Currently, registered representatives of broker-dealers are required under NASD Rule 3030 to provide “prompt notice” in writing to the broker dealer of their outside activities. However, the broker-dealer is not required to take any supervisory responsibility for or approve the activity unless the activity is deemed to be a private securities transaction (popularly known as “selling away”) of the registered representative under NASD Rule 3040. Generally, to be deemed a private securities transaction the registered representative has to participate for compensation in the execution of a securities transaction “away” from the registered representative’s broker-dealer.
FINRA Rule 3270 which will replace NASD Rule 3030 effective December 15, 2010 takes a much more conservative view on what a registered representative can do without permission of the registered representative’s broker dealer.
For one thing “advance” written notice of the outside activity is required. However, of perhaps more moment are what the member broker dealer’s obligations on receiving notice will be.
Upon receipt of a written notice under Rule 3270, the broker-dealer must consider if the proposed activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the member and/or the member’s customers or (2) be viewed by customers or the public as part of the member’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered.
Based on the broker-dealer’s review of such factors, the broker-dealer must evaluate the advisability of imposing specific conditions or limitations on a registered person’s outside business activity, including where circumstances warrant, prohibiting the activity. As before, the broker-dealer also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. The broker-dealer must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in the securities laws.
For registered persons who are actively engaged in an outside business activity prior to December 15, 2010, broker-dealer firms have until June 15, 2011, to review such pre-existing activities under the standards set forth in FINRA Rule 3270, including the requirement that firms keep a record of their compliance with such standards.
A FINRA official has been quoted as saying that under the new rule the broker-dealer firm does not have to supervise the outside business “but it has to make a threshold determination as to whether [it is] going to allow that business ... It simply [tells firms to] assess” it.
Assuming the registered representative’s outside activities are with a “deep pocket” company (e.g. a relatively well heeled third party investment adviser or insurance agency), it looks like this new rule will lead to an indemnification requirement by the broker-dealer from that company. That device was somewhat uncommonly used in Rule 3030 situations and will likely be seen much more under Rule 3270.
