FINRA PROPOSAL REDUCES BROKER’S OBLIGATIONS BUT EXPANDS OTHERS

FINRA PROPOSAL REDUCES BROKER’S OBLIGATIONS BUT EXPANDS OTHERS

FINRA has solicited comments on its proposal to replace Rules 3270 (0utside Business Activities) and 3280 (Private Securities Transactions) with a new rule, Outside Business Activities (3290). The proposal reduces some of the reporting and supervisory duties imposed by Rules 3270 and 3280. Given this, it is probable that FINRA will ultimately propose this new Rule 3290. However, it leaves a number of other issues unaddressed. Attached is a New York State Bar Association comment letter on this proposal of which I was one of the draftsmen.

Current Rules—Notice and Approval
Rule 3270 prohibits any outside business activities for compensation or the reasonable expectation of compensation unless the registered person gives his firm prior written notice. Upon receipt of the notice of such outside business activity, the firm may approve, disapprove or approve it subject to limits. Rule 3280 prohibits a registered person from participating in any private securities transaction without the prior approval of his firm, if it is for compensation, and if not for compensation, then subject to such limits as the firm may set.

Proposed Rule—Notice; Limit on Required Notice; Firm Assessment
Proposed Rule 3290 requires a registered person to report to his/her firm before engaging in any outside investment related or other business activity. In the case of a proposed outside investment related activity, the firm must perform a reasonable assessment of the risks created by the activity including whether it would interfere with the registered person’s responsibilities to the firm’s customers, or if it would be viewed by customers or the public as part of the member firm’s business. The firm must also consider whether the person could engage in the activity without being a registered person of the firm. The firm must approve, disapprove or approve with limitations on the proposed activity. If limitations are imposed, the firm must supervise the person’s compliance with those limitations, but not the underlying activity. If the approved activity would require broker-dealer registration and the entity is not so registered, the member firm will be deemed to be engaged in that activity and have recordkeeping and supervisory responsibilities for it.

Proposed Rule– Exclusions
Excluded from the proposal are personal investments (but still subject to Rule 3210 to report such accounts and send trade reports to the firm) and managing immediate family money but not for a fee. If the activity is on behalf of an affiliate of the member firm it too is excluded. The proposal would eliminate the requirement that if the outside activity is acting as an investment adviser the firm must record and execute all transactions- thus subjecting such activity to the suitability, best execution, supervision and books and records rules.

Issues
Some of the issues raised by the Bar Association and others include: a) it does not permit the registered person pursuing new employment in the industry or forming a new firm without giving prior notice to the employer; b) it applies to banking, real estate and non-security insurance businesses–for example forming a partnership to buy a rental building; c) the idea that non-compensated activities are outside of the proposal’s scope is not clearly delineated, although prior FINRA notices have implied that they are subject to the prior reporting requirements; and d) the proposal that if a person is registered with two firms they can allocate supervisory responsibility appears inconsistent with the Securities Exchange Act.

Please feel free to call (212 455 0476) or email (msimkin@securitiesregslawyer.com) me with your comments or questions. The FINRA comment period has expired, but you can stills end your comments to FINRA at pubcom@finra.org and refer to RN 18-08.