FINRA has sanctioned PFS Investments Inc (PFSI) of Duluth, Ga, for failing to enforce the requirement that representatives submit written notice of participation in an outside business activity (OBA).
The failure to comply with FINRA Rule 3270 has resulted in a censure and a $60,000 fine.
According to the Letter of Acceptance Waiver and Consent, between April 2021 and March 2023 PFSI knew that three of its registered representatives operated an independent company that assisted customers with operating e-commerce sites and provided digital real estate that advertised services.
The OBA had accrued approximately $33m in revenue and written notice of its existence was still absent.
Despite having written supervisory procedures in place requiring written disclosures of OBAs pursuant to FINRA rules, PFSI failed to enforce them. Instead, the firm orally approved the OBA in April 2021 without looking deeply into the magnitude and nature of its operations. After receiving numerous complaints from its own registered representatives in the fall of that year, PFSI prohibited the OBA from doing any advertising.
The OBA expanded, however, and advertising continued, as did the complaints. By April of 2022, PFSI demanded that the three registered representatives either terminate their OBA or leave the company. However, no further action was taken, and two of the OBA participants left PFSI in in August of that year, with the third leaving in March 2023.
By that time, the OBA had accrued approximately $33m in revenue and written notice of its existence was still absent.
FINRA rule violations
Because PFSI failed to acquire written notice of the OBA, it contravened FINRA Rule 3270, which prohibits registered persons from engaging in OBAs without providing written disclosure to the firm. And because PFSI failed to adhere to its own internal policies, it violated FINRA Rule 3110, which requires maintaining effective compliance supervision, and FINRA Rule 2010, which covers upholding commercial honor.
After receiving written notice of an OBA’s existence, an investment firm must determine whether it poses a potential conflict with the registered person’s duty to the firm and public. The firm would also have a pendant obligation to determine if the OBA constitutes an outside securities transaction under FINRA Rule 3280.
PFSI’s satisfaction with oral conversations concerning OBA participation represent a significant oversight of FINRA regulatory requirements, despite having internal protocols in place that would have prevented its exposure to sanctions.
