Quick Answer
An outside business activity is work a registered person does outside the firm for pay or in a role such as employee, contractor, or director, like serving on a board or driving for a rideshare company. Prior written notice comes first; the firm may approve, restrict, or deny it. Unpaid volunteering with no such role is not an OBA.
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 business activity a registered person performs outside the scope of their relationship with their member firm. The notice duty applies when the registered person:
- Is an employee, independent contractor, sole proprietor, officer, director, or partner of another person or business, or
- Is compensated, or reasonably expects compensation, from anyone else as a result of the activity
Examples include:
- Serving on a board of directors
- Operating a side business (real estate, insurance outside the firm, etc.)
- Driving part time for a rideshare company (paid independent contractor work)
- 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 prior written notice regardless of compensation. Being a director of another entity is an enumerated outside business activity, so notice is required whether or not the role is paid.
- Unpaid volunteering in no covered role is not an OBA. Coaching a youth soccer team or serving meals at a shelter for free involves no pay and no employee, contractor, officer, director, or partner role, so no notice is required. An unpaid officer or partner seat, like an unpaid board seat, still needs notice. Paid gig work, such as driving for a rideshare company on weekends, is an OBA.
OBAs vs. Private Securities Transactions
OBAs and private securities transactions are often confused on the exam:
| Feature | OBA | Private Securities Transaction |
|---|---|---|
| What it covers | Non-securities business activities | Securities transactions outside the firm |
| Requirement | Prior written notice | Prior written notice (plus the firm's written approval if compensation is 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 the firm's written approval if compensation is involved. The firm must tell the registered person in writing whether it approves or disapproves. OBAs only require notice, with no written approval step.
What Should You Check on Exam Day?
- Can you explain the difference between prior written notice and prior written approval for an OBA?
- Do you know which two types of activities are exempt from OBA notice, and why unpaid volunteering in no covered role is not an OBA while paid gig work is?
- Can you state whether serving on a board of directors requires notice even if unpaid?
- Do you know how an OBA differs from a private securities transaction?
- Can you explain when a private securities transaction requires firm approval, not just notice?