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March 06, 2017

Outside Business Activity Best Practices

By: Sydney Beaudreault

In the securities industry, FINRA requires that all registered representatives disclose any outside business activity (OBA) including compensation that is earned outside of the scope or relationship of their firm. The goal is to ensure that these activities aren't interfering with the firm or affecting clients in any way. But what is considered an OBA? How do reps ensure that they are complying with this rule? What practices should your businesses follow to ensure you're effectively monitoring and supervising your team?

How do reps know what to report?

It's better to be safe than sorry. If a rep is engaging in any activities outside of your firm that brings in money, chances are, it should be disclosed. This could include a small businesses, investments, etc.

How do you know what should be reported to FINRA?

A rule of thumb is to report any outside activities that are, or could become, investment related.

How do reps disclose?

When filling out the Form U-4, the rep must enter any existing outside business in section 13 – here they can fill out this activity prior to employment. If the rep is already registered, they must provide a written notification to their firm prior to taking part in the outside business activity. The firm will review this request and either approve or deny if it creates a conflict of interest. If approved, the firm may choose to disclose the activity to FINRA by filling out a U-4a, again updating section 13.

Who is responsible?

The firm, the firm's chief compliance officer (CCO), the rep, the rep's supervisor, and any other involved parties could be responsible for a mistake in reporting an OBA. If the firm fails to conduct a thorough analysis, audit failures can result in millions of dollars in fines.

Review and Analyze

When OBAs are reported, it is important to analyze all aspects and ensure that there are no possible conflicts of interest. If there are red flags, the compliance officer should first work with the rep to discuss any concerns. Ask questions! You can work together to determine how these can be mitigated properly with certain policies in place to ensure that it does not interfere with the firm or customer.

Continuous monitoring

Supervisors should continue to check in on all approved outside business activities. This way, they can interview and stay informed of all changes in case the situation has changed since the original reporting. Even if there was not change, the supervisor should document this review to ensure that they were keeping an eye on the situation. It is important to verify that all statements that are being made are correct and that the list of outside activities is complete.

Be prepared and keep records

Most importantly, ensure that your firm has a process and systems in place that you trust. It is crucial to have all of this information centralized to ensure proper monitoring by the appropriate supervisor. By keeping proper records of current and historic information, your firm will have a complete audit history to avoid hefty fines.

Is your business lacking an effective and efficient way to manage and monitor outside business activities? Do you want to trust and improve your compliance culture? Learn more about the industry's latest discovery for easily managing and reporting OBAs.

Sydney Beaudreault

Sydney Beaudreault is a Technical Writer – Marketing Specialist for Vertafore's Sircon solution set. Sydney graduated from Michigan State University with a BA in Professional Writing and an emphasis in Public Relations. When Sydney isn't in Vertafore's East Lansing office, you can find her with her dog, Koda, or in the stands cheering on the Spartans.