2 Definition – Outside Business Activity The engaging, by an agent, in an activity which does not include the sale of securities, outside the regular course or scope of his employment.Requires prior written notice to the broker dealer.Although written authorization is not required, most firms have, as part of their supervisory procedures, a requirement to provide written authorization to the agent prior to engaging in the activity.
3 Governing Rules NASD Conduct Rule 3030 Outside Business Activities of an Agent
4 NASD Conduct Rule 3030No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member.Such notice shall be in the form required by the member.
5 Provisions of the RuleAn agent who engages in an outside business activity without prior notice to his or her firm, including the sale of non-securities products, violates NASD Rule 3030.
6 Firm’s Responsibilities Supervisory procedures should be reasonably designed to achieve compliance with NASD Rules 3030 and 3040 regarding outside business activities and private securities transactionsAppropriately educate their agents regarding the requirements of Rules 3030 and 3040.
7 Examination Steps Outside Business Activities Do the firm’s supervisory and compliance procedures appear to be reasonably designed to prevent and detect outside business activities?Does a review of the firm’s records indicate that agents notified the firm prior to engaging in the activity?
8 Examination Steps cont. Does the firm require agents to affirmatively disclose, on a periodic basis, their outside business activity(ies)?Review agent files for such records and determine whether it was subsequently reviewed and approved/denied by the firmReview annual compliance questionnairesDoes the firm independently verify the disclosures on the questionnaires?
9 Elements of Outside Business Activity Violations Activity does not include the sale of securitiesAgent failed to notify the firm in writing prior to engaging in the activity
10 Outside Business Activity Examples Outside business generally includes engaging in activity which does not include the sale of securities outside the scope of the firmExamples requiring prior notice to the firm.President of homeowners associationMember of the audit committee of a churchReal Estate salesMortgage BrokerTax Preparation
11 Outside Business Activity Supervision As part of the supervisory and internal audit program, the dealer should have a procedure to ensure the agent does not engage in any activity denied by the firm.Likewise, the examiner should confirm that activity denied by the dealer, did not occur.
12 Definition – Selling Away The engaging, by an agent, in a private securities transaction outside the regular course or scope of his association or employment with the dealer he is registered with, without prior written notification to the dealer with whom he is associated.
13 Governing Rules NASD Conduct Rule 3040 Private Securities Transactions of an Associated Person (Agent)
14 Provisions of the RuleRule 3040(b) requires written notice to the broker dealer and written approval from the broker dealer to the agent prior to engaging in the transaction(s).In transactions which involve compensation, Rule 3040(c) requires that the dealer approve or disapprove of the transaction(s) in writing and record the transaction and compensation on its books.
15 Provisions of the Rule – cont. In transactions which do not involve compensation, Rule 3040(d) requires that the dealer acknowledge in writing receipt of the agent’s notice.The broker dealer is required to supervise the activity in connection with the sales by the agent.
16 Elements of Selling Away Violation The product sold is a security.The agent did not provide written notification to the broker dealer and/or receive approval.Transactions involving compensation were not recorded on books and records of broker dealer.In transactions which do not involve compensation, the firm did not provide written acknowledgement to the agent.
17 Proof that Product is a Security Documents given to investor(s) to evidence ownership such as contract, note, stock certificate, canceled check, bank records of issuer, etc.Analysis by examiner, attorney, or expert that the product sold is a security.
18 Proof of Written Notification and Approval Section of dealer’s procedures manual which outlines steps for submission and approval.Documents evidencing request by agent and approval/denial/acknowledgement by firm, or letter from compliance that no such requests were made.Interview of agent and compliance officer.
19 Proof that Transaction was not Recorded on Books and Records If compensation was received, review commission records of dealer and agent to determine if compensation was recorded.Statement from agent, supervisor and compliance personnel that compensation was not recorded.
20 Examination Steps Selling Away Review your state’s corporate records prior to your exam to determine any affiliated companies of individuals located at the home or branch office.You may also conduct other searches such as Google….Interview branch manager/principal regarding firm’s procedures to prevent selling away.Review supervisory procedures manual for selling away procedures.
21 Examination Steps (cont.) Review customer files for indications of the sale of securities not approved by the firm.Review bank records for unusual bank deposits (i.e., commissions) or payments (i.e., interest payments to investors).Document each selling away transaction with check, wire, contract, certificate, etc.Interview agent, customer, supervisor, compliance personnel, and other interested parties.
22 Examination Steps (cont.) Conduct on-site visit, if possible, and follow examination steps. Otherwise, utilize the following steps.Review corporate records to determine any affiliated companies for individuals.Request documents from dealer and agent including list of investors, supervisory procedures manual, agent file, compensation records, and approval/ denial documents.
23 Examination Steps (cont.) Interview branch manager/principal, or get written response, regarding firm’s procedures to prevent selling away.Review supervisory procedures manual for selling away procedures.Review agent files for evidence of outside business activity.
24 Examination Steps cont. Does the firm require agents to affirmatively disclose, on a periodic basis, selling away activity?Review agent files for such records and determine whether it was subsequently reviewed and approved/denied by the firm.Review annual compliance questionnairesHow does firm verify the questionnaires?
25 Examination Steps (cont.) Interview agent, customer, supervisor, compliance personnel, and other interested parties.
26 As part of the supervisory and internal audit program, the dealer should have a procedure to ensure that agents do not engage in the activity denied by the firm.Likewise, the examiner should confirm that activity denied by the dealer did not occur.
27 Other Possible Associated Violations Sale of unregistered securities.Sale of securities by unregistered agent.Fraudulent sale of securities.NASD Conduct Rule 3010 – Failure to Supervise based upon no procedure, deficient procedure or failure to enforce procedure
28 Other Possible Associated Violations – cont. FINRA Rule A member in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.
29 Do not Confuse Selling Away with Outside Business Activity An agent who sells a security away from his or her firm without first obtaining approval from the firm violates Rule 3040.An agent who engages in an outside business activity without prior notice to his or her firm, including the sale of non-securities products, violates Rule 3030.