Recently, a rookie registered rep telephoned me in a panic with a story I've heard often. He wasn't opening as many new accounts as he had hoped and he was having a tough time making ends meet with a new baby on the way. To generate some additional income, he took on a second job working part-time and on some weekends, and he had recently learned through a colleague at his branch that he might have violated the rule against outside employment.
No Moonlighting Sonata
The rule is short and simple with an easy to remember title, Outside Business Activities of an Associated Person, and number, 3030. It prohibits registered persons from becoming employed by or compensated from any other person “as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member.”
I added the emphasis so you know that there just isn't any wiggle room. That said, I'm not sure that “prompt” is a helpful choice of terminology when drafting a regulatory rule, but you are not going to be on firm ground if you notify your firm three months after you start an outside employment.
How Much It Could Hurt?
When imposing sanctions for outside business activities, the NASD sets the guidelines at a range of $2,500 to $50,000 (which does not include the amount of any financial benefit you realized, and a Hearing Panel may add that amount on top of any fine). Typically, an outside business activity violation results in a suspension of up to 30 business days, but where “aggravating conduct” exists, the guideline extends to up to one year — and in “egregious” cases involving substantial activity or significant injury to customers or your firm, you could be barred.
If you are considering taking an outside job, consider yourself warned. If you are already moonlighting, you should know the principal considerations that will be considered in determining the appropriate sanctions for violating the rule are:
Whether the outside activity involved customers of the firm.
Whether outside activity resulted directly or indirectly in injury to customers of the firm and, if so, the nature and extent of the injury.
The duration of the outside activity, the number of customers and the dollar volume of sales.
Whether the respondent's marketing and sale of the product or service could have created the impression that the employer (member firm) had approved the product or service.
Whether the respondent misled his employer member firm about the existence of the outside activity or otherwise concealed the activity from the firm.
Consequently, the less you can make of any connection the work had to your broker/dealer when it's your time to appear before the NASD comes, the stronger your bargaining position. For example, stress that you didn't deal with customers of the firm, or, if you did, that you never gave the impression that your b/d was involved with your second employment. Similarly, if you gave some notice but not in the required form, or if your outside activities were well-known at your office — perhaps you handed out business cards to other brokers or sent mailings to colleagues — raise those points, too, to demonstrate you were not attempting to conceal your actions.
Of course, your boss or the NASD may never find out about your second job. The rookie was in that position when he called. However, after talking to him about the consequences of covering up his activities and recommending that he inform his employer of his other employment, he said he was prepared to follow my advice.
Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com