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In this article we are going to provide you with a comprehensive review regarding the outside business activities of associated persons and private Securities transactions. Both of these topics are hot buttons for FINRA and are not only widely tested on their exams, but are also closely scrutinized during compliance examinations by FINRA staff members. Below we provide a template which incorporates the rules and regulations member firms are required to follow when supervising outside business activities and private Securities transactions.
Outside Business Activities And Private Securities Transactions (“Selling Away”)
The following table documents some of the items broker-dealers should have clearly outlined in their policy and procedures manual
|Name of Supervisor (“designated Principal”):||Designated Principal:|
|Frequency of Review:||Review of notification when received; document consideration of OBA.Review of selling away transactions: as described in this Manual, as with all securities transactions (daily).|
|How Conducted:||Document analysis, restrictions and/or prohibitions of OBAMonitor OBA if necessary based on analysis. Correspondence ReviewsCompliance Review, Interviews, Audits|
|How Documented:||Notification forms, analysis records. Investigation recordsChecklists|
|3010 Checklist:||Consolidated FINRA Rule 3270, NASD Rules 3040, 3010(c); Notice 01-79, 10-49|
Outside Business Activities (OBA): Consolidated FINRA Rule 3270.
Registered persons with new outside business activities: No registered person of the Company may be an employee, independent contractor, sole proprietor, officer, director or partner of an enterprise/business other than the Company, or be compensated, or have the reasonable expectation of compensation as a result of such outside activity, unless he or she has provided PRIOR written notice to the Company. Registered persons should provide the required notice as far in advance as possible, however, no later than ____ weeks prior to the planned commencement of the activity.
All registered persons who intend to commence new outside business activities must request from the designated Principal the appropriate form or other document used to disclose all information required by the Company about the activity. Registered persons must submit the required, completed form and any additional, requested information to the designated Principal and MAY NOT begin to conduct the activity prior to notification from the designated Principal that such activity may commence without restrictions or conditions. In the event the designated Principal imposes restrictions or conditions relating to the activity, the registered person must comply with them or cease to commence his outside business relationship/activity. If the designated Principal prohibits the activity based on his/her concerns about the activity, the registered person may not commence the relationship/activity.
Registered persons with existing outside business activities: Any registered person who is currently conducting an outside business activity, and who has not notified the Company as described in the procedures directly above, must complete required internal documentation and provide it to the designated Principal. Registered persons should not assume that as long as their existing OBA is disclosed on their Form U4, they have met their compliance obligations. Internal notification and supervisory processing is required for all outside business activities as described herein.
As with a new OBA, in the event the designated Principal imposes restrictions or conditions relating to the existing activity, the registered person must comply with them or terminate his/her outside business relationship/activity. If the designated Principal prohibits the activity based on his/her concerns about the activity, the registered person must terminate the relationship/activity.
Designated Principal’s responsibility: Upon receipt of a written notice of a new or existing OBA, the designated Principal shall consider whether the activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the Company and/or its customers or (2) be viewed by customers or the public as part of the Company’s business based upon, among other factors, the nature of the activity and the manner in which it will be conducted or offered.
After such a review, the designated Principal may impose specific conditions or limitations on the outside business activity, or may outright prohibit it. The designated Principal will convey such restrictions to the registered representative and establish a system for monitoring compliance. Registered representatives must cooperate with such monitoring or face disciplinary action. If the outside activity meets the definition of ”private securities transaction’ as described below, the designated Principal will ensure that the related procedures are followed.
The Company will maintain records evidencing compliance with these procedures as called for in SEA Rule 17a-4(e)(1) (three years). In addition, each respective registered person’s Form U4 must be amended to disclose any outside business activities not previously reported, in accordance with U4 reporting instructions.
Note that passive investments and activities as described below are exempt from this requirement.
Private Securities Transactions (“Selling Away”)
Private securities transactions (otherwise known as “selling away”) are outside business activities involving securities transactions and are governed by FINRA. The term “private” is meant to connote all those securities transactions, including direct participation programs and other financial products, engaged in by the individual outside his or her regular course of activities as an associated person, or other investment transactions which may mislead customers or participants into believing the transactions are sponsored by the Company. Rule 3040(b) requires associated persons to provide written notice of their intention to participate in any private securities transaction before commencing such participation. Rule 3270 further requires that the Company provide written approval or disapproval, depending on its preference, of the associated person’s participation in the transaction if the person proposes to receive compensation as a result of his or her participation; should there be no intended compensation, the Company shall acknowledge the associated person’s notice and may require adherence to specific conditions in connection with his or her participation in the transaction. In the event an associated person participates, with the approval of the Company, in a private securities transaction for compensation, the transaction shall be recorded on the books and records of the Company and the Company shall supervise the person’s participation in the transaction as if it were executed on behalf of the Company.
The Company requires strict adherence to the following policy:
Under no circumstances is the Representative to purchase or sell a security for, to or from a client without reporting the transaction for recording on the Company’s books. No Representative may engage in any private securities transaction without the prior express written permission of the Company. Firm Name will terminate a Representative if instances of “selling away” are discovered and will notify the regulatory authorities. Under no circumstances is any Representative to purchase or sell a security that is not publicly traded to, from or for a client without prior approval by a principal of the Company.
The Principal designated to approve and review these Outside Business Activities and Private Securities Transactions is also required to comply with these procedures.] Approval of, and subsequent review of, if required, the designated Principal’s Outside Business Activities and Private Securities Transactions are the obligations of deisgnated principal different registered principal or a member of senior management or the Company’s Board of Directors.] or The designated Principal is the only person with supervisory authority in the Company and will therefore supervise his or her own compliance with these policies.] This designated individual must ensure that the policies described above are enforced and documented and must document and follow up on any violations discovered.
Note that passive investments and activities are exempt from this requirement. Passive investments are those from which an individual receives income but for which he or she performs no service. Examples would include interest on investments or income from a corporation of which the person is a passive shareholder. Passive investments need not be reported; however, in accordance with FINRA Rule 3050, the Company requires all associated persons to provide written notice of whether or not they have accounts with outside brokerage firms (for further information, see “Personal Accounts and Trading”).
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