Understanding FINRA Rules on Outside Business Activities and Private Securities Transactions

Navigating FINRA’s rules on Outside Business Activities (OBAs) and Private Securities Transactions (PSTs) can be confusing, as both involve financial professionals engaging in activities outside their primary brokerage firms. However, these two categories have distinct regulatory implications. This blog will clarify the differences, the applicable FINRA rules, and the compliance obligations associated with each.

Outside Business Activities (OBAs

FINRA Rule 3270 governs outside business activities (OBAs). An OBA refers to any compensated or uncompensated business activity conducted by a registered representative outside of their employment with a FINRA member firm. These activities can include consulting work, serving on a board of directors or of a religious institution or civic organization, owning a business, providing accounting or pension plan consulting services, acting as a real estate broker, or working a second job.

FINRA Rule 3270 requires fulsome, prompt, and written disclosure of an OBA to the employer firm. Under the rule, registered representatives must provide prior written notice to their member firm before engaging in any OBA. The notice must be provided in such form as specified by the firm and be provided promptly or, in other words, "at the time when steps are taken to commence a business activity unrelated to his relationship with his firm.” Dep’t of Enf’t v. Schneider, Complaint No. C10030088, 2005 NASD Discip. LEXIS 6, at *13-14 (NASD NAC Dec. 7, 2005).

Upon receiving the notice, the firm must evaluate whether the activity could create conflicts of interest or otherwise interfere with the individual’s responsibilities to clients and the firm, or whether the proposed activity may be viewed by the investing public as part of the firm’s business. The firm must also ensure that the activity is properly categorized as an Outside Business Activity. The rule applies regardless of whether the activity is compensated or not. The firm has the right, and in appropriate circumstances obligation, to prohibit or place limitations and conditions on the activity if the circumstances warrant it. The rule does not apply to passive investments or private securities transactions covered under FINRA rule 3280.

Private Securities Transactions (PSTs)

Private Securities Transactions (PSTs) fall under FINRA Rule 3280. A Private Securities Transaction occurs when a registered representative participates in a transaction involving securities outside the regular course of their firm’s business. These transactions often involve private placements, private equity investments, or other securities transactions not recorded on the books of the member firm.

Under FINRA Rule 3280, registered representatives must provide written notice to their firm before participating in a PST. Participation is construed broadly and includes "participating in any manner" such as soliciting investors by providing information that may influence their investment decisions and facilitating the execution of transactions. Joseph Abbondate, Exchange Act Release No. 53066, 2006 WL 42393, aff’d, 209 Fed. Appx. 6, at *8 (2d Cir. 2006).

If the representative will receive compensation, the firm must either approve or disapprove the transaction in writing and supervise it accordingly. Under the rule, the term “compensation” is defined broadly and is understood to mean “selling compensation." It is any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security. If the firm approves the transaction, it must record and supervise it as if it were executed by or on behalf of the firm.

If no compensation is involved, the firm must still be notified in writing but does not need to actively supervise the transaction. However, while the firm may prohibit or place conditions on the representative's participation in the transactions, it is not required to do so.

Differences between OBAs and PSTs

There are key differences between OBAs and PSTs. OBAs involve any non-securities business activity, whereas PSTs specifically involve securities-related transactions outside the firm. Both require notice to the firm, but only PSTs that involve compensation require firm approval and supervision. OBAs may be compensated or uncompensated, and while firms do not need to approve them, they can prohibit them if necessary. PSTs may also be compensated or uncompensated, but if compensation is involved, firm approval and supervision are mandatory. The regulatory risk for OBAs is moderate, while PSTs pose a higher regulatory risk.

Digital Assets and Increased Complexity in Regulatory Compliance

The rise of digital assets has added significant complexity to the application of FINRA’s rules on OBAs and PSTs. Determining whether a particular digital asset qualifies as a security is a critical step that can trigger different disclosure, compliance, and supervisory obligations. If a digital asset is deemed a security, then participation in its sale, promotion, or management outside of the firm may be subject to FINRA Rule 3280, requiring firm approval and supervision. If the asset is not classified as a security, the activity may instead fall under FINRA Rule 3270 as an OBA, necessitating only disclosure rather than firm oversight.

Because regulatory agencies, including the SEC, continue to refine their stance on digital assets, firms and representatives must remain diligent in assessing how these assets are classified. Improper classification or failure to disclose involvement with digital assets can lead to significant compliance risks, regulatory actions, and reputational damage. To avoid regulatory violations, firms should develop clear policies on digital asset activities and ensure that representatives understand their reporting obligations.

Failure to disclose OBAs or PSTs can lead to disciplinary actions, including fines, suspensions, or even bans from the industry. Registered representatives should always err on the side of disclosure if they are unsure whether an activity qualifies as an OBA or PST. FINRA member firms should implement robust supervisory procedures to ensure compliance with both rules. Understanding the nuances between OBAs and PSTs is critical for financial professionals. By adhering to FINRA’s regulatory framework, firms and individuals can mitigate risks and maintain the integrity of the securities industry. If you need help in navigating this or other FINRA rules, reach out to our firm for guidance and consultation.