A registered representative (RR) works for a firm that primarily offers mutual funds. The RR's spouse is a licensed insurance agent who sells fixed annuities. The RR occasionally mentions their spouse's business to clients who express an interest in guaranteed income products, but does not provide specific recommendations or receive any compensation. What is the RR's ethical obligation regarding this situation?
- AIt is permissible as long as no direct compensation is received by the RR.
- BThe RR must disclose the spouse's business to their firm and potentially to clients.
- CThe RR must refrain from mentioning their spouse's business to any clients.
- DThis constitutes an impermissible referral arrangement and must be immediately stopped.
Show answer & explanationAnswer & explanation
Correct answer: B. The RR must disclose the spouse's business to their firm and potentially to clients.
Even without direct compensation, an RR referring clients to a spouse's business creates a potential conflict of interest. FINRA Rule 3270 (Outside Business Activities) requires RRs to provide written notice to their firm of any outside business activity, including those of an immediate family member that could create a conflict. Disclosure to clients may also be required.
Why the other options are wrong
- A. Lack of direct compensation does not remove the potential for conflict of interest or the need for disclosure and firm approval.
- C. While refraining is an option, the more comprehensive and compliant action is to disclose the activity and allow the firm to determine its permissibility and required disclosures.
- D. It's not necessarily impermissible if properly disclosed and approved by the firm, but it absolutely requires disclosure, making 'immediately stopped' an overstatement without firm review.
Outside Business Activities (Spousal Influence)
Registered representatives must disclose to their firm any outside business activities, including those of an immediate family member, that could create a conflict of interest or influence client recommendations. This ensures transparency and allows the firm to supervise and approve such relationships.
- Disclosure of outside business activities is mandatory.
- Includes activities of immediate family members that create conflicts.
- Requires firm's written consent/acknowledgment.
- Ensures transparency and avoids undisclosed conflicts.
Memory trick: Family Business? Tell Your Firm, So Conflicts Don't Germinate.