FINRA Proposes Single Rule to Replace FINRA Rules 3270 and 3280

FINRA has proposed a single, streamlined rule (the Proposed Rule) to replace FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person) (collectively, the Existing Rules). FINRA’s stated goal for this proposal, described in Regulatory Notice 25-05, is to create a more efficient framework for tracking and, as required, supervising outside activities of registered persons and associated persons of FINRA member firms. Comments are due by May 13, 2025.

The proposal includes a flowchart to assist firms in understanding the Proposed Rule (Attachment B) and Q&As demonstrating the differences between the current and proposed frameworks in certain scenarios (Attachment C).

WHAT CHANGES DOES THE PROPOSED RULE MAKE?

The outside activities within scope of the Proposed Rule include “investment-related activities”—a helpful proposed change and clarification from the Existing Rules: [1]

• The term “investment-related activity” is defined in the Proposed Rule as “pertaining to financial assets, including securities, crypto assets, commodities, derivatives (such as futures and swaps), currency, banking, real estate or insurance.”
  • According to the proposal, the term includes, but is not limited to, “acting as or being associated with a broker-dealer, issuer, insurance agent or company, investment company, investment adviser, futures commission merchant, commodity trading advisor, commodity pool operator, municipal advisor, futures sponsor, bank, savings association or credit union.”
• NOTE: There are differences in how the term “investment-related activities” is defined in the proposal relative to “investment-related” for purposes of Form BD, Form U4, and Form U5 (collectively, the Forms).
  • The Forms define “investment-related” to mean “[p]ertaining 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).”
  • FINRA did not address in the proposal whether any changes to the Forms might be forthcoming. However, harmonizing the reporting requirements under the Forms and the Proposed Rule would be consistent with FINRA’s efforts, as discussed in the proposal, to reduce unnecessary burdens, simplify requirements, and enhance efficiency with respect to the outside activities of member firms’ associated persons. Such a harmonization would also limit the burden of FINRA members having to track activities differently for different purposes. Firms may want to request that explicit harmonization be provided in any final rule. Of course, amending the Forms would require involvement of the SEC, other self-regulatory organizations, and the states.

Helpfully, the Proposed Rule would not apply to non–broker-dealer activity on behalf of an affiliate of the broker-dealer. As a result, disclosure of work for investment advisers, insurance, or banking activity conducted at an affiliate would no longer have to be disclosed or supervised as it is under the Existing Rules. However, the Proposed Rule would not alter the requirements in the Existing Rules for associated persons to disclose and members to supervise, when necessary, activities carried out for unaffiliated investment advisers and other unaffiliated third parties engaged in investment-related activities.

• NOTE: While the Proposed Rule would exclude an associated person’s “non–broker-dealer activity,” there is still some lack of clarity regarding what activities would be within scope of the Proposed Rule. For example, it is unclear how the Proposed Rule might apply to a person engaged in securities activities through an affiliated bank as permitted under the Exchange Act and Regulation R. This may be an area where firms should request additional guidance in any final rule.

The Proposed Rule would clarify that the FINRA member will not be required to supervise and maintain records regarding an associated person who (1) acts as a portfolio manager or investment committee member specifically for registered investment companies, unregistered investment companies, business development companies, real estate investment trusts, and entities that are recognized as tax exempt; and (2) does not receive “selling compensation” for those activities, provided that the associated person provides prior written notice and receives prior written approval for such activity.

The Proposed Rule would codify the accepted practice of establishing formal allocation agreements between or among multiple members, pursuant to which only one member would be obligated to monitor an associated person’s participation in an outside securities transaction involving selling compensation when the associated person is associated with more than one member.

Lastly, FINRA appears to be very focused on the sale of crypto assets, fixed annuities, commodities, and private placements away from the FINRA member firm, characterizing these activities as higher-risk “investment-related” activities that must be disclosed to the FINRA member firm.

IMPLICATIONS AND NEXT STEPS

The Proposed Rule would not appear to impose additional obligations on FINRA member firms and their associated persons, but instead would appear to offer a welcome reprieve from the current obligation to disclose what FINRA has identified as “low-risk activities that create white noise,” such as “refereeing sports games, driving for a car service, and bartending on weekends.”

FINRA previously proposed changes to the Existing Rules in 2018 (the Prior Proposal), which would have eliminated members’ supervisory and recordkeeping obligations for outside investment adviser activities. FINRA stated in its proposal that the Prior Proposal prompted comment letters “with strong differences in views about the Prior Proposal’s treatment of outside [investment adviser] activities.”

FINRA did not move forward with the Prior Proposal at the time and does not propose to eliminate supervisory and recordkeeping obligations for nonaffiliated investment adviser activities in the Proposed Rule. However, FINRA requests feedback on its proposed treatment of outside investment adviser activity under the Proposed Rule.

As noted above, FINRA will accept comments on the proposal until May 13, 2025.