FINRA Rule 3270 Case Study: Highlighting FINRA's Jurisdiction Over Requests for Documents and Information Regarding Outside Business Activities
The SEC and FINRA will demand that a broker-dealer or registered representative of a FINRA member firm provide documents and testimony based on requests during regulatory examinations. (Admin. Proc. File No. 3-15183)1 What this means to you: You should carefully consider your outside business activities, if you are a registered representative with a FINRA member firm. Refusing to cooperate with the SEC or FINRA can result in a life-time bar from the securities industry.
Case Summary and Relevant FINRA Regulations: In 2010, FINRA investigated Marquis Financial Services, Inc. ("Marquis"), a FINRA member firm and its employees upon receiving a referral about suspicious trading in penny stocks. This included an employee, Gregory Evan Goldstein, an associated person, officer, and control person of Marquis. FINRA discovered during the investigation that Mr. Goldstein had also been operating a consulting business called Wall Street at Home.com but had failed to report that activity to FINRA as required by Rule 3270. FINRA Rule 3270 prohibits registered persons from serving as an officer of an outside business without providing prior written notice to his or her firm. Marquis' written procedures similarly required any registered person who received compensation from outside business activities to provide notice and a description of the outside affiliation. Mr. Goldstein attempted to convince FINRA that his outside business activity was not relevant to FINRA's examination. He explained that Wall Street at Home was an indirect owner of Marquis. Wall Street at Home owned one hundred (100) percent of a holding company called Steven Gregory Securities, which owned ninety-five (95) percent of Marquis. Mr. Goldstein was also the president of all three companies. FINRA was not convinced by Mr. Goldstein's arguments. On January 4, 2013, FINRA found that Mr. Goldstein failed to respond to certain requests by FINRA at an on-the-record interview and a request to produce documents and information made pursuant to FINRA Rule 8210. FINRA Rule 8210(a)(1) requires members and persons associated with a member to "provide information orally [or] in writing...with respect to any matter involved in...[a FINRA] examination. Rule 8210(a)(2) further states that FINRA staff shall have the right to "inspect and copy books, records, and accounts of such member or person with respect to any matter involved in...[a FINRA] examination." FINRA ordered Mr. Goldstein to reply to all outstanding Rule 8210 information requests within twenty-one (21) days of the date of the decision or risk automatic suspension from associating with any FINRA member firm in any capacity.
Conclusion: If you refuse to cooperate with the SEC or FINRA, this can result in a life-time bar from the securities industry. You should review your outside business activities carefully with your Chief Compliance Officer prior to becoming a registered representative. ________________ 1 See http://www.sec.gov/litigation/opinions/2013/34-68904.pdf