An outside business activity (“OBA”) is defined as a registered person having any business activity outside the scope of the relationship with their member firm. As defined in FINRA Rule 3270, this may include acting as an employee, independent contractor, sole proprietor, officer, director, or partner for any other entities besides the member firm. Generally, the activity may also involve compensation or a reasonable expectation of compensation.
Registered persons must disclose these outside business activities and ensure that their disclosures remain up-to-date with their firm. Sometimes, however, this seemingly straightforward task set firms on a journey for the greatest challenge to their compliance program. Below are some common compliance challenges with outside business activities and their disclosures.
Training Representatives on Outside Business Activity Disclosures
Firms need to ensure that registered persons receive the rule, as well as understand its implications and are able to apply it. Rules are typically in “regulatory speak”. For compliance professionals with experience in reading and interpreting these rules, it may feel like second nature. The same is not true for others who may only come across these rules once a year during the annual compliance meeting. It is important to establish an effective method of training to help representatives learn, understand, and apply the rule. Doing so will give representatives the tools so they can better recognize the scenarios in which they need to take action.
Representatives sometimes wait until after their involvement with the outside business before they come to their firm. In other instances, they forget to notify the firm of changes in their activity altogether. Proper training on what is required and expected of registered persons will aim to prevent this and encourage representatives to be proactive. Try to use examples to make the rule more approachable, thus increasing the chances that representatives will be able to self-report any anticipated outside business activity.
Reminding Representatives on the Need to Disclose
Registered persons are busy keeping firms running, generating revenue, and running operations. Even the most well-intentioned annual compliance meeting highlighting a multitude of topics may not be enough. Often, compliance officers are surrounded by rules and regulations related to their compliance program and may mistakenly assume that others are just as tuned in. Periodic reminders of their obligations to disclose will help to keep it top of mind. Additionally, occasional reminders help the firm have a layer of protection through documentation that they provided adequate notice to their registered persons. In the event that a registered person does not timely disclose and this failure surfaces during a regulatory exam, the firm can provide this documentation.
Disclosing the Necessary Information for Each Outside Business Activity
When completing a disclosure for an outside business activity, the name of the OBA is not enough. Not even close. Disclosures should provide the following information as best practice:
- Name of the other business;
- Address;
- If it is investment-related or not;
- If it is a private security transaction or not;
- Compensation information;
- Nature of business;
- Title or relationship;
- Start date;
- Number of hours worked during and outside of market hours;
- Duties; and
- Potential conflicts.
Why is this important? The OBA section on a Form U4 requests this information. The firm also needs to understand enough about the activity in order to determine potential conflicts of interest or indications of a private securities transaction.
For example, undisclosed private securities transactions can lead to cause exams, regulatory actions, fines, and suspensions. This is an area that FINRA is very zealous in enforcement. Private securities transactions create the potential for additional disclosures, supervision, books and records review, and pre-approval processes. Without gathering the necessary information on the outside activity, the principal cannot fully evaluate the activity.
Approving and Updating Form U4
A representative has disclosed the outside activity to its compliance department, and that’s half of the battle complete. Now, however, the firm must take it to the finish line to complete the full process. As discussed, the principal will need to perform a review to ensure that all information is complete and there are no additional actions. The principal should also document the review and approval process. Finally, the activity must be properly submitted and included in the employee’s Form U4. Any mistake in one of these steps creates a situation with a potential for OBA issues.
Our team of experts can help streamline your firm’s new hire and annual forms processes to help ensure your registered persons are properly disclosing their outside business activities. Contact us today.
Browse our previous blog posts for more information on necessary disclosures for your firm and its representatives.