It's an old story: registered representatives want to engage in outside business activities. Why? Sometimes a lucrative outside business opportunity comes your way and, to be blunt, times are tough. Lately, you can't make ends meet doing the 9-to-5 at your FINRA member firm. Plus, your employer arbitrarily cut payouts and raised the qualifying levels on the grid. You have to do that much more business just to get back to even.
All of which convinces you to pitch some outside deal to your firm's clients or potential clients. You know the folks behind the deal — or at least you think you do — and you've looked over the terms of the proposition — well, okay, you're not a lawyer or CPA, but you sort of skimmed the numbers. What you do know is that you're being offered a chunk of change to find investors. The way you see it, no harm, no foul.
If only it were that easy. Problem one is NASD Conduct Rule 3030: Outside Business Activities of An Associated Person. It restricts your ability to accept employment/compensation away from your FINRA firm, unless you provide prompt written notice to your employer. Okay, so you'll send the damn notice and nicely ask your firm's permission. Of course, some genius suggested to you that you should just keep your mouth shut and go ahead and sell the deal off the books. Like who's gonna know?
How come Wall Street is filled with stories of knock-down-drag-outs between employees and employers over outside business activities? The answer is pretty simple. Brokerage firms are petrified of the legal exposure that they take on when outside deals go bust. Consider this case for some context.
Case in Point
Public customer Robin L. Visocsky alleged in 2008 that Benjamin D. Williams recommended that she buy $275,000 in VesCor Capital Inc. promissory notes and a $68,750 investment in EMP Capital, LLC. Who is Mr. Williams? Ahh, now the tale unfolds: He is the employee and registered representative of FINRA member firm Hornor, Townsend & Kent, Inc. (HTK) in Horsham, Pa., a subsidiary of The Penn Mutual Life Insurance Co. And what else do we know about Mr. Williams and HTK? Well, the employee doesn't get named in customer Visocsky's FINRA arbitration statement of claim, but employer HTK is. In the Matter of the Arbitration Between Robin L. Visocsky, Claimant, vs. Hornor, Townsend & Kent, Inc. (Respondent) (FINRA 08-00462, March 31, 2010).
Visocsky alleged that acting through Williams, its employee and registered representative, HTK assured her that the above VesCor investment was “safe,” when, to the contrary, it was part of a Ponzi scheme. Worse, Visocsky described both the VesCor and EMP investments as unregistered and fraudulent. Accordingly, Visocsky alleged that HTK did not take any steps to review Williams' outside business activities to confirm that he was not using his outside business to sell unregistered securities. Partially as a result of that alleged failure to supervise, Visocsky asserted that HTK is liable for her compensatory losses of $334,750.00.
Why You Picking on Us?
HTK generally denied Visocsky's allegations, and, among other defenses, noted that it maintained a reasonable and proper system of supervision and internal controls — and made reasonable efforts to enforce same. HTK claimed that it undertook no transactions involving Visocsky and that, in fact, Visocsky never had a brokerage or other account at HTK. Unfortunately, the FINRA arbitration decision doesn't flesh out that non-account defense beyond merely letting us know it was raised. Suffice it to say that the arbitration panel heard the employer's position that Visocsky did not have any account with the member firm.
The FINRA arbitration panel determined that HTK was liable and ordered the firm to pay Visocsky $334,750 in compensatory damages plus pre-award interest at the rate of 8.25 percent on her $275,000 and $69,750 investments through the date of the service of the award. Further, HTK is liable for $50,902 in costs.