FINRA Crackdown — Outside Business Activities

Understanding the regulations and guidelines surrounding outside business activities (OBAs) is crucial for registered representatives in the financial industry. The Financial Industry Regulatory Authority (FINRA) has established specific rules by which it claims to ensure transparency and protect the interests of both clients and firms. In this blog, we will provide you with important information on what constitutes an OBA, how to accurately report it, what actions your firm may take if an activity is not reported, and how you can protect yourself from enforcement actions.

Defining FINRA’s “Outside Business Activity”

FINRA defines OBAs as work conducted outside of your primary employment as a securities professional, for which you are paid or compensated. This includes various scenarios, such as working as an employee or independent contractor for another company, serving as an officer or director in external boards or organizations, receiving compensation for services rendered outside of your primary job, or having the expectation of being paid for such activities. As an investment advisor, it is your obligation to inform your employer about OBAs, under FINRA Rule 3270. While the rule does not impose additional responsibilities upon you beyond the prior notification requirement, compliance is essential.

What’s not considered an OBA?

Although FINRA Rule 3270 encompasses various activities, it specifically permits investment advisors to pursue passive personal investments without categorizing them as OBAs. Examples of such investments include diversified index funds and participation in private securities transactions. Moreover, investment advisors have the option to place their personal funds into blind trusts, where the investment decisions are independent of their influence. However, it’s important to note that other FINRA rules require disclosure of personal investments, in order to maintain transparency and address potential conflicts of interest. For instance, FINRA Rule 3280 mandates the disclosure of private securities transactions, and it’s the responsibility of firms to ensure their advisors’ adherence to this rule.

Accurately Reporting OBAs

When reporting your OBAs, it is crucial to provide accurate and comprehensive information to your firm, prior to engaging in any activity related to the OBA. Clearly describe the nature of the activity, the time commitment involved, and any compensation received or expected. Your firm will have established reporting forms and a review process in place to assess the impact of these activities upon your obligations to the firm and clients. By ensuring transparent and accurate reporting, you contribute to maintaining integrity and building trust within the industry.

To ensure accuracy and compliance with disclosure requirements, the firm must obtain the following information and report it on the registered representative’s Form U4.

  • Name of the other business — provide the full name of the outside business in which you are involved.
  • Investment-related nature — indicate whether the other business is investment-related; this helps to assess potential conflicts of interest.
  • Address of the other business — include the complete address, including street, city, state, and zip code, where the other business is located.
  • Nature of the other business — clearly describe the nature or type of the outside business activity to provide a comprehensive understanding.
  • Position, title, or relationship — specify your position, title, or relationship with the other business; this information helps evaluate any potential conflicts or overlapping responsibilities.
  • Start date of the relationship — state the date when you initiated your involvement with the other business.
  • Approximate number of hours per month devoted — provide an estimate of the number of hours you devote to the other business activity per month; this helps evaluate the time commitment involved.
  • Number of hours during securities-trading hours — specify the number of hours dedicated to the other business during securities trading hours; this detail is crucial for assessing any potential impact on your obligations during market hours.
  • Description of duties — clearly outline the specific duties and responsibilities you perform for the other business; this description aids in understanding the scope of your involvement.

It is vital to be diligent in providing this information to your firm to uphold professional standards and adhere to regulatory requirements.

Firm Actions For Non-Reported Activities

If your firm discovers that you have engaged in an OBA without proper prior disclosure, it is obligated to take appropriate action. This may include limiting or prohibiting such activities to safeguard client interests and ensure conflict-free services in managing client assets. As a registered representative, it is crucial to understand that failure to report OBAs can have serious consequences. It can lead to disciplinary actions, reputational damage, and potential legal and financial liabilities. Compliance with your firm’s reporting requirements is essential to maintain trust and protect both your clients and yourself.

FINRA Intensifies Scrutiny Of OBAs — Increased Fines & Suspensions

Highlighting its concern with brokers’ failure to disclose OBAs and investment activities, FINRA has recently stepped up its disciplinary actions. Over the last year, FINRA has increased fines and suspensions for violations related to OBAs — sending a clear message that it is closely monitoring compliance in this area.

While many of these cases are blatant violations, even FINRA officials acknowledge that brokers can sometimes be confused. For instance, the distinction between occasional vacation home rentals and OBAs requiring approval is often a grey area. Compliance officials emphasize that brokers may unintentionally stumble over FINRA rules at times.

Recognizing the complexities and challenges in defining outside-activity conflicts and properly supervising them, FINRA has proposed a new rule to replace the existing ones and reduce unnecessary burdens. However, compliance with the current rules remains crucial, as FINRA has identified OBAs as a priority examination area for firms. Firms must understand and mitigate potential conflicts of interest associated with these activities to protect both customers and the reputation of the industry. Your firm can only do that when you follow its procedures for prior reporting.

Protecting Yourself From Enforcement Action

To protect yourself from potential enforcement action, it is vital to adhere to FINRA rules and guidelines regarding OBAs. Accurately report all activities that fall within the scope of FINRA’s definition of OBAs. Additionally, maintain transparency with your firm, and promptly address any concerns it may have regarding potential conflicts of interest. By demonstrating a proactive and compliant approach, you can mitigate risks and protect your professional reputation.

How AdvisorLaw Can Support You

AdvisorLaw is here to help you navigate the complex challenges of OBAs and potential enforcement actions. Our experienced team specializes in FINRA arbitration and has a proven track record of advocating for advisors who have suffered harm due to meritless or false claims of misconduct. If you have concerns about an OBA or how to disclose it to your firm, or you’re facing an enforcement action for violating FINRA’s OBA rule, our team can provide the guidance and legal representation that you need.

AdvisorLaw Successfully Removes OBA Termination Disclosure, Helping Investment Advisor Restore Perfect Record

AdvisorLaw successfully assisted a D.C.-based investment advisor in removing a termination disclosure from his record after violating FINRA’s OBA rule. The advisor had been terminated by Edward Jones (EJ), over five years prior, for allegedly failing to comply with the firm’s policies regarding OBAs. The advisor, who operated an ATM machine business separately from his work with EJ, had not reported the income from his ATM business to the firm. However, the business was unrelated to EJ, and no customers were harmed or complained about the advisor’s activities. Through the efforts of AdvisorLaw’s Dochtor Kennedy, J.D., the arbitrator agreed that the termination disclosure was inaccurate and potentially misleading, and he recommended expungement of the disclosure and the related Form U5 amendments. As a result, the advisor will soon have a disclosure-free public record on various industry databases, including BrokerCheck and the IAPD.

Read the full award here.

Contact AdvisorLaw Today!

If you believe you have a potential case or need assistance with any aspect of OBAs, don’t hesitate to reach out to AdvisorLaw for a comprehensive evaluation of your situation. We are dedicated to protecting your rights, upholding integrity in the industry, and advocating for your best interests.

Blog Contact