Q: My firm and I were involved in an arbitration. In discussing settlement with the firm's attorney, I asked if they could get the customer to agree that the record of the complaint should be deleted from my CRD report. The attorney said that was prohibited. Can you shed some light on this? -V. F., Illinois
A: FINRA Rule 2081 became effective in July 2014. It states that "no member or associated person shall condition or seek to condition the settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member's or associated person's request to expunge such customer dispute information from the CRD system."
This was a very common occurrence years ago. Customers wanted to settle, and brokerage firms wanted their reps to get a clean CRD. So they'd require the customer to agree (or not oppose) an expungement order.
When FINRA began to crack down on this process, claimants' lawyers simply stopped naming the individual rep and only named the firm. This was one of the main reasons FINRA revised the rules to require disclosure, even if a rep was only "the subject of" the claim and not a named party. Rule 2081 now codifies the fact that it's considered a violation to require a customer to consent to expungement. Recently a firm was fined $35,000 for trying this.
Q: A registered rep in my office has listed dozens of website addresses as outside business activities, stating that he has "numerous businesses" and referencing the sites. They run the gamut from financial services sites to entertainment sites, but none appear to be active. He also lists what he describes as "personal activities" and says that "modest amounts of money may be received or paid, including reimbursements for dues, carpooling, gas money, meals or entrance fees." I don't think these descriptions are adequate for outside business activities. What are your thoughts? - G. R., Florida
A: The Form U4 requires that registered reps list their outside business activities. The instructions to the U4 say reps must list the name and address of the business, the nature of the business (including whether it's investment related), the rep's position, title, duties, start date and approximate amount of hours devoted to it.
More specifically, however, FINRA Rule 3270 prohibits registered persons from receiving compensation (including a reasonable expectation of compensation) as a result of any outside business activity unless the rep has provided prior written notice to their firm in whatever manner specified by the firm.
Furthermore, the supplementary material for Rule 3270 says a member shall consider whether the proposed activity will: (1) interfere with the registered person's responsibilities or (2) be viewed by customers as part of the member's business. Based on the member's review, the firm must evaluate whether to impose conditions on or to prohibit the rep's outside business activity.
You're also required to keep records of this. With that said, it seems your employee doesn't grasp the concept of an outside business activity. If I understand it correctly, he's not running each of those "businesses" but has merely purchased the domain names with the anticipation that he would resell them.
So, in that regard, his "outside business activity" should be reported as "buying and selling internet domain names/URLs". If he's doing that in his personal capacity, he should say so. If he's buying and selling those domain names through a company, then it should be listed that way.
Additionally, as to the specific websites themselves, you need to make sure there is no content on them. Any content on any sort of social media site that is financially related could be attributable to him and, potentially, your firm. This could result in liability to the firm if the content is inaccurate or stale.
Finally, as to his reimbursements, this doesn't sound like an outside business activity at all. If someone gives him money or gas to carpool with, that's not an outside business activity.
Likewise, if he's going out to dinner with friends and treating them, that's not an OBA. Then again, if he's compensating someone for something like a referral or to reward them for being a client, these may fall under other disclosure rules, even though they aren't outside business activities.
- Fixing FINRA's Expungement Process
- How an Advisor's Red Flags Snagged His Supervisor
- Advisor Kept in the Dark on Client's 'On the Record' Complaints
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