Why You Should Check Up On Your Broker’s Outside Business Activities

Just like any other employee, brokers have lives outside of work. They might play in a band or host a radio show where they give financial advice. When brokers receive outside compensation for work done outside of the firm—even if it doesn’t appear to have to do with the securities industry—brokerage firms have a responsibility to supervise their activities as if they were exercised on their own behalf. Why? Unscrupulous brokers may use outside business activities (OBA) or private securities transactions (PST) to commit fraud or sell away from their member firms, leading to misconduct or conflicts of interest.

outside business activitiesSome brokers establish shell companies to try to lure clients away from their member firm by enticing customers with investment opportunities—often in real estate. Borne out of shell companies established by brokers, these real estate holdings often amount to nothing. When these deals turn out to be “too good to be true,” investors are harmed. In other cases, brokers might establish an insurance agency. While most brokers who do this don’t break the rules, others may use that as an opportunity to sell away from their member firms, peddling variable annuities or other complex insurance products that might not be suitable for a certain investor.

In one high-profile case of undisclosed outside business activities leading to fraud, Gary Basralian preyed on elderly widows. His firm, Royal Alliance, failed to supervise Gary Basralian, allowing him to defraud older, emotionally vulnerable women who were physically and mentally handicapped. Gary Basralian admitted to stealing $2 million from his elderly clients and using it for his personal enrichment. Fitapelli Kurta later won an arbitration against Gary Basralian in which our client was awarded over $2 million in compensatory damages. A copy of the award letter can be viewed here.

In this case, Gary Basralian clearly did not disclose his outside business activities to Royal Alliance. Brokers not only must disclose any outside business activities to their firm in writing, but must also receive written authorization from their firm that it is okay to do so, according to FINRA Rule 3270. When considering engaging in a private securities transaction, a broker must follow the same process, according to FINRA Rule 3280. Yet FINRA has found that brokers sometimes did not notify the firms properly (in writing as opposed to verbally), if at all, did not understand what constitutes an outside business activity or a private securities transactions, or did not provide enough detail about a proposed OBA or PST for the member firm to make a determination.

Firms are not above reproach, however. When FINRA conducted a rule review in May 2017 in which they sought public comment on regulations surrounding outside business activities, they found that firms often did not have strong policies in place to review OBA or PST requested. FINRA found that “[s]ome firms construed ‘compensation’ too narrowly, erroneously determined that an activity was not a PST, or approved participation in a proposed transaction without adequately considering whether they could supervise the transaction as if it were executed on their own behalf.”

If your broker engaged in unauthorized outside business activities or broker private securities transactions without their firm’s approval, don’t hesitate to contact a securities attorney. Call (877) 238-4175 or email for your free consultation with a securities attorney.