Outside Business Activity

A registered representative gives her member firm written notice that she intends to start a landscaping company. What is the firm required to do with that notice?

1. A.Evaluate whether the activity would compromise her duties to the firm and its customers and whether it is really a securities activity of the firm.Correct. That two-part evaluation, followed by a recorded decision to permit, limit, or prohibit, is precisely what the rule demands of the firm.
2. B.Forward the notice to FINRA, which reviews the proposed activity and determines whether the representative may proceed.Wrong. FINRA never sits in judgment on individual outside activities; the supervisory judgment is the member firm's to make and to document.
3. C.Place the notice in her personnel file, since a business unrelated to securities requires no substantive review.Wrong. The rule reaches any business activity outside the scope of the relationship, and a non-securities venture can still consume time or create conflicts.
4. D.Grant written approval before she begins, because every outside activity requires the firm's affirmative consent.Wrong. Affirmative written approval belongs to compensated private securities transactions; an outside business activity requires prior written notice.

Why: Written notice of an outside business activity triggers an affirmative duty on the firm, not a filing obligation. The firm must consider whether the proposed activity will interfere with or otherwise compromise the representative's responsibilities to the firm and to its customers, and whether the activity should properly be treated as a securities activity of the firm itself. Having done so, the firm may impose conditions or limitations, or prohibit the activity outright, and it must keep a record of its decision. If the landscaping venture were instead a securities-selling venture, the second half of that analysis would pull it out of the outside-activity rule entirely and into the private securities transaction rule.

Embarrassed by a loss in a customer's account, a representative privately promises to reimburse the customer out of his own pocket if the position does not recover. No money has changed hands. Which rule does this implicate?

1. A.The prohibition on guaranteeing a customer against loss and sharing in an account, which the promise itself violates.Correct. The undertaking is the prohibited act, and no transfer of funds is needed to complete it.
2. B.The borrowing and lending rule, since the representative has committed his personal funds to a customer.Wrong. A contingent promise to make a customer whole is not a loan in either direction.
3. C.No rule, because a representative may use his own money as he pleases and the customer benefits.Wrong. The customer's apparent benefit is exactly the harm, since it misrepresents the risk of the position.
4. D.The outside business activity rule, because the promise creates a financial arrangement outside the firm's business.Wrong. He is not conducting a business away from the member; he is making a promise about a firm account.

Why: Guaranteeing a customer against loss, and sharing directly or indirectly in the profits or losses of a customer's account, are prohibited by their own rule and not by the borrowing and lending provisions. Sharing is permitted only where the member firm gives prior written authorisation, the customer agrees in writing, and the representative's participation is proportionate to his own financial contribution, with a narrow exception for immediate family accounts. A guarantee against loss is treated more strictly still, because it corrupts the customer's understanding of risk and disguises the true character of the investment. That no money has moved is irrelevant; the promise itself is the prohibited act.

After receiving notice of a representative's plan to run a tax-preparation practice, his firm permits it on two written conditions: he may not solicit firm customers as clients, and he may not reference his securities registration in the practice's advertising. He does both anyway. How is his conduct evaluated?

1. A.Acceptable, because the notice obligation was satisfied and the firm cannot restrict lawful outside employment.Wrong. The rule expressly empowers the firm to limit or prohibit the activity, so restriction is a contemplated outcome of the review.
2. B.A violation, because operating outside the firm's conditions means the activity he is conducting was never the one the firm assessed.Correct. The conditions define the permission, so exceeding them leaves the actual business unreviewed and unsupervised.
3. C.Acceptable as to soliciting customers but not as to the advertising, since only the latter involves the securities business.Wrong. Soliciting firm customers is the sharper conflict of the two, since it puts his outside interests against the firm's client relationships.
4. D.A violation only if a customer suffers financial harm from the tax practice he conducted.Wrong. The obligation is prophylactic, and customer harm is a consequence that aggravates a violation rather than creating one.

Why: Once a firm has evaluated an outside business activity, it may permit the activity, impose limitations on it, or prohibit it outright, and conditions attached to a permission are part of the firm's supervisory response rather than advice. Breaching them puts the representative in the same position as one who never gave notice, because the activity he is actually conducting is not the activity the firm assessed. Both conditions here were substantive: soliciting firm customers creates precisely the conflict the review existed to manage, and invoking his registration lends the firm's credibility to an unsupervised business. Had he wanted to change the arrangement, the answer was to go back to the firm with an amended notice and let it reassess.

Investment adviser representative Corentin Alebiosu accepts paid weekend work as a commercial real estate consultant, unrelated to securities. Regarding this outside business activity, he must:

1. A.Disclose the activity to his employing firm, which evaluates and supervises the conflict, with material activities also disclosed to clients in Form ADV Part 2B.Correct. The firm gets notice first, and the brochure supplement carries material outside activities to clients.
2. B.Do nothing, because the consulting work does not involve securities.The disclosure duty is not limited to securities-related outside activities.
3. C.Disclose it only to clients he personally advises, not to his firm.The employing firm must be told so it can supervise; client disclosure alone is insufficient.
4. D.Register the consulting business separately as an investment adviser with the state.Real estate consulting unrelated to securities does not require adviser registration.

Why: An investment adviser representative must disclose outside business activities to the employing firm so that the firm can evaluate and supervise the conflict, and material outside activities are disclosed to clients through Form ADV Part 2B, the brochure supplement. The activity need not itself involve securities to require disclosure. Failing to disclose an outside business activity is treated as an unethical practice.