FINRA and advisors' other work

The Financial Industry Regulatory Authority (FINRA) is once again proposing changes to how broker-dealers supervise some of the work of advisors registered with independent broker-dealers, touching nerves across the industry.

The proposed rule changes, published in March, harken back to the self-regulator’s efforts in 2018 to streamline rules guiding work not directly related to a financial advisor’s work at a broker-dealer. Advisors have jobs outside the office as wide-ranging as tending bar on the weekends and driving an Uber after the market closes.

But it is advisors’ investment-related work as registered investment advisors that continues to push FINRA to revamp its rules for broker-dealers.

The focus of the rule, known as Outside Business Activities, or OBA, overwhelmingly affects financial advisors who work as independent contractors and are registered to sell securities at giant firms such as LPL Financial and Osaic.

Independent financial advisors at firms like that often use an outside, third-party custodian such as Charles Schwab or Fidelity to hold client assets, creating the need for some kind of oversight by the brokerage firm to supervise the advisor.

Wirehouses and banks like Merrill Lynch work with financial advisors who are full-time employees and typically don’t have other investment-linked responsibilities or duties with clients. As more financial advisors have moved in the last 30 years from wirehouses or banks to independent broker-dealers or RIAs, the need for firms to oversee their outside work only increases.

And in 2025, FINRA is in a pickle with its proposal.

Too much, or not enough?

On one hand, the industry perceives the self-regulator, which oversees 3,298 broker-dealers, as overreaching in its proposal. On the other, industry watchdogs including state regulators are wary of FINRA retreating from its oversight of investment-related businesses, which independent financial advisors often operate, from legal advice to doing a client’s taxes.

“While FINRA’s approach to reduce the ‘white noise’ created by supervising benign outside business activities is welcomed, LPL is concerned that the proposal maintains the unnecessary, outdated requirement to supervise unaffiliated investment advisor activities,” as the Securities and Exchange Commission (SEC) and the states already regulate RIAs, wrote Althea Brown, LPL Financial’s chief legal officer, in a comment letter dated May 13.

A senior state securities regulator couldn’t disagree more.

“I urge FINRA to reconsider the proposed rule in its current form because it would establish reduced standards and oversight, to the detriment of investors and savers,” wrote Secretary of the Commonwealth of Massachusetts William Galvin in a comment letter also dated May 13.

“The OBA rules, which have been around since the 1990s, are designed to protect broker-dealers from their advisor doing stuff like selling insurance or running a mortgage broker that could create liability for those firms,” says one senior industry executive who spoke privately to InvestmentNews about the matter. “The controversial part in 2018 and now is the firm’s supervision of any outside investment-related activities.”

New rule proposal

FINRA’s rule proposal is the result of its review of industry rules governing outside business activities and private securities transactions, with the proposed rule replacing two old ones.

FINRA’s proposal focuses on outside investment-related activities that may pose a greater risk to the investing public and members, according to the regulator.

“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, such as refereeing sports games, driving for a car service, bartending on weekends,” FINRA noted in its March notice about the proposed rule change.

“This focus will allow members to dedicate resources to activities presenting higher risk, particularly the risk that customers or the public will view the activities as part of the member’s business, including selling crypto assets, fixed annuities, commodities, or private placements away from the member,” according to FINRA.

Adding to the industry ruckus over FINRA’s proposal, one of the most well-known financial advisors, Ric Edelman, in May chastised the self-regulator in a column published on ThinkAdvisor.com, calling the outside business activities “absurd.”

“Just when everybody thought crypto had entered the Age of Enlightenment, thanks to the strong support it’s been given by the Trump administration, along comes FINRA with a proposed rule that, for FINRA-licensed reps and those dually licensed, would push crypto back into the dark ages of the Biden and Gensler regime,” wrote Edelman, a proponent of digital assets. “And the rule’s impact would go far beyond cryptocurrency.”

A few days later, FINRA took the odd step of making a statement denying it would limit advisors from owning Bitcoin.

“Some statements claim that the proposal would require associated persons to report to and receive approval from their broker-dealers to personally purchase Bitcoin, a beach house, insurance, or even make a deposit or withdrawal at a bank,” according to FINRA’s note. “This claim is false. The proposal explains that these types of personal activities are, in fact, excluded from the rule.”

Further action on the proposed rule is pending.

“The way the OBA proposal has played out for FINRA and independent BDs is like the line from the Grateful Dead song: ‘What a long, strange trip it’s been,’” the senior industry executive says.