Registered: Mar 2011
08-06-12 09:45 PM
I work for a BD+RIA so I am governed by different rules that I believe have the same practical effect upon us.
The temptation to trade OPM has grown since I worked my way up from receptionist to #2, but it has not gone away. However, #1 has been clever enough to keep my disincentives (ie forgone pay from getting my ass kicked to the curb) in line with my opportunities. But I think about trading OPM all the time so I've kept up with knowing where the line is, and how far away I am from crossing it.
There are three issues actually; OBA, consent/reporting of "covered transactions" (ie sending duplicate statements), and private securities transactions.
OBA is defined as any other activity that you reasonably expect to derive compensation from, except for wholly passive investments. Other activity is broadly defined as any activity other than the specific activities you are hired, paid, and supervised to perform by your employer (your employing entity that is regulated as a bank/bd/fcm/ria/cta/cpo).
You have to report (and for employees of some firms: gain pre-trade consent) trading in securities. As a practical matter, you will have to have duplicate statements sent to your CO for each and every account in which you have either (1) a beneficial interest, or (2) discretionary trading authority. Exceptions exists for arrangements in which there are no opportunities to abuse your client, such as trading mutual funds and securities with forward pricing ie mutual funds and common stock directly held on the books of the issuer or transfer agent.
Finally, you may not engage in issuing, purchasing, selling - directly or indirectly - securities without giving your firm notice. Take this very broadly, direct and indirect, as in you may not even CAUSE any security to be issued/sold/purchased without getting the banks approval.
So let's get back to your objective, and your proposed options. You want to trade and establish a track record, and you propose to do so within a fund vehicle, either domestic or offshore. Establishing a LLC in which you are the manager, and you own the entire economic interest (ie you are its sole member) is not a private securities transaction because that transaction does not involve the issuance of a security. Serving as a manager, without receiving any compensation in your capacity as manager, is not an OBA because you have no expectation compensation. Serving as a member is not an OBA because the membership is an entirely passive investment. Finally, you would retain both beneficial interest in 100% of the LLC assets, AND you will take discretion on the LLC investments, so you WILL have to request approval from your firm to establish brokerage/commodity-merchant accounts and have duplicate statements forwarded. Will that really be a problem for you? It would for me, as my firm would view trading in a wholly-owned LLC as step one towards trading OPM, and I'll be kicked to the curb just the same. You would not need to have statements for mutual fund accounts and Direct Reinvestment Program accounts forwarded to your CO.
Your alternative involves an offshore LLC. Same problem: No OBA, no PST, but you will need to send brokerage statement dupes to your CO.
The question I should be really asking is WHY an LLC or some other business-like vehicle. It is your money, why not just put it in an account in your name, and just trade it? Segregate that money, charge all expenses and income attributable to that account TO THAT ACCOUNT, period. Treat it as if you were serving as nominee of the future Mario Eva Incubator Fund LLC. Then, have duplicate statements sent to your CO who will be happy to see you trading profitably. If you really are profitable you should be happy to have everyone in compliance going through your trade runs.
The problem really begins when you - like me - wants to take OPM. Good luck. I'm pretty much stuck taking discretion over mutual funds an DRP's accounts, with friends and family members outside of my household holding the profit interest (or taking the fees). Well, either that or quit
but there is something nice about that fixed paycheck, right, which is why you find yourself in the same position?