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Regulatory Sanctions

Firm U5’s Broker Over Outside Business Activities (Or Was it Private Securities Transactions?)

March 5, 2019

[Image:  Stairwell Painting by M.C. Escher]



by Howard Haykin


A broker had a short but expensive association with FINRA member Flying Cloud Securities. Shortly after joining the firm in July 2014, the broker received permission to engage in an outside business activity (“OBA”) – (according to BrokerCheck it was) with Elan Alternative Group, a boutique consulting firm for alternative products, including hedge funds, private equity funds and private deals, and transactions to a highly-filtered investor base. From here, things got involved.



WHAT WENT WRONG.    In September 2014, the broker entered into an agreement with a company to participate in a private offering of its convertible notes. FINRA does not identify the firm, but simply notes that the broker was not otherwise affiliated with this company. [For the record, I surmise that the unidentified company is, once again, Elan Alternative Group.]


Thereafter, …

  • From September through December 2014, the broker marketed the convertible notes offering ("private securities transaction" or "PST").
  • The broker introduced a venture capital fund to the company. The VC fund, not a Flying Cloud client, invested $200,000 in the company.
  • In January 2015, the broker arranged for an offering to be placed on a crowdfunding website, which raised $150,000 by month-end, including $1,000 invested by the broker, himself.
  • The broker received $17,500 from the company for his participation in these investments.
  • At no time did the broker provide written notice to, or obtained written permission from, Flying Cloud to participate in these investments.



As per the broker:  Flying Cloud called for the broker's voluntary resignation over its concern that the broker may have violated FINRA Rule 3270Outside Business Activities of Registered Persons.
As per FINRA:  By virtue of the foregoing, FINRA charged the broker with violating NASD Rule 3040Private Securities Transactions of an Associated Person, which was superseded by FINRA Rule 3280.



FINANCIALISH TAKE AWAY.    There's plenty of confusion to go around in this case.

  • Whether the broker violated FINRA's rules for OBAs and/or PSTs
  • Whether the broker adequately explained to Flying Cloud what services he would provide to Elan Alternative Group.
  • Whether the broker understood that ... (i) marketing an issuer's securities, (ii) assisting with an issuer's crowdfunding site, and (iii) making a person investment are all considered participations in PSTs, or private securities transactions.


What's not confusing is FINRA's take on the violations and its sanctions against this broker: $5K in fines, $17.5K in disgorgement of commissions, and a 3-month suspension.


Perhaps this case is a 'shout out' for member firms and their associated persons to tighten up their understanding of OBAs and PSTs. It's not too late to conduct additional firm element training on these topics. 



This case was reported in FINRA Disciplinary Actions for January 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015045185501.