FINRA has issued Regulatory Notice 18-08 announcing its proposed new Rule 3290 addressing outside business activities of registered persons. The Proposed Rule would replace Rules 3270 (Outside Business Activities) and 3280 (Private Securities Transactions of an Associated Person) and according to FINRA, is intended to “reduce unnecessary burdens while strengthening investor protections relating to outside activities.” A copy of the Notice can be found at http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-18-08.pdf
Notable changes under the Proposed Rule are that non-invested related activities do not need to be approved by the member, the Proposed Rule would not apply to non-registered associated persons (currently Rule 3280 does), and the member’s supervisory and record keeping responsibilities would be more limited.
Specifically, under the Proposed Rule, registered persons would be required to provide their member firm employer with written notice seeking approval for a “broad range” of outside activities. The registered persons’ employer would then be required to conduct a reasonable risk assessment on a “narrower set of investment related activities.” The notice required by the registered person must include a description of the proposed activity and the role the registered person will have (which must be updated in the event of any material changes to the activity). Below is a chart that FINRA included in the Regulatory Notice, which summarizes various categories of outside activities and how each would be treated under the Proposed Rule:
Upon receipt of written notice of an outside business activity, the member firm must conduct a upfront reasonable risk assessment with respect to investment related activities, but is not required to do so with respect to non-investment related activities. Although the risk assessment will vary based on the facts, the member is required to assess whether the outside activity will:
- "interfere with or otherwise compromise the registered person’s responsibilities to the member’s customers; or
- be viewed by customers or the public as part of the member’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered."
Upon completion of the risk assessment, the member may approve or disapprove of the activity or approve it with conditions or limitations. The member’s supervisory responsibilities would only apply to situations where approval was granted with conditions or limitations (reasonable supervision of compliance with the conditions or limitations) or essentially where the registered person could only engage in the activity because he or she is associated with the member. The member would be required to keep records that demonstrate compliance with the rule for at least three years after termination of the registered person’s employment with the member. The Proposed Rule would not require the member to record transactions that result from the outside activity unless it is an activity for which the registered person is relying on the member’s registration as a broker-dealer.
Ultimately, FINRA believes that the Proposed Rule “takes a balanced approach that would ensure that members are apprised of their registered person’s outside activities, while tailoring members’ responsibilities to those activities that are most likely to raise investor protection concerns.” The comment period for the Proposed Rule closes on April 27, 2018.