Outside business activities (OBAs) can include anything from volunteer positions to positions of influence in a side business.
And while there’s nothing wrong with running bake sales for your mosque or being a Big Brother, there is a problem for advisors: too few registrants disclose their outside activities on time (or at all) and, on top of that, not enough firms adequately identify and supervise them.
These are issues for both provincial regulators and national SROs. In this year’s annual reports, IIROC, MFDA, OSC and BCSC all identify erroneous OBA reporting and poor oversight by firms.
This trend isn’t new. OSC, in its summary released in July, says failure to report and monitor outside activities remains a top repeat deficiency in Ontario. Similarly, the B.C. Securities Commission has identified the same issue in its last four annual reports. And MFDA’s 2016 review, released in February, says its main concern is supervisors who aren’t properly overseeing outside activities. MFDA planned to review the adequacy of member supervision throughout 2017 and “take formal disciplinary action where appropriate.”
Understanding OBA rules and procedures (see “Outside activity industry guidance”) would be easier if firms not only focused on advisor education about OBAs, but also offered regular disclosure reminders, especially where employees have multiple registrations, says Chris Turchansky, president at ATB Investor Services in Edmonton, Alta.
If the disclosure process is difficult, he adds, people can misinterpret the rules, push boundaries or feel discouraged from pursuing positive activities like community involvement.
Common OBAs and why reporting matters
The outside activities mentioned in discipline notices are often arrangements where advisors are borrowing from or making unauthorized, off-book investments for clients. Other violations include situations where an advisor has failed to disclose that she has significant personal financial interest in a company. Penalties from the last four years of IIROC cases include fines of between $20,000 and $100,000, as well as sanctions such as disgorgement and registration suspension.
But, as IIROC explains in its 2017 compliance priorities report, these aren’t the only activities you need to report. As Turchansky points outs, you should disclose everything “from volunteering as the general manager of your kids’ hockey or soccer team to any outside business activities where you’re a partner or working in another business.”
IIROC expects dealers to disclose all business activities of advisors because such activities may cause “a potential for conflicts of interest, even if the OBA is not securities-related,” and even if the activity is a one-time event.
Another reason for proper disclosure and oversight of outside activities is advisors need to be dedicated to their clients, says Turchansky. It’s important that “the individual is invested and that [his] primary activity is working in the wealth management industry and taking care of clients—that [his] focus isn’t part-time,” he explains.
The most common OBAs he’s seen are volunteer positions and where advisors own and manage rental properties. When reporting the latter, says Turchansky, an advisor needs to identify whether he or a third-party company manages the property. He also sees a lot of advisors who own companies with their spouses.
When an outside activity is disclosed, monitoring typically occurs in two ways: through audits of individual advisors and their books of business, and daily supervision of advisor email and social media accounts. If there are abnormalities, then further investigation would ensue, says Turchansky.
The takeaway? If you think your activities might qualify as outside activities, contact your compliance department. Turchansky says the key is figuring out whether or not you need to report and if the activity will “jeopardize registration in any way, shape or form.”
Outside activity industry guidance
Outside business activities (OBAs) must be reported via Form 33-109F4, which is for people registering in one or multiple categories, or who want to be reviewed as a permitted individual. Using that form, all business and employment activities with and outside of a registrant’s sponsoring firm must be disclosed, including all officer or director positions, and any other positions of influence.
Firms must ensure the forms are true and complete, as per section 5.1 of National Instrument 33-109. And if an employee says his OBA details have changed, his dealer has 10 days to report the information. To keep track, IIROC suggests:
- firms require that approved persons periodically report OBAs to keep track of material changes; and
- where OBAs are reported, approved persons should describe their activities in detail to ensure the “potential for conflicts of interest or client confusion” is examined and addressed.
MFDA, which follows similar guidelines as of 2016, says registrants must even report one-time OBAs. The association requires that advisors:
- disclose outside activities to their firms and clients;
- get written permission from their firms to continue their activities; and
- if an activity is similar to a service provided by their firm, disclose the difference to clients.
Firms and advisors should keep tabs on when OBA rules change. For example, as of 2017, both MFDA and IIROC updated their guidance regarding whether or not advisors can act as power of attorney, trustees and executors on behalf of clients. Accepting these appointments means having control over the financial affairs of a client, so both SROs no longer allow advisors to do so unless an advisor is related to the client and receives firm approval.