FINRA Calls PST Then OBA Then PST. Omaha! Omaha!! Omaha!!!

August 28, 2017

In a recent Financial Industry Regulatory Authority ("FINRA") regulatory settlement, a stockbroker was barred from the industry as a result of allegedly failing to properly notify his employer and obtain its approval for soliciting firm customers to invest in his own company. As Blog's publisher Bill Singer, Esq. notes, the published settlement is a bit perplexing because it seems to be start off as an Outside Business Activity violation but winds up as a Private Securities Transaction violation. With the football season nearly upon us, let's just say we got a bit of a regulatory misdirection play going on here.

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, Adam K. Veron submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Adam K. Veron, Respondent (AWC 2017053237601, August 22, 2017).

The AWC asserts that Veron was first registered in 2002 and by 2013 he was registered with FINRA member firm Questar Capital Corporation.

Selling Shares

The AWC alleges that in July 2015, Veron formed Contract Funding and Corporate Management, LLC ("CFCM") and served as its President. The AWC asserts that CFCM provides a line of credit to a company referred to only as "Company A," which uses the funds to fulfill its federal procurement contracts. The AWC asserts that there was a profit sharing arrangement between Company A and CFCM.

The AWC alleges Veron began selling shares in CFCM shortly after its formation. Pointedly, the AWC alleges that a portion of his sales included about:

  • $1.74 million worth of shares to nine Questar customers; and
  • $50,000 worth of shares to one non-customer.
Bill Singer's Comment: With its pointed references to Veron's CFCM sales, the AWC appears headed in the direction of alleging a Private Securities Transaction ("PST") violation.

Investment Participation

The AWC asserts that Veron "participated in the customers' and non-customer's investments in CFCM" through engaging in such activities as by

  • soliciting the investments;
  • hiring legal counsel to draft the Subscription Agreement and Private Offering;
  • Memorandum ("the Offering Documents");
  • accepting investments by check and depositing those checks into a bank account that he controlled;
  • providing investors with the Offering Documents;
  • deciding who could invest in CFCM and how much they could invest;
  • distributing profits from CFCM; and
  • managing CFCM's relationship with Company A
Bill Singer's Comment: Looks like the FINRA quarterback came to the line planning on calling a PST but audibled into an outside business activity ("OBA") play.  On the other hand, this could all be a misdirection because much of the conduct cited in the above bullet points is connected to the solicitation of an investment -- except, hmmm, the last two points (distributing profits and managing the companies' relationship) seem somewhat immaterial to the solicitation aspect of a PST violation. Damn! They going to run or pass?

The Rulebook

Pursuant to FINRA Rule 3280, it is incumbent upon associated persons to provide to their FINRA member firm prior written notice describing  in detail a proposed private securities transaction ("PST"):

FINRA Rule 3280: Private Securities Transactions of an Associated Person states:

(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 . . .

Questar's written supervisory procedures ("WSPs") required its registered representatives to provide the firm with written notice  and obtain its approval prior to participating in any PSTs. Questar's in-house WSPs were more restrictive than FINRA PST Rule because the member firm prohibited registered representatives from engaging in a PST that involved investments in the registered representative's own private company.

The AWC asserts that in Veron did not provide written notice to, or obtain Questar's approval for, nearly $1.8 million worth of investments from July 2015 to December 2016. Moreover, in responding to Questar's 2015 and 2016 annual compliance attestations, Veron allegedly provided false answers regarding his PST activities and outside business activities.

Bill Singer's Comment: Okay, great, so FINRA opted for the pass: It's a PST violation


Online FINRA BrokerCheck records as of August 28, 2017, disclose that Questar "discharged" Veron on February 9, 2017, based upon allegations that:

Registrant failed to report an outside business activity on a timely basis in violation of firm policies and procedures for an affiliated firm of the RIA.

Bill Singer's Comment: Crap! Everyone drop the pass protection!! It's a run. Eyes on the halfback!!! It's not a PST it's an OBA.


FINRA deemed that Veron's conduct constituted violations of NASD Rule 3040 and FINRA Rules 3280 and 2010. (NASD Rule 3040 was replaced by FINRA Rule 3280 on September 21. 2015.)

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

Bill Singer's Comment: What??? Drop back into pass protection! That's a fake to the halfback. The tight end is going deep!!! It's a PST and not an OBA.

Bill Singer's Comment

For starters, what's with the odd statement in the AWC that:

Veron has since repaid two investors the amount of their investment plus interest.

I characterize the above quote as "odd," because it is pregnant with possibilities.  
  • What does that elastic phrase "since repaid" mean?
  • Did Veron repay two investors on a timely basis or only after they complained or pursuant to prodding by Questar and/or FINRA?
  • Why doesn't the AWC distinguish as to whether the two investors were both firm customers or included the one non-firm customer -- after all, the AWC made a point of classifying investors as nine firm customers and one non-firm customers.
  • Since the AWC specifically referenced 10 investors, what happened to the other eight investors' investments? The AWC only addresses the repayment to two investors and we are left uninformed as to the status of the investments by the others.
Finally, and perhaps most puzzling, FINRA has settled charges against Veron that only allege a violation of its PST Rule. On the other hand, Questar's BrokerCheck disclosure asserts that the member firm had fired Veron because he "failed to report an outside business activity on a timely basis . . ." Veron was fired in February 2017 for alleged OBA misconduct but was barred for PST misconduct. 

If nothing else, this settlement underscores the prevalence of confusion within the registered rep community and (by inference within the Compliance community) as to the difference and interaction between FINRA's OBA and PST rules. Many approved OBAs subtly transform into PSTs, which is why Compliance departments should monitor OBAs to ensure that they have not (intentionally or inadvertently) crossed over the line into fund-raising activities. Registered reps may not recognize that their activities have left the exclusive sphere of OBA and requires a separate PST notice to the member firm. This is a clear-cut case where proactive compliance supervision is helpful to protecting both the firm and its registered reps.