Horter In The News

Outside Business Activities

Compliance Today
Blog #6
September 20, 2017

Outside Business Activities

Welcome back to another edition of Compliance Today!   Our goal is to continue bringing you information on compliance topics relevant to you and your practice.   Today we are discussing Outside Business Activities.  Almost all of our advisors are engaged in other business activities beyond just their role as an Investment Adviser Representative under Horter.  If this applies to you, then it is important that you understand the compliance responsibilities that come with engaging in these other activities.

An Outside Business Activity (“OBA”) is an activity where a registered person is compensated, or has the reasonable expectation of compensation, from someone other than their Registered Investment Adviser (e.g. Horter).   It may also be an activity where a registered person may not be compensated, but the activity may still create a conflict with Horter or its clients.   Certain non-compensated charitable activities may be considered an OBA where the registered person has access or control over charitable funds or investments.

There are two important regulatory reasons for monitoring Outside Business Activities: (a) Form ADV disclosure purposes and (b) Form U4 disclosure purposes.

A Registered Investment Adviser is required to disclose to clients all potential and actual conflicts of interest, including outside activities of the firm and its related persons, on the Form ADV Part 2.   In addition, Investment Adviser Representatives (“IARs”) must disclose their employment history for the previous 10 years and their current outside business activities on the Form U4.  

As an IAR, it is ultimately your responsibility to keep your Form U4 current and accurate.   You must be cognizant of the 30 day deadline for making material updates to the Form U4.   Changes to your Outside Business Activities are considered a material change.   Failure to keep a current and accurate Form U4 subjects you to possible fines, penalties, suspensions and could even jeopardize your registration with the state(s) you are registered with.

In addition to disclosing any actual or potential conflicts of interest, Outside Business Activities should not compromise the advisor’s responsibilities to the firm or its clients.  OBA’s should also not be viewed by the public as being a part of Horter’s business.

Outside Business Activities may include a wide range of endevours including but not limited to:

  • Employee of an unaffiliated company
  • Owner (full or partial) of an unrelated business
  • Acting as a finder for an unaffiliated investment
  • Receiving referral fees from a third party
  • Acting as an independent contractor or consultant to an outside party
  • Receiving direct or indirect compensation for services rendered outside the scope of employment with the firm
  • Non-compensatory duties such as board of directors, officerships, civic leaderships, consultant, etc

As an Investment Adviser Representative under Horter, you are required to obtain approval of your Outside Business Activities during your initial onboarding.   Thereafter, you are required to obtain approval prior to engaging in any new OBA: new OBA’s must not wait until the annual certification of existing OBA’s.   You are then required to certify the accuracy of your OBA’s on an annual basis.

On an ongoing basis, you must provide prompt notification to the compliance department any time a previously approved outside business activity undergoes a change, such as:

  • More time committed to or anticipated to be required by the activity
  • Greater percentage of total income derived from the activity
  • Increase/decrease in ownership interest
  • Change in the status or title regarding the activity

Keep in mind as an Investment Advisor Representative you have a fiduciary duty to provide full and fair disclosure to all of your clients and to always act in your clients’ best interest.    An OBA that is considered “Investment Related” is by definition a potential conflict of interest.   For this reason, investment related OBA’s will undergo a higher level of scrutiny than non-investment related OBA’s.   A non-investment related OBA can also represent a potential conflict of interest if it takes a significant amount of the IAR’s time or represents a significant portion of the IAR’s income.                                     

In certain cases, Horter may require that prospective OBA clients execute an ‘OBA Disclosure’ Form as a condition for Horter approving the OBA.  Outside Business Activities are considered unsupervised activities.  The disclosure form is to ensure that clients understand that Horter has no involvement or oversight of the advisor with regards to that business activity.

BasisCode

Horter has recently implemented compliance automation software by BasisCode.    All OBA requests must be submitted through BasisCode.    The software will give us the means to track outstanding requests and to document the review and approval process.

When you log into BasisCode, you will select the ‘Forms Studio’ in the left hand navigation pane:

 

You will then select the ‘OBA Request Form’ from the drop down list:

 

When you finish completing the form and hit <Submit> it will be automatically routed to the Compliance Department for review and approval.    If you have any questions during the process please contact your Compliance Analyst.

We hope you found this information useful.   We hope that by sharing we can prevent any examination deficiencies in the future and avoid any misstatements on advisors’ Form U4’s.   As always, if you have any suggestions for future blog posts that you would like to see, please just let us know…and have a great day!

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