FINRA Proposes New OBA Rules

For broker-dealers and registered reps alike, FINRA rules regarding Outside Business Activity (OBA) has always been a compliance headache. As any seasoned CCO knows, FINRA can exemplify the minutia surrounding the rule, and sanction firms for inadequate (although often irrelevant) disclosure of its reps. From annual assessments to Google searches, firms have long been burdened with heavy OBA oversight, and in some cases, expected by FINRA to act as detectives, seeking out undisclosed OBA of their registered reps. Recently, FINRA has brought about a new regulatory notice, Notice 18-08 dated February 26, on a proposed new OBA rule that would replace the two rules currently governing outside business activities and private securities transactions, FINRA Rule 3270 and FINRA Rule 3280, respectively.

Core Concepts of the Proposed Rule

FINRA is adopting risk-based rules to better align the investor protection goals with the current regulatory landscape and business practices. The proposed rule would require registered persons to provide their members with prior written notice of a broad range of outside activities, while imposing on members a responsibility to perform a reasonable risk assessment of a narrower set of activities that are investment related, allowing members to focus on outside activities that are most likely to raise investor protection concerns. The proposed rule also would generally exclude from the rule a registered person’s personal investments (sometimes referred to as “buying away”) and work performed on behalf of a member’s affiliates. Moreover, the proposed rule would not impose supervisory and recordkeeping obligations for most other outside activities, including IA activities at an unaffiliated third-party IA. At the same time, the proposal would hold a member responsible for approved activities that could not take place but for the registered person’s association with a member.

Below is an illustration provided by FINRA outlining the core concepts of the new proposed rule. A full copy of the notice can be found at-http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-18-08.pdf

The rule will still require prior notice of outside business activities from the registered representatives in most cases, besides their activities of at affiliates of the Member and their personal investments. The burden on the member firm is reduced with respect to outside non-investment business activities while requiring compliance resources to focus on properly assessing, supervising and maintaining record keeping on those activities deemed to be outside business investment activities. The initial assessment analysis will entail a determination of potential (1) interference with or otherwise compromise the registered person’s responsibilities to the member’s customers; or (2) be viewed by customers or the public as part of the member’s business, based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Therefore, establishing a risk-based analysis between a member firm’s obligations to its customers and FINRA approved activities, as well as the effect of a registered representatives’ potential outside investment-related business activities with respect thereto.

Final Words

While each Member Firm is different, it will be imperative that each update their Written Supervisory Procedures (WSPs) to account for how to properly assess, supervise and maintain recordkeeping in compliance with FINRA’s new proposal.

At Compliance Exchange Group (CXG), we are always here to assist with this or any other securities industry related needs. Feel free to reach out and speak with one of our Principals, or visit us on the web at www.cxgllc.com

For additional information, see:

·      FINRA Rules3270 and 3280

·      Regulatory Notice 18 -08