Last spring, FINRA began a review of its rules regarding Outside Business Activities (OBAs) and Private Securities Transactions (PSTs). The review was meant to evaluate the efficiency and efficacy of FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person). FINRA concluded that while Rules 3270 and 3280 are fulfilling their intended purposes, they could benefit from changes to make the rules more contemporary and present-day and to better align the goal of protecting investors with the reality of the current regulatory landscape and business practices. Based on its findings, FINRA has proposed a new rule governing OBAs and PSTs, meant to replace the current rules and reduce unnecessary burdens on member firms.
FINRA Rules 3270 and 3280
The purpose of FINRA Rules 3270 and 3280 is to protect the investing public. By requiring registered representatives and associated persons to disclose OBAs and PSTs, both regulators and the investing public can better evaluate potentially problematic activities engaged in by such persons: are the activities known to the member firm with which the persons are registered or associated? Are the activities a part of the member firm’s business, or can they be interpreted as such? Rules 3270 and 3280 also help to protect firms from legal and reputational risks.
The Proposed Rule Change
FINRA is proposing a single, streamlined rule regarding OBAs. The rule would require registered persons to provide their firms with prior written notice of a wide range of OBAs, while requiring member firms to perform a reasonable risk assessment on a narrower, specifically investment related, range of activities. This would allow firms to focus on OBAs that are most likely to raise investor protection concerns.
Core Concepts of the Proposed Rule
Selling Private Placements Away from Member Firm: subject to the proposed rule – potentially to the fullest extent. A registered person must provide prior written notice to the firm, and the firm must perform a risk assessment. If the firm disapproves of the activity, the firm is under no further obligation. If the firm approves the activity, it becomes a part of the firm’s business and must be supervised and recorded as such.
Activities at Third-Party IA: subject to the proposed rule, but to an intermediate extent. A registered person must provide prior written notice to the firm, and the firm must perform a risk assessment, because investment related activities are not exempt from the proposed rule. However, the firm is not required to supervise or record the IA activities.
Non-Investment-Related Work: subject to the proposed rule, but to a limited extent. A registered person must provide prior written notice to the firm, but the firm is not required to perform a risk assessment of or supervise the activity.
Activities at Affiliates: The rule generally excludes activities at affiliates, whether or not the activities are investment related. However, if the activities would require registration as a broker or dealer if not for the person’s association with a member firm, then the rule is applicable.
Personal Investments (e.g. “Buying Away”): excluded from the proposed rule, but potentially still subject to other rules (such as FINRA Rule 3210 – Accounts at Other Broker-Dealers or Financial Institutions) or firm-imposed notice requirements.
Requesting Comment
Through April 27, FINRA is requesting comment on all aspects of the proposal. For further information on the scope of the proposed rule, as well as information providing feedback, please refer to FINRA Regulatory Notice 18-08.