In accordance with FINRA Rule 3270, all registered persons must provide written notice to and receive approval from their firm prior to engaging in any outside business activities.  In addition to the obligation on the part of the registered rep, member firms must implement reasonable controls related to reporting, approving, monitoring, and assessing conflicts of interest related to such outside business activities.

Per Rule 3270, every FINRA member firm is to require its covered persons to submit a written request for approval prior to engaging in any outside business activity. Such outside business activities include acting as employee, independent contractor, sole proprietor, officer, agent, director, or partner of a company other than their broker-dealer. This could include anything from running a carwash to assisting with your neighbor’s online store.  Additionally, it includes situations where compensation is to be paid or those where there is a reasonable expectation of compensation as a result of any business activity outside the scope of the relationship with your firm and the activities associated with your firm. Passive investments are specifically exempted from this requirement.

To remain in compliance with these requirements, each firm must ensure that all covered persons haved disclose any and all outside business activities they are involved with. Generally, firms request covered persons to complete disclosure forms and disclose their outside activities upon hire and then periodically in order to verify that all outside activities have been disclosed previously and are periodically evaluated.  We recommend that this be done at least annually, if not more frequently.

Once the disclosure forms are received, they must be approved by the registered rep’s designated supervisor or other such compliance designee. This approval process should include a provision whereby it is verified that the forms are fully complete and appear accurate. Whether such activity is approved or denied, notice must be communicated in writing to the associated rep. Additionally, a copy of the completed form should be maintained in the firm’s records.

The review process for outside business activities should ensure that such activities do not:

  • Interfere with or otherwise compromise the registered rep’s responsibilities to the firm and/or its customers, including approximate time commitment;
  • Be viewed by customers or the public as part of the firm’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered;
  • Whether the firm should impose specific conditions or limitations on such outside business activity, including, where circumstances warrant, prohibiting the activity entirely; and,
  • Whether the proposed activity is properly characterized as investment related and whether it would require firm supervision.

Once the activity is approved to be conducted by the registered rep, it is important that your firm ensure that all appropriately reported and approved outside business activities are reflected on each respective registered rep’s Form U-4.   This is a commonly missed step in the process that can cost you should FINRA discover this during an audit.

Overall, FINRA members firms must establish reasonable controls to ensure compliance with detecting conflicts of interest and risks regarding activities done away from the firm by their associated persons. You must ensure that your firm has appropriate controls reasonable for ongoing monitoring and reporting, including new hires and periodic requirements for submission of OBA compliance forms. Moreover, your firm should consider additional surveillance methods used to monitor for non-reported outside business activities.   This is commonly done through email and social media reviews, Google Alerts, internet searches and other surveillance methodologies.