FINRA Lawyer Blog
Maybe it’s just me, but it feels like FINRA has ramped up its caseload for undisclosed outside business activities and unapproved private securities transactions. This week alone, FINRA resolved two such cases in FINRA Matter No. 2018058026701, Alexander Jon James and FINRA Matter No. 2019061490801, Barry Robert Bode. Before analyzing the cases, it’s worth re-visiting the scope of these rules:
FINRA Rule 3270 (Outside Business Activities)
The rule is designed to prevent FAs from engaging in outside business activities absent written approval from the member firm. Generally speaking, the rule does not apply to the registered person’s personal passive investments (e.g., buying away) and activities conducted on behalf of a member firm’s affiliate (e.g., work for an affiliated investment advisory firm or insurance arm). Examples of reportable outside business activities could include providing accounting or consulting services, working for a start-up or sitting on a board of directors, acting as a real estate broker, and serving on the board of a religious or civic organization, among other things.
FINRA Rule 3280 (Private Securities Transactions)
Private securities transactions are transactions outside the regular scope of the FAs employment. Excluded from this broad rule are transactions subject to FINRA Rule 3210 (meaning, accounts at other broker-dealers and financial institutions), transactions among immediate family members without any selling compensation, and personal transactions in investment company and variable annuity securities. For those transaction covered by this rule, the FA is required to provide written notice to his employer and indicate his role in the transaction and he has received or may receive compensation. “Selling away” violations are typically covered by this rule.
Alexander Jon James — FINRA Matter No. 2018058026701
Alexander James was formerly associated with Voya Financial Advisors, Inc. According to FINRA, from January 2013 through July 2016, James engaged in an undisclosed outside business activity by forming and incorporating a company that charged users a monthly subscription fee for access to a website that could be used to seek funding for ventures. Apparently, James helped run the day-to-day operations and was paid $16,000 for his services. James’ arguably more serious violation was his decision to solicit 2 customers to invest a total of $667,000 in his company. This conduct causes obvious litigation risk for a broker-dealer since the customer may have believed the investment was vetted by the firm. According to BrokerCheck, one of James’ customers complained about an “unapproved, outside investment” which resulted in a $75,000 settlement. As a result of FINRAs alleged violations, James consented to a 1 year suspension and a fine of $10,000.
Barry Robert Bode — FINRA Matter No. 201906140801
Barry Bode was formerly registered with The O.N. Equity Sales Company. He was discharged by the firm in early 2019 for allegedly engaging “in an unapproved outside business activity related to the negotiation and sale of mineral rights on behalf of a client for compensation.”
According to FINRA, Bode violated Rule 3270 (outside business activity rule) by (a) forming an LLC and servicing as managing partner without notice to the member firm; (b) performing business consulting services that resulted in $7,000 of consulting fees; (c) contracting with an individual to market the mineral rights associated with property in Colorado; and (d) soliciting offers to purchase the mineral rights from energy and mineral companies. Although, according to FINRA, Bode ultimately submitted an outside business activity disclosure form, Bode failed to disclose the existence of the LLC or his role in it, or that he entered into contract to market, or that he, in fact, marketed the mineral rights. According to FINRA, Bode misled his employer failing to acknowledge that he had been a fee of $12,000 for his work in connection with the mineral rights. As a result of FINRAs alleged violations, Bode consented to a 2 month suspension and a fine of $5,000
Herskovits PLLC has a nationwide practice defending against FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation at 212-897-5410.