Outside Business Activities and Private Securities Transactions
Quick Answer
The FINRA outside-business-activity (OBA) requirement governs any non-firm employment, contracting, or compensated activity. The registered person must give prior written notice to the firm, and the firm must evaluate whether the activity will interfere with firm responsibilities or create attribution risk. The FINRA private-securities-transaction (PST) requirement governs any securities transaction outside the rep's firm employment. Prior written notice is required, and the firm's response (and books-and-records treatment) depends on whether the rep receives selling compensation.
These two requirements together capture "selling away": a registered person who sells investments outside the firm without prior notice and approval. The exam pairs OBA and PST frequently, often with the FINRA commercial-honor standard stacked on top for the underlying ethics breach.
Outside Business Activities (OBAs)
A registered person may not be:
- An employee, independent contractor, sole proprietor, officer, director, or partner of another person, OR
- Compensated (or have a reasonable expectation of compensation) for any business activity outside the scope of their employer-member relationship,
UNLESS prior written notice has been provided to the employer member firm.
What Triggers the Rule
The rule reaches a broad range of outside engagements:
- Holding any employment-style role with a non-firm entity (W-2 employee, 1099 contractor, sole proprietor, officer, director, partner)
- Compensated activity (or activity with a reasonable expectation of compensation) outside the firm
- Volunteer board service that involves compensation or business attribution
The rule does NOT reach pure passive investing, ordinary household consumer activity, or activities that are entirely social (e.g., serving as treasurer of a small homeowners' association without compensation, depending on the firm's WSPs).
What the Firm Must Do
Notice triggers the firm's obligation to evaluate whether the OBA will:
- Interfere with or compromise the registered person's responsibilities to the firm or its customers, OR
- Be viewed by customers or the public as part of the member's business (creating attribution risk: a customer might believe the OBA is endorsed or supervised by the firm)
The firm has authority to:
- Approve the OBA without conditions
- Approve subject to conditions (e.g., a recordkeeping requirement, a customer-disclosure obligation)
- Restrict the activity (e.g., prohibit the rep from soliciting firm customers for the OBA)
- Prohibit the activity entirely
Ongoing Obligation
The firm's evaluation is not a one-time event. Changes in scope of the OBA require updated written notice to the firm. A rep who initially disclosed a part-time consulting role and then moves into a fee-sharing arrangement triggers a fresh notice obligation.
Exam Tip: Gotchas
- The OBA trigger is "compensated OR a reasonable expectation of compensation." A rep who agrees to perform services for a startup in exchange for equity (no current cash) still triggers the OBA requirement because the equity is the compensation.
- Material changes require fresh notice. A rep cannot rely on a stale OBA disclosure when the scope of the activity expands. The firm must re-evaluate when the rep's role changes.
Private Securities Transactions (PSTs)
A "private securities transaction" is any securities transaction outside the regular course or scope of an associated person's employment with the member, including new offerings of securities not registered with the SEC.
What the Rep Must Do
Prior to participating, the associated person must give written notice to the member describing:
- The proposed transaction in detail
- The associated person's proposed role in the transaction
- Whether the associated person has received or may receive selling compensation
How "Participation" Is Defined
"Participation" is interpreted broadly. Triggering activities include:
- Facilitating a funds transfer (taking the customer's check, even if the rep does not deposit it)
- Delivering offering documents to a prospective investor
- Expressing interest as the rep
- Acting as an intermediary between the issuer and the customer
- Receiving any compensation in connection with the transaction
Almost any meaningful role triggers the rule. A rep who merely "introduces" a customer to a private offering is participating if the introduction leads to the customer's investment.
The Firm's Response Depends on Selling Compensation
| Compensation Type | Member Response | Books and Records Treatment |
|---|---|---|
| Selling compensation involved | Must approve or disapprove in writing | If approved, transaction must be recorded on the firm's books and records and supervised as if executed for the firm |
| No selling compensation | Member must provide prompt written acknowledgment of the notice and may, at its discretion, impose conditions on the rep's participation | Not required to be recorded on the firm's books |
What "Selling Compensation" Includes
Selling compensation is interpreted broadly:
- Commissions (cash or otherwise)
- Finder's fees
- Securities received as compensation (including warrants, equity stakes)
- Expense reimbursement in connection with the transaction
- Any compensation paid directly or indirectly from any source in connection with or as a result of the purchase or sale
Selling-Away Cases
The OBA and PST requirements together capture "selling away": a registered rep who sells investments outside the firm without prior written notice. A typical selling-away case involves all three of:
- A PST violation (the transaction itself, without notice)
- An OBA violation (the broader unauthorized business activity, e.g., soliciting investments through an undisclosed marketing entity)
- A commercial-honor violation (ethics breach via the dishonest concealment)
Exam Tip: Gotchas
- A PST with selling compensation that is approved must be supervised as if it were a firm transaction. The firm's WSPs and books-and-records obligations follow the trade. Approval is not a "blessing and walk away"; the firm takes on supervisory responsibility.
- A PST without selling compensation still requires prior written notice and prompt firm acknowledgment. The lighter response standard (acknowledgment instead of approval) does not eliminate the notice requirement. A rep who participates without notice violates the PST requirement regardless of compensation.
- "Selling compensation" includes more than cash commissions. Receiving warrants, equity, or expense reimbursement counts. A rep who receives "no commission" but is granted founders' shares is in the selling-compensation category.