Effective December 15, FINRA Rule 3270 will replace NASD Rule 3030 regarding the outside business activities of registered representatives. The new FINRA rule expands the activities subject to reporting and review requirements, and imposes new obligations on broker-dealers for documented review of such activities. For registered representatives actively engaged in outside business activities prior to the December 15th implementation date, firms will have until June 15, 2011 to comply with the new requirements.
Under the new rule, a registered representative must provide written notice to his/her broker-dealer prior to: 1) acting as an employee, independent contractor, sole proprietor, officer, director or partner of another entity, regardless of whether compensation is paid; or 2) being compensated, or having the reasonable expectation of compensation, as a result of any business activity outside the scope of his broker-dealer relationship.
Supplementary material for the new rule requires a broker-dealer to perform, document and retain an analysis of the proposed outside business activity to determine whether it will: 1) interfere with, or otherwise compromise, the registered representative's responsibilities to the broker-dealer or its customers; or 2) be viewed as part of the broker-dealer's business. Based on this analysis, the broker-dealer must determine whether to impose conditions or limitations on, or completely prohibit, the activity.
Rule 3270 raises two issues that were not present in its predecessor. First, an activity for which a registered representative reasonably expects to be compensated is subject to the rule. While FINRA maintains that this provision is intended to address work for start-up companies, where compensation may be delayed until sufficient revenue is generated, it may also apply to other situations as well.
Second, the rule provides no guidance for analyzing whether a proposed activity will interfere with or compromise a representative's responsibilities to his firm or customers. While it is possible to read this provision simply as an issue of time management, it's also arguable that this analysis, along with the broker-dealer's obligation to impose conditions or limitations as necessary, is the functional equivalent of requiring a broker-dealer to supervise, or at least conduct due diligence on, the proposed outside business activities of its representatives. FINRA itself has fueled this ambiguity; in a July letter to the SEC responding to comments on the proposed rule, a FINRA executive stated: "While FINRA recognizes that a member does not have the same supervisory responsibilities over a registered person's outside non-securities activities as it does for his or her outside securities activities, a member nevertheless has an important regulatory responsibility to evaluate the potential impact of the outside business activities of its registered persons, and this provision emphasizes that responsibility."
Thus, it remains to be determined whether FINRA will provide additional guidance and interpretation regarding the new rule. A particular issue for an insurance-affiliated broker-dealer is determining the scope of review of its affiliated insurers, as well as of unaffiliated insurers for whom its registered representatives sell fixed insurance products.