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.
Firm Element Solutions