In a recent blog, we discussed 3 Things to Consider When Going into Business with a Partner. This week, we want to remind FINRA-registered financial advisors who are considering starting a side business or becoming involved in a corporation or LLC that they must take steps to remain in compliance with FINRA Rule 3270.
Rule 3270 sets forth the requirements that registered persons must abide by when engaging in an outside business activity, or OBA. The rule states “No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement” (FINRA.org).
Let's unpack this…
First, what qualifies as an OBA? Don't fall into the trap of thinking that compensation is the determining factor. Note the language of the rule—any business activity could qualify as an OBA, even if it is unpaid. If you have a role in any business or organization, paid or unpaid, consider whether or not it falls under Rule 3270, and consult with your firm or an attorney if you aren't sure.
Note that you must provide prior written notice. This means that you should disclose outside business activities you are planning to engage in BEFORE you begin. If a friend has asked you to help out with his start up, or you've been invited to serve on a board, disclose these activities before you agree to them. Most firms have internal policies that require that the advisor receive approval from the firm before participating, so be careful to adhere to all of your firm's policies and procedures, or you could find yourself in a compliance mess.
How do you report your activities? As stated in the rule, a financial advisor must disclose his outside business activities to his firm using the member's specified method. Each firm is different, but this is typically a form outlining the nature of the business, your involvement, compensation, time dedicated to the venture, and more. You will fill out the form, include any necessary documentation, and submit it to your firm for review.
What about advisors registered with a RIA only – does this rule apply? For a financial advisor registered with an investment adviser only, and not a FINRA-member broker-dealer, the FINRA rules won't apply. Having said that, many RIA firms have internal policies and procedures in place with respect to disclosing outside business activities that are very close to this rule. So, before you engage in any outside activity be sure to check your firm's internal policies and procedures and follow those.
Finally, when you engage in an OBA, either as a registered representative of a broker-dealer or an investment adviser representative of a registered investment adviser, you will need to properly disclose the outside business activity on your Form U4 as well. Remember, it is crucial that Form U4 disclosures are made timely and honestly. Failing to update your Form U4 accurately and promptly could result in sanctions and consequences for you that can lead to some draconian consequences. For more information on keeping your Form U4 clean and in compliance, click here to download our free Guide to a Cleaner Form U4.
If you aren't sure if your OBA falls under Rule 3270, remember this rule of thumb—when in doubt, ask. Speak with your firm's compliance department or consult an experienced attorney. Don't risk inadvertently violating Rule 3270 and facing repercussions from your firm or FINRA for a misunderstanding. If you still have questions about your situation, call The Beck Law Firm, LLC at (678) 344-5342 to see how we might be able to assist you.