Understanding FINRA Rule 3270: Undisclosed Outside Business Activities Can Land Brokers in Hot Water
FINRA Rule 3270 prohibits brokers from engaging in outside business activities without first receiving written approval from their member firms. Why is this rule so important? What happens if brokers don’t follow this rule? Well, it could land them in big trouble. Read on to find out more.
Why is FINRA Rule 3270 so important? Firms have specific lists of approved securities products that their brokers can sell. These products have been vetted according to a “reasonable basis suitability analysis.” Brokers then use a “customer-specific suitability analysis” to ensure that an approved product is suitable for a given client based on that client’s short-term and long-term investment objectives, risk tolerance, need for liquidity, age, and other factors. FINRA Rule 3270 is so important because it ostensibly prevents brokers from selling unapproved securities products that have not been vetted by their firms. This is known as “selling away” and can have devastating consequences on unsuspecting investors.
But even if a broker does not intend to “sell away” from their member firm, they should still ensure that all outside business activities are approved by their firm. Even the appearance of impropriety could land a broker in huge trouble. That’s exactly what happened to Barry Bode (CRD#: 1203578), a former registered representative with O.N. Equity Sales Company in Windsor, Colorado. He has been suspended by the Financial Industry Regulatory Authority (FINRA), according to his BrokerCheck record accessed on April 20, 2020.
What led to Barry Bode’s suspension? On January 28, 2019, Barry Bode was terminated from O.N. Equity Sales Company after the firm found that he engaged in an unapproved outside business activity involving mineral rights and oil and gas rights. The firm found that Barry Bode negotiated a transaction for his client, helping the client sell their mineral rights. The client later invested the funds at O.N. Equity Sales Company. About a week later, on February 7, 2019, the Financial Industry Regulatory Authority (FINRA) commenced an investigation into Barry Bode’s termination and his facilitation of the sale of a client’s mineral rights.
Ultimately, on April 2, 2020, FINRA suspended Barry Bode for two months and issued him a fine of $5,000. FINRA found that Barry Bode operated a limited liability company (LLC) with two individuals not affiliated with his member firm. As part of this LLC, according to FINRA, Barry Bode solicited purchase offers from an energy company and facilitated transactions regarding mineral rights. FINRA also found that Barry Bode failed to obtain written approval from his member firm before engaging in these outside business activities; while he submitted an application to his member firm, he failed to disclose that he had an LLC. When the firm later investigated his outside business activities, Barry Bode told them he had not received any compensation for helping the client with their mineral rights; he later admitted he was paid $12,000. Barry Bode entered into an Acceptance, Waiver, and Consent (AWC) agreement with FINRA, consenting to FINRA’s findings and sanctions. Barry Bode’s suspension will last from April 6, 2020 through June 5, 2020. A copy of his AWC can be viewed here.
If you’re a broker, make sure that you dot all your i’s and cross all your t’s when it comes to outside business activities. If not, you could find yourself in a serious situation.
If you’re an investor and you have questions about outside business activities as they relate to brokers, don’t hesitate to contact the securities attorneys of Fitapelli Kurta. Call (877) 238–4175 or email info@fkesq.com for your free case consultation.
