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San Diego Securities Lawyers: FINRA’s Proposed Rule on Outside Business Activities

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, June 26, 2017.

Erwin J. Shustak, Esq.
619.696.9500 ex. 109
[email protected]

Registered representatives who operate under FINRA regulation, are aware of the requirements, both of FINRA and their broker-dealer firms, to disclose and obtain firm approval of all Outside Business Activities. FINRA proposes modifying the OBA rule and is now seeking comments on the new rule. The proposed changes to the Rule are contained within Regulatory Notice 17-20. That Notice can be found at: http://www.finra.org/industry/notices/17-20

According to the Notice, FINRA routinely evaluates its various rules to determine whether a particular rule is meeting its intended investor-protection objectives by reasonably objective means. FINRA has, in turn, identified the OBA rules, contained within FINRA Rule 3720 (which can be found at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9467 as one of the rules it has decided to re-examine. The Rule governs firm employees’ business and securities activities outside of the employing firm; activities that are outside of, and presumably not governed by, the rules of the employing firm. FINRA has determined that the ability of firm personnel to engage in outside business activities may be of benefit to some investors and the firm but, at the same time, FINRA seeks to protect the investing public from “potentially problematic or risky activities that are unknown to the firm but could be perceived by the investing public as either part of the firm’s business or having the firm’s imprimatur”.

To determine whether exiting Rule 3720 is accomplishing its intended purpose, FINRA seeks comments from the public and industry on four subjects:

1. Has the rule effectively addressed the problem it was intended to mitigate?  Are there alternative ways to achieve the goals of the rule that should be considered?

2. What have been the experiences with implementation of the rule, including any ambiguities in the rule or challenges in compliance with it?

3. What have been the economic impacts arising from the rule?  To what extent would these economic impacts differ by business attributes, such as firm size or differences in the various business models of various firms?

4. Can FINRA make the rule, its interpretation or administration more efficient and effective?

In our firm’s experience, it is the existence of Outside Business Activities, whether disclosed to the firm or not, that often create problems for the investing public. As one example, we represented a very elderly woman with a sizable estate. Her long time, trusted broker operated a non-securities business with his wife and approached the elderly client seeking a loan for “his wife’s business,” despite the fact he was a majority owner in the business and the loan would personally benefit him. While this particular firm, and all firms, prohibit registered representatives from soliciting or accepting loans from clients, this broker did it anyway, never told the firm, and, until a complaint was filed with FINRA by family members who discovered the loan, none of the principal or interest had been repaid to the elderly client.

Once the firm was made aware of the solicitation and acceptance of the loan, it immediately fired the broker but the damage already was done. The broker had taken money from an elderly client and the unpaid loan- but for a relative who caught the transaction and questioned it- may never have been repaid.

Shustak Reynolds & Partners, P.C. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com. 

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