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FINRA hits snags in effort to reform rule on brokers’ outside business activities

On Behalf of | May 21, 2024 | Firm News

The Financial Industry Regulatory Authority continues to face hurdles in its efforts to reform rules governing brokers’ outside business activities, (OBAs) AdvisorHub reports.

Over the past six years, FINRA has been working to revise Rule 3270 which 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 at a panel discussion during FINRA’s 2024 Annual Conference in Washington, D.C., FINRA chief legal officer Robert Colby said the authority’s initiative has “foundered”.

One main issue, Colby said, regards defining the obligations of broker-dealers to supervise independent registered investment advisory firms of dually registered brokers.

“That’s very difficult because there’s a difference of views about whether this is something you inherently have to supervise,” Colby said.  He cited the arguments of those opposed to requiring supervision of the RIAs, saying “We can’t supervise this. We have no tools and no authority, and so we should be freed from having to oversee this,” Colby said.

While FINRA does not directly supervise investment advisers, it does place some responsibility on firms to supervise the outside activities of their advisers.

The issue dates back to 2018, when FINRA first proposed modifying the rule to narrow the definition of what qualified as an outside business that firms must approve and supervise.  After that proposal drew opposition, subsequent reform efforts also stalled.

FINRA has made unreported OBAs a priority for enforcement, saying issues have arisen with firms’ monitoring of brokers’ activities and possible private securities transactions.

The authority said firms have had “inadequate controls to confirm adherence to limitations placed on OBAs,” such as prohibiting brokers from soliciting firm clients to participate in an OBA.

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