The Financial Industry Regulatory Authority is proposing relaxing its rules pertaining to brokers’ outside business activities, Financial Advisor reports.
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, such as brokers refereeing sports games, driving for a car service or bartending on weekends.
The focus would instead be on high-risk activities, including brokers who sell cryptocurrency, annuities and private placements outside their firm. The brokerage firms would have the responsibility of determining whether an outside activity involves firm clients, poses conflicts of interest, or requires further supervision.
After reviewing its rules governing outside business activities and private securities transactions, FINRA is now seeking comment on the proposed rule, which is intended to streamline and reduce unnecessary burdens regarding existing requirements on outside activities.
The proposal would replace two rules—Rules 3270 and 3280—with one rule that is intended to enhance efficiency without compromising protections for investors and members relating to outside activities. The new Rule 3290 would provide “clarity and reduces unnecessary compliance burdens for member firms in reviewing outside activities of their associated persons,” FINRA said in Regulatory Notice 25-05. “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 allows brokers to proceed with an outside business activity without acquiring their firms’ approvals, including a securities transaction, if no compensation is at stake. Among the activities excluded from reporting requirements are real estate transactions such as rentals and sales of homes.
FINRA is seeking comments on the proposal, with a deadline of May 19.
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