- An associated person helps a friend raise capital for a new company by selling equity shares to several investors. The associated person receives a commission for each share sold. This activity, if not approved by the firm, is a violation commonly known as:
Answer: selling away.
Engaging in private securities transactions outside the scope of one's employment with a member firm is referred to as "selling away." Under FINRA Rule 3280, if the transaction involves compensation (like a commission), the representative must receive prior written approval from the firm, which must also supervise the transaction and record it on its books.
- A registered representative is invited to join the board of directors of a local technology company and will be compensated with stock options. This activity requires:
Answer: prior written notice to her firm as an outside business activity.
Serving on a board of directors for compensation is a classic example of an outside business activity. The form of compensation (cash, stock, options) is irrelevant. The representative must provide prior written notice to her firm for evaluation and approval or disapproval under FINRA Rule 3270.
- The written notice that an associated person provides to a firm regarding a proposed outside business activity must, at a minimum, describe the activity and which other piece of information?
Answer: The proposed compensation arrangement.
FINRA Rule 3270 specifies that the prior written notice must describe the proposed outside business activity and the compensation to be received. This allows the firm to properly assess any potential conflicts of interest or other risks.
- A registered representative's brother is starting a small business and needs to raise funds by selling promissory notes to family members. The representative offers to help facilitate these sales but will not receive any form of compensation. According to FINRA rules, the representative must:
Answer: provide prior written notice to the member firm.
This is a private securities transaction (PST). Under FINRA Rule 3280, even if no compensation is received, the associated person must provide prior written notice to their firm describing the transaction in detail. The firm then has the right to impose conditions on the representative's participation. Prior written approval is only required if compensation is involved.
- Which of the following would generally NOT be considered a reportable outside business activity under FINRA Rule 3270?
Answer: Maintaining a personal securities portfolio of publicly traded stocks.
Passive investments, such as owning stocks, bonds, or mutual funds in a personal account, are specifically excluded from the definition of an outside business activity. The other options involve active participation for which compensation is reasonably expected, and therefore require prior written notice to the employing firm.
- A registered representative owns a duplex and actively manages it by finding tenants, collecting rent, and arranging maintenance. Which statement is most accurate?
Answer: This is an outside business activity that requires prior written notice.
While owning rental property can be a passive investment, the representative is actively managing it for compensation (rent). This active involvement makes it an outside business activity under FINRA Rule 3270, requiring prior written notice to the firm.
- Upon receiving written notice of a proposed outside business activity, a member firm must take all of the following actions EXCEPT:
Answer: automatically approve the activity if it is disclosed in a timely manner.
A member firm is not required to approve any outside business activity. The firm has the right to evaluate the activity and may prohibit it or place limitations on it if it deems the activity to be a conflict of interest or otherwise problematic. Timely disclosure does not guarantee approval.
- A registered representative is offered a referral fee for sending clients to an outside insurance agent for products not offered by the rep's firm. Before accepting any fees, the representative must first:
Answer: provide prior written notice to her employing firm.
Receiving referral fees for activities conducted outside of the firm is considered an outside business activity because the representative has a reasonable expectation of compensation. FINRA Rule 3270 requires the representative to provide prior written notice to the firm before engaging in the activity.
- An associated person serves on the board of a local non-profit animal shelter. The position is unpaid, and the shelter's fundraising activities do not involve the sale of securities. What is the associated person's obligation to their firm?
Answer: They generally have no reporting obligation for this activity.
FINRA Rule 3270 on outside business activities applies to activities for which an associated person receives or expects to receive compensation. Since this is a non-compensated, volunteer position for a charity, it generally falls outside the rule's reporting requirements.
- An associated person inherits a minority interest in a family-owned S-Corporation. She has no management duties and her only involvement is receiving an annual profit distribution. This is best described as:
Answer: a passive investment that likely does not require disclosure as an OBA.
The key distinction for an OBA is active participation for compensation. Since the associated person has no active role or management duties, her ownership is considered a passive investment, similar to owning shares of a public company. Passive investments are generally excluded from the definition of an OBA under Rule 3270.
- An associated person writes and publishes a financial newsletter in his spare time. He charges a subscription fee. This activity would be considered:
Answer: an outside business activity requiring prior written notice.
Because the associated person is receiving compensation (subscription fees) for an activity outside the scope of his employment, this is an outside business activity. He must provide prior written notice to his firm. The firm will review it for potential conflicts, such as the newsletter giving investment advice that contradicts the firm's recommendations.
- Which of the following activities would most likely be classified as a private securities transaction rather than an outside business activity?
Answer: A representative helping a startup company sell convertible notes to investors.
A private securities transaction (PST) is distinguished from an outside business activity (OBA) by the presence of a securities transaction. Selling convertible notes, which are a type of security, falls under the PST rule (FINRA Rule 3280). The other activities are OBAs (FINRA Rule 3270) as they involve compensation for work outside the firm but do not involve effecting securities transactions.
- Under FINRA rules governing private securities transactions, which of the following would be considered "compensation"?
Answer: Receiving securities or an equity stake in the new venture.
For the purpose of FINRA Rule 3280 (private securities transactions), compensation is defined very broadly and includes any form of economic benefit resulting from the transaction, including commissions, fees, finders' fees, and receiving securities. Reimbursement of legitimate out-of-pocket expenses is generally not considered compensation.
- A registered representative is a talented musician and plays in a band that has paid gigs on weekends. This activity is best described as:
Answer: an outside business activity.
Since the representative is receiving compensation for an activity performed outside the scope of their employment with the broker-dealer, it is considered an outside business activity (OBA). It does not involve securities, so it is not a private securities transaction (PST). While it could potentially be a conflict of interest, it is not strictly prohibited, but it must be disclosed to the firm via prior written notice.
- If a member firm approves an associated person's participation in a private securities transaction for which the person will receive compensation, the firm is required to:
Answer: record the transaction on its books and supervise the associated person's participation.
FINRA Rule 3280 states that if a firm approves a compensated private securities transaction, it must treat the transaction as if it were its own. This includes recording the transaction on the firm's books and records and supervising the activity to ensure compliance with securities laws.
- An associated person is approached by a client who wants to invest in a private placement that is not offered through the representative's firm. The representative facilitates the investment without notifying the firm. The representative has engaged in:
Answer: a private securities transaction.
Any securities transaction conducted by an associated person outside the regular course or scope of their employment with a member firm is defined as a private securities transaction (PST). Regardless of whether compensation is received, the activity requires, at a minimum, prior written notice to the firm.
- An associated person wants to start a part-time job as a rideshare driver and also plans to help her neighbor sell shares in a private company. These two activities are governed, respectively, by which FINRA rules?
Answer: Rule 3270 (OBAs) and Rule 3280 (PSTs).
The rideshare driver job is an outside business activity (OBA), as it involves receiving compensation for work done outside the firm, and is governed by Rule 3270. Helping to sell shares (securities) in a private company is a private securities transaction (PST) and is governed by Rule 3280.
- A registered representative refers a client to his cousin who is raising money for a new restaurant. The client invests, and the cousin sends the representative a $500 bottle of wine as a thank you. The representative has most likely engaged in:
Answer: an unapproved and compensated private securities transaction.
The representative facilitated a securities transaction. The expensive bottle of wine is considered compensation, making this a compensated private securities transaction. Because it was done without the firm's prior written approval, it is a violation of FINRA Rule 3280 (selling away). While it may also violate the gift rule, the primary violation is the unapproved PST.
- After an associated person provides proper written notice for a private securities transaction where no compensation will be received, the member firm must:
Answer: provide the associated person with a written acknowledgement and may impose conditions.
For an uncompensated PST, the firm's responsibility is to acknowledge receipt of the notice and determine if it has any objections. The firm has the right to impose conditions on the person's participation to protect the firm and its customers, but it is not required to supervise the transaction as if it were its own, which is the requirement for compensated PSTs.
- A broker-dealer discovers that one of its associated persons has been receiving commissions for selling limited partnership interests on behalf of a local developer without the firm's knowledge. The firm could be held liable by regulators for:
Answer: failure to supervise.
Broker-dealers have a fundamental responsibility to supervise the activities of their associated persons. When a representative engages in unapproved private securities transactions ("selling away"), it is considered a significant supervisory failure on the part of the firm.
