SEC OKs Merging, Narrowing FINRA Rules on Outside Activities
The SEC approved a FINRA rule to limit requirements governing the outside activities of associated persons by narrowing the scope of reportable activities to those that are investment-related.
The new rule, FINRA Rule 3290 ("Outside Activities Requirements"), will consolidate, replace, and shrink the scope of two existing rules, FINRA Rule 3270 ("Outside Business Activities of Registered Persons") and FINRA Rule 3280 ("Private Securities Transactions of an Associated Person"). In addition to shrinking the absolute scope of the existing rules, the new rule will move certain activities, particularly advisory activities, from regulation as "private securities transactions" to regulation as "outside activities," which will reduce the compliance burden imposed on member firms with respect to such activities. As with the existing rules, the provisions related to securities transactions apply to all associated persons of a firm, while the provisions related to outside activities apply only to registered persons.
The new rule requires registered persons to provide prior written notice to their member firms before participating in any outside investment-related activity that is not in connection with a securities transaction. The existing Rule 3270 requirement that registered persons report all outside activities with any possibility of compensation to their member firms (see prior coverage) will be eliminated. Activities such as bartending and refereeing sports games are examples of activity that is no longer required to be reported. However, the term "investment-related" should be read very broadly to include, for example, money transmission, lending, collectible activity relating to financial assets, financial planning, tax advice, capital raising, selling private funds, investment partnerships, and activities relating to crypto assets.
For outside securities transactions, all associated persons (not just registered persons) must provide prior written notice, and if the transaction involves selling compensation, they must obtain prior written approval from the member firm.
The new rule treats an associated person's activity at a registered investment adviser as an outside activity rather than an outside securities transaction. That is quite significant. The person must still give the member prior written notice, and the member must still assess the activity and decide whether to condition, limit, or prohibit it. But FINRA said the change eliminates the member's supervision and recordkeeping obligations for investment advisory activities performed by associated persons at unaffiliated investment advisers.
The rule also does not require that associated persons provide notice of activities conducted on behalf of a member or its affiliate, on the theory that members are aware of such activity. The rule excludes certain personal real estate activities, limited to a main home and up to two secondary homes.
FINRA has not yet set a compliance or effective date for the rule and will issue a separate regulatory notice announcing the effective date.