Background
Last month, FINRA released Regulatory Notice 25-05 (the “Notice”), which proposes to consolidate the existing requirements concerning the outside business activities (“OBAs”) of registered representatives and the private securities transactions (“PSTs”) of associated persons. The Notice seeks industry commentary on FINRA’s proposal to replace current FINRA Rules 3270, Outside Business Activities of Registered Persons, and 3280, Private Securities Transactions of an Associated Person, with a single rule that both narrows the activities that require approval and streamlines the request and approval process for investment-related outside activities. FINRA’s objective in proposing this new rule is to reduce unnecessary burdens associated with the existing Rules without compromising investor protection and market integrity. Notably, this marks the first time that FINRA has proposed a change to the existing OBA and PST rules since 2018, when FINRA announced in Regulatory Notice 18-08 proposed changes to these rules which would have eliminated members’ supervisory and recordkeeping obligations for outside investment advisor activities. FINRA ultimately abandoned that set of proposals.
Proposed Amendments
The proposed amendments found in the Notice narrow the focus of OBAs and PSTs to activities that are investment related. In so doing, FINRA intends to decrease burdens on members by allowing them to dedicate resources to higher-risk activities and eliminate the reporting and assessment of low-risk activities. The proposal defines “investment-related activity” as pertaining to financial assets, including securities, crypto assets, commodities, derivatives, currency, banking, real estate, or insurance. This includes, but is not limited to, acting as or being associated with a broker-dealer, issuer, insurance agent or company, investment company, investment adviser, futures commission merchant, commodity trading advisor, commodity pool operator, municipal advisor, futures sponsor, bank, savings association, or credit union. This also includes personal securities transactions, other than transactions in accounts that are known to the member under, or otherwise delineated in, Rule 3210 (e.g., securities held at other members, as well as transactions in certain securities, such as mutual funds, Section 529 plans, and variable annuities).
The proposal specifically excludes from the scope of the new rule outside investment adviser activities that are performed on behalf of the member firm or at an investment adviser affiliated with the member. This includes investment adviser activity at a dually registered firm and investment adviser, insurance or banking activity conducted at an affiliate.
As is the case for the existing rules, under the new rule the notice requirements for registered representatives and associated persons and the obligations of members are different depending on whether the notice is: (1) an outside activity; (2) an outside securities transaction not for selling compensation; or (3) an outside securities transaction for selling compensation. For outside activity and outside securities transactions not for selling compensation, only a single notice is required. For outside securities transactions for selling compensation, a separate notice is required. For outside activity, the member must consider on a risk-based basis whether it is necessary to impose conditions or limitations on the outside activity, but there is no longer a requirement to acknowledge or approve outside activity. For outside securities transactions not for selling compensation, members must provide a written acknowledgement, but there is no approval requirement. For outside securities transactions for selling compensation, the member is required to provide a written notification of their reasonable determination of whether to approve, approve subject to specific conditions or limitations, or disapprove each proposed securities transaction.
Finally, the proposed rule requires the member to assess whether the outside activity or securities transaction is properly characterized; whether it involves the member’s customers; whether it will interfere with or otherwise compromise the person’s responsibilities to the member or the member’s customers; and whether it will be viewed by the member’s 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.
FINRA is currently seeking comments on the Proposal. The comment period expires May 13, 2025.
