FINRA Struggles to Revise Outside Business Rules
From the desk of Jim Eccleston at Eccleston Law
The Financial Industry Regulatory Authority’s (FINRA) attempt to update its rules on advisors’ outside business activities has stalled, according to Robert Colby, FINRA's chief legal officer. As reported by AdvisorHub, the primary challenge lies in defining broker-dealers’ responsibilities to supervise independent registered investment advisory (RIA) firms of dually registered brokers.
Although FINRA does not supervise investment advisers registered with the Securities and Exchange Commission (SEC) and state regulators, FINRA does require broker-dealers to maintain some level of supervisory and recordkeeping responsibility for advisors conducting such outside investment adviser activities. As reported by AdvisorHub, this regulatory overlap has complicated efforts to modernize the rules.
FINRA has been considering reforms to its private securities transaction rule and outside business activity rule, which have been criticized by its board as outdated, for over six years. In 2018, FINRA proposed revisions to Rules 3270 and 3280 to narrow the scope of what qualifies as an outside activity and to exempt certain activities from supervisory and recordkeeping requirements. However, these proposed changes received mixed reviews from the industry and have not been approved.
Compliance officials continue to grapple with questions about what constitutes an outside business. Colby shared an anecdote from a meeting with lawyers where one questioned whether raising goats for fun and profit would need to be supervised as an outside business.
Colby suggested that FINRA might find quicker success by addressing these simpler "goat-herding" type questions rather than the more complex issue of RIA supervision. This approach could lead to more manageable and immediate updates to the rules, alleviating some of the frustration currently felt by compliance officials.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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