Tuesday, December 12, 2017

Trouble Ahead - FINRA Focus on Outside Business Activities. Are Yours Fully Disclosed?


By now, most registered representatives are aware that FINRA has been actively investigating the backgrounds of registered persons for undisclosed judgments and liens. There have been questions as to how they are conducting those investigations, and a few folks have suggested to me that FINRA is running credit checks on brokers.

That would be of questionable legality, but there is no evidence that it is happening. What has happened is FINRA was very successful at sanctioning registered representatives who did not fully disclose such items. Some reps were charged with willfully failing to disclose, which is a small trap laid by FINRA. You see, while FINRA will take a settlement with a fine for a willful failure to disclose, many state regulators will use a willful failure as a reason to bar the broker!

Fortunately, for the reps that I represented, there were no suspensions or bars and no findings of willful violations. I managed to convince FINRA in some cases that there was no failure to disclose, and in all cases that any such failure was not willful.


Having fought that battle, the next one is starting. FINRA has no identified outside business activities and private securities transactions as the next regulatory concern. FINRA has stated that it has found that some individuals failed to notify their firms of proposed OBAs or PSTs, including situations where a new hire or current registered or associated person failed to notify their prospective or current firm in writing of an existing OBA or PST. 

FINRA acknowledges that in some cases, individuals did not understand what constitutes an OBA or PST, or did not satisfy important provisions of the rules (e.g., the requirement for written rather than verbal notice). In other cases, individuals failed to provide the information with sufficient detail for a firm to make an adequate determination as to whether to allow a proposed OBA or PST to proceed.

This is important not only to avoid an issue with FINRA, but with the firms. Most large firms will jump at the opportunity to terminate a broker and seize his assets under management for failing to disclose an outside business activity, and certainly for failing to disclose a private securities transaction.

Outside business activities are covered by FINRA Rule 3270 and must be disclosed on Form U-4 in item 13

3270. Outside Business Activities of Registered Persons
No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.

Form U-4 Item 13.
Are you currently engaged in any other business either as a proprietor, partner, officer, director, employee, trustee, agent or otherwise? (Please exclude non investment-related activity that is exclusively charitable, civic, religious or fraternal and is recognized as tax exempt.) If YES, please provide the following details: the name of the other business, whether the business is investment-related, the address of the other business, the nature of the other business, your position, title, or relationship with the other business, the start date of your relationship, the approximate number of hours/month you devote to the other business, the number of hours you devote to the other business during securities trading hours, and briefly describe your duties relating to the other business.

There is a bit of a mis-match between the rule and the dislosure, as the rule limits the activity to those which involve compensation, or the expectation of compensation, and the disclosure item is not so limited - it purports to require a yes answer for any position with any other business.

Take a look at your own disclosures. Have you disclosed all of your outside business activities to your employer and on Form U-4? Have you obtained written approval of the activity from your employer? Verbal approval from your manager is not enough - you need it in writing.

Have a question about an outside business activity? Received an 8210 request about your U-4 disclosures? Give me a call at 212-509-6544, let's see if you have a problem, and if so, how we can fix it.

Next up: Private Securities Transactions
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