FINRA’s Symphonic Reimagining of Its OBA and PST Rules

Disharmony resulted earlier this year when FINRA attempted to “reduce unnecessary burdens and simplify” its rules on outside business activities (Rule 3270) and private securities transactions (Rule 3280).

In March, FINRA published and requested comment on a proposed new “outside activity” rule 3290 — a composition that would blend and replace rules 3270 and 3280. In doing so, FINRA abandoned a different score governing outside business activities and private securities transactions that it composed and published for comment in 2018.In March, FINRA published and requested comment on a proposed new “outside activity” rule 3290 — a composition that would blend and replace rules 3270 and 3280. In doing so, FINRA abandoned a different score governing outside business activities and private securities transactions that it composed and published for comment in 2018. 

Loud Chorus of Registered Investment Adviser Opposition

In proposing rule 3290, FINRA’s intent was to “enhance efficiency without compromising protections for investors and members.” Yet FINRA was promptly flooded with comment letters from registered investment advisers saying that FINRA had exceeded its authority regarding supervision and record-keeping obligations for outside investment adviser activities. Commenters asserted, for example, that the proposed rule unjustifiably would “subject independent RIA/IAs to an additional layer of corporate and regulatory oversight” and “add additional ambiguity and burdens on both member firms and unaffiliated registered investment advisory firms.” Other registered investment advisers chimed in with multiple variations on the theme.

In May, FINRA, sensing it risked losing its audience, took the unusual step of issuing a statement “to correct misinformation,” declaring that “statements published in news media” — respecting reporting and approval obligations and outside investment adviser activities — were false and mischaracterized FINRA’s proposal. In its statement, FINRA spelled out in plain language multiple explanatory points, as if trying to make classically minded listeners appreciate atonal music.

Investment-Related Activity

Proposed rule 3290 applies only to “investment-related” activities. So activities such as “refereeing sports games, driving for a car service, bartending on weekends” wouldbe excluded from the rule. The proposal definesinvestment-related differently (and more expansively) from how Forms BD, U4, and U5 define the term. Commenters have called on FINRA to reconcile the definitional differences, noting that the different definitions require broker-dealers to “decide how (or if) to supervise activities that are [currently] outside the scope of Rule 3290.” Apart from advocating such definitional harmony, commenters sang different (indeed opposite) tunes as to whether the rule should be narrowed to cover only investment-related activities.

Investment Adviser Activity

On the controversial topic of broker-dealers’ supervision of and record-keeping for investment adviser activity of their dually registered personnel, proposed rule 3290 distinguishes between (a) activities performed at an investment adviser affiliated with the broker-dealer, which are excluded under the proposed rule and (b) activities performed at an unaffiliated investment adviser, which are covered under the proposed rule. The exclusion of affiliated investment adviser activity reflects FINRA’s view that broker-dealers are able “to implement meaningful controls across [affiliated] business lines.” Investor advocate commenters thought this aspect of the proposal was off-key, arguing that the Securities Exchange Act requirement to maintain reasonable supervisory procedures requires broker-dealers to supervise the investment-related activities of their registered representatives “no matter where such activities occur.” Other commenters thought this whole theme was inappropriate for the proposal, arguing that broker-dealers should not bear supervisory responsibility for any investment adviser activity — affiliated or unaffiliated — because it is outside their control and such responsibility could lead to duplicative oversight and potential investor confusion.

The proposed rule clarifies that broker-dealers’ associated persons could perform solos as portfolio managers or investment committee members for mutual funds,exchange-traded funds, unit investment trusts, or registered closed-end funds, among others, without any supervision by the broker-dealer.

Next Steps

FINRA is still reviewing comments and, before submitting this proposed work to the SEC for approval, could revise, add, or delete individual parts, or even whole movements. It also could solicit further public comments to learn more about what the industry’s critics of its music might think.