Series 7

By Investopedia AAA

Rules and Regulations - Reporting Outside Business Activities

All RRs must report outside business activities and accounts, in accordance with FINRA Rule 3050. The first thing this rule calls for is an assurance that you do not have an "adverse interest" that could cause loss to your employer. Although you can knowingly execute a trade for the account of someone at another firm, or for someone who has discretion over an account at another firm, you must use "reasonable diligence" to ensure this trade will not adversely affect your own firm.

Outside Business Activities That Need to Be Disclosed
Second, the rule specifies what you need to disclose to your boss. Everyone knows why you got into this business, and nobody expects you to live a life of poverty. Almost everyone in the industry trades on his or her own accounts. What matters most to the SEC, the SROs and the states is ensuring that your trading does not have a negative impact on your firm or your clients.

If you find yourself in a position where you do have, or might have, a financial interest in or discretionary authority over a trading account at another firm, that other firm must do three things:

  1. Notify your employer in writing, prior to the execution of a transaction for the account, of your intention to open or maintain that account.
  2. Upon written request by your employer, the firm must transmit duplicate copies of confirmations, statements or other information with respect to the account.
  3. Notify you of its intention to provide the notice and information required by 1 and 2.

Before opening an account or placing an initial order for the purchase or sale of securities with another firm, you have to notify your employer about the brokerage where you have your account and notify the brokerage where you have your account about your employer. This must all be done in writing. It is very possible that your account with the one brokerage could pre-date your employment at another brokerage. In that situation, you would have to notify both members, in writing, promptly after taking your new job.

If you open a securities account or place an order for the purchase or sale of securities with a futures dealer, an investment advisor, a bank or some other financial institution other than a FINRA-member firm, you must do the following:

  • Notify your employer in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order.

  • Upon written request by your employer, request in writing and assure that the other financial institution provides your employer with duplicate copies of confirmations, statements or other information concerning the account or order.

  • If the account pre-dates your employment as an RR, you must notify both your employer and the other institution in writing promptly after taking your new job.

There are two big exceptions to this rule: mutual funds and pensions, known in industry jargon as "investment company shares" and "unit investment trusts". It is easy to understand why these ubiquitous investment options are exempt. The securities held in these funds churn so frequently and the shares themselves are generally held for such a long time that it would not make any sense to require disclosure under FINRA Rule 3050.

Sanctions for the violation of rules regulating the conduct of FINRA members include these:

  • Censure
  • Fine
  • Suspension
  • Expulsion of a firm from FINRA membership
  • Suspension or revocation of a person's license to sell securities.
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