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All too often, advisors who hire AdvisorLaw to help them seek expungement of termination disclosures have Form U5 allegations relating to outside business activities (OBAs) or a Private Securities Transaction (PST) and their disclosure, or alleged lack thereof.
Firms are largely inconsistent or vague when it comes to what does and does not constitute an OBA, as well as the proper method of disclosing the activities. Understanding the critical differences and disclosure requirements for both is essential to safeguarding your career.
What Is an Outside Business Activity (OBA)?
An OBA is any business activity a registered person engages in outside the scope of their relationship with their member firm, from which they receive or expect to receive compensation. This is governed by FINRA Rule 3270.
Examples
- Working a second job (e.g., teaching a college course, real estate, or bartending).
- Serving as a compensated director or officer on a company board.
- Running a side business, such as a consulting firm or a small online shop.
Key Rule: You must provide prior written notice to your firm about the activity. The firm is then required to evaluate the activity for potential conflicts of interest, and they may approve it, set limitations, or prohibit it.
- What it is not: Passive investments, like holding stock in a publicly traded company, or activities from which you receive no compensation (like unpaid volunteer work), are generally not considered OBAs.
What Is a Private Securities Transaction (PST)?
As with OBAs, reps are obligated to disclose private-securities transactions, as well. A PST is any securities-related transaction that an associated person participates in outside the regular course of their employment with their firm. This is governed by FINRA Rule 3280.
Examples
- Selling or purchasing a private placement or other unregistered security.
- Assisting with the sale of stock in a private company.
- Receiving a finder's fee for connecting a client to a private investment opportunity.
Key Rule: The disclosure requirements for PSTs are much stricter than for OBAs. You must provide prior written notice to your firm and receive approval for any PST involving compensation. If approved, the firm must then record and supervise the transaction as if it were their own. If the firm disapproves, you are forbidden from participating in any way. For PSTs without compensation, the firm must still provide a written acknowledgment of your notice.
The Critical Difference: Outside Business Activity (OBA) vs. Private Security Transaction (PST)
The primary distinction lies in the nature of the activity.
| Feature | Outside Business Activity (OBA) | Private Securities Transaction (PST) |
| FINRA Rule | Rule 3270 | Rule 3280 |
| Activity Type | Non-securities-related compensated work. | Any securities-related transaction. |
| Disclosure | Prior written notice required. | Prior written notice required. |
| Firm's Action | The firm must evaluate the activity and can approve, set conditions, or prohibit it. There is no requirement for a formal approval letter or supervision unless the firm chooses to. | The firm must approve or disapprove the transaction in writing. If approved, the firm must supervise it as their own business. |
The key takeaway is that even if a firm receives notice of a potential OBA, they are not obligated to supervise it. However, if they approve a PST for compensation, they are legally required to supervise it, which is a significant burden. This is why firms are far more likely to prohibit PSTs than OBAs.
The Risks of Non-Disclosure
Firms are under increasing pressure from FINRA to enforce these rules. A failure to disclose can lead to severe consequences for an advisor, including:
- Termination: Many firms cite "failure to follow firm procedures" on the Form U5, which can be a red flag for future employers.
- FINRA Investigation: Undisclosed activities are a major target for FINRA enforcement, leading to fines, suspensions, or even a bar from the industry.
- Loss of Expungement: If your termination is related to a non-disclosure, it can make it nearly impossible to get the Form U5 language expunged from your record.
In order to safeguard yourself as much as possible from being hit with an OBA or private-securities-related termination, the prudent approach is to notify your firm of any other entity or private-securities transaction with which you are involved. Always over-disclose. If you are unsure whether an activity qualifies as an OBA or PST, it is safer to provide written notice to your firm and let them make the determination.
Was Your Career Impacted by a Non-Disclosure?
If you were terminated by your broker-dealer or RIA, or you know that a U4 or U5 termination is imminent, for an alleged non-disclosure of an OBA or PST, hiring AdvisorLaw now is critical to ensuring that your interests are represented. Employing firms will have serious issues, and be hesitant to hire, advisors with any form of Form U4 or Form U5 termination disclosures other than “voluntary.”
We can assist with getting negative disclosures expunged, defending you in a FINRA investigation, and representing your interests during a U5 dispute. Hiring us now is critical to protecting your career.
Engage with our experts today!