Finra advances proposals to clarify outside business activities, churning rules

Compliance experts say the changes would focus enforcement on investor harm

Dec 21, 2017 @ 2:11 pm

By Mark Schoeff Jr.

An upcoming Finra rule proposal would make it easier for brokerages to determine whether their representatives are engaging in harmful activities away from the office.

At its meeting last week, the board of the Financial Industry Regulatory Authority Inc. authorized the organization to propose a rule that would streamline the range of outside business activities firms have to monitor, concentrating them on "investment-related" actions that could cause investor harm.

The rule also would relieve brokerages of supervising a registered representative's investment-advisory work at a nonaffiliated firm.

Another rule proposal the board advanced would allow a customer to bring a churning case without having to prove he or she had no control over the account.

Neither regulation has yet been published.

Defining and monitoring outside business activities is a big challenge for brokerages, according to Amy Lynch, president of FrontLine Compliance.

"It's not consistent throughout the industry, because the current rule is vague," Ms. Lynch said.

She likes the direction Finra is going in drawing a line between what brokers do at offices related to theirs and what they do in independent offices.

"It's a good sign that they're making that distinction," Ms. Lynch said. "It would be a win for the industry [if firms are] not being held responsible for what is happening at the unaffiliated adviser."

Experts said the pending Finra activities rule should help the regulator focus on a brokers' undertakings outside the office that can truly harm investors, rather than innocuous ones such as serving on a church board.

"If administered correctly, this should be a positive development," said Mark Attar, partner at the law firm Schiff Hardin. "My hope is that as a result of this rulemaking, there will be less risk of sanctions against brokers for outside business activities that are unrelated to the securities business."

The activities proposal stems from a retrospective review of Finra rules that is part of the organization's Finra360 self-examination. Such a reconsideration is necessary given the various potential affiliations of a registered representative, including working as a broker, an investment adviser representative and in insurance, according to one expert.

Finra is "responding to the evolving needs of the marketplace," said Stephen P. Wilkes, partner at The Wagner Law Group. "It will be good to get [the rules] reset."

The pending churning regulation is another dimension of the suitability rule, which requires brokers to sell products that meet an investor's needs and risk tolerance. The proposal would make it easier to bring churning cases whether an account is discretionary or not.

"It will increase the already significant burden on firms to supervise sales activity, to make sure their financial advisers do not make recommendations that, in the aggregate, may later be deemed excessive," Mr. Attar said.


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