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Introduction
1. Supervision
1.1 Personnel supervision
1.1.1 Foundational supervision
1.1.2 Supervision working life
1.1.3 Working with outsiders
1.2 Company supervision
1.3 Sales supervision
2. Registrations
3. Client issues
4. Investment products
5. Margin accounts
6. Federal rules and regulations
Wrapping up
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1.1.3 Working with outsiders
Achievable Series 10
1. Supervision
1.1. Personnel supervision
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Working with outsiders

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Outside Business Activity (OBA) and Private Securities Transactions (PST)

These are topics that are sort of related, and can be easily confused, so it is an area to pay attention for when the test asks questions about it. One of the big things we have to focus on, when it comes to having a job, or making money outside of our employing member firm, is that there are basically 4 outcomes, 4 requirements;

  1. No problem at all
  2. You will need to notify your employing firm,
  3. You will need to ask and receive permission from your employing firm, or
  4. “Yeah, right, no you can’t do that, don’t bother asking”-type things.

The last case, is one of the less likely to be tested, because it likely is quite obvious. Any significant and obvious conflict of interest, either one that would likely hurt clients, or actually in reality, ones that are more likely to hurt the employing firm, would be banned, and not allowable. If you had some other type of investment service, crypto, real estate, comic books, where you provided clients investment services in non-securities products, the question of course is when a client comes to you, are you going to recommend what the member firm does business with? Or are you going to take business away from the employing firm and give it to this competing business? Having a business where you sell identity information on the dark web would clearly be a conflict with client’s interests, but that is already illegal.

The first one is also one that won’t like be tested as much. It could be, mostly as wrong answers on the exam, as they won’t look like what you might be looking for if you’re looking for “permission” or “notification” from the question. If you’re looking for not “notification”, well then “nothing” is not notification, so it might look correct, when in reality you are really looking for “permission”.

If you basically are a volunteer, at a completely non financial, non insurance, not in anyway related to the areas of work of financial services, and you are not paid, then you don’t even need to let your employing firm know. Volunteer every Saturday to coach little league? Yeah, don’t need to tell anyone anything. Get paid $50 to do it? Well, now you’re getting paid and that is different. But if you are purely volunteering, unpaid, and unrelated to the industry, you will not need to get permission, or even notify your employing firm of this “job”.

Outside business activity

Now we start getting to where the questions on this topic are likely to focus. Outside Business Activities, are any activities, where the registered person is receiving any form of compensation from a source, outside the relationship with the employing member firm. Passive investments, and investments described under the Private security transactions below are exempt. Any and all activities qualifying as an Outside business activity, must have written notice to the employing member. Permission is not required, but notification is with outside business activities.

There are certain activities, that although not paid, and therefore wouldn’t generally qualify as PSTs, they are handled similarly. These are potential conflicts of interest, like taking an unpaid seat on a board of directors of a company. The firm gets notification, and depending on the exact description, may need permission. If you are taking an unpaid seat on a board of a directors, of a local non-profit, with an annual budget of $500k, no one is likely to care. If however you are taking an unpaid seat on a board of directors of a $10b organization, could you potentially direct business of that firm in potentially problematic ways? Hence, depending on specifics, permission may be required for some of these more unique potential conflict of interests.

Private security transaction

Private security transactions basically require permission. The listing and description for PSTs is definitely more complicated than OBAs. The specific list isn’t necessarily needed, as long as you remember that these focus on things that “are not a problem, but might possibly, in the right situation, under the right light, given certain assumptions, COULD be a problem”. Remember, if it “going to be a problem”, it is just not allowed. These are things that look like they might be, but likely aren’t, again, provided everyone is watching and careful.

Private securities transactions involving personal purchased, where the registered person is not receiving compensation, the full PST rules don’t apply. The rules around registered persons opening accounts at other member firms certainly does, and the employing firm can (at their request), get copies of all statements the registered person gets on all transactions they do in the account. That would protect it from any impropriety, like pump and dump, or other market manipulation.

Remember though, you as a registered person, hearing about a hot new investment, and you, as a private person, wanting to invest, your own personal private money in this investment, where you are taking all the risk any investment would have, and you have zero intention to discuss or even mention it to clients, let along trying to sell it to them, is quite different, than you trying to sell an investment your firm doesn’t typically sell to your clients.

When a transaction is desired to be outside of the employing member firm by an associated person, special rules apply. Written notification with description of the transaction and proposed role must be provided to the member, and if compensation is involved permission of the employing firm is required. Violating this, and “selling something that we don’t sell”, is a violation called selling away. In all honestly, selling away is probably not the single worst thing a registered person can do; they absolutely could commit actual criminal acts. In the career though, there is likely little worse a registered person could do, SHORT of committing a more serious actual felony-type crime. When you are fired, and if you are caught selling away, you will be fired, the reason for your firing is put on your U-5. Every future potential employing firm will look up your U-5, they have to. They will see you were fired for selling away, because again, you will be fired for it, and they almost certainly won’t hire you. You sold away before, how could they trust you not to do it again? Selling away, is career ending.

Sidenote
Questions from real students

Recognize, there have been students over the years say “well, I was told you can sell away if you get permission”. Well, logically that doesn’t work. Selling away is doing a PST where you need permission, and you either did not get permission, or you ignored being told not to do it. “Selling away with permission”, is logically the same idea as trying to “steal something after someone gave it to you”. If you were given, as a gift, 2 silver candlesticks (nod to Val Jean), how could you steal them? They’re yours, you were given them, they aren’t the original owners anymore, they are yours, so, how do you steal them if you’ve gotten permission?

Accounts at other broker dealers and financial institutions

As an associated person of a member firm, you are welcome to open an account at any member firm, not just your own. You may want to check with your firm, on which they support, and would prefer you work with, as there could potentially be penalties (like not being able to be an advisor if you don’t have your accounts at one of the dozen “approved” broker dealers).

If an associated person opens an account at another member firm, they must get written consent of their associated member firm. This is done by notifying the executing firm that they are associated with a FINRA member firm, usually done with a very early question on the application. The executing firm will notify the employing firm, and must send duplicate confirmations of all trades the associated person makes, upon the employing firms request. It is not automatic, the employing firm must request it.

The purpose of the duplicates, is to make sure that the associated person is not doing anything wrong, unethical in the account, compared with the work they are doing at the firm. Pump and dumping, or other forms of market manipulation, would be the primary concerns.

If this is an account that was opened prior to employment, the associated person has 30 days to notify the new employing member, and obtain written consent and notify the carrying/executing firm that they are not associated with a FINRA member firm. Duplicates can still be requested and then would be required to be delivered.

Related persons that would be combined and also notified, would include Spouse, dependent children, or any related or unrelated person the associated person has control over or provides financial support to.

If the transactions only are for investment company products or municipal fund securities including 529 plans, notification and consent are not required, and duplicates would also not be required. You can not market manipulate, or unethically trade based on insider or other information acquired unfairly as an associated person, in mutual funds, variable annuities, or municipal funds.

“Selling away is allowed if you have permission”, is the same logic as “stealing is allowed if they gave it to you first”. Well, if they gave it to you, it isn’t stealing, and if you got permission, it isn’t selling away.

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Working with outsiders

Outside Business Activity (OBA) and Private Securities Transactions (PST)

These are topics that are sort of related, and can be easily confused, so it is an area to pay attention for when the test asks questions about it. One of the big things we have to focus on, when it comes to having a job, or making money outside of our employing member firm, is that there are basically 4 outcomes, 4 requirements;

  1. No problem at all
  2. You will need to notify your employing firm,
  3. You will need to ask and receive permission from your employing firm, or
  4. “Yeah, right, no you can’t do that, don’t bother asking”-type things.

The last case, is one of the less likely to be tested, because it likely is quite obvious. Any significant and obvious conflict of interest, either one that would likely hurt clients, or actually in reality, ones that are more likely to hurt the employing firm, would be banned, and not allowable. If you had some other type of investment service, crypto, real estate, comic books, where you provided clients investment services in non-securities products, the question of course is when a client comes to you, are you going to recommend what the member firm does business with? Or are you going to take business away from the employing firm and give it to this competing business? Having a business where you sell identity information on the dark web would clearly be a conflict with client’s interests, but that is already illegal.

The first one is also one that won’t like be tested as much. It could be, mostly as wrong answers on the exam, as they won’t look like what you might be looking for if you’re looking for “permission” or “notification” from the question. If you’re looking for not “notification”, well then “nothing” is not notification, so it might look correct, when in reality you are really looking for “permission”.

If you basically are a volunteer, at a completely non financial, non insurance, not in anyway related to the areas of work of financial services, and you are not paid, then you don’t even need to let your employing firm know. Volunteer every Saturday to coach little league? Yeah, don’t need to tell anyone anything. Get paid $50 to do it? Well, now you’re getting paid and that is different. But if you are purely volunteering, unpaid, and unrelated to the industry, you will not need to get permission, or even notify your employing firm of this “job”.

Outside business activity

Now we start getting to where the questions on this topic are likely to focus. Outside Business Activities, are any activities, where the registered person is receiving any form of compensation from a source, outside the relationship with the employing member firm. Passive investments, and investments described under the Private security transactions below are exempt. Any and all activities qualifying as an Outside business activity, must have written notice to the employing member. Permission is not required, but notification is with outside business activities.

There are certain activities, that although not paid, and therefore wouldn’t generally qualify as PSTs, they are handled similarly. These are potential conflicts of interest, like taking an unpaid seat on a board of directors of a company. The firm gets notification, and depending on the exact description, may need permission. If you are taking an unpaid seat on a board of a directors, of a local non-profit, with an annual budget of $500k, no one is likely to care. If however you are taking an unpaid seat on a board of directors of a $10b organization, could you potentially direct business of that firm in potentially problematic ways? Hence, depending on specifics, permission may be required for some of these more unique potential conflict of interests.

Private security transaction

Private security transactions basically require permission. The listing and description for PSTs is definitely more complicated than OBAs. The specific list isn’t necessarily needed, as long as you remember that these focus on things that “are not a problem, but might possibly, in the right situation, under the right light, given certain assumptions, COULD be a problem”. Remember, if it “going to be a problem”, it is just not allowed. These are things that look like they might be, but likely aren’t, again, provided everyone is watching and careful.

Private securities transactions involving personal purchased, where the registered person is not receiving compensation, the full PST rules don’t apply. The rules around registered persons opening accounts at other member firms certainly does, and the employing firm can (at their request), get copies of all statements the registered person gets on all transactions they do in the account. That would protect it from any impropriety, like pump and dump, or other market manipulation.

Remember though, you as a registered person, hearing about a hot new investment, and you, as a private person, wanting to invest, your own personal private money in this investment, where you are taking all the risk any investment would have, and you have zero intention to discuss or even mention it to clients, let along trying to sell it to them, is quite different, than you trying to sell an investment your firm doesn’t typically sell to your clients.

When a transaction is desired to be outside of the employing member firm by an associated person, special rules apply. Written notification with description of the transaction and proposed role must be provided to the member, and if compensation is involved permission of the employing firm is required. Violating this, and “selling something that we don’t sell”, is a violation called selling away. In all honestly, selling away is probably not the single worst thing a registered person can do; they absolutely could commit actual criminal acts. In the career though, there is likely little worse a registered person could do, SHORT of committing a more serious actual felony-type crime. When you are fired, and if you are caught selling away, you will be fired, the reason for your firing is put on your U-5. Every future potential employing firm will look up your U-5, they have to. They will see you were fired for selling away, because again, you will be fired for it, and they almost certainly won’t hire you. You sold away before, how could they trust you not to do it again? Selling away, is career ending.

Sidenote
Questions from real students

Recognize, there have been students over the years say “well, I was told you can sell away if you get permission”. Well, logically that doesn’t work. Selling away is doing a PST where you need permission, and you either did not get permission, or you ignored being told not to do it. “Selling away with permission”, is logically the same idea as trying to “steal something after someone gave it to you”. If you were given, as a gift, 2 silver candlesticks (nod to Val Jean), how could you steal them? They’re yours, you were given them, they aren’t the original owners anymore, they are yours, so, how do you steal them if you’ve gotten permission?

Accounts at other broker dealers and financial institutions

As an associated person of a member firm, you are welcome to open an account at any member firm, not just your own. You may want to check with your firm, on which they support, and would prefer you work with, as there could potentially be penalties (like not being able to be an advisor if you don’t have your accounts at one of the dozen “approved” broker dealers).

If an associated person opens an account at another member firm, they must get written consent of their associated member firm. This is done by notifying the executing firm that they are associated with a FINRA member firm, usually done with a very early question on the application. The executing firm will notify the employing firm, and must send duplicate confirmations of all trades the associated person makes, upon the employing firms request. It is not automatic, the employing firm must request it.

The purpose of the duplicates, is to make sure that the associated person is not doing anything wrong, unethical in the account, compared with the work they are doing at the firm. Pump and dumping, or other forms of market manipulation, would be the primary concerns.

If this is an account that was opened prior to employment, the associated person has 30 days to notify the new employing member, and obtain written consent and notify the carrying/executing firm that they are not associated with a FINRA member firm. Duplicates can still be requested and then would be required to be delivered.

Related persons that would be combined and also notified, would include Spouse, dependent children, or any related or unrelated person the associated person has control over or provides financial support to.

If the transactions only are for investment company products or municipal fund securities including 529 plans, notification and consent are not required, and duplicates would also not be required. You can not market manipulate, or unethically trade based on insider or other information acquired unfairly as an associated person, in mutual funds, variable annuities, or municipal funds.

Key points

“Selling away is allowed if you have permission”, is the same logic as “stealing is allowed if they gave it to you first”. Well, if they gave it to you, it isn’t stealing, and if you got permission, it isn’t selling away.

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  • Supervision working life