Outside Business Activities (OBAs)
Now that you understand the red flags firms watch for, let's look at one specific area that frequently causes problems: when registered persons engage in business activities outside of their firm.
What Is an OBA?
An outside business activity (OBA) is any business activity performed by a registered person outside the scope of their relationship with their member firm.
Examples include:
- Serving on a board of directors
- Operating a side business (real estate, insurance outside the firm, etc.)
- Paid speaking engagements
- Teaching or tutoring for compensation
The Requirement: Prior Written Notice
- A registered person must provide prior written notice to the employing firm before engaging in any OBA
- The notice must describe the proposed activity
What the Firm Does Next
After receiving notice, the firm must evaluate whether the OBA:
- Creates a conflict of interest
- Could be confused with the firm's business by customers or the public
- Requires additional supervision
The firm may then:
| Action | Description |
|---|---|
| Approve | Allow the activity (with or without conditions) |
| Deny | Prohibit the activity |
| Restrict | Place specific limitations on the activity |
Exam Tip: Gotchas
- The requirement is prior written notice, not prior written approval. The registered person must notify the firm before starting the activity, but the firm then decides whether to approve, restrict, or prohibit it. Starting the activity before providing notice is a violation, even if the firm would have approved it.
Exemptions
- Passive investments (such as owning rental property or stocks) are exempt
- Activities covered under private securities transactions rules are also exempt
Exam Tip: Gotchas
- Passive investments are exempt. Owning rental property or stocks does not trigger the notice requirement.
- Serving on a board of directors requires notice even if the position is unpaid, as long as there is compensation or a reasonable expectation of compensation.
OBAs vs. Private Securities Transactions
OBAs and private securities transactions are often confused on the exam:
| Feature | OBA (Rule 3270) | Private Securities Transaction (Rule 3280) |
|---|---|---|
| What it covers | Non-securities business activities | Securities transactions outside the firm |
| Requirement | Prior written notice | Prior written notice (plus firm approval if compensation involved) |
| Firm supervision | Firm evaluates and may restrict | Firm must supervise as its own business if approved |
Exam Tip: Gotchas
- OBAs cover non-securities activities; private securities transactions cover securities deals outside the firm. If the activity involves selling or trading securities, it falls under private securities transaction rules, not OBA rules.
- Private securities transactions require firm approval if compensation is involved. OBAs only require notice.