Dealer firms should consider offering training to their financial advisors in terms of what constitutes an outside business activity (OBA) for compliance purposes to protect both the firm and its advisors from regulatory problems.
“A lot of advisors don’t realize how broad the term is, so they are not disclosing activities that are actually within the definition of an OBA,” says Robert Brush, a partner with Crawley MacKewn Brush LLP in Toronto, who spoke at the Association of Canadian Compliance Professionals’ annual conference in Toronto on Monday. “It’s not that [advisors are] not disclosing [this information] because they’re trying to hide it, but because they don’t realize that it has to be disclosed.”
An OBA happens when an advisor engages in any business activity unrelated to his or her practice with the firm. This can range from anything from serving as a chairman of a golf tournament, on a volunteer basis, to operating a small hobby business online buying and selling products.
“The concern that regulators have,” Brush says, “is sometimes these outside business activities involve clients — and the clients end up being confused, thinking that the outside business activity is actually an activity being conducted by the advisor in his or her capacity as a registrant with a particular dealer.”
Regulators want firms to improve their training of approved persons so that when advisors are filling out annual disclosure forms, they’ll know what to set out as an OBA, Brush says.
In addition, dealer firms should ask advisors who are new to the firm to go through the OBA and personal financial dealings (PFDs) disclosure when they join the firm and again at the regular annual reporting time. PFDs can include borrowing from or lending to clients or entering into a private investment scheme with a client.
“Many advisors are optimists and entrepreneurial,” Brush says. “They think, ‘This [OBA] is great. I’m helping clients, I’m helping myself,’ and they’re optimistic that it’s all going to work out well. They’re not as concerned; they don’t see the pitfalls; they don’t see the risk for client confusion. They don’t recognize that this could cause problems for them and their dealer down the road. That’s why you need compliance professionals to provide that impartial, professional, calm perspective so they can properly identify what’s going to be a problem.”
Photo copyright: hafakot/123RF