The SEC recently approved FINRA’s proposed rule change relating to the outside business activities of registered persons. New FINRA Rule 3270 merges NASD Rule 3030 and NYSE Rule 346, both of which will be deleted.
FINRA Rule 3270 prohibits any registered person from being an employee, independent contractor, sole proprietor, officer, director or partner of another person, or being compensated, or having the reasonable expectation of compensation, from another person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member.
Two of the most significant changes relate to the timing of the required notice and a member’s prior written consent. Consistent with NYSE Rule 346, Rule 3270 requires a registered person to provide prior written notice of outside business activity to the member (NASD Rule 3030 had required prompt written notice), but Rule 3270 differs from NYSE Rule 346 in that it does not require a member’s prior written consent.
Upon receiving prior written notice of outside business activity, firms must consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the firm and/or the firm’s customers or (2) be viewed by customers or the public as part of the firm’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based upon this review, firms must determine whether to impose any conditions or limitations on the registered person’s outside business activity. Firms must also determine whether the proposed activity is an outside business activity or if it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. Firms must also keep a record of their compliance with the requirements of the Rule.
Firms that permit outside business activities should consider revising their procedures to either: (1) require a minimum notice period or (2) require written consent, before a registered person can commence with outside business activity. A minimum notice period will reduce the risk that a firm may not have enough time to review and object to the registered person’s proposed outside business activity before he or she commences such activity. In addition to periodic attestations regarding outside business activities, firms should require registered persons to notify the firm in the event of a material change to his or her business activities.