Outside Business Activities (OBAs) and Private Securities Transactions (PSTs) can create significant regulatory, financial, reputational, and customer-protection risks.
Representatives should remember that all OBAs must be disclosed and approved before engaging in the activity, and changes to or termination of an approved OBA must also be reported. The definition of an OBA is broad and can include outside employment or businesses, insurance activities and DBAs, professional services, referral arrangements, real estate activities, fiduciary roles, and certain volunteer activities involving leadership responsibilities or handling funds. Compensation is also broadly defined and may include equity, products, services, or other economic benefits – not simply salary or commissions. Representatives should not assume an activity is outside the disclosure requirement because it is part-time, unpaid, or unrelated to securities.
Representatives must also recognize when an outside activity may involve a private securities transaction. Personal investments in private offerings – including promissory notes, private equity, venture capital, hedge funds, and certain real estate investments – require ESI approval before executing a subscription agreement or investing any capital. Additional investments in an already-approved offering require separate pre-approval. Representatives may not offer, recommend, solicit, refer, introduce, facilitate, or otherwise participate in a client’s or prospective client’s private investment without prior written approval from ESI; even an introduction to an issuer or underwriter can raise a PST or “selling away” concern. IARs also have ongoing reporting responsibilities for approved personal PSTs, including quarterly transaction and annual holdings reporting.
For supervisors, effective oversight requires more than confirming that a disclosure form is on file. Know the Representative’s business and understand what is actually occurring. Supervisors should consider the services performed, compensation received, ownership interests, involvement of clients or prospective clients, movement of funds or securities, and whether the activity has changed since it was approved. Particular attention should be given to outside entities raising capital, issuing debt or ownership interests, receiving client funds, or involving Representatives in introductions to potential investors. An approved OBA does not automatically authorize a related PST, nor does an initial PST approval cover subsequent investments. When facts are unclear, an activity has materially changed, or client involvement is suspected, the matter should be promptly escalated to ESI Compliance.
Questions? Contact ESI Compliance for more information.
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