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Regulatory Sanctions

Should FINRA Have Cut This Broker Some Slack on a PST Violation?

October 16, 2018

by Howard Haykin


A broker with National Securities Corporation (“NSC”) agreed to pay a $5K fine and serve a 30-day suspension to settle FINRA charges that he failed to disclose to his member firm his participation in private securities transactions (“PSTs”) involving a private company engaged in cloud services. 


Relatively nominal sanctions. Even so, I had a nagging sense (after reading FINRA’s capsule summary of the disciplinary action) that the broker didn't get “a fair shake” in this case, and he was hit with ‘excessive’ sanctions for ‘simply’ selling private securities holdings that he had previously earned. Of course, I get that such a transaction would, technically, violate FINRA Rule 3280 if the broker had failed to notify his member firm and gotten its permission to complete the transaction.


As I note below, it took a more complete reading of the case (in FINRA’s AWC Letter) and the broker’s track record (in the CRD files) to provide a more measured understanding into FINRA's handling of the case.


FINRA FINDINGS.    The PSTs in question pertained to this broker’s efforts to unload some shares he had received prior to joining National Securities Corporation in 2012. The broker and his registered investment adviser (“RIA”) received a total of 450,0000 shares of stock issued by a private company engaged in cloud services – as commission for raising capital.


Fast forward to March 2016, and the broker now seeks to sell (? some of ?) these shares to an existing investor in the company, who was not a customer of NSC. The broker sold 118,000 shares of his personal holdings in the company to that individual for around $35,000, and one month later, he sold 110,000 shares of stock in the company on behalf of his RIA for around $33,000 to the same individual. Apparently, the broker never provided NSC with prior written notice of either of these private securities sales. [And for the record, FINRA makes no mention of the remaining 222,000 shares – i.e., whether they were previously sold or possibly still held by the broker and his RIA - facts that might enable one to put the broker's actions into context.]


In any event, the broker violated FINRA Rule 3280, which prohibits registered reps from "participating in any manner in a private securities transaction" unless the registered rep provides prior written notice to his or her member firm. A private securities transaction is defined broadly as "any securities transaction outside the regular course or scope of an associated person's employment with a member." A violation of FINRA Rule 3280 is also a violation of FINRA Rule 2010.


FINANCIALISH TAKE AWAYS.    Based on a more complete reading of this case, I’ve gone 180º on this case and now side with FINRA and the sanctions it levied against this broker. Here are my reasons.


  • This broker knew, or should have known, that he violated the rules pertaining to private securities rules. After all, he had 29 years’ experience with 9 firms and held 5 securities licenses, including the General Securities Series 24 license.


  • This broker sported a checkered regulatory history that could not factor favorably into his current negotiations with FINRA. Of the 19 disclosures in his CRD file, 9 pertained to tax judgments/liens, 4 related to settled customer disputes, and 3 related to regulatory settlements with NASD or FINRA.


  • This matter began as a cause examination relating to, among other things, the broker’s outside business activities. It never bodes well for an individual under investigation because a regulator is bound to find any “skeletons in one’s closet.”


  • And finally, as a side note, my discomfort with the unknown whereabouts of the remaining 222,000 shares exposes the following issues. If the broker and his RIA still held those shares, was the broker actively ‘hawking’ these shares to potential buyers - which would expand the seriousness of his violations? Or, was the broker, in some way, still associated or involved with the private company engaged in cloud services - which might shed light into the ‘outside business activities' investigation that FINRA initially conducted.


Bottom line, a violation is a violation and the broker got what he deserved!


This case was reported in FINRA Disciplinary Actions for October 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016050066401.