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Regulatory Sanctions

Broker Who Wore Too Many Hats Got the Boot

May 13, 2019

 by Howard Haykin


Shortly after obtaining his Series 7 license, a broker departed Northwestern Mutual for Merrill Lynch, where he began engaging in unauthorized outside business activities (“OBAs”). For more than 2 years, between January 2015 and May 2017, the broker engaged in 5 outside business activities (“OBAs”) and in private securities transactions (“PSTs”) in connection with 2 of those OBAsMerrill Lynch never received advance notice of these activities, and the broker provided little, if any, disclosure in 2 annual compliance questionnaires (‘ACQs’) that he submitted to the firm.
Merrill Lynch terminated the broker for cause by June 2017, and FINRA followed up with an investigation. The broker recently agreed to pay a $15K fine and serve a 10-month suspension to settle FINRA charges that he violated FINRA Rule 3270 (OBAs) and Rule 3280 (PSTs).



This FINRA case came to my attention in a recent BrokeAndBroker blog, 5 OBAs, 2 PSTs, $15,000 Fine And 10 Month Suspension In 1 FINRA AWC, which I encourage you to read. The author, Bill Singer, presents an unbiased description of the case in which he acknowledges that FINRA member firms have in-house compliance policies and the self-regulator routinely enforces its rules. Interestingly, it was Bill Singer’s reference to this broker as “the unfortunate fellow” that really grabbed my attention.


To me, this broker was in no way "unfortunate." Yes, he got socked with a 10-month suspension which is harsh. Yet, while regulatory sanctions can at times come across as overreaching and unduly severe, some sanctions - including this one - seem appropriate when the respondent is someone who isn't cut out to work in a highly-regulated industry. That description would apply to the broker in this case who, after a relatively short time in financial services, became so busy with his non-Merrill Lynch pursuits that it was a wonder how (and if) he had sufficient time to service his Merrill Lynch customers.





  • In April 2015, the broker co-founded … a corporation that would enable clients to communicate with celebrities on social media for a fee. From April 2015 through December 2016, he served as the company’s treasurer, sat on its board, and received 18% of company stock. His responsibilities included marketing, capital raising, and working with lawyers and accountants to incorporate the company and pay its taxes. He helped raise capital by soliciting securities investments from at least 3 investors, 2 of whom were Merrill customers.


  • In August 2016, the broker co-founded … another company to facilitate the creation of a fitness center. From August 2016 through May 2017, he and another co-founder jointly held a majority interest in that company. The broker’s responsibilities included marketing, capital raising, hiring, and obtaining equipment for the business by signing a personal guarantee. He helped raise capital by helping to structure investment agreements, sending the investment agreements to potential investors, and voting to approve the issuance of ownership interests to those investors.


  • In late 2015, the broker sold a life insurance policy … to a friend, and received a $40,000 commission for the sale.


  • In January 2015, the broker referred a friend to a real estate agent. The friend purchased a home from that agent and the broker received a referral fee of $16,000.


  • In early 2015, the broker introduced a vendor … that sells tickets for sports, music, and entertainment events to 2 entities that were putting on music festivals. He received $12,000 in fees for these introductions.



FINANCIALISH TAKE AWAYS.    I have no ill-will against individuals with an entrepreneurial flare. But when they sign up to work with a broker-dealer, they need to understand the 'bright line' rules and company policies that are in place to discourage registered person from trying to surreptitiously create, build and operate outside businesses and effect private securities transactions. Co-employment is usually not an option when employed as a broker for a broker-dealer.


Depending on how well suited he is as an entrepreneur, the individual in this case is probably off now that he's no longer burdened by financial services rules and regulations. And apparently so are his former brokerage customers. 



[For a full read on the case, click on FINRA AWC #20170546503-01.]