Following up the postings on selling away, let's touch on the outside business activity rule. FINRA (Formerly NASD) Rule 3030 requires associated persons, who are registered, to provide written notice to their firm of any outside business activities in which they are employed, or receive compensation. The "employment" requirement is interpreted broadly. The notice is to be given in the manner set forth by the firm. (See our earlier posting on U-4 requirements, because the U-4 also has a requirement to disclose, in further detail, the outside activities). Once the broker provides the notice, he or she has complied with the Rule.
Smart firms have more detailed policies requiring approval of outside activities, and require that if the activity is not approved, the broker not participate. But, if the firm approves it, the firm should continue to monitor the activities through reasonable supervision. A recent administrative action by the SEC demonstrates the consequences of failing to do so.
Earlier this month, the SEC announced an action against Commonwealth Equity Services, LLP, making findings that the firm failed to supervise reasonably a broker who defrauded about 34 investors, and misappropriated more than $12 Million. According to the release, the SEC found that the broker had lied to customers about purchases and sells of securities, misappropriated funds, and provided false statements to the customers. The broker later pled guilty to criminal charges, and, according to the release, was sentenced to 11+ years.
The fraud apparently stemmed from the broker's outside business activities, that included two investment advisory businesses, and a radio station. The broker had disclosed the activities to the firm, and even provided financial statements for one of his businesses to the firm. The firm failed to review these, and apparently ignored "red flags" such as evidence the business was failing and the broker was making large capital contributions to keep it running. Further, the SEC found that the broker failed to disclose his source of funding for the radio station venture on his outside activity form, and the firm failed to follow up. The SEC asserted that the funding for these activities came from the misappropriated funds. Finally, the SEC noted that the firm did not have procedures in place to review incoming mail, and that the broker received checks and correspondence from customers, apparently for his outside activities, the mirrored amounts withdrawn from the customers' brokerage accounts. As a result of the SEC action, the firm was fined $250,000. (See Release No. 34-56362).
FINRA just made available a new webcast on Outside Business Activities & Private Security Transactions. See http://www.finra.org/EducationPrograms/OnlineLearning/Webcasts/p018204
Posted by: Russell | October 09, 2007 at 08:54 AM