider the full-text of FINRA's applicable rule:
FINRA deemed that Nahass violated NASD Rule 3030 (before December 15, 2010), FINRA Rule 3270 (on and after December 15, 2010), and FINRA Rule 2010 (on and after December 15,2008). Away Account The AWC asserts that between March 2014 and February 2015, Nahass had opened an individual brokerage account at a FINRA member firm that was not his employer Arque (the "Away Account") and engaged in securities transactions in that account. Nahass purportedly held and sold TTC shares in the Away Account. The AWC alleges that in addition to failing to notify Arque of his opening of the Away Account, when Nahass completed the other firm's New Account Form, he misrepresented that he was not associated at the time with another FINRA member firm. FINRA deemed that Nahass's non-disclosure and misrepresentations violated NASD Rule 3050(c) and FINRA Rule 2010. Annual Compliance Questionnaire While registered with PKSI, on October 21, 2009, Nahass submitted an Annual Compliance Questionnaire on which he misrepresented that he had provided written disclose of all OBAs. While registered with Arque on June 4, 2011, December 31, 2012, June 8, 2013, and August 26, 2014, Nahass submitted Annual Compliance Questionnaires on which he misrepresented that he had provided written disclosure of any OBAs. Similarly, the AWC asserts that while registered with Arque, Nahass submitted on August 26, 2014, an Annual Compliance Questionnaire on which he misrepresented that he did not maintain any away accounts despite having maintained the Away Account and transacted securities trades therein. FINRA deemed the false certifications to constitute violations of FINRA Rule 2010. Arque U5 The AWC asserts that on March 12,2015, Arque filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") reporting:FINRA Conduct Rule 3270. Outside Business Activities of Registered PersonsNo 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).
the discharge of Nahass' registration for violating the Firm's written supervisory procedures and compliance polices because he failed to notify Arque that: (i) he engaged in outside business activity as a director of a publicly traded company since approximately January 2012; and (ii) he opened an outside securities account in March 2014 and he liquidated shares of the company for which he acted as a director,FINRA Sanctions In accordance with the terms of the AWC, FINRA imposed upon Nahass a $15,000 fine and a 6-month suspension from association with any FINRA member firm in any capacity. READ the BrokeAndBroker.com Blog Outside Business Activity Archive READ the BrokeAndBroker.com Blog Away Accounts Archive