Outside Business Activities

FINRA recently issued a report regarding its examination findings. FINRA issued this report so that firms can gain insight from the work of FINRA’s examination of other firms.

Among the FINRA’s findings are the following areas that need additional attention:

  1. Cybersecurity, including access management, risk assessments, vendor management, branch office security, segregation on internal duties and data loss prevention.
  2. Outside business activities and private securities transactions, including failure to provide notice to firms, notice reviews and post private securities transaction approval conduct.
  3. Anti-money laundering compliance programs, including maintaining adequate policies and procedures for suspicious activities, responsibility for AML monitoring, exclusions from data feeds used for AML monitoring, resources for AML monitoring and independent testing for AML monitoring.
  4. Product suitability, including unit investment trusts, multi-share class and complex products and training.
  5. Best execution.
  6. Market access controls, including establishing pre-trade financial thresholds, implementing and monitoring aggregate financial exposures, tailoring erroneous or duplicative order controls, implementing effective fixed income financial controls, reliance on vendors for fixed income financial controls, and effective testing for fixed income financial controls.

This list and the items in it should provide other firms with the benefit of hindsight. Review the report and then self-critique your firm. Do you have any of these issues? If so, implement modifications and adjustments to address them.

FINRA is currently reviewing its rules regarding outside business activities and private securities transactions. From time to time, FINRA reviews its rules and application of those rules to see if anything needs to be tweaked. Is there any significance to FINRA looking at these particular rules?

From my experience, some bad brokers have used the outside business activity disclosure process as the tool to cover their tracks while engaging in activity that the firm would otherwise want to know about. In some case, the undisclosed outside business turned out to be a Ponzi scheme.Core Values

The purpose of requiring outside business disclosures is for a firm to make sure that it and its clients know about any conflicts of interest that their brokers may have. For example, the firm would want to know if the broker had a real estate broker’s license because that business may compete with the time the broker can give to her securities investing clients.

FINRA exploring this area should be a message to firms that they need to ask critical questions about what they are doing regarding outside business disclosures.

Ask yourself:

  • Are you doing enough to make sure you receive honest and complete disclosures?
  • What, if any, ramifications are there for incomplete or untimely disclosures?
  • Are you asking enough follow-up questions to understand the proposed outside business activity?
  • What follow-up, if any, do you make with brokers who make disclosures?

If you cannot answer these questions, you need to do more homework or be exposed to the bad broker who may be in your midst.