Firm Settles Supervisory Violations over Outside Business Activity
Commentary by Glen Barrentine
A broker-dealer settled FINRA charges for failing to adequately supervise its registered representatives' involvement in an outside business activity ("OBA").
According to the AWC, between 2021 and 2023, the firm was on notice that its registered representatives co-owned and operated an outside company with two distinct lines of business. FINRA said that the company "assisted customers with setting up and operating e-commerce storefronts" and "offered to customers lead-generation websites (digital real estate)." FINRA found that the firm "became aware of the e-commerce storefront component of the OBA after one of the three representatives orally disclosed it to the firm's OBA team." The firm approved the OBA in 2021, based on oral notice from one representative, though the firm's supervisory policies required that the representative provide notice in writing. FINRA found that the firm "did not require the representatives to make any written disclosure of the OBA," despite repeatedly receiving new information suggesting that the representatives' involvement in the OBA was significant and ongoing.
FINRA found that the firm violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) pay a $60,000 fine.
Commentary
The bringing of an enforcement action by FINRA against the firm reflects not only the documentation failures stated in the AWC but also the firm's failure to follow up on the information known to it and take meaningful action in response thereto.
As to documentation, it is hard to overstate the importance that FINRA places on member firms creating comprehensive, written documentation with respect to their handling of compliance issues. This is particularly true where specific documentation is required under both FINRA's outside business activity rule, Rule 3270, and the firm's own procedures.
Here, the firm's difficulties started when the firm, notwithstanding its awareness of the outside business activities, failed to obtain required written notice from any and all of the representatives involved in the outside business activities. Ideally, such written notice would have included a certification that the notice was accurate and comprehensive. Obtaining written notice from each representative would have given the firm an opportunity to ensure that the representatives' description of the activities was consistent.
With respect to follow up, apparently, the firm failed to perform and document a meaningful and substantive review of the outside business activities. The firm seems to have failed to ask key questions regarding such activities, including whether the activities would be marketed to existing firm customers. It also appears that the firm failed to take any action against the representatives for failing to comply with the firm's procedures and Rule 3270, insofar as the representatives failed to seek approval of the outside business activities prior to the commencement of such activities. Finally, the firm delayed taking decisive action once more information regarding the business came to the firm's attention and let issues over the outside business activities linger for over a year.