A Registered Rep in Keller, TX, was barred from industry, and was ordered to pay $125K in restitution, to settle FINRA charges pertaining to his participation in private placements, which he never told his member firm about.

[C-I Note:  This unfortunate scenario is played out nearly every day across the U.S.A., involving broker-dealers of all shapes and sizes.  What's the worst-case scenario?  What's the firm's exposure?  What's a firm to do about it?  We'll get to that later.]   

    What Went Wrong.   Among other things, this broker:  (i) failed to notify his firm or get its approval prior to participating in private placements ("PP's");  (ii) failed completely to perform a reasonable investigation on the product;  (iii) took representations off of a Web site at face value;  (iii) failed to challenge those representations - i.e., conducted no independent verification;  (iv) made negligent misrepresentations of material fact when he selling installment plan contracts - e.g., told investors in error that they could take charitable tax deductions on their investments;  (iv) provided customers with sales materials that contained misleading and oversimplified descriptions of the contracts - and, of course, they were never shown to a firm principal.  [FINRA Disciplinary Actions for Sept., Case #2009019041601]

[C-I Note:  Firms are required to supervise the securities activities of their associated persons - within and outside the firm, though that responsibility may perhaps be mitigated or lessened if those outside activities are responsibly supervised by another financial institution registered with the SEC - say, a registered B/D or RIA.

Firms cannot be expected to prevent a registered person from doing business away from the firm if that person chooses not to inform firm principals and/or other associated persons.  An RR is going to conduct "clandestine" outside business activities unless or until he or she is "caught" - which can happen, for example, if a firm customer is unhappy with, say, the private securities investment. 

So they should continue to do what they are likely doing - require employees and independent contractors to affirmatively state in, say, annual compliance questionnaires, that they have not violated firm or securities regulations. Yet, if there's a "blow-up," despite their best efforts, a firm and its top officers and principals are likely to be named in customer complaints, arbitrations filings and criminal complaints - guilty or not guilty. 

Yet, even if the firm and its owners, principals and other associated persons are eventually released from liability, the time and legal expense of defending oneself can be significant.

Accordingly, C-I would recommend that firms conduct ongoing compliance and CEP training - which may include "classroom" instruction and handouts of FINRA and SEC disciplinary cases  - followed up by group discussions.  Firms must reassure its staff that its intention are honorable - i.e., to protect the firm and all its personnel - and "this is what can happen, or what it can cost, if you try do it on your own." ]

Be Careful.  Be Ready!