FINRA Signals Continued Scrutiny of Outside Business Activities and Private Securities Transactions

By Jonathan Hall, Esq.

Outside business activities (OBAs) and private securities transactions (PSTs), some iterations of which are referred to as “selling away,” remain a significant regulatory focus for FINRA. When registered representatives engage in outside ventures or raise capital for private investment without proper disclosure and firm supervision, the risks to advisors, investors, and firms can be substantial. 

FINRA rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person) require registered persons and associated persons to provide prior written notice to their firms of proposed outside activities and private securities transactions. 

Where a firm approves a private securities transaction involving selling compensation, the firm must record and supervise the transactions as if it were executed on the firm’s behalf. 

FINRA Findings: Common Compliance Deficiencies 

FINRA has identified recurring deficiencies in how firms supervise OBAs and PSTs. 

Misinterpretation of “Selling Compensation

FINRA has observed that some firms interpret “selling compensating” too narrowly, focusing only on direct commissions while overlooking indirect financial benefits, such as receipt of securities or other economic incentives. This misinterpretation may result in firms incorrectly concluding that certain activities do not qualify as compensable private securities transactions.

 Inadequate Approval and Supervision

FINRA has also cited failures to adequately supervise approved PSTs involving compensation. In some cases, firms approved participation in outside transactions without implementing meaningful supervisory controls or recording the transactions on the firm’s books and records.

Other findings include: 

• Failing to retain documentation demonstrating compliance with supervisory obligations; 
• Failing to record transactions because they were not captured by clearing firm feeds; 
• Failing to review requited written notices; and 
• Failing to enforce limitations placed on approved outside activities. 

Effective Practices Firms Should Consider

FINRA has emphasized that firms should adopt robust, documented supervisory frameworks tailored to outside activities and private securities transactions. 

Effective practices may include: 

• Requiring detailed, periodic questionnaires and attestations regarding outside business activities and potential private securities transactions; 
• Conducting enhanced due diligence when activities are disclosed, including reviewing public records, social medial, communications, and supporting documentation; 
• Monitoring red flags such as unusual fund movements, lifestyle changes, production anomalies, or customer complaints;
• Clearly defining “selling compensation” in written supervisory procedures; and 
• Imposing meaningful consequences for failures to provide notice or obtain required approvals. 

Conclusion

Outside business activities and private securities transactions present heightened compliance and enforcement risks when firms fail to implement reasonably designed supervisory controls. FINRA’s recent findings, and its proposal to streamline existing requirements, underscore that while the rules may evolve, the obligation to supervise associated persons remains central. 

Firms should evaluate whether their written supervisory procedures, approval processes, monitoring systems, and documentation practices are reasonably designed to identify and address risks associated with OBAs and PSTs. And advisors who are considering engaging in OBAs and PSTs must be sure to submit them for vetting and approval before doing so. 

If you have questions about FINRA’s requirements concerning outside business activities, private securities transactions, or related supervision obligations, please contact a securities attorney at inquiry@galbraithlawfirm.com or 212.203.1249.