What is an Outside Business Activity (OBA)?

If you are a financial advisor, you may have heard of the term Outside Business Activity (OBA). But what does it mean, and why should you care? In this article, we will explain what an OBA is, which advisors have to report it, and what happens if you don’t disclose your OBA.

What Qualifies as an OBA?

An OBA is any activity that you engage in outside of your regular employment or affiliation with a broker-dealer or investment adviser. This could include:

• Working as a employee, contractor, sole proprietor, officer, or partner of another person
• Receiving compensation or having an ownership interest in another business or entity
• If there’s a “reasonable expectation of compensation”

An OBA does not include:

• Personal investments or hobbies that do not involve soliciting or receiving compensation from customers
• Activities that are part of your normal duties or responsibilities with your broker-dealer or investment adviser
• Passive Investments
• Non-investment-related activity that is exclusively charitable, civic, religious, and tax exempt.

If you have an OBA, you must report it to your “member firm” (the investment advisor or broker dealer you work for). Their compliance team will ask you for information about the OBA. They’ll ask what the activity is, if it’s investment related, how many hours it requires, and similar questions. Here’s a link to Form U4 where you can scroll down and see the Outside Business questions.

Your member firm may choose to limit or allow the OBA. If the OBA is something you publish online, they may be required to archive or monitor it.

The firm then submits the OBA info to FINRA. FINRA is the Financial Industry Regulatory Authority, a self-regulatory organization that oversees the conduct of broker-dealers and their registered representatives. FINRA stores info about every registered stockbroker and investment advisor representative (IAR).

Can a paraplanner work from home? Absolutely. One of the reasons why I love this industry.

Are OBA Rules Different for RIA’s?

Outside Business Activity rules are the same for Registered Investment Advisors (RIA) as they are for Broker Dealers. However, the compliance might not be as strict on the RIA side.

RIA (Registered Investment Adviser) is a firm that provides investment advice for a fee. If you are an investment adviser representative (IAR) of an RIA, you must comply with the rules and regulations of the Securities and Exchange Commission (SEC) or the state securities regulator, depending on the size and location of your firm.

FINRA doesn’t regulate RIA’s, unless you’re dually registered as a stockbroker and an IAR (investment adviser representative). But IAR’s still have to file their U4’s (it’s like a Registration form) with FINRA. So while FINRA doesn’t directly govern RIA’s, they still play a role. Therefore, if you engage in any OBA that could affect your ability to provide unbiased and objective advice to your clients, you must disclose it to them. You must also disclose your OBA to your RIA firm and follow its policies and procedures on OBA.

From what I’ve heard from both sides of the industry, Broker Dealer compliance is generally a bit more strict than the compliance teams at RIA’s. That’s just my anecdotal experience. This is not legal advice.

What is an Associated Person under FINRA?

An associated person under FINRA is anyone who is involved in the securities business of a broker-dealer, such as:

• Registered representatives who sell securities to customers
• Principals who supervise or manage the securities business of a broker-dealer
• Operations professionals who handle the back-office functions of a broker-dealer
• Compliance officers who ensure that the broker-dealer and its associated persons follow the rules and regulations

If you are an associated person under FINRA, you have to comply with FINRA Rule 3270, which requires you to notify your broker-dealer in writing before engaging in any OBA. You also have to update your Form U4, which is the uniform application for securities industry registration or transfer.

What Happens If You Don’t Disclose Your OBA?

If you fail to disclose your OBA to your broker-dealer or investment adviser, you could face serious consequences, such as:

• Disciplinary action by FINRA, which could include fines, suspension, or expulsion from the industry
• Enforcement action by the Securities and Exchange Commission (SEC), which could include civil penalties, injunctions, or criminal prosecution
• Legal action by your customers, who could sue you for breach of fiduciary duty or negligence
• Termination by your broker-dealer or investment adviser, who could also sue you for damages

Therefore, it is important to be transparent and honest about your OBA and seek approval from your broker-dealer or investment adviser before engaging in any activity that could be considered an OBA. By doing so, you can protect yourself from potential liability and maintain your reputation and integrity as a financial advisor.

Interested in an OBA because you want to add notary services to your firm? Here’s my article on how you can become a notary public and still work in financial advising.

(This article is not legal or financial advice.)