2/28/2011
In December 2010, FINRA consolidated NASD Rule 3030 and NYSE Rule 346 under the new FINRA Rule 3270, effecting significant revisions to the supervisory requirements of Outside Business Activities which includes broker-dealers’ review of all pre-existing OBAs under the new supervisory requirements by June 15, 2011.
I. Definition of an Outside Business Activity.
Under FINRA Rule 3270, an Outside Business Activity (“OBA”) is an activity where a registered person is compensated, or has the reasonable expectation of compensation, from someone other than their broker-dealer. This includes acting as an employee, independent contractor, sole proprietor, officer, director or partner of another person of someone other than their broker-dealer.
II. Deadline for broker-dealer review of a pre-existing Outside Business Activity.
Broker-dealers that have not engaged in OBA reviews to the standards placed by the new supervisory requirements under FINRA Rule 3270 should begin to immediately review all pre-existing OBAs under the new standards discussed below. FINRA has imposed a deadline of June 15, 2011 to conduct the review of all pre-existing OBAs. If a broker-dealer does not maintain a readily accessible list or file of previously submitted OBAs, the broker-dealer may need to send questionnaires to existing registered persons to initiate this process or request an ad hoc report from FINRA for a fee.
III. Supervisory requirements.
a. Written notification prior to engaging in an Outside Business Activity.
FINRA Rule 3270 prohibits any registered person from engaging in an OBA without providing written notice to his or her broker-dealer prior to engaging in an OBA. Broker-dealers must include in their procedures the form in which registered persons make this notification to the broker-dealer.
b. Broker-dealer review of an Outside Business Activity.
Upon receipt of a registered person’s written notice, the registered person’s broker-dealer must review the proposed OBA. Factors the broker-dealer must consider include, whether:
(1) the OBA will interfere with or compromise the registered person’s responsibilities to the broker-dealer or its customers.
(2) the OBA will cause customers or the public to consider the OBA a part of the broker-dealer’s business based on the nature of the proposed activity and the manner in which the registered person will offer it.
(3) the activity is properly characterized as an outside business activity or should be treated as an outside securities activity subject to the requirements of NASD Rule 3040, Private Securities Transactions of an Associated Person.
We recommend that broker-dealers design a form for a registered person to utilize when submitting the required written notification to assist the broker-dealer’s supervisory personnel in identifying relevant information related to the OBA that the broker-dealer should review.
The following are examples of questions a broker-dealer may consider when designing a form:
(1) Will the representative solicit the broker-dealer’s customers on behalf of the OBA?
(2) Where the location is that the OBA representative will conduct the OBA?
(3) How much time will the OBA involve?
(4) Will the representative require a license or accreditation to conduct the OBA?
(5) How much the representative expects to earn from the OBA?
(6) How is the representative compensated for the OBA?
(7) Are other representatives of the broker-dealer involved in the OBA?
Broker-dealers are expected to review OBA notifications and consider whether to impose specific conditions or limitations on registered persons engaging in OBAs to assure that registered persons are complying with FINRA Rules or otherwise not violating FINRA standards of commercial honor and principles of trade. While FINRA Rule 3270 has no specific requirement that a broker-dealer provide written approval of an OBA, we recommend a broker-dealer provide written acknowledgement to registered persons of its approval, including any specific conditions or limitations, or its denial of an OBA to aid in satisfying this requirement.
c. Outside Business Activity records must be maintained for three years after a registered person leaves a broker-dealer.
Broker-dealers must assure that they are maintaining records of each registered person’s written OBA notification and the broker-dealer’s review and compliance with review standards. These records will include supporting documents, research, and a record of the person who reviewed the OBA notification for compliance with the Rule. Broker-dealers must retain this documentation for the duration of a registered person’s affiliation or employment and then at least three (3) years after a registered person’s association with the broker-dealer has terminated.
For further information, contact Dionne Fajardo at 813-347-5118. Dionne provides consulting to broker-dealers, investment advisors and their associated persons in addressing the compliance challenges they face and developing strategies to implement effective solutions suitable for each client’s individual business operation.