An irreverent Wall Street Blog

FINRA Proposes Consolidation of Outside Business Activities and Private Securities Transactions Rules

February 28, 2018

On February 26, 2018, the Financial Industry Regulatory Authority ("FINRA") published "Outside Business Activities FINRA Requests Comment on Proposed New Rule Governing Outside Business Activities and Private Securities Transactions" (FINRA Regulatory Notice 18-08, February 26, 2018) (the "OBA Notice") http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-18-08.pdf As set forth int he OBA Notice's "Summary":


FINRA seeks comment on a proposed new rule to address the outside business activities of registered persons. The proposal is the result of FINRA's recent retrospective review of FINRA's rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person), respectively. The proposed rule would replace FINRA Rules 3270 and 3280 and is intended to reduce unnecessary burdens while strengthening investor protections relating to outside activities. 

In their present incarnation, FINRA Rule 3270 (FINRA's "OBA Rule") and FINRA Rule 3280 (FINRA's "PST Rule") state:

FINRA Rule 3270. Outside Business Activities of Registered Persons

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. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.

Supplementary Material:

.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by 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. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

FINRA Rule 3280. Private Securities Transactions of an Associated Person

(a) Applicability

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

(b) Written Notice

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person's participation in the proposed transaction; or

(B) disapproves the person's participation in the proposed transaction.

(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

(e) Definitions

For purposes of this Rule, the following terms shall have the stated meanings:

(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3210, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.

(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

As has been amply detailed in the BrokeAndBroker.com Blog over the years, few FINRA rules have prompted more misunderstanding and alleged non-compliance than Rule 3270. Rather than regale my readers with yet another diatribe about the many problems with FINRA's OBA Rule, I would refer you to this well-worn path: 




Woe be it for me to ever stand in the way of any regulator's desire to reduce the number of its rules or to consolidate when and where appropriate. To that extent, I applaud FINRA's proposed revisions and consolidation of its OBA and PST rules. On the other hand, it's hard to read the proposed Rule 3290 and not come away with the impression that the outcome is less about streamlining and consolidating than it is about cut-and-pasting two rules into a new one. Be that as it may, I still concede that it makes more sense to have OBA and PST unified into one comprehensive rule rather than split apart. For your reading pleasure, consider the proposed new FINRA Rule:

Proposed FINRA Rule 3290. Outside Business Activities 

(a) Obligations of a Registered Person 

No registered person may participate in any manner in an investment-related or other business activity outside the scope of the relationship with the person's member firm unless the person provides prior written notice to and, with respect to any investment-related activity, receives prior written approval from, the member. In the case of a material change to the activity, a registered person must provide the member with updated prior written notice and, with respect to any investment-related activity, receive updated prior approval. The notification shall be provided in such form as specified by the member, describing the proposed activity and the person's proposed role therein. If the member disapproves the proposed activity or places conditions or limitations on it, the registered person shall not participate in the activity or shall comply with such conditions or limitations. 

(b) Obligations of a Member Receiving Notice of an Investment-Related Activity 
(1) Upon receipt of a written notice of any investment-related activity, a member shall: 

(A) perform a reasonable assessment of the risks created by the engagement of the registered person in the proposed activity, including an evaluation of whether the proposed activity will: 

(i) interfere with or otherwise compromise the registered person's responsibilities to the member's customers; or 
(ii) be viewed by 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; 

(B) consider whether the activity would require the person's registration as a broker or dealer under the Exchange Act if not for the person's association with a member; and 

(C) make a reasonable determination of whether to approve the registered person's participation in the proposed activity, to approve it subject to specific conditions or limitations, or to disapprove it.

(2) Upon completion of the member's assessment, a member shall advise the registered person in writing whether the member: 

(A) approves the person's participation in the proposed activity and imposes any conditions or limitations on that participation; or 

(B) disapproves the person's participation in the proposed activity. 

(3) If the member imposes conditions or limitations on its approval of the person's participation in the proposed activity, the member shall reasonably supervise the registered person's compliance with such conditions or limitations. 

(4) If the member approves the person's participation in the proposed activity and such activity would require, if not for the person's association with a member, registration as a broker or dealer under the Exchange Act and the person is not so registered, the activity shall be deemed to be that of the member and the member shall be subject to all applicable securities laws and regulations and FINRA rules, including those requiring supervision and recordkeeping, with respect to that activity. If the person is associated with more than one member, the members may develop a detailed, formal allocation arrangement, which must be in writing, whereby at least one member agrees to be responsible for compliance with respect to all applicable securities laws and regulations and FINRA rules regarding the proposed activity, including those requiring supervision and recordkeeping. 

(5) A member must keep a record demonstrating its compliance with the obligations pursuant to this Rule and must preserve this record at least three years after the registered person's employment or association with the member has terminated.

Supplementary Material: 

.01 This Rule shall not apply to: 

(a) a registered person's personal investments (including transactions in accounts that are subject to FINRA Rule 3210); 

(b) transactions on behalf of the registered person's immediate family members (as defined in FINRA Rule 5130) for which the registered person receives no transaction-related compensation; 

(c) activities conducted on behalf of a member's affiliate, unless those activities would require, if not for the person's association with a member, registration as a broker or dealer under the Exchange Act and the person is not so registered; or 

(d) a member's non-broker-dealer activities. 

.02 For purposes of this Rule: 

(a) "Affiliate" means any entity that controls, is controlled by or is under common control with a member. 

(b) "Business activity" means: (i) acting as an employee, independent contractor, sole proprietor, officer, director or partner of another person; or (ii) receiving compensation, or having the reasonable expectation of compensation, from any other person as a result of the activity. 

(c) "Investment-related" means pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).

The deadline for FINRA's receipt of comments is April 27, 2018. Comments must be submitted through one of the following methods: 
Jennifer Piorko Mitchell 
Office of the Corporate Secretary 
FINRA 
1735 K Street, NW 
Washington, DC 20006-1506

Bill Singer's Comment

I support the proposed consolidation of FINRA Rules 3270 and 3280 into a unified Rule 3290.

Notwithstanding FINRA's alleged input from so-called "stakeholders," the men and women who will be subject to proposed FINRA Rule 3290. Outside Business Activities are the industry's registered persons. It is their understanding that is most pertinent when crafting a rule by which they will be fined, suspended, or barred. 

The FINRA Rule 3290 proposal should be presented to a focus group of active registered persons.  FINRA should submit a set of questions to the men and women on that focus group in order to gauge their understanding of the intended application and scope of the proposed rule. Moreover, FINRA should elicit suggestions from this group that would enhance the clarity of the proposed rule.  If, in fact, there are words, clauses, phrases, sentences, and/or paragraphs in the proposed Rule 3290 that are consistently misunderstood or misconstrued by the focus group, it would be a far more appropriate to revise the cited language before finalizing the rule rather than doing so after-the-fact through an interpretive memorandum/letter or, worse, through the blunt implement of a regulatory complaint. 

Permalink

Search BrokeAndBroker

Related Topics

Previous Entries

No Headlines Found

Tag Cloud

Bill Singer BrokeAndBroker FINRA Arbitration AWC SEC BrokerAndBroker Expungement Guest Blog Guest Blogger Aegis Frumento OBA Wells Fargo U5 BrokeAndBroker CRD InSecurities OHO Email Morgan Stanley Defamation U4 NAC ALJ Merrill Lynch BrokerCheck PST Supervision Whistleblower Statutory Disqualification Securities Industry Commentator Rule 3270 Suitability DOJ SDNY Promissory Note Rule 2080 Elderly Rule 2010 Willful WSP OIP Form U4 Wire Fraud Pro Se Rule 8210 EFL UBS Expenses RIA Form U5 Dodd Frank Stephen Kohn Business Expenses TRO Discretion Rule 1122 Bar Willfulness IRS Bank JP Morgan Fraud Discovery Wife Trump Ameriprise Husband NASD Bill SInger FAA Rule 3240 Borrowing Small Firm Conversion Supreme Court Rule 3280 Crypto Edward Jones Margin Wrongful Termination IRA Raymond James CCO Insurance 2Cir Estate Frumento Corrective Action Statement Outside Business Activities Stay Rule 12206 Mail Fraud Schwab arbitration Punitive Damages Tax LPL Promissory Notes Customer Bankruptcy Beneficiary Explained Decision TD Ameritrade Felony COVID Remand Citigroup Motion to Dismiss Options BrokeAndBroker.com Commissions Settlement Trust Case In Point OWB Injunction CFTC ACQ Board DCCir Rule 4511 OTR Initial Decision Retaliation Blockchain Sanctions Rule 3040 Tax Liens Ponzi Rule 2510 Wall Street Motion to Vacate Burris Due Diligence Forgery Spouses 9Cir Rule 4530 Discrimination Jurisdiction Eligibility Rule Unauthorized Discretion Reg SP Personal Expenses Unsuitability Offer of Settlement Rule 12200 Solicitation Outside Business Activity FBI Mandatory Arbitration SRO Insider Trading Bank of America Rule 3010 Compliance Failure to Supervise Checks NYSE Barclays Annuities Manifest Disregard ETF CRS Goldman Sachs Private Securities Transaction Divorce Disgorgement Loan Dissent FINRA Board Rule 3110 10Cir Class Action Cease And Desist PCAOB Fiduciary Conspiracy email Trustee Board of Governors Impersonation Power of Attorney Reimbursement Rule 9552 Credit Card IAR expungement VA Broker Protocol Unfair Competition Spoofing Spouse Cryptocurrency Customer Complaint Liens AML Zipper Emails Annuity Away Account T&P Tax Lien JPMorgan Complaint Indemnification Retirement Wey Disclosure Lucia SDFL Kokesh Due Process POA BD Breach of Contract Appeal MC-400 4Cir Lien Bitcoin Rule 12904 Willfully Coronavirus Public Interest Unauthorized Trading Postponement Racism BOP Severance REIT 3Cir Indictment Elder Abuse Securities Fraud Vacatur Fees Antitrust HFT Brummer Exhaustion of Administrative Remedies Dakota Securities Rule 12805 CMA Net Capital Test Motion to Confirm Rule 2111 Signature Covid Hilton Weiner Whistleblowers Wire Rule 3050 WSPs insecurities guest blogger guest blog aegis frumento Rule 2150 Employment Sexism Whistleblowing Statute of Limitations Marijuana PNC RR Suspension Gensler NASDAQ Deceased Widow Private Securities Transactions Examination Bureau of Prisons Money Laundering OIG BrokeAndBroker.com Blog Robinhood Stifel Nicolaus Sanction Guidelines Deutsche Bank PIABA Loans Bonus Rule 2081 Apple Stifel Signatures DNJ Non Solicitation Audit Will DOL Puts Bonds Leggett Puerto Rico Rule 13200 Preliminary Injunction Confidential Information Enforcement 11Cir Botkin Rule 4513 Misdemeanor Charles Schwab Self Regulation Great Recession OSHA Elder Fraud Mortgage TOD Absolute Immunity JPMS Margin Call Unjust Enrichment Mutual Funds CPA Membership Continuance Credit Suisse Statutory Disqualification Committee Hacking Registration Commission Unsuitable Small Firm Governor NoCA Website Rationale Diversity 1Cir supervision NDCA TheBlot Exam Pennystocks Standing Appointments Clause Arbitraiton Undisclosed Settlement ADA JPM Test Center Passcode BrokeAndbroker Inability to Pay RBC money laundering Mother IPO Finra Election Away Accounts Scottrade Immunity Rule 2210 Testimony Real Estate Robert Cook Annual Compliance Questionnaire AAA TCR Feigenbaum Spoliation Cannabis Statement of Corrective Action WB-APP Rule 13805 Waiver 6Cir Trade Secrets Written Supervisory Procedures 9/11 securities industry commentator State Actor E*Trade Rule 12504 Concentration Reg S-P Bandimere BrokeandBroker Extraordinary Cooperation Rule 9554 CEO Excessive Trading Sexist Affiliate Variable Annuities Michael King Biden Variable Annuity Hurry Sarbanes Oxley Form ADV brokeandbroker FINOP Compensation Imposter Michael King Associates Tortious Interference Solicited Irreparable Harm Restitution Johnny Burris Newman Superior Court FMLA Unsolicited DMD NRF Wachovia Facebook Star Wars Series 7 Medical Condition BrokeAndBroker Bill Singer FINRA Small Firm Rule 12212 Termination Fidelity Hester Peirce DDC Churning Conflict of Interest EDNY Ethereum Administrative Remedies Circuit Court Taxes Confidentiality Trading Platform Customer Information Non-Solicitation Subpoena Default Motion to Compel Sharemaster Financial Professionals Coalition Beneficiaries Research Sexual Discrimination ICO Talman Harris High Frequency Trading Pennystock Self Reporting Constitution Continuing Education Life Insurance Scottsdale 10b-5 Customers McDuff Self Directed PAQ Kon Social Media Marines Vietnam Marine Corps Honorarium Whitman Relevant Disciplinary History Consent Order Ride the Thunder Employment Agreement VIX IM Mutual Fund Service Hugh Hewitt Funds Rule 3030 Wanger Extraordinary Circumstances Stipulated Award Internet Rule 3310 Flash Crash Boycott Saad RMBS Hearing Sexual Harassment Government Accountability Project Information NSF SunTrust Cheating Check Kiting Guitron Obstruction RICO Lawyers Debit Card Wedbush Yesenia Guitron Testing ATM 5Cir Probate Respondeat Superior Privilege FNMA FINRA AWC Private Placement Dementia Scholander Interactive Brokers FOCUS Layering Nondisclosure Annual Audit Falsification 17a-5 Check JP Morgan Securities Guest Bloggers EEOC Lawyer Morgan Stanely Federal Reserve Chevron Son Revocation Capital Gains securities fraud Conflict SP Pension Prudential Oral Discretion Shah Gilani Slander Charity Penalty OWWP Hedge Fund Confirm Disciplinary History wire fraud Attorneys Fees WBAPP GameStop mail fraud Amazon Client Information Gamification Regulation SP Outside Counsel Fiduciary Duty Rory Flynn Acosta DCO Rule 1210 Blackbook Forex Executor Relevant Transamerica Liquidation NY Life Res Judicata Offset Puerto Rico Bonds Permanent Bar ARS Form TCR CDO SD FCI Rule 13504 Death Peirce ACH Joint Account Over Concentration WhatsApp Tesla FCI Beaumont FAP Zoom Texting Newport Coast Securities LLC Jennifer Tarr Obstruction of Justice Christian Stanley Rule 21F Arbitration Civil Rights Unauthorized Practice of Law Taft Correctional Institution Cold Spring Advisory Group Reverse Life Insurance Lehman Third Party Vendor Deferred Compensation Bear Stearns Oppenheimer Rule 13104 MSSB Elder Law 40 Act Withdrawals Rule 2430 Expert Witness Leveraged ETF Google OCIE Crime Embezzlement Control Person Non Solicit Securities America Libel Pruco Time And Price Commodities Fraud Verbal Discretion For Cause Book of Business First Amendment fraud NYG Capital Turnover EDPA bill singer Counterclaim Subject Matter Jurisdiction Tennis Court Mistake Trade Practices Oilpro Charge Rule 13904 Rule 12104 Calls Cantor Fitzgerald Allocation Compliance Questionnaire Trading Jay Clayton Retired Woman With Cane 10b-10 Constructive Discharge Rule 3210 Johnson Purshe Kaplan DAO Powell wrongful termination AWC. FINRA FINRA Arbitration Teleconference Finder\'s Fee Rule 12203 Hotel Jarkesy Nationwide ESOP Kierkegaard Motion Reason for Termination LIBOR AXA YouTube Administrative Process SDOH Non-Disclosure ESG CE Fernandez Trader Tax Advice Pham Panama Telephone Vungarala Cherry Picking Expulsion Lorenzo Nicolas Corcione Fundacion Nicor Ten Commandments Credit Cards SDCA Retroactive Bar Collateral Bar Municipal Advisor Fine Financial Disclosure Retroactive Pershing GME FNI Media sexism NRSRO DRS NFT Section 1332 Exception Reports Schottenstein Bartko FINRA Foundation Negligence Private Placements ALJ Grimes Third Party Beneficiary Transparency JOBS Act Last Known Address QuadrigaCX Mantar GAP Rule 21F-17 In House Counsel CD NYAG Communications Undertaking expenses Promoter SLUSA Accounting JAMS In Connection With Deceased Customer MAP reimbursement TSSB HSBC false statements AMC Rule 13206 Reg SHO DMCA Gross Ruder Task Force Confidential Audit Committee Sharing Agreement Books and Records Kiting Rule 144 VXX Corporate Governance Motion to Compel Arbitration Back Dated Equity ACT! Tysk Altered Apartment Particularity Declaratory Judgment Rule 13212 Lek Rule 13201 Ethics Court of Appeal Orders Daspin Rule 2140 APA Title VII Motion to Exclude Section 206 PSRO Joint Production Discharge Exception Report Salman Stephen A. Kohn Self Regulatory Organization Investment Advisers Act Kent Transitional Bonus UIT MSPB Ruemmler Production Bonus Burden of Proof Notice Alcoholism Jury Instructions Harris finra Confirmation NPI Sterne Agee ALJ Foelak NMS Covid-19 Shotgun Pleading Risk Romer Article V Motiion to Acquit Fraudulent Inducement Grievance LOA annuities Wires Crowdfunding Hacker Confidential Customer Information defamation Rule 12511 Bob Dylan Data Meals Office of Special Counsel Escrow Clearing Firm Bill singer Unauthorized Trades Stipulation Reasonable SIFMA S&P Microcap elderly Motion to Postpone Electronic Communications Fidelity Brokerage Services Public Arbitrator Dostoevsky Bezos Municipal Bonds Berthel Fisher ETFs Expert EDVA FOREX Currency CNBC Income Capitalism No Show Series 79 Guardian Punitive Cryptocurrencies PN Exotic ETF Clayton Lexicon Reg D Ecuador Production Hayden Newbridge MDLA Daughter Witness Tampering JPMorgan Chase NYLIFE Non-Solicit Rule 420 Voya Principal Quasi Governmental Exemption Non Compete College Solomon Day Trading Disability Regulation Elon Musk Restaurant Private Actor Disparate Treatment Abstention AI Chief Compliance Officer Willfull Nietzsche Bequest Rule 2330 Rule 9216 Unregistered Fee Conflicts Rule 1031 Game of Thrones whistleblower Initials Perjury Investment Adviser Howey Harassment Vaccarelli Led Zeppelin Broke And Broker Judgments Traders Exhaustion Doctrine SIE Success Fee TradeStation ADR