Quick Answer
Associated persons must give their firm written notice before engaging in an outside business activity, and firms may approve, restrict, or prohibit it. Private securities transactions done away from the firm, known as "selling away," also require notice, and whether compensation is involved determines the level of firm supervision. Failing to give notice is itself a violation, regardless of outcome.
Associated persons sometimes conduct business outside their firm, whether non-securities business activities or securities transactions done away from the firm. FINRA has specific rules governing both situations.
Outside Business Activities (OBAs)
- Associated persons must provide written notice to their firm BEFORE engaging in any outside business activity
- The firm can then approve, restrict, or prohibit the activity
- This applies to any business activity outside the scope of the person's relationship with the firm
Examples of Outside Business Activities
- Working as a real estate agent
- Serving on a corporate board of directors
- Operating a side business (consulting, coaching, etc.)
- Teaching at a university
Think of it this way: If you work at a securities firm and want to moonlight as a real estate agent on weekends, your firm needs to know. The firm may worry that your side job creates conflicts of interest or takes time away from your duties. That is why prior written notice is required.
Exam Tip: Gotchas
- Written notice must come BEFORE the activity begins, not after. The exam tests timing. Notifying the firm after you have already started the activity is a violation.
Private Securities Transactions: "Selling Away"
- Associated persons must provide written notice to their firm BEFORE participating in any private securities transaction
- A private securities transaction is any securities transaction outside the regular course of the person's employment with the firm
The Compensation Distinction
| Scenario | Firm's Obligation |
|---|---|
| Compensation received (or expected) | The firm must approve AND supervise the transaction as if it were done through the firm |
| No compensation | The firm must acknowledge the written notice (but does not need to supervise) |
Exam Tip: Gotchas
- If compensation is involved, simple acknowledgment is NOT enough. The firm must approve AND supervise the transaction. The exam frequently tests whether students know the difference between the "compensation" and "no compensation" paths.
What Is "Selling Away"?
- Selling away is conducting private securities transactions without the firm's knowledge or approval
- Even if the investment is legitimate and profitable for the customer, failing to notify the firm is itself a violation
- Selling away exposes customers to unsupervised transactions with no firm oversight or investor protections
Think of it this way: A broker tells a client about a "great investment" in a friend's startup and helps the client buy shares, all without telling the firm. Even if the startup succeeds and the client makes money, the broker violated FINRA rules by not notifying the firm. The violation is the lack of notice, not the outcome.
The Key Difference: OBAs vs. Private Securities Transactions
| Activity | Covers | Key Requirement |
|---|---|---|
| Outside Business Activity (OBA) | Outside business activities (non-securities) | Written notice to firm |
| Private Securities Transaction | Private securities transactions | Written notice to firm; if compensation involved, firm must approve and supervise |
- The critical distinction: a private securities transaction involves securities specifically, while an OBA covers any other business activity
- Both require prior written notice, but private securities transactions have the additional supervision requirement when compensation is involved
Exam Tip: Gotchas
- OBAs (outside business activities) do NOT require firm supervision, only notice. Private securities transactions require supervision when compensation is involved. The exam tests whether you know which activity triggers the supervision requirement.
- A broker who "participates" in a private securities transaction without firm notice is selling away, even if no commission is earned. The question is whether the broker played a role in the transaction, not whether money changed hands.
- The consequences of selling away are severe. They include a fine, suspension, or industry bar.
What Should You Check on Exam Day?
- Can you explain why written notice must come before an outside business activity begins, not after?
- Do you know when a firm must approve and supervise a private securities transaction, not just acknowledge it?
- Can you explain what makes a transaction "selling away"?
- Do you know why selling away is a violation even if the investment makes the customer money?
- Can you state the difference between an outside business activity and a private securities transaction?