FINRA Compliance: Proper Handling of Outside Business Activities

by NCS Regulatory Compliance on April 19, 2012

Maintaining FINRA compliance weighs heavily on the minds of many in the securities industry. One area that is garnering attention from FINRA examiners is the outside business activities of registered associates. Member firms need to be aware of registered associates’ outside activities and properly document their review of requests related to these activities.

 

Prior written notification required

Registered associates may not engage in business activities outside the scope of their relationship with their member firm, unless they have given the firm prior written notice. FINRA compliance stipulates that without providing prior notification to their broker-dealer, registered associates are prohibited from being an employee, independent contractor, sole proprietor, officer, director, or partner of another person, or being compensated, or having a reasonable expectation of being compensated, by another person as a result of any outside business activity.

 

Key compliance questions to consider

After the member firm’s designated principal receives written notice, he or she should ask the following questions to determine whether the outside activity will be allowed and whether specific conditions or limitations should be imposed, or if the request should be rejected:

  • Will the outside activity interfere with or otherwise compromise the registered person’s responsibilities to the firm and/or its customers?
  • Will the outside activity be viewed by customers or the public as part of the firm’s business based upon the nature of the activity and the manner in which it will be conducted or offered?

 

The firm also needs to evaluate whether the activities would involve private securities transactions, which must be reviewed and supervised under NASD Rule 3040. (An upcoming blog entry will discuss this further.)

 

Key compliance actions to take

For FINRA compliance, following consideration of these questions, the member firm should:

  • maintain evidence of the prior notification, results of the principal’s review and any special conditions being imposed;
  • amend each respective registered employee’s Form U4 to disclose the activity, in accordance with U4 reporting instructions, if applicable.

 

Taking these steps can help member firms maintain FINRA compliance when a registered associate engages in outside business activities.

 

Learn more about maintaining compliance with federal securities laws, rules and regulations at RegulatoryCompliance.com.
 

 

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