Finra’s scrutiny of brokers’ outside business activities is a recurring area of focus and presents potential pitfalls that member firms and registered representatives must guard against, according to industry professionals.
There has been a “significant amount of time during cycle exams devoted to outside business activities and private securities transactions,” says Stephen Murphy, managing director at compliance consulting firm Foreside. “I would have thought that it would start to subside by now and it seems to have only picked up pace.”
Former Finra deputy of enforcement Emily Gordy says it’s to be expected that Finra would continue to closely scrutinize OBAs and private securities transactions, given the reputational risks posed by a registered rep engaged in bad behavior through one of those avenues.
“It will always be a cornerstone of their regulatory priorities because it has the potential to create a lot of risks for customers and for firms,” says Gordy, now a partner at law firm McGuireWoods.
Earlier this month, Finra released an examination and risk monitoring report that included findings that broker-dealers and registered reps had run into problems with OBAs and private securities transaction rules.
In some instances, “compensation” was interpreted too narrowly, focusing only on direct salary and commissions, without considering how other forms of payment and indirect benefits interacted with the rules, Finra wrote in the report.
Finra examiners have also found issues with firms failing to document compliance with their supervisory obligations for private securities trades on account of those transactions being inconsistent with firms’ electronic systems, the industry self-regulator noted.
Where it can get tricky
Some of the common persistent sources of confusion about the rules that can trip up firms and advisors stem from mix-ups between Finra Rule 3270, which governs OBAs, and Rule 3280, which deals with private securities transactions, Murphy says. Reps are at times uncertain which rule covers a given activity and can make missteps due to the fact that OBAs must be disclosed on the Form U4 registration notice, whereas private securities trades aren’t disclosed, he adds.
Another potentially troublesome area for registered reps with respect to OBAs and private securities transaction disclosures is real estate, according to Murphy. “This is where it gets very grey.”
Murphy says it isn’t always clear to registered reps when they must disclose their involvement with rental properties, for instance. Registered reps’ activities can range from something as simple as renting out a single apartment to hiring property managers, he says. They can also include forming limited liability corporations with others to control the property, which becomes a private security transaction, he notes.
Real estate-related OBA issues can also arise from the renting of office space, says McGuireWoods’ Gordy.
At times, reps can also overlook mundane outside activities that nevertheless have to be disclosed, she says.
Citing an example from while she was with Finra, Gordy says there was a case in which an individual didn’t disclose working at a Christmas tree farm, where the individual was paid to sell Christmas trees, during the holidays. Although that might seem like an insignificant business activity, it still needed to be disclosed and that person was the subject of an enforcement action, she says.
At the moment, Finra also appears to be “cross-referencing” outside business activity-related disclosures with information about loans received through the Payroll Protection Program, Foreside Financial’s Murphy says.
In instances where registered representatives received a PPP loan in connection with an outside business activity, regulators will want to check to confirm that the outside business activity had been disclosed, he says.
“Rather than waning, it appears to be waxing,” says Murphy of the ongoing scrutiny.
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The O.N. Equity Sales Company Feb. 16, 2021 at 09:54 AM EST
Keep in mind, there are pitfalls with disclosing as well. An example is the guy who was paid to see Christmas trees. Some "unscrupulous" advisor might find that on anothers' record, a competitor, and that person might suggest that the advisor getting paid for selling Christmas trees "isn't doing well" as an advisor. I had such a situation when I visited my sister in Tennessee & we both worked as extras in a movie for two days. I was paid $100 per day for the work & properly disclosed that to my firm. However, years later when in a competitive situation with another advisor, he decided to tell the client that I was an "aspiring actress"... the client chose to work with the other advisor & told me why. When I brought up a complaint against him for what he said, the rules are you cannot make a disparaging comment about another advisor or another firm, the client suddenly didn't remember telling me what she'd told me he'd said. There are bad people out there just looking for ways to disparage you & unfortunately, clients who'll stand behind them.
Truth in Advertising
Feb. 16, 2021 at 06:32 PM EST
I agree Alishia - unfortunately the financial services industry is over regulated in such a way that only negative views about Financial Advisors are considered acceptable and SEC/FINRA does precious little to stop the Suze Orman's and other media personalities like her from making $$millions$$ negatively bashing advisors at large, discouraging the public from seeking advice, and lying to the public that "they don't need advice, they can do it themselves if they just buy her book etc.) when the truth is so many people are woefully unprepared for retirement and desperately NEED experienced human advice. Media personalities are permitted to go on TV and essentially give broad based advice without "knowing their clients" simply because they say they are "education and entertainment" when the public actually views them as really giving investment advice, not just engaging in education or entertainment. Advisors are gagged from even acknowledging or thanking a person who says anything positive about their investment experience with a Financial Advisor so again, all we're left with is negativity that casts doubt about the entire industry and encourages advisors to do the same to each other. Unfortunately, it's become a stupidly over-regulated industry driven by people who've often never provided investment advice and think high quality, experienced advice should be delivered to the public for FREE. I wonder if those same regulators would also choose the low-bidder for their next surgery?