Outside Business Activities and Private Securities Transactions

Selling investments outside the firm without required notice or approval can be "selling away." The PST rule governs those transactions. An OBA charge requires a separate covered outside role or business; it does not automatically attach to the same PST activity.

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

Passive investments and activities subject to the PST rule are exempt from the separate OBA notice requirement. Purely social or recreational activity without a covered business role or compensation also falls outside the rule. An unpaid officer or director role can still be covered.

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.

Excluded from the private-securities-transaction rules are: transactions in an associated person's own outside brokerage account that the firm already oversees; transactions among immediate family members for which no associated person receives selling compensation; and personal transactions in investment-company and variable-annuity securities.

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

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

Selling-away cases can involve more than one charge, but the facts must support each one:

• A PST violation (the transaction itself, without notice)
• An OBA violation for a separate covered outside role or business, rather than the PST activity itself, which is exempt from separate OBA notice
• A commercial-honor violation (ethics breach via the dishonest concealment)

For example, paid teaching requires OBA notice, while separately soliciting a private offering for a finder's fee requires PST notice and prior written approval. The offering activity does not require duplicate OBA notice.

Exam Tip: Gotchas

• A PST with selling compensation that is approved must be supervised as if it were a firm transaction. The firm's written supervisory procedures (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.

What Should You Check on Exam Day?

• Do you know the outside-business-activity rule triggers on compensation or a reasonable expectation of compensation, including equity instead of cash?
• Can you state that a private securities transaction with selling compensation must be approved or disapproved in writing and, if approved, recorded on the firm's books?
• Can you distinguish the firm's response when no selling compensation is involved, prompt written acknowledgment, from when compensation is involved, written approval or disapproval?
• Do you know a material change in the scope of an outside business activity requires updated written notice to the firm?