Crypto, collectibles, and lending should count in outside business oversight, NASAA tells Finra

Citing risks to the investing public, NASAA is urging Finra to significantly expand the scope of its proposed rule governing outside business activities by associated persons at broker-dealer firms.

In a comment letter submitted this week in response to Finra's Regulatory Notice 25-05, the North American Securities Administrators Association expressed several concerns with Finra’s proposed Rule 3290, which would combine Finra's existing Rules 3270 and 3280 in an effort to simplify requirements for registered BD firms.

While acknowledging improvements over an earlier version floated in 2018, the letter contends that key elements of the newer proposal could still weaken protections for investors unless revised.

Among other wish-list items, NASAA's called on Finra to adopt a more expansive definition of “investment-related activity,” suggesting that the rule goes too far in streamlining broker-dealer oversight as it narrowed the types of outside activities under its purview.

NASAA warned that the current language cound undermine investor protection as it omits numerous activities.

“Ignoring these other activities ... would increase the likelihood that firms would fail to identify risks posed by unmitigated conflicts of interest, questionable compensation arrangements, and potential fraud and unregistered activity,” the letter stated.

Citing risks of fraud, hidden costs, and past cases of investor harm, NASAA recommended that Finra specifically include activities related to crypto assets, which it included in a March alert to investors; collectibles such as art, wine, and whiskey; and other alternative investments such as real estate, commodities, and private funds. 

"Investments marketed as loans or lending have also caused massive harm to investors in the not-so-distant past," the letter added.

It pointed to the evolution of the investment landscape, including the growing prominence of alternative assets and new technologies. In particular, NASAA flagged the rising interest in tokenized products and investment vehicles that may not be readily classified as securities.

NASAA's submission emphasized the need to include specific types of entities and arrangements within the rule’s language, such as investment partnerships, cooperatives, and crypto-related platforms or intermediaries.

“As tokenization and crypto assets move further into the mainstream ... it will be increasingly important for Finra member firms to understand that association with a variety of actors in this space is subject to proposed Rule 3290,” the letter stated, citing the $1.2 billion Woodbridge Ponzi scheme that ruined countless unsuspecting investors.

NASAA also reiterated its stance opposing any reduction in oversight of activities conducted at unaffiliated investment advisers. Finra’s 2018 version of the proposal had suggested removing such obligations altogether. While the latest draft retains them, Finra is still seeking input on whether those requirements should be scaled back.

NASAA warned that such external advisory relationships can pose risks to investors, particularly when they are lightly regulated or operate as small businesses. State securities regulators, NASAA emphasized, do not have access to the daily activities of brokers in the way that firms do.

In support of its position, NASAA cited several past enforcement cases where misconduct linked to private securities transactions or undisclosed advisory roles came to light due to broker-dealer supervision. Without firm-level oversight and reporting, such incidents may have gone undetected, it argued.

The organization also stressed the importance of maintaining robust recordkeeping requirements, especially where broker-dealer personnel are involved in outside advisory activities. NASAA noted that records kept by the firm can play a vital role in examinations and enforcement, even if duplicative of other documentation.

While acknowledging Finra’s attempt to balance investor safeguards with regulatory efficiency, NASAA urged the self-regulatory organization to refine Rule 3290 to reflect the modern realities of financial services and investor behavior.

“The risk of fraud tends to increase in periods of economic uncertainty and market volatility,” the letter said, warning that the proposed rule, if not strengthened, may leave gaps in protections at a time of heightened investor vulnerability.