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Regulatory Sanctions

Broker Dinged for Exceeding Scope of his Approved Outside Business Activities

July 7, 2017

by Howard Haykin


Outside business activities, private securities transactions, family finances. They're all here in this case, which serves to 'muddy up' the facts and circumstances. One BIG TAKE-AWAY is for brokers, where possible and practicable, to disclose any/all outside business dealings to their firms. It's called "playing it safe."


Arthur Smithee Jr. agreed to pay a $10K fine and serve a 3-month suspension to settle FINRA charges that he exceeded the scope of his member firm’s approval to conduct 2 consulting businesses. FINRA also notes that Smithee participated in an undisclosed private securities transaction.


BACKGROUND.    Arthur Smithee, a resident of Orem, UT, entered the business in 1988. In his 28 years, Smithee has been associated with 4 firms - Merrill Lynch, Citigroup, LPL Financial, and Berthel Fisher. He served as a general securities rep with LPL Financial from 2004 until December 2014; he joined up with another firm one month later. He currently is serving out his suspension.


FINRA FINDINGS - Outside Business Activities.    In October 2006, Smithee received approval from LPL to engage in an outside business activity ("OBA") disclosed as providing "computer technology consulting and sales." LPL approved Smithee's participation in a second OBA disclosed as providing the same services in September 2009.


  • From October 2008 through February 2014, Smithee provided services through these OBAs to a publicly traded company that amounted to day-to-day management of the company and exceeded the scope of his disclosed activities that LPL approved.


  • From February 2009 through January 2015, Smithee engaged in 2 additional OBAs that he never disclosed to LPL - a consulting firm that he managed, an LLC formed to hold a family member's house.


  • Smithee failed to fully disclose his involvement with OBA’s on 3 LPL annual compliance questionnaires.


When LPL Financial U5’d Smithee, it included the following statement: “Representative formed LLC without prior disclosure to the firm. In addition, certain firm clients invested in an unapproved security of issuer for which representative was member of board of directors.”


Smithee Responded: “Representative formed a single member LLC that is owned solely by a previously approved outside business activity. It was anticipated that the new LLC would eventually engage in the same previously approved activity, and also provide additional asset protection. No business was conducted in the new LLC.


In 2006, LPL approved representative to be on the board of directors of a company. In 2007, two clients invested in that company. Representative was not involved in any solicitation of investment. Clients requested funds from their account with LPL to invest. Representative cautioned both clients and confirmed he could not recommend the investment. Clients still wanted to proceed so third party checks were requested from their LPL accounts. LPL approved and issued checks to these clients.”


FINRA FINDINGS - Private Securities Transaction.    In June 2009, an LLC managed by Smithee's daughter paid $150,000 to purchase 6 million shares of common stock in a publicly traded company from the company's outgoing chairman. Smithee proposed the transaction to his daughter and facilitated its execution by, among other things, meeting with the attorney who structured the transaction. The transaction was not executed through LPL, and Smithee did not give LPL prior notice that he would be participating in this transaction.


FINANCIALISH TAKE AWAY.    It’s unclear the extent to which Smithee's undisclosed PST - or even the OBA in which an LLC was formed to hold a family member's house - may have factored into the FINRA sanction. In any case, I do not agree with FINRA's determination that providing assistance to an immediate family member should be construed as a private securities transaction.


That said, I would encourage anyone in a similar situation to offer the following disclosures: (i) notify one's employer that he or she is planning to assist an immediate family member in business transaction , for which no compensation would be received; and, (ii) disclose to all parties in the transaction that he or she is acting in a personal capacity, and not as a representative of LPL Financial.


Lastly, while I think Smithee's 3-month suspension seems harsh - he's got an otherwise pretty clean CRD record - it would be hard for an outsider to protest FINRA's sanctions, given the fact that there are too many 'moving parts' in this case.


This case was reported in FINRA Disciplinary Actions for June 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015044115601.