As avid readers of BDLawBlog.com know, I'm posting a series on some of the violations that are most repeatedly found by the regulators, for which brokers are sanctioned. Continuing this series of mistakes to avoid, today's topic is participating in undisclosed outside business activities. Look through any monthly report of disciplinary actions, and you'll likely find several brokers who have been disciplined for not disclosed their involvement in an outside business activity. Sanctions may typically include a suspension, fine, and censure.
FINRA Rule 3030 is the outside business activity rule. It says: "No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement."
The Rule does not prohibit engaging in outside business activities. The Rule requires that brokers provide their firms with written notice that they are involved in an outside business activity. But what is an outside business activity? It's easy to identify those when you are employed by another person or company such as at a retail store, restaurant, or some similar part-time job. Many brokers, however, fail to recognize the existence of an outside business activity when they receive finder's fees, do consulting work on the side, prepare tax returns for clients for a fee, sell a product that's not a security or do something similar for money. Under the rule, if you receive money for doing something away from your firm, its likely an outside business activity that requires disclosure.
But it may be a reportable activity even if you don't receive compensation. Note that the rule defines an outside activity as being "employed." If you start a new side business but have yet to pay yourself, that may result in you being considered as an employee of that business. Even serving on the board of directors of a company, depending on the nature of the company, may result in your being considered as engaged in an outside business activity as one Hearing Officer noted in a Default Decision.
Also note that the Form U-4 requires brokers to disclose outside business activities in which they engage, along with additional information about that activity.
Finally, in addition to the regulatory requirements, most firms also have internal policies and procedures relating to Rule 3030. Most firms will require the broker to obtain approval from the firm before participating in any activity. Failing to follow the firm's policies and procedures may subject the broker to disciplinary action by the term, including termination.
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