4.3 Employee Conduct

Employee Conduct and Reportable Events

FINRA rules establish standards of conduct for registered representatives and require disclosure of certain activities and events. Understanding these requirements is essential for compliance.

Outside Business Activities (OBAs)

FINRA Rule 3270 governs outside business activities of registered persons.

What is an OBA?

An outside business activity is any business activity outside the scope of employment with the member firm.

Examples of OBAs

Employment: Part-time job, consulting work

Business Ownership: Rental properties, small business

Board Service: Serving on corporate boards

Professional Services: Tax preparation, legal services

Other Compensation: Speaking fees, teaching

OBA Requirements

Prior Written Notice: Must notify firm before engaging

Firm Approval: Firm may approve, deny, or restrict

Form U4 Disclosure: May need to be disclosed

Ongoing Reporting: Update firm if activity changes

Why Firms Care About OBAs

Firms review OBAs to assess:

- Potential conflicts of interest

- Reputational risk

- Time commitment concerns

- Regulatory compliance issues

Firm Response Options

Approve: Activity is permitted

Approve with Conditions: Permitted with restrictions

Deny: Activity is prohibited

Important: Engaging in an OBA without proper notice and approval is a FINRA violation.

Private Securities Transactions (PSTs)

FINRA Rule 3280 governs private securities transactions, also known as "selling away."

What is a PST?

A private securities transaction is any securities transaction outside the regular course of business of the member firm.

PST vs. OBA

Involves: OBA - Any business activity; PST - Securities transactions

Rule: OBA - 3270; PST - 3280

Firm Role: OBA - Notification; PST - Approval + supervision

PST Requirements

All PSTs: Prior written notice to firm

Compensation Received: Firm must approve and supervise

No Compensation: Firm may impose conditions

Selling Away

Selling away occurs when a registered representative:

- Sells securities not offered by their firm

- Does so without firm knowledge/approval

- May receive compensation outside the firm

Warning: Selling away is a serious violation that can result in suspension, fines, or industry bar.

PST with Compensation

If the representative receives or may receive compensation:

Approval: Must approve the transaction

Supervision: Must supervise as if firm business

Recordkeeping: Must record on firm books

Gifts and Gratuities

FINRA Rule 3220 limits business-related gifts by a member or associated person to employees of another person, such as employees of an institutional customer, vendor, or counterparty. The rule does not apply to gifts to a member's own associated persons or to individual retail customers.

Gift Limit

Annual Maximum (effective March 30, 2026): $300 per person

Per Recipient: Gifts attributable to the member are aggregated

Scope: Related to the business of the recipient's employer

What Counts as a Gift?

Included: Physical gifts; Gift cards; Tickets to events (if the giver does not attend); Cash or cash equivalents

Excluded: Promotional items of nominal value; De minimis or promotional items; Personal gifts unrelated to business; Reasonable bereavement gifts

Business Entertainment

The cost of an event where the host accompanies the recipient is not treated as a gift if it is legitimate business entertainment. It must be:

- Reasonable in nature

- Not so frequent as to raise questions

- Not conditioned on achieving business goals

An incidental gift provided at the event remains subject to Rule 3220 unless a recognized exception applies.

Borrowing and Lending

FINRA Rule 3240 restricts borrowing and lending between registered representatives and customers.

General Rule

Borrowing money from or lending money to customers is prohibited unless specific conditions are met.

Permitted Arrangements

Immediate Family: Yes, with firm approval

Personal Relationship: May be permitted with controls

Financial Institution: Yes, if customer is in lending business

Both Registered: May be permitted with controls

Requirements for Permitted Arrangements

- Firm has written policies

- Prior approval from firm

- Documentation maintained

- No exploitation of customer

Reportable Events

Registered representatives must report certain events that require Form U4 updates.

Events Requiring Disclosure

Criminal: Felony charges/convictions, financial misdemeanors

Regulatory: SEC/FINRA actions, other regulator actions

Civil Judicial: Investment-related lawsuits, injunctions

Customer Complaints: Written complaints, arbitrations

Financial: Bankruptcies, judgments, liens

Terminations: Certain types of job terminations

Reporting Timeline

Most disclosable events: Within 30 days

Certain customer complaints: Within 30 days

Changes to existing disclosures: Promptly

Consequences of Non-Disclosure

Late filing: Fine, censure

False information: Suspension or bar

Willful omission: Criminal charges possible

Political Contributions

FINRA Rule 2030 restricts political contributions (based on SEC Rule 206(4)-5).

Pay-to-Play Rules

Representatives cannot contribute to elected officials who:

- Can influence the award of municipal securities business

- May direct investment advisory contracts

Contribution Limits

De minimis: $350 per election (if can vote)

Non-voter: $150 per election

Consequences

Excessive contributions can result in:

- Firm losing ability to do business with government entity

- Two-year "time out" period

- Regulatory sanctions

Key Takeaways

- OBAs require prior written notice to firm (Rule 3270)

- PSTs require notice and, if compensated, firm supervision (Rule 3280)

- Selling away is a serious violation

- Rule 3220 gift limit: $300 per recipient per year for covered business-related gifts; individual retail customers are outside the rule

- Borrowing/lending with customers is restricted

- Reportable events must be disclosed within 30 days

- Political contributions can trigger pay-to-play restrictions