Investments in cannabis-related businesses has boomed as some states have legalized marijuana, but brokers and advisers can face plenty of problems if they don't follow industry guideline when it comes to selling private securities of such businesses.
Indeed, it appears that, as the year ends, the Financial Industry Regulatory Authority Inc. is taking a close look at how broker-dealers and their advisers' conduct so-called "outside business activities." Registered reps have to get the approval of their broker-dealer before getting paid from a different business or joining a partnership.
Just last week, Finra hit Cetera Financial Group broker-dealers with a fine totaling $1 million for failing to supervise certain private securities transactions made by dually registered representatives at unaffiliated, outside registered investments advisers.
And the scrutiny pertains to cannabis-related businesses, as well. The lesson to be learned from the case of one broker, Brian Radoo, is that reps need to inform their firms if they're selling securities of those businesses. They should be particularly cautious because both Finra and the Securities and Exchange Commission have been warning investors for years about marijuana stock scams.
Radoo is a former registered rep with Next Financial Group Inc. from May 2008 until last December when he was "discharged," meaning fired, by the firm for allegedly participating in "unreported, unapproved, outside business activities," according to his BrokerCheck report.
The Financial Industry Regulatory Authority Inc. on Friday barred Radoo from the securities after he failed to cooperate in the regulator's investigation and provide information, according to the Finra settlement.
Radoo could not be reached to comment, and a call to Next Financial was not returned. But the unregistered securities in question apparently had to do with alleged investments in a cannabis-connected business.
According to his BrokerCheck profile, Radoo in April was named in a Finra arbitration complaint that alleges Radoo "offered them an investment in an unapproved outside business activity that involved a 'cannabis cultivation' company."
Radoo's customer alleges that Next Financial failed to supervise this outside business and that the investments were made in 2017 and 2018.
The moral of the story? Don't let any "outside business" send your work as an adviser up in smoke.
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