FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval. A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer. Private securities transactions remain a regulatory focus for FINRA. As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter: “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”
Case In Point
In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)
- A 5 month suspension from association with any FINRA member in all capacities
- A fine of $10,000
Collins was terminated Robert W. Baird & Co. in October 2017. According to the Form U5 filed by the Firm, Collins was terminated because he “introduced [a] client to a private investment without Firm approval.”
According to FINRA, between February 2014 and December 2015, Collins participated in private securities transactions totaling approximately $200,000 without prior notice to Baird. Specifically, FINRA alleged that Collins solicited 15 individuals to invest in membership units of an LLC organized to operate a restaurant in Chicago. Although Baird approved Collins to invest in the LLC, the firm prohibited him from soliciting other investors. Nonetheless, FINRA found that Collins:
- Participated in the sale of membership interests
- Introduced investors to the restaurant’s business partners
- Discussed his own investment in the LLC with investors
- Attended networking events with the investors where the investment was discussed
Importantly, FINRA also found that 7 of the investors solicited by Collins were customers of Baird.
The facts here make out a slam dunk case for FINRA. It certainly appears that Collins engaged in some serious no no’s. According to the facts presented by FINRA, Collins directly flouted his employer’s admonition not to solicit investments in the restaurant. To compound the problem, he apparently went to customers of the Firm to solicit investments. In so doing, Collins exposed Baird to litigation risk (it is possible that the customers thought the restaurant was a firm-sponsored investment, when it clearly wasn’t). Furthermore, by circumventing Baird’s system of supervision, he deprived Baird’s customers of the supervisory oversight they were entitled to.
FINRAs Sanction Guidelines provide guidance on proposed sanctions for selling away (private securities transactions). The Sanction Guidelines call for a monetary sanction of between $5,000 and $77,000, as well as a suspension of 10 days to 3 months for sales up to $100,000; 3 to 6 months for sales of $100,000 to $500,000; 6 to 12 months for sales of $500,000 to $1 million; and 12 months to a bar for sales over $1 million.
Given the facts of the case, Collins is fortunate that FINRA was willing to resolve the case within the sanction guidelines range.
Herskovits PLLC has a robust practice defending individuals and entities against regulatory investigations and disciplinary proceedings brought by FINRA and other regulators. Click here to see our landing page for FINRA regulatory defense.
Feel free to contact us to discuss your matter. 212-897-5410.