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FINRA Proposal Would Revamp Supervision of Outside Business Activities

FINRA is seeking comments on a proposed streamlined rule to address the outside business activities and private securities transactions of registered advisers at member firms in an effort to reduce regulatory confusion and provide better investor protection.

The self-governing organization’s Feb. 26 proposal (Regulatory Notice 18-08) would:


  • require registered advisers to provide their firms with prior written notice for all investment-related or other business activities outside the scope of their relationship with the firm; and

  • directs FINRA member firms to perform a risk assessment over such activities that are investment related.


A registered adviser’s personal investments and work performed on behalf of affiliates of a FINRA member firm generally would be excluded from the rule.

The proposal comes as a result of the organization’s “retrospective review” of its rules governing outside business activities (FINRA Rule 3270) and private securities transactions (FINRA Rule 3280). “The retrospective rule review confirmed the continuing importance of rules relating to outside activities, but also indicated that the current rules, as well as related guidance, could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices,” the notice states.

FINRA is seeking input on several specific areas, including potential alternative approaches, compliance costs, notice requirements, risk assessments and excludable activities. Comments on the proposal should be submitted by Apr. 27, 2018.

Notice Requirements and Risk Assessment

Among other things, the proposed rule would require the notice to describe the proposed activity and the adviser’s proposed role therein. In addition, the adviser would be required to update the notice in the event of a material change to the activity. With respect to investment-related activities only, the proposal specifies that an adviser would be required to receive prior written approval from the FINRA member firm before participating in the activity.

Upon receiving notice, the firm would be required to perform an “upfront reasonable assessment of the risks created by the engagement of the registered person in the proposed activity.” Similar to Rule 3270, the firm would be required to evaluate whether the proposed activity will:


  • interfere with or otherwise compromise the adviser’s responsibilities to the firm’s customers; or

  • be viewed by customers or the public as part of the firm’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered.


The firm would also be required to consider whether the adviser is relying on the firm’s registration as a broker or dealer to conduct the activity, in which case, the activity would be deemed to be that of the firm, if approved.

“By focusing the member’s assessment on investment-related activities, the proposed rule would allow members to concentrate their compliance resources on those activities that may pose a greater chance of harm to investors,” the proposal states in noting that FINRA member firms would no longer be required to conduct a risk assessment on a non-investment-related activity.

Following the assessment, the firm would determine whether to approve the adviser’s participation, approve it subject to conditions or limitations, or disapprove it. In addition, the firm would provide the adviser written notice of its determination.

Supervisory obligations as well as recordkeeping requirements are also addressed under the proposal. It would not impose supervisory and recordkeeping obligations for most other outside activities, including adviser activities at an unaffiliated third-party investment advisory firm.

At the same time, the proposal would hold a member firm responsible for approved activities that could not take place but for the adviser’s association with the firm. In particular, supervisory obligations would be imposed in two situations:


  • If a firm imposes conditions or limitations on an adviser’s participation in an investment-related activity, the firm would be required to reasonably supervise the adviser’s compliance with those conditions or limitations.

  • To the extent that a firm approves an adviser’s participation in a proposed investment-related activity and such activity would require, if not for the adviser’s association with the firm, registration as a broker or dealer under the Exchange Act and the adviser is not so registered, the activity would be deemed to be the firm’s business.


“In other words, if the person can only legally engage in the outside business activity because the person is associated with a member, the member approving that activity must treat it as its own,” the proposal emphasizes.

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