Outside Business Activities
and Selling Away
1
Definition – Outside Business
Activity

The engaging, by an agent, in an activity which
does not include the sale of securities, outside
the regular course or scope of his employment.
 Requires prior written notice to the broker
dealer.
 Although written authorization is not required,
most firms have, as part of their supervisory
procedures, a requirement to provide written
authorization to the agent prior to engaging in
the activity.
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Governing Rules
 NASD

Conduct Rule 3030
Outside Business Activities of an Agent
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NASD Conduct Rule 3030
 No
person associated with a member in
any registered capacity shall be employed
by, or accept compensation from, any other
person as a result of any business activity,
other than a passive investment, outside
the scope of his relationship with his
employer firm, unless he has provided
prompt written notice to the member.
 Such notice shall be in the form required
by the member.
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Provisions of the Rule
An agent who engages in an outside
business activity without prior notice to his
or her firm, including the sale of nonsecurities products, violates NASD Rule
3030.
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Firm’s Responsibilities
 Supervisory
procedures should be
reasonably designed to achieve
compliance with NASD Rules 3030 and
3040 regarding outside business activities
and private securities transactions
 Appropriately educate their agents
regarding the requirements of Rules 3030
and 3040.
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Examination Steps
Outside Business Activities
 Do
the firm’s supervisory and compliance
procedures appear to be reasonably
designed to prevent and detect outside
business activities?
 Does a review of the firm’s records
indicate that agents notified the firm prior
to engaging in the activity?
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Examination Steps cont.
 Does
the firm require agents to affirmatively
disclose, on a periodic basis, their outside
business activity(ies)?
 Review agent files for such records and
determine whether it was subsequently
reviewed and approved/denied by the firm
 Review annual compliance questionnaires
 Does the firm independently verify the
disclosures on the questionnaires?
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Elements of Outside Business
Activity Violations
 Activity
does not include the sale of
securities
 Agent failed to notify the firm in writing
prior to engaging in the activity
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Outside Business Activity
Examples

Outside business generally includes engaging in
activity which does not include the sale of
securities outside the scope of the firm

Examples requiring prior notice to the firm.
•
•
•
•
•
President of homeowners association
Member of the audit committee of a church
Real Estate sales
Mortgage Broker
Tax Preparation
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Outside Business Activity
Supervision
 As
part of the supervisory and internal
audit program, the dealer should have a
procedure to ensure the agent does not
engage in any activity denied by the firm.
 Likewise, the examiner should confirm that
activity denied by the dealer, did not occur.
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Definition – Selling Away
The engaging, by an agent, in a private
securities transaction outside the regular
course or scope of his association or
employment with the dealer he is
registered with, without prior written
notification to the dealer with whom he is
associated.
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Governing Rules
NASD Conduct Rule 3040

Private Securities Transactions of an
Associated Person (Agent)
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Provisions of the Rule
 Rule
3040(b) requires written notice to
the broker dealer and written approval
from the broker dealer to the agent prior
to engaging in the transaction(s).
 In transactions which involve
compensation, Rule 3040(c) requires
that the dealer approve or disapprove of
the transaction(s) in writing and record
the transaction and compensation on its
books.
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Provisions of the Rule – cont.
 In
transactions which do not involve
compensation, Rule 3040(d) requires that
the dealer acknowledge in writing receipt
of the agent’s notice.
 The broker dealer is required to supervise
the activity in connection with the sales by
the agent.
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Elements of Selling Away
Violation

The product sold is a security.
 The agent did not provide written notification to
the broker dealer and/or receive approval.
 Transactions involving compensation were not
recorded on books and records of broker dealer.
 In transactions which do not involve
compensation, the firm did not provide written
acknowledgement to the agent.
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Proof that Product is a Security
 Documents
given to investor(s) to
evidence ownership such as contract,
note, stock certificate, canceled check,
bank records of issuer, etc.
 Analysis by examiner, attorney, or
expert that the product sold is a
security.
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Proof of Written Notification and
Approval
 Section
of dealer’s procedures manual
which outlines steps for submission and
approval.
 Documents evidencing request by agent
and approval/denial/acknowledgement
by firm, or letter from compliance that no
such requests were made.
 Interview of agent and compliance officer.
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Recorded on Books and
Records
 If
compensation was received, review
commission records of dealer and
agent to determine if compensation was
recorded.
 Statement
from agent, supervisor and
compliance personnel that
compensation was not recorded.
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Examination Steps
Selling Away
Review your state’s corporate records prior to
your exam to determine any affiliated
companies of individuals located at the home
or branch office.You may also conduct other
searches such as Google….
 Interview branch manager/principal regarding
firm’s procedures to prevent selling away.
 Review supervisory procedures manual for
selling away procedures.

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Examination Steps (cont.)
 Review
customer files for indications of the
sale of securities not approved by the firm.
 Review bank records for unusual bank
deposits (i.e., commissions) or payments
(i.e., interest payments to investors).
 Document each selling away transaction
with check, wire, contract, certificate, etc.
 Interview agent, customer, supervisor,
compliance personnel, and other
interested parties.
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Examination Steps (cont.)

Conduct on-site visit, if possible, and
follow examination steps. Otherwise,
utilize the following steps.
 Review corporate records to determine
any affiliated companies for individuals.
 Request documents from dealer and agent
including list of investors, supervisory
procedures manual, agent file,
compensation records, and approval/
denial documents.
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Examination Steps (cont.)
 Interview
branch manager/principal, or get
written response, regarding firm’s
procedures to prevent selling away.
 Review supervisory procedures manual for
selling away procedures.
 Review agent files for evidence of outside
business activity.
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Examination Steps cont.
 Does
the firm require agents to affirmatively
disclose, on a periodic basis, selling away
activity?
 Review agent files for such records and
determine whether it was subsequently
reviewed and approved/denied by the firm.
 Review annual compliance questionnaires
 How does firm verify the questionnaires?
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Examination Steps (cont.)
 Interview
agent, customer, supervisor,
compliance personnel, and other
interested parties.
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 As
part of the supervisory and internal
audit program, the dealer should have a
procedure to ensure that agents do not
engage in the activity denied by the firm.
 Likewise, the examiner should confirm that
activity denied by the dealer did not occur.
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Other Possible Associated
Violations
 Sale
of unregistered securities.
 Sale of securities by unregistered
agent.
 Fraudulent sale of securities.
 NASD Conduct Rule 3010 – Failure to
Supervise based upon no procedure,
deficient procedure or failure to enforce
procedure
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Other Possible Associated
Violations – cont.
 FINRA Rule
2010 - A member in the
conduct of his business, shall observe
high standards of commercial honor and
just and equitable principles of trade.
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Do not Confuse Selling Away
with Outside Business Activity

An agent who sells a security away from his or
her firm without first obtaining approval from the
firm violates Rule 3040.
 An agent who engages in an outside business
activity without prior notice to his or her firm,
including the sale of non-securities products,
violates Rule 3030.
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