FINRA seeks comments on a proposed new rule to consolidate FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person). The proposed rule would require registered persons to provide their firm(s) with prior written notice for all investment-related or other business activities outside the scope of their relationship with the member, including a description of the proposed activity and the registered person’s proposed role therein, and that the registered person update the notice in the event of a material change to the activity. With respect to investment related activities only, a registered person would be required to receive prior written approval from the member before participating in the activity.
The rule would define “investment-related” as “pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).” This definition is also used for purposes of the Uniform Application for Securities Industry Registration or Transfer (Form U4) and would better harmonize the Form U4 reporting requirements and the notice obligations under FINRA rules. The concept of “business activity” would be similar to current Rule 3270, with minor clarifying changes, and would be defined in the rule as (1) acting as an employee, independent contractor, sole proprietor, officer, director or partner of another person; or (2) receiving compensation, or having the reasonable expectation of compensation, from any other person as a result of the activity.
In brief overview, the proposed rule addresses the following outside business activities and private securities transaction situations directly:
- Selling Private Placements Away from Firm: Would be subject to the proposed rule, potentially to the fullest extent – prior written notice by the registered person and a risk assessment by the broker-dealer. If the broker-dealer disapproves the activity, it has no further obligations. If the broker-dealer approves the activity, the activity becomes part of the broker-dealers business and must be supervised and recorded as such.
- Activities at Third-Party Investment Adviser (IA): These activities are subject to the rule, but in an intermittent manner – prior written notice by the registered person is required and the broker-dealer must perform a risk assessment because it’s investment related and not excluded from the proposed rule; however, the broker-dealer is not required to supervise or keep records related to the IA activities (as those activities are regulated by other rules and regulations).
- Non-Investment Related Work: While these activities are subject to the proposed rule, it’s only in a limited manner – prior written notice is required to the broker-dealer, but the broker-dealer does not have to perform a risk assessment and or supervise the activity.
- Activities at Affiliates (e.g. IA, Insurance and Banking Affiliates): These activities, whether or not investment related, are excluded from the proposed rule, unless those activities would require registration as a broker or dealer if not for the persons affiliation with the firm.
- Personal Investments (e.g., Buying Away): Excluded from the proposed rule, but potentially subject to other rules (e.g., FINRA Rule 3210) or firm-imposed notice requirements.
Finally, the proposed rule has several exclusions that are intended to reduce unnecessary burdens without lessening investor protection. First, the proposal would exclude from the rule’s coverage registered persons’ personal investments (e.g., buying away), as it does not raise the same investor protection concerns as selling away activities. Second, as noted above, the proposed rule would exclude activities conducted on behalf of a member’s affiliate, unless those activities would require registration as a broker or dealer if not for the person’s association with a member. Therefore, a registered person generally would not be required to provide prior written notice, and a member would not be required to conduct the assessment required by the proposed rule, of any non-broker dealer activity conducted for a member’s affiliate, such as an affiliated IA, insurance entity or bank. In addition, any non-broker-dealer activity conducted on behalf of the member (e.g., any IA activities for a dually registered broker-dealer/investment adviser (BD/IA)) would not be subject to the rule. These exclusions recognize members’ ability to implement meaningful controls across business lines and are consistent with functional regulation – that such activities are subject to other regulatory regimes and oversight. The rule would define an “affiliate” as “any entity that controls, is controlled by or is under common control with a member,” which is consistent with other FINRA rules.
FINRA has requested comments on all aspects of the proposal; but specifically requests comments concerning the following issues: 1. What are the alternative approaches, other than the proposal, that FINRA should consider with respect to Outside Business Activities and private securities transactions? 2. How would consolidation of the rules governing outside business activities and private securities transactions in this proposal simplify compliance? What impact would it have on the cost of compliance? Comments on the proposed new FINRA rule are due April 27, 2018. For more information on the proposed rule, see Regulatory Notice 18-08.