Observations From FINRA’s January 2020 Disciplinary Actions Report

Outside business activities and private securities transactions were a focus of FINRA’s January 2020 Disciplinary Actions Report with at least nine (9) cases being cited within the report.  Several registered persons were sanctioned for failure to notify and obtain prior written approval from their member firm before engaging in an outside business activity or private securities transactions.  

Those who failed to cooperate with FINRA’s investigation by refusing to provide on-the-record testimony have been barred from the industry. 

For those who did cooperate in the FINRA investigation, all but one received fines.  Fines ranged from $10,000 to $30,000.  (A fine was not issued in one case due to the registered representative’s financial status.)  All received suspensions ranging from three (3) months to eighteen (18) months.  The most egregious case resulted in a $30,000 fine and an eighteen (18) month suspension.  This case involved outside business activities that took place at the member firm branch office and involved customers of the member firm, private securities transactions as well as false statements on annual compliance and branch office questionnaires.   Several other cases also involved false statements on compliance questionnaires.

Sanctions around outside activities vary based on facts and circumstances.  FINRA’s 2019 Sanctions Guidelines provides information on principal considerations and sanctions:

Outside Business Activities

  • Principal considerations in determining sanctions include:
    • Whether the outside activity involved customers of the firm.
    • Whether the outside activity resulted directly or indirectly in injury to other parties, including the investing public, and, if so, the nature and extent of the injury.
    • The duration of the outside activity, the number of customers and the dollar volume of sales.
    • Whether the respondent’s marketing and sale of the product or service could have created the impression that the employer (member firm) had approved the product or service.
    • Whether the respondent misled his or her employer member firm about the existence of the outside activity or otherwise concealed the activity from the firm.
    • The importance of the role played by the respondent in the outside business activity.
  • Monetary fines range from $2,500 to $77,000 (disgorgement could also be considered).
  • Suspensions range from ten (10) days up to two (2) years (or could include a complete bar in lieu of suspension). 

Private Securities Transactions

  • Principal considerations in determining sanctions include:
    • The dollar volume of sales.
    • The number of customers.
    • The length of time over which the selling away activity occurred.
    • Whether the product sold away has been found to involve a violation of federal or state securities laws or federal, state or SRO rules.
    • Whether the respondent had a proprietary or beneficial interest in, or was otherwise affiliated with, the selling enterprise or issuer and, if so, whether respondent disclosed this information to his/her customers.
    • Whether respondent attempted to create the impression that his or her member firm sanctioned the activity, for example, by using the employer’s premises, facilities, name and/or goodwill for the selling away activity or by selling a product similar to the products that the member firm sells.
  • Monetary fines range from $5,000 to $77,000 (disgorgement could also be considered).
  • Suspensions range from ten (10) days to twelve (12) months based on extent of selling away (dollar amount of sales, number of customers, length of time over which selling away occurred).

Although FINRA’s 2020 Risk Monitoring & Examinations Priorities Letter did not flag outside activities specifically as an examination priority (other than a digital asset footnote), their January 2020 Disciplinary Actions Report certainly evidences an ongoing regulatory focus on outside activities.

How confident are you in your compliance program around outside business activities and private securities transactions?  When was the last time you trained your registered persons on how to report such activities to your firm for approval?  Are you adequately supervising the activities you do approve or condition? How are you documenting your supervision of these activities?  If you’ve denied activities, do you monitor to ensure activities aren’t taking place?  Do you have best practices in place to validate the information you receive in response to your annual compliance questionnaires and branch office questionnaires?  Do you require your non-registered persons to report such outside activities as a best practice?

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