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FINRA wants to know about your other business activities

Speaking at last month’s Compliance Outreach Program for Broker Dealers hosted by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), panelists discussed supervisory practices and reviews relating to outside business activities.

According to Kevin Goodman, the SEC’s National Associate Director, Broker-Dealer Examination Program, Office of Compliance Inspections and Examinations, “This is a hot topic for the SEC and FINRA…We’re focusing more than ever on branches because that is where the sales practices actually occur.”[spacer height=”20px”]

Addressing the issue of Outside Business Activities (OBA) from a mid-sized, regional firm’s perspective, Marion Halliday, Senior Vice President, Chief Compliance Officer, Janney Montgomery Scott LLC said, that in some ways, her firm tries “to cast a really wide net. I’d rather people ask for permission than for forgiveness.”

According to Halliday, the giving of permission is really a supervisory function, and ultimately the responsibility to supervise an employee’s involvement in what Janney refers to as Outside Activities (OA), lies with that employee’s manager. Part of the process, she says, is completion of a form answering questions like:

  • Are you spending more than 10 percent of your time on this OA; and
  • Do you expect to incur 10 percent or more of your income from this OA?

“It is these kinds of questions,” she told attendees, “that signal to the supervisor whether you are going to be able to get the job done that you were hired to do.” And at the end of the day, that is what matters.

Don’t trust. Verify.

How do firms reassure themselves of compliance – that employees are doing exactly what they said they would be doing in their outside activities?

Janney has several areas where the firm monitors outside activities, including:

  • Whether the activity involves investing away from the firm;
  • How passive the employee’s activity is. Janney will do background searches on the entity and the employee’s involvement. The firm asks the question: You say you are purely passive, but are you really?
  • Email monitoring. Outside activity is noted in Janney’s ZIPLIP email surveillance system. Managers will see emails involving the entity going back and forth. Janney’s compliance program, said Halliday, is not “in the business of super-sizing in that sense…but you need to comply with the conditions we’ve put on [outside activities].

What are large firms doing?

Bank of America – Merrill, Lynch, Pierce, Fenner & Smith Inc. also requires pre-approval before an employee engages in any outside business activity. And like Janney, submissions go through a direct supervisor. However, applications are reviewed by a centralized compliance function that focus on all OBAs – the same group that also reviews personal trading activities.

“So,” explained Gloria Greco, Managing Director, Co-Chief Compliance Officer, “they are familiar with those disclosures and [the] kind of accounts that the employee has.” What her firm asks, as employees seek approval, is a description of the employee’s role, and, in that context, whether any specific conflicts that may exist. For example:

  • Is there an affiliation with one of our clients that may be related to the entity?
  • Does the entity have a customer with the company or with that financial advisor?
  • Are there time commitments or requirements that would conflict with their responsibilities as an employee of the company?
  • What role do they actually play in this entity? For the latter, Greco explained, “we traditionally shy away from anyone taking a role that would involve them in providing financial advice or acting as a treasurer, or having financial responsibility for the entity.”

Because many firms encourage employees to be active in the community in which they work, Broker-Dealers, RIAs, etc. frequently get involved with outside (business) activities, many of which have to do with charitable organizations. But oversight and reporting is still is the responsibility of each firm.

So the best advice offered? Be prepared. Make sure your firm, regardless of size, has the right processes in place and the systems to support those processes. Make sure you can document accurately and then locate those documents when you need them. If you don’t have appropriate OBA oversight processes in place, develop them, maybe even calling in an independent regulatory archival and compliance solutions specialist to help you. Like Patrina. Ask about our comprehensive regulatory archival and compliance solutions specifically designed for Broker/Dealers, RIAs, and FCMs.

Let’s talk (212- 233-1155).