Broker-Dealer Violations of Rules Governing Outside Business Activities
Broker-Dealers
Compliance Operations
March 31, 2024
The Case
From January 2018 to present, a broker-dealer firm failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with rules governing outside business activities (OBAs). During this period, the firm failed to evaluate and document its evaluation of OBAs disclosed by its registered representatives as required by FINRA Rule 3270.
The settlement notes that the firm did have written supervisory procedures (WSPs) requiring it to review disclosed outside business activities (OBAs) to ensure that they did not "compete with the firm's business, use firm resources, or present a potential conflict of interest.” However, the firm failed to assess and document its evaluation of OBAs disclosed by its registered representatives.
In particular, the firm approved at least 37 OBAs without evaluating and documenting its evaluation of whether:
They should be restricted or prohibited;
They would interfere with or otherwise compromise the registered person’s responsibilities to the firm or its customers or be viewed as part of its business;
They should be treated as outside securities activities, with any transactions recorded on the firm’s books and records.
As a result of these violations, the firm incurred fines totaling $30,000.
Why Does This Matter?
Outside business activities appear yet again on FINRA's list of priorities for 2024, and recent enforcement actions undertaken by the SRO support this. In particular, the newly released 2024 FINRA Annual Regulatory Oversight Report flags both OBAs and private securities transactions (PSTs) as this year’s focus areas.
FINRA Rule 3270 requires registered persons to notify their firms in writing of proposed OBAs so firms can determine whether to prohibit, limit, or allow those activities. But, some firms are falling short of the mark in establishing, maintaining, and enforcing a supervisory system tied to OBAs.
InnReg's Experience
As an established outsourced compliance provider since 2013, InnReg is uniquely positioned to help you remain ahead of evolving regulations on OBAs and other key FINRA priorities.
Based on our experience, we recommend that fintechs consider their methods for identifying individuals involved in undisclosed OBAs and PSTs and determine whether their WSPs "explicitly" state when and how registered persons must notify the firm of a proposed OBA or PST.
In addition, fintechs are well advised to adhere to the following best practices:
Questionnaires: Require registered persons and other associated persons to complete detailed, open-ended questionnaires with regular attestations regarding their involvement in new or previously disclosed OBAs and PSIs;
Due Diligence: Learn about all OBAs and PSTs at the time of initial disclosure to the firm and periodically thereafter;
Training: Conduct training on OBAs and PSTs during onboarding and periodically thereafter.
Learn More About This Topic
For additional insights, familiarize yourself with InnReg’s staffing compliance services to understand how our experts are positioned to provide support and guidance for comprehensive staffing compliance, including onboarding, monitoring, and education.
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