FINRA Proposes to Consolidate "Outside Activities" Rules
Commentary by Steven Lofchie
FINRA proposed to consolidate its rules on outside business activities of registered and associated persons to "streamline and reduce unnecessary burdens."
FINRA proposed to consolidate FINRA Rule 3270 ("Outside Business Activities of Registered Persons") and FINRA 3280 ("Private Securities Transactions of an Associated Person") into a single rule—FINRA Rule 3290 ("Outside Business Activities (PROPOSED)").
The proposed rule would apply to two types of activities, one a subset of the other:
- "investment-related activity," which "pertain[s] to financial assets, including securities, crypto assets, commodities, derivatives, ... real estate and insurance; ... this term also includes personal securities transactions;" and
- "outside securities transactions," which refers to conduct away from an individual's employment that involves securities transactions.
The proposed rule would apply to:
- for "investment-related activity," the proposed rule would apply only to "registered persons;" and
- for "outside securities transactions," the proposed rule would apply to persons of a "broker-dealer," including persons that are not required to be registered.
The proposed rule would require:
- registered persons to provide their member firm notice of any investment-related activity, including any "outside securities transactions;" and
- associated persons—that are not registered—to provide notice of any activity involving "outside securities transactions."
The firm receiving the notice would then have an obligation to:
- assess whether the activity involves a firm customer, conflicts with firm responsibilities, or appears to be part of the firm's business; and
- keep records.
Unlike the existing rules, the proposed rule does not require notice and approval of:
- outside activities that are not investment-related, e.g. work such as bartending;
- activities conducted for an affiliate of the member firm;
- securities transactions effected without compensation for "immediate family members;" and
- transactions involving personal-use real estate.
The proposed rule contains a discussion of its application to investment advisory activities.
Comments on the proposal are due by May 13, 2025.
Commentary
In Regulatory Notice 25-05, FINRA said that there were "longstanding questions" on outside business activity dating back to 2017 and 2018 (see, Regulatory Notice 18-08 and Regulatory Notice 17-20). Although the proposed changes seemed to have received generally positive reviews, FINRA opted to let the issue sit for six years without follow through. It is likely that FINRA's revival of the issue reflects the Trump-effect change in regulatory culture. It is notable that the impact extends beyond governmental agencies to self-regulatory organizations.
Firms should consider carefully and provide comments regarding whether there are further improvements or modifications to be made to the proposal. Additionally, firms should consider what other specific areas they believe FINRA should consider for review.