Kyung Soo Kim, an ex-General Securities Representative associated with Merrill Lynch, Pierce, Fenner & Smith Incorporated, agreed to pay the Financial Industry Regulatory Authority a nominal fine and be suspended from association with any FINRA member for one month for engaging in a cryptoasset business he established without advising Merrill Lynch in advance as required by a FINRA rule. (Click here to access FINRA Rule 3270.)
According to FINRA, in December 2017, Mr. Kim established a company to engage in virtual currency mining activities, engaged a third party to build and operate computer hardware and software for his company, and paid the third party for its services. Mr. Kim was subsequently terminated by Merrill Lynch in March 2018 for “fail[ing] to disclose an outside business activity.”
There was no allegation in FINRA’s Letter of Waiver, Acceptance and Consent publicizing its enforcement action against Mr. Kim that the respondent’s company actually engaged in any virtual currency mining activity.
Compliance Weeds: Under FINRA rules, no registered person may be directly or indirectly employed in any other capacity in a business activity outside the scope of his or her relationship with his or her member firm unless he or she has given prior written notice to the member. (See FINRA Rule 3270.) Additionally, a person associated with a member must provide advance written notice to his or her employer if he or she engages in a securities transaction outside the ordinary course or scope of his or her employment, including transactions involving a new offering of securities which are not registered with the Securities and Exchange Commission, subject to various exceptions and conditions. (Click here to access FINRA Rule 3280.)
In April 2018, Arthur Meunier a/k/a Arthur Breitman agreed to be suspended for two years from association with any FINRA-regulated broker-dealer to settle FINRA charges that, from February 2014 to April 2016, he participated in the development of Tezos, a blockchain technology project, without notifying the broker-dealer he was then employed by that he was engaging in such activity, as required by FINRA rules. (Click here for background in the sub-article “FINRA Fines a Tezos Co-Founder” in the April 22, 2o18 edition of Bridging the Week.)
Subsequently, in September 2018, FINRA brought a disciplinary proceeding against Timothy Ayre for soliciting investors to purchase shares in a worthless company he owned and served as president of – Rocky Mountain Ayre, Inc. (“RMTN”) – by making material misstatements in public filings, and by unlawfully offering to the public digital assets – HempCoins – that he claimed were backed by RMTN common stock. FINRA charged that the sale of HempCoins was unlawful as they were unregistered securities that were not eligible for any exemption. FINRA also claimed that Mr. Ayre engaged in private securities transactions involving RMTN while employed by a broker-dealer without disclosing such transactions to his employer, also in violation of the firm’s written supervisory procedures. (Click here for background in the article “SEC and FINRA File Three Unrelated Enforcement Actions Charging Digital Assets-Related Securities Law Violations” in the September 16, 2018 edition of Bridging the Week.) Mr. Ayre recently agreed to be barred in all capacities from the securities industry to settle all his FINRA charges. (Click here to access Mr. Ayre’s “Order Accepting Offer of Settlement.”)
This latest FINRA action against Mr. Kim, coupled with FINRA’s prior actions against Mr. Breitman and Mr. Ayre, serves as an implicit warning to FINRA-member firms that they should double-check that their written supervisory procedures track applicable FINRA rules regarding outside business activities by their registrants and private securities transactions by their APs. Moreover, registered entities should remind their employees and agents that these requirements apply to transactions involving security tokens as well as to business activities involving all digital assets, in addition to traditional securities transactions and business activities. Natural person registrants and APs of broker-dealers should also be mindful of their obligations under their employers’ applicable policies and procedures as well as under relevant FINRA rules.