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Finra Hunts Down FAs Violating Outside Activities Rules

June 5, 2018

Self-regulator Finra is cracking down on advisors failing to disclose active outside business interests, but sometimes what constitutes an active outside-business activity is unclear -- as even the organization admits.

By law, brokers must disclose and receive firm permission for all outside business and private security activities, and Finra is cracking down on violators, AdvisorHub says. The Finra website for the week of May 28 shows 13 letters of acceptance and waiver – four of which relate to brokers violating outside business activities. Greg Smith, senior vice president of Securities America, says failing to report outside activities is a frequent problem his firm sees when conducing branch reviews.

But among the four noted violations in the week of May 28, one reveals a common issue faced by many brokers -- distinguishing between what is and is not outside business activity, writes Advisor Hub. Former Waddell & Reed broker Carlos Velazquez found himself apparently in trouble for not disclosing he handled bookkeeping and taxes for a family business owned by his father. As punishment, he received a $10,000 fine and an eight-month suspension from Finra, which said he failed to effectively report his involvement in his father’s business, according to the website. The website further reports that Velazquez was released from Waddell & Reed after admitting he made false statements about his outside business activity.

Noting further confusion about being actively or passively involved in outside investments, Meredith Cordisco, Finra associate general counsel, says a "gray area" exists for some investments – including real estate. Finra doesn’t explicitly define what constitutes passive investment, but the likelihood an investment is active and not passive increases as the amount of time committed to the investment increases, she said at Finra’s annual conference in May, according to Advisor Hub.

Finra

To help clarify the definition behind outside business activities, Finra has also proposed a rule to replace current Finra rules 3270 (outside business activities of registered persons) and 3280 (private securities transactions of an associated person). The comment period for the proposed rule closed at the end of April.

By Garrett Keyes
  • To read the Advisor Hub article cited in this story, click here.