Under a new FINRA proposal, brokers who have a side hustle selling antiques online would no longer risk fines and censures for not reporting the business to their firm.
That's just one of several
In general, the proposed rules would replace the current catch-all requirement with one that limited to businesses engaged in "investment-related activities."
FINRA's reporting requirements for outside business activities have been a thorn in the side of many in the industry for years, sometimes leading to fines and industry suspensions for individual brokers. The rules are generally meant to eliminate conflicts of interest that could cause brokers to issue recommendations that aren't in keeping with their clients' interests. One current rule calls on registered brokers to report any side businesses to their firms, which then must decide if the activity constitutes a conflict and if it should be restricted or prohibited.
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A second rule requires both registered and nonregistered associates to report plans for what's known as "
Rolling it all into one
FINRA's proposal would pull those two rules together into one while largely eliminating the requirement to report outside business activities not related to the securities industry, among other modifications. According to FINRA, the new rule has a goal of reducing "unnecessary burdens while maintaining the core investor protections of the existing rules."
"This will both increase investor protection and decrease burdens on members by eliminating the reporting and assessment of low-risk activities that create white noise (e.g., refereeing sports games, driving for a car service, bartending on weekends)," according to FINRA. The public has until May 13 to
Amy Kroll, a partner in the Washington, D.C., offices of Morgan Lewis, said brokers won't be entirely relieved of the requirement to report side hustles. They'll still have to list outside business interests of all stripes on the Form U4 they submit for registration purposes.
That requirement makes sense to Kroll because firms "need to know what their people are doing," she said.
"They are supposed to be working as registered reps," Kroll said. "Firms need to know who they are responsible for in a regulatory capacity."
The proposed rule change is welcome, Kroll said, because it not only brings simplification but also will let "FINRA focus on other investment-related issues, which is ultimately what regulators need to know."
Examples of changed regulatory outcomes
It's not just brokers with a side business who would find relief under the proposal, according to FINRA's examples. So would registered representatives who, for instance, get paid for moonlighting with driving services or refereeing football games on the weekend. Yet a registered broker-dealer who used a separate business entity for investing in private securities transactions would still have to report that activity, according to FINRA.
FINRA also provides several slightly more complicated scenarios for employees who are dually registered with both a brokerage firm and an advisory firm. If the advisory firm is a direct affiliate of the broker-dealer, then the employee would not have to worry about the selling-away rules when they put in trades in keeping with recommendations for clients' advisory accounts.
"The Proposal excludes activity at an affiliate in recognition of a member's ability to implement meaningful controls across business lines," according to FINRA.
However, for brokers who are dually registered but not with an advisory practice that's directly affiliated with the brokerage firm, the selling-away rules would still apply. FINRA notes that it issued a "notice to members" finding that assets-under-management fees — commonly relied on by advisors — "constitute selling compensation." As a result, according to FINRA, brokerage firms in this scenario would still need to "record the transactions on its books and records if it approves the activity."
By narrowing the requirements, FINRA hopes to enable firms to concentrate on "activities presenting higher risk." FINRA is particularly concerned that the public will be confused and come to view an advisor's side transactions in cryptocurrencies, annuities, commodities or other investments as part of business activities being conducted through a brokerage firm.
FINRA previously called for reforming its rules for outside business activities in 2018. That proposal, though, stalled amid an outpouring of industry comments.
Comments sought on 'modernizing the workplace'
FINRA separately posted a
Comments on these matters are
