FINRA Outside Business Activities

Navigating Outside Business Activities: What You Need to Know

Rules surrounding Outside Business Activities (OBAs) can feel like a maze. 

While the concept seems simple: disclose any business activity outside your job.

Once you dig into the details you can see that it’s a bit more complex than just filling out a few forms and calling it a day.

Understanding and complying with OBAs is not only essential for staying in good standing with regulators, but also crucial to protecting your firm’s reputation. 

Let’s break down the requirements, the risks, and the best practices you can follow to make sure you’re on the right side of the rule.

What is Considered an Outside Business Activity?

At the core, an outside business activity is any professional activity you engage in outside of your role. This includes:

• Any business where you are receiving compensation outside your main role as an advisor, such as a side business, consulting work, or even being involved in a board position.
• Any activity that could influence your responsibilities as a registered person, such as involvement in decisions that might present a conflict of interest.
  

These outside business activities can be things such as:

• Secondary employment
• Selling products
• Investments
• Creating a business entity
• Board memberships
  

But just because something could be considered an outside business activity doesn’t necessarily mean it needs to be disclosed. 

There are certain exceptions, and not every side gig will trigger disclosure requirements.

However, if you’re in doubt it’s best to err on the side of caution and disclose them all. 

Why Does FINRA Care About OBAs?

Why does FINRA place so much emphasis on OBAs? 

The primary reason is to ensure that there is no conflict of interest between a registered person’s personal or business activities and their professional responsibilities.

Beyond that, it’s about safeguarding the integrity of the financial services industry. 

Disclosing and getting approval for OBAs ensures that your professional activities are transparent and that you are not engaged in anything that could potentially harm clients or damage your firm’s reputation.

The Disclosure Process

Here’s where it can get a little complicated. 

According to FINRA Rule 3270 of the FINRA Rulebook, you must disclose any outside business activity that could reasonably be expected to interfere with your duties. 

Reading and understanding this rule is a requirement. 

What does this mean?

• Disclose Early: If you plan to engage in an outside business activity, you need to disclose it to your firm before you start. 
• Transparency is key: This should be a full disclosure, do not leave details out. This can include compensation, time necessary, conflicts of interest, etc.
• Documentation: Even if you’ve disclosed your activity, don’t forget that written approval from your firm is required before proceeding. Without it, you may face consequences from your firm or from regulatory bodies.
• If rejected, follow it: If you perform business activities you have not been approved for, don’t do them. You can potentially be terminated for cause. This can prevent you from getting a job elsewhere!
• Update Regularly: Your outside business activities might change over time, so regular updates to your compliance team are necessary to ensure you’re still in compliance.

Firms are required to supervise these activities, and must disclose if you have conflicts of interest to their clients. 

Broker-dealer vs. Registered Investment Advisers (RIAs)

Broker-dealers 

• Registered representatives must disclose and obtain approval from their firm before engaging in any outside business activities. The firm must monitor and ensure no conflicts with their primary role, and FINRA requires detailed documentation and approval processes.

RIAs

• While RIAs must disclose any OBAs that could create conflicts of interest, they do not typically require the same formal approval process from their firm as broker-dealers do. 
• If your RIA has an approval policy you must follow it. 
• RIAs must ensure these activities do not interfere with their obligation to act in clients’ best interests. 

This difference is because RIAs are primarily regulated by the SEC Rules and Regulations.

Why the Details Matter

Failing to comply with FINRA’s OBA requirements can lead to serious consequences. 

Whether it’s fines, suspension, or even termination, the penalties for non-compliance can significantly impact your career.

In addition to regulatory consequences, engaging in unapproved outside business activities can create reputational risks for both you and your firm. If an OBA creates a conflict of interest or is perceived as unethical, it can harm client relationships and affect the firm’s reputation. 

This is something that no professional wants to deal with.

Firms are required to supervise these activities, and must inform their investors if you have conflicts of interest, which can be these outside business activities. 

The Compliance Process Doesn’t Have to Be Overwhelming

Here’s the good news: managing your OBAs doesn’t have to be a burden. 

The right processes can make the whole compliance landscape much easier to navigate.

If you’re looking for professional guidance, My RIA Lawyer’s Outsourced Compliance Services can help manage the process. These services assist with ensuring that all OBAs are reviewed and approved in line with regulatory requirements, giving you peace of mind.

Additionally, having General Counsel support on hand can be invaluable when legal questions arise about what constitutes an OBA or how to handle a specific situation. 

It’s always better to ask first and get advice from someone who understands the legal nuances of compliance.

Consider Further Education: RIA Compliance University

If you’re new to compliance or need a refresher, RIA Compliance University is a fantastic resource for understanding the ins and outs of FINRA regulations, including the OBA rules. 

With in-depth courses and support, it’s an ideal way to stay up to date on the ever-evolving regulatory landscape.

Key Takeaways for Managing OBAs

Here are the core things to remember when it comes to the Outside Business Activities rule:

• Disclose Early: Let your firm know about any outside business activity before you engage in it. Transparency is key: This must be a full disclosure, including compensation, time necessary, conflicts of interest, etc.
• Get Written Approval: Don’t skip this step, approval from your firm is required, verbal discussions can be denied. 
• Stay Up-to-Date: If your outside business activity changes, inform your compliance team promptly.
  

By following these steps, you can avoid unnecessary complications and remain compliant with regulators.

If you need help managing OBAs, don’t hesitate to reach out to My RIA Lawyer for support.

Our compliance nerds are here to make the compliance process smoother and less stressful for you.

In the end, staying compliant with OBAs is not just about following the rules. This is about maintaining your professional integrity and protecting your reputation in a highly regulated industry.

Remember, if you’re unsure about something it’s always worth getting expert advice, contact us!