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.
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.
- 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.