Over the years that I have defended broker-dealers and investment advisors, a more robust overview of outside business activity (OBA) disclosures would have gone a long way to disprove a number of claims. So where did these firms go wrong?
The biggest issue that I have seen is a firm’s willingness to take the OBA of a representative or IAR at face value and not do any more due diligence. In one instance, that due diligence could have unraveled a Ponzi scheme at its inception, instead of years after the facts and millions of dollars lost.
In that case, the representative disclosed a beneficial interest in another business and that certain of his clients used that other business for tax preparation services. Although that other entity was not subject to the firm’s authority, the firm could have done more than nothing.
For one, the firm could have conditioned its approval of the OBA on the representative providing bank account statements for the other firm so that the FINRA-regulated firm could have assessed the scope of its clients using that other firm. By doing so, the firm could have uncovered that its clients were transferring money in not insignificant sums from their brokerage accounts to this third-party.
Conversely, if the representative refused or unable to get these statements, the firm could have denied approval of the OBA. Although this extra step may not have exonerated the firm from its representative’s use of the OBA to perpetrate a fraud, it would have provided a solid argument that it should have no liability because the representative acted outside the scope of his authority.
The moral of the story is that there is no perfect system for assessing OBAs. The important thing, however, is to take nothing at face value. Ask questions and push for information. If your employee is unwilling or unable to get that information, then the best thing is to not approve the OBA and lay the foundation for a defense if you are ever questioned about your employee’s outside business activity.