September 22, 2021
Sometimes you break a rule that you didn't know existed. Sometimes you don't think you did anything wrong and it's not clear that you even broke a rule, but a regulator argues that you did and it's cheaper to just settle the case and pay a small fine than hire an expensive lawyer. Sometimes no matter what you do, it seems like you're going to get in trouble on Wall Street. A recent FINRA regulatory settlement alleges that a newbie rep engaged in an outside business activity without having first submitted prior, written notice to his firm. All of this while we were in the midst of the Covid pandemic. Which makes you wonder about FINRA's priorities and its agenda. Yeah, you're right, the rep agreed to the settlement, so, what the hell, why even raise a stink about it. Well, that's what our publisher Bill Singer does.
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, Marceliano Macias submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Marceliano Macias, Respondent (FINRA AWC 2020068784901)
The AWC asserts that Marceliano Macias was first registered in January 2020 with Transamerica Financial Advisors, Inc.
As far as FINRA's rules go, its outside business activities ("OBA") Rule ain't all that complicated:
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 Rule 3280 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 Rule 3280. 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 gist of FINRA's OBA Rule is that you have to submit prior, written notice to your employer member firm. From there, the onus is on the member firm. The firm must consider the nature of your proposed OBA, and following that review, the firm may impose conditions/limitations on the activity or may prohibit the activity.
The Crypto Biz
The AWC alleges that during the relevant period from June 2020 through March 2021, Macias provided capital to a business that engaged in a "cryptocurrency purchase and sales program." Note that the relevant period includes Macias' tenure at Transamerica. The AWC further alleges that the business used Macias' capital to purchase crypto in Colombia; and, thereafter, Macias and his unnamed partner purportedly sold crypto on a U.S.-based exchange for a profit. The AWC further alleges that after Macias had established several banking accounts (apparently in Colombia) for the business, and that the proceeds of the crypto sales were deposited into those accounts. Allegedly, Macias monitored the bank balances, and he and his partner would withdraw available funds in order to fund further crypto purchases. During the relevant period, the AWC asserts that Macias received about $15,000 in compensation from the crypto business.
Nothing in the above fact pattern involves anything with Transamerica's customers, or customer funds, or fraud. How then did Macias run afoul of FINRA Rule 3280? According to the AWC:
The cryptocurrency business was outside the scope of Macias's relationship with
Transamerica. Macias failed to provide prior notice to Transamerica, written or
otherwise, of his involvement in the cryptocurrency business.
Online FINRA BrokerCheck files disclose as of September 22, 2021, that Transamerica "discharged" Macias on April 15, 2021, based upon allegations that:
FINRA issued both the firm and the representative 8210 letters in connection with an investigation conducted by FINRA. Upon review by the firm, the Representative acknowledged that he had participated in the purchasing and selling of cryptocurrency. The Representative did not seek or receive firm approval to engage in this activity.
In accordance with the terms of the AWC, FINRA deemed Macias' conduct to constitute a violation of FINRA Rules 3270 and 2010, and the regulator imposed upon him a $7,500 fine and three-month suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment
Y'all Recall The Start of Covid?
So -- we got a guy who engages in a relatively mundane bit of crypto trading at the apparent risk of his own cash starting in June 2020 -- that's about six months after he was first registered and started working with Transamerica. As the AWC alleges:
Macias first became registered with FINRA in 2020. He was registered as an Investment Company and Variable Contracts Products Representative through an association with Transamerica Financial Advisors, Inc. (CRD No. 16164) from January 2020 to April 2021. . . .
https://www.finra.org/sites/default/files/2020-03/Regulatory-Notice-20-08.pdf, in which the "Summary" notes:
Due to the recent outbreak of coronavirus disease (COVID-19), FINRA reminds
member firms to consider pandemic-related business continuity planning,
including whether their business continuity plans (BCPs) are sufficiently
flexible to address a wide range of possible effects in the event of a pandemic
in the United States. Each member firm is also encouraged to review its BCP
to consider pandemic preparedness and to review its emergency contacts to
ensure that FINRA has a reliable means of contacting the firm. This Notice also
provides pandemic-related guidance and regulatory relief to member firms
from some requirements. As coronavirus-related risks decrease, member firms
should expect to return to meeting any regulatory obligations for which relief
has been provided.
So . . . about two months after Macias starts at Transamerica, Covid became serious enough to warrant FINRA's issuance of a notice urging its member firms to consider implementing "pandemic-related" emergency plans. I doubt that the whole OBA prior, written notice process were particularly high on anyone's list of such emergency measures.
"Otherwise" -- Are You Kiddin' Me?
About three months after FINRA's March 2020 Covid notice, Macias started his participation in the crypto business without providing prior written notice to Transamerica. I find it a bit cynical that the AWC actually alleges that "Macias failed to provide prior notice to Transamerica, written or otherwise, of his involvement in the cryptocurrency business." There's nothing in FINRA Rule 3270 about "otherwise." The Rule requires prior written notice to the member. In fact, FINRA often charges respondents who allege that they gave only prior "oral" notice because the requirement is for "written." It rankled me to see that FINRA tossed in for effect the lamentation that Macias hadn't provided written or other notice, as if that "other" would have been deemed compliant.
Lost in the Mail?
During the relevant period of June 2020 through March 2021 when Macias managed to make a lousy $15,000 in crypto profits, Covid raged out of control. If Macias had, in fact, sent via first-class mail a prior, written notice to Transamerica, given the emergency pandemic measures that may have been implemented, Macia's notice could have gotten:
- lost in the mail (remember the horrific USPS delays?),
- lost in an in-box of some Transamerica employee who stopped coming into the office, or
- placed in the in-box of some supervisor/manager who was hospitalized with Covid.
Remember that the obligation in the OBA Rule is to send prior written notice to the member; pointedly, there is no requirement that a registered person refrain from engaging in the proposed OBA after he has sent the notice. If you doubt my interpretation, go back and re-read the OBA Rule, which states that no registered person may hold the proscribed roles or be compensated "unless he or she has provided prior written notice to the member . . ." There is no language in the Rule that says that the registered person must refrain from embarking upon the OBA after the submission of the prescribed notice. The Rule's Supplementary Material outlines the member firm's obligations after receiving the notice. Okay, you're right and I will concede the point, it may be that Transamerica resorted to a "form specified by the member" as set forth in the OBA Rule; and that form may have been an electronic, online form, which, okay, would have subverted my whole "in the mail" or "lost in the mail" thing -- but that ain't set out in the AWC and I'm going with what FINRA alleged.
In looking at the AWC, it does not appear that Macias was represented by counsel, and, as such, after FINRA contacted him, he may well have handled matters on a pro se basis from first contact through the execution of the settlement agreement. Given that apparent lack of a lawyer and what I deem a host of benign factors and mitigating circumstances, I truly don't think that a $7,500 fine and a three-month suspension were fair or appropriate. Keep in mind that Macias did not use customer funds or trade for customers. Keep in mind that this all took place during Covid. Keep in mind that Macias was pretty much a rookie rep who had just started out at Transamerica during a horrific pandemic. Keep in mind that Macias lacked a lawyer.
To Macias' credit, he didn't seem to take the opportunity to blame Covid. I'm sure that you could easily imagine a situation where he could have intentionally lied to Transamerica and FINRA and swore on a stack of bibles that he had mailed the OBA notice to the firm or that he went online and filled out the form but, gee, maybe with Covid something got lost in transmission? Again, he did NOT do that even though it's easy to imagine someone taking advantage of just such an opportunity. To his credit, Macias owned up to what he allegedly did and paid the fine and will do the time. I've seen FINRA respondents do far worse and obtain far more lenient fines and suspensions. Sorry, I just don't like this case and sure as hell don't like the sanctions. And just in case you need me to further spell it out, a three-month suspension for the cited misconduct is bull shit -- and all the more so given that the fine should not have been more than $5,000, if that.