RIA Compliance Blog
The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities. Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.
FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).” FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.” As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.
If the proposed rule is adopted, it will replace Rules 3270 and 3280. The comment period ends on April 27, 2018.
The proposed rule, FINRA Rule 3290, would obligate registered persons to give their broker-dealer prior written notice of any investment-related or other business activities not within the scope of their relationship with the firm. The notice must describe the proposed activity and what the registered person’s duties would be regarding that activity. The registered person must update the notice if the activity materially changes. If the proposed activity is investment-related, the registered person would have to obtain written approval from the firm before engaging in the activity. The proposed rule would define “investment-related” as “pertaining to securities, commodities, banking, insurance, or real estate.”
The proposed rule also outlines a member firm’s obligations upon obtaining a registered person’s written notice of an outside investment-related activity. The member firm would be obligated to determine whether the proposed activity will inhibit the registered person’s duties towards the firm’s customers, to evaluate whether customers or the general public could mistake the proposed activity for one of the firm’s own activities. The member firm must make a decision to approve or disapprove of the registered person’s engagement in the proposed activity and advise the registered person in writing. If a member firm approves the registered person’s participation in the proposed activity but places conditions or limitations on the registered person’s engagement in that activity, the proposed rule would obligate the firm to effectively supervise the registered person to help ensure compliance with those conditions and obligations.
If the proposed activity would obligate the registered person to register as a broker-dealer if the registered person were not associated with the member firm, the member firm would be compelled to regard the activity as its own. The proposed rule would also obligate a member firm to keep records detailing compliance with the proposed rule’s requirements for three years or more after the registered person ends his or her employment or association with the firm.
The proposed rule would also feature a number of exclusions from coverage. For example, registered persons would not be obligated to provide written notice regarding their personal investments. The rule also would not obligate registered persons to provide written notice regarding activities performed for a member firm’s affiliate unless the activity would require the registered person to register as a broker-dealer if the registered person was not affiliated with the firm. If the proposed activity involved transactions in accounts governed by FINRA Rule 3210 or transactions pertaining to the registered person’s immediate family members, the activity would be exempt from the proposed rule’s requirements.
If adopted, the rule would dramatically change the obligations of a broker-dealer with respect to the investment advisory activities of its registered representatives. If such activities are conducted through an affiliate of the broker-dealer, the activities are excluded from the rule’s coverage, as mentioned above. If the activity is conducted through an entity unaffiliated with the FINRA member, such as the representative’s independent RIA, the rule would eliminate two critical requirements of current Rules 3270 and 3280. Specifically, the broker-dealer would not be required to supervisor the advisory activity or to record advisory transactions on the member’s books and records.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.