Trends in Disciplinary Actions - Outside Business Activities

by Julie Mendel | Jan 25, 2019
FINRA Trends in Disciplinary Action

Continuing with our series on trends in disciplinary actions, we are going look at outside business activities. This is an area that seems to present big problems. Many people work two jobs and others perform tasks for which they receive compensation (for example, coaching high school basketball). For a number of reasons, including potential conflicts of interest, FINRA rules prohibit registered representatives from becoming an employee, independent contractor, sole proprietor, officer, director, or partner of another person as a result of any business activity outside the scope of the relationship with their firm, unless the representatives have provided prior written notice to the firm and received approval for that activity.

Because any offer to work part-time or off-hours with any other business or any compensation received for services performed outside of the firm can directly violate these rules, and even if they are not a violation, representatives should discuss them with their supervisor to determine whether the offer of employment or the offered compensation can be accepted. The firm must review the potential outside business activities to determine whether they will approve the activities, impose conditions, or limit or prohibit your participation.

Let’s look at an example. One registered representative engaged in an outside business activity with a company through which he conducted insurance sales—including sales of equity-indexed annuities—for compensation, and never provided his member firm with written notice of his involvement with the company. He completed his firm’s annual compliance questionnaires and inaccurately answered on each questionnaire that he:

  • was not involved in any business activity outside of the firm (except he identified a teaching position on one of the questionnaires)
  • had not participated in any equity-indexed annuity transactions other than those processed through the firm
  • had not received any compensation from any person or entity other than a current firm representative without the firm’s approval

For all of this, the registered representative was assessed a deferred fine of $10,000 and was suspended from association with any FINRA member in all capacities for four months.

Make sure that your representatives are disclosing their outside business activities and receiving approval for the activities and related compensation through education, training, and firm policies and procedures.

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