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Regulatory Sanctions

I'll Drink to That - Better Yet, Let's Take a Pass

November 14, 2017

by Howard Haykin


Christopher Russell agreed to pay a $5K fine and serve a 3-month suspension to settle FINRA charges that he participated in private securities transactions (“PSTs”) without providing prior written notice to or receiving prior written approval from his member firm.


BACKGROUND.    Russell, a resident of Huntsville, AL, had 10 years’ experience with 4 firms. He was associated with LPL Financial as a General Securities Representative from April 2014 through November 2016.  He currently is not associated with another FINRA member firm. Russell had no prior disciplinary history.


FINRA FINDINGS.    From March 2016 through August 2016, while associated with LPL Financial, Russell participated in private securities transactions without providing prior written notice to, or receiving prior written approval from, LPL Financial.


  • Russell invested $50,000 in a private company that produced craft beers.
  • Russell 'solicited' 2 investors who were not Firm clients, and each invested $50,000 in the company.
  • Russell furnished those investors with relevant paperwork and instructions.
  • Russell did not receive selling compensation for those investments.
  • On LPL’s annual compliance questionnaire (“ACQ”) for 2016, Russell indicated that he had not participated in any private securities transactions.


FINRA Rule 3280 prohibits any person associated with a member from "participat[ing] in any manner in a private securities transaction" without first providing written notice to his member firm. The rule further defines a private securities transaction as '*any securities transaction outside the regular course or scope of an associated person's employment with a member."


FINANCIALISH TAKE AWAYS.    Russell’s $5K fine is nominal and seems fair. His 3-month suspension, however, seems harsh and perhaps inappropriate. Several questions arise:


  • Did Russell notify LPL Financial about his passive investment in a craft beer company? If not, would that constitute a violation of FINRA Rule 3270, Outside Business Activities of Registered Persons?


  • Did FINRA and LPL Financial overreach when they charged Russell with having violated FINRA Rule 3280, Private Securities Transactions of an Associated Person? LPL FInancial terminated Russell for having violated firm policy over Private Securities Transactions. What proof do FINRA and LPL Financial have that "solicited" these 2 investors? To me, it's more likely that the investors are Russell's friends and that the idea of investing in a craft beer company came up during a social conversation in Russell's man-cave "over a couple of beers" 


  • Did FINRA and LPL Financial "pile on" when they accused Russell of submitting false responses on the firm's ACQ? Based on the fact that Russell received no compensation for the referral, and the likelihood that the investors were Russell's friends, it's quite possible, if not probable, that Russell didn't view the friends' investments as Private Securities Transactions, and that he never gave these matters a second thought when filling out the annual questionnaire. 


This case is yet another illustration of the need for FINRA to provide greater detail in its case summaries - if nothing else than to provide compliance professionals and member firms with infomation that can be used to reinforce their surveillance efforts.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016052276601.