The Financial Industry Regulatory Authority’s plan to relax its rules on brokers’ outside business activities has drawn comments from over 2,000 individuals, according to AdvisorHub..
In a proposed rule change filed with the Securities and Exchange Commission, FINRA seeks to adopt FINRA Rule 3290 (Outside Activities Requirements) and to delete existing FINRA Rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person).
The intent is to streamline and reduce unnecessary compliance burdens regarding requirements that address the outside activities of member firms’ associated persons, specifically low-risk and non-investment-related activities.
Though many of the comments that were submitted sought changes to the proposal, FINRA said it does not intend to make any further amendments to its rule change.
“The Proposal focuses on outside activities appropriately within members’ purview that potentially present heightened risks for members and the public,” FINRA’s Associate General Counsel Matthew Vitek wrote in a June-11 letter to the SEC.
“In so doing, the Proposal would bolster members’ review of these activities while reducing unnecessary burden,” Vitek added.
Currently FINRA Rule 3270 states, “No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.”
But with more brokers taking on outside work, or ‘side hustles’, FINRA has seen the need for a rule revision in which outside investment-related activities would not be monitored as strictly as before. The proposal would eliminate the reporting and assessment of low-risk side work that does not impact customers.
The proposal would replace two rules—Rules 3270 and 3280—with Rule 3290, which would amend the requirements to focus on outside activities that potentially present heightened risks for members and the public. FINRA said of the consolidated new rule, “This will both increase investor protection and decrease burdens on members by eliminating the reporting and assessment of low-risk activities that create white noise.”
The proposal would eliminate the reporting and assessment of activities such as brokers refereeing sports games, driving for a car service or bartending on weekends. Brokers would be allowed to proceed with those activities without acquiring their firms’ approvals, including a securities transaction, if no compensation is at stake. Among the activities excluded from reporting requirements are personal real estate transactions such as rentals and sales of homes.
As a result, FINRA said, firms would be able focus on more substantive potential conflicts that could include brokers selling away potentially risky products such as crypto assets, fixed annuities, commodities or private placements.
After the rule change was initially proposed last year, FINRA amended it to remove a classification that would have required additional recordkeeping for broker-dealers serving advisors at third party registered investment advisors.
Some of those who submitted comments suggested that the recordkeeping requirements be maintained, including the Public Investors Advocate Bar Association. (PIABA)
PIABA President Michael Bixby spoke out against removing the requirement for FINRA-registered broker-dealers to keep records about the securities transactions of registered investment advisors affiliated with their firms.
“PIABA and its members have seen firsthand how registered representatives use a variety of outside business activities to solicit investors for financing schemes, with a variety of outside businesses often described as non-investment related being used as the impetus for solicitation of investments,” Bixby wrote.
FINRA has stated that SEC and state regulators already governed those activities of registered investment advisors so its monitoring would be “duplicative.”
Another comment letter, posted by Massachusetts state secretary William Galvin, also expressed opposition to the move.
“Finra should not move away from its current framework mandating member supervision of an agent’s participation in [private securities transactions] involving investment advisory accounts,” Galvin wrote. “Removing such basic investor protection requirements would increase investor exposure to unethical and dishonest business practices.”
The PIABA expressed its apprehension about the general impact of the FINRA proposal.
“PIABA remains deeply concerned that the overall proposed rule changes regarding Outside Activities Requirements will substantially weaken investor protections and open the floodgates for the proliferation of fraud and misconduct that will have a devastating impact on retirees and vulnerable investors,” Bixby wrote.
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