FINRA currently requires registered representatives to inform their broker-dealer of any proposed outside business activities that they may be engaging in so that the firms can determine whether to permit the representative to proceed with the activities. This requirement has a far reaching impact, which includes compliance concerns, reporting requirements, and investor protection protocols.
The proposed rule seeks to clarify the obligations and further strengthen investor protection. It would require representative’s to provide “prior written notice for all investment-related or other business activities outside the scope of their relationship” with the broker-dealer. If the activity is not investment related, the member has no obligation; but if it is investment related, the member would be required to perform a reasonable risk assessment. This would allow members to focus on outside activities that are most likely to raise investor protection concerns.
The assessment includes a number of factors, all geared toward determining the risks associated with the representative engaging in the activity. If the activity is ultimately approved, the member will have supervisory obligations to ensure that, for example, the representative is complying with all conditions associated with the member’s approval, as well as ensuring that all rules and regulations are being followed.
The proposal also has a number of exclusions, which allows the members to effectively focus their compliance resources. For example, a representative’s personal investments are excluded, since these activities do not raise investor protection concerns.
FINRA is currently seeking comments on the proposed rule. The comment period expires on April 27, 2018.