In February, FINRA issued Regulatory Notice 18-08, requesting comments on a new rule that would replace current rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person.)
If the new rule becomes effective, it could simplify outside business activity (OBA) oversight for FINRA members. Of course, FINRA-member firms need to ensure their processes comply with all applicable regulations. Fortunately for ComplySci clients, the ComplySci Platform makes it easy for firms to facilitate pre-approval and to maintain records of employees’ activities.
What Would Change Under the New Rule?
Proposed new FINRA Rule 3290 would change OBA oversight in several ways:
- Scope. Current FINRA Rule 3280 applies to associated persons, which in most FINRA member firms is most of their employee bases. The new rule would instead only apply to those employees registered with FINRA. This would effectively limit the scope of the rules for private securities transactions.
- Clarified Definition of OBAs. The existing rule governing OBAs consists of one paragraph with a broad definition of what constitutes an OBA. While the new rule does not expand that definition, it does clarify and break OBAs into five color-coded categories. This should make it easier for firms and registered people to understand their obligations.
- Limitations on Preclearance Requirements. Under the new rule, investment-related activities would need to be pre-approved by the member firm. Activities that are not investment-related would simply require disclosure. This is a change from current rules which require member firm pre-approval for all outside activities.
- “Dual-Hat” Activities Would be Exempt. Current rules have been interpreted as requiring firms to report and supervise the activities of their dually-registered personnel, such as those working for banks and/or investment advisers in addition to their broker-dealer roles. In an attempt to resolve jurisdictional issues that could arise because FINRA doesn’t have authority to supervise banking or IA activities, the new rule would exempt those activities from broker-dealer supervision.
- Risk Assessment Requirement. Today, FINRA-member firms must perform a detailed review of an employee’s proposed OBA. The new rule would require a risk assessment instead. While the language has changed, the review and analysis should be substantially similar.
- Clarified Record Retention. Existing rules do not explicitly state how long records related to OBAs must be retained. The new rule would clarify that firms must retain related data for at least three years after the employee leaves the firm.
Supervisory Obligations Could Arise in Two Circumstances
New FINRA Rule 3290 would also impose supervisory obligations on member firms in two scenarios:
- If the firm has approved an employee’s investment-related activities but has imposed conditions on those activities, the member is required to reasonably supervise the registered person’s compliance with those conditions; and
- If the approved participation in an investment-related activity would require registration as a broker-dealer or agent thereof, but for the registered person’s association with the member, then the activity will be seen as that of the member itself and must be supervised just like its other business activities.
ComplySci Can Help Firms Comply with New FINRA Rule 3290
FINRA’s comment period on the proposed new rule ends on April 27, 2018. It’s possible, of course, that a final rule may look somewhat different. Regardless of what the new rule ultimately includes, firms can rely on the ComplySci platform to help with their oversight and record-keeping responsibilities.
If the new rule passes, ComplySci’s compliance monitoring software will be able to help firms by clearly defining OBAs for users in the system, and by tracking various categories or subtypes of OBAs separately. For example, selling private placements away from the firm and working in a part-time retail job are two very different activities. Using ComplySci, firms can set up a separate form and separate workflows for each category.
The OBA categories themselves can also be designed to flag investment-related and non-investment related OBAs, helping ensure nothing slips through the cracks. This type of categorization can also help facilitate the preclearance and direct reporting processes, where required. Firms that prohibit certain users from specific OBA activities, such as private placements, will be able to hide those modules.
Finally, compliance and supervisory personnel will be able to attach communications to OBA requests, documenting that risk assessments were completed, as required. Maintaining all of this data electronically not only makes the entire OBA process smoother and easier; it also helps firms meet their record-retention obligations in a WORM-compliant format.
Whether FINRA Rule 3290 passes in its current form or not, ComplySci is prepared to continue helping firms stay in compliance with all applicable requirements. ComplySci clients can be confident knowing the platform is flexible enough to adapt to changing regulations, today and in the future.
Check out our quick video on the proposed OBA rule changes.