SEC Approves FINRA Overhaul of Outside Business Activity Rules
From the desk of Jim Eccleston at Eccleston Law
The Securities and Exchange Commission (SEC) has approved FINRA's long-awaited overhaul of the rules governing outside business activities and private securities transactions by financial advisors.
In a 72-page order, the SEC approved rule changes that FINRA submitted in January. According to AdvisorHub, the approval follows nearly a decade of efforts to revise the framework, including earlier proposals that never received final approval. FINRA will announce the effective date later.
The changes replace FINRA Rules 3270 and 3280 with a consolidated Rule 3290 that focuses on investment-related activities.
According to AdvisorHub, one of the most significant changes removes reporting and supervisory requirements for lower-risk, non-investment activities. Brokers previously had to disclose any outside activity for which they received compensation. Under Rule 3290, activities such as bartending, driving for a car service or refereeing weekend sporting events will no longer trigger those requirements.
The SEC said the change will reduce the burden of reporting and reviewing lower-risk activities and allow firms to devote resources to conduct that presents greater risks to investors.
Rule 3290 also clarifies a firm's responsibilities when a dually registered broker operates an unaffiliated registered investment advisory firm. Broker-dealers will not have to supervise those outside RIA activities. The SEC agreed with industry commenters who argued that additional broker-dealer supervision would duplicate existing federal and state oversight of RIAs.
AdvisorHub reports that state regulators and investor advocates had raised concerns about that change, arguing that removing an additional layer of oversight could make fraud involving independent RIAs more difficult to detect.
The rule continues to require oversight of a broad range of investment-related outside activities, including crypto assets, fixed annuities, commodities and private placements. Financial advisors must provide prior written notice before participating in those activities. Firms may also impose restrictions that exceed Rule 3290's requirements.
Outside securities transactions involving potential compensation will continue to receive heightened scrutiny. Firms must approve or reject those transactions in writing and, when approved, supervise them as if the transactions occurred through the firm.
Rule 3290 also requires firms to assess whether an outside activity or securities transaction could interfere with or compromise a financial advisor's responsibilities to customers. Firms must evaluate the risks that the proposed activity presents to both the brokerage and its customers.
According to AdvisorHub, the SEC emphasized that the new requirements establish a minimum standard rather than a limit on firm oversight. Brokerages may conduct broader reviews or adopt stricter requirements and may concentrate their resources on activities that create the greatest legal and reputational risks.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, finra rules, sec compliance, outside business activities, private securities transactions, securities regulation
