When you engage a registered investment adviser to manage your money, you want to make sure that nothing will interfere with your securities professional’s duty to you.
FINRA Rule 3270, referred to outside business activities, gives transparency to potential conflicts of interest your investment adviser may have.
FINRA Rule 3270 requires your investment advisor to disclose their outside business activities. The purpose of FINRA 3270 is to keep FINRA member firms accountable to you, the client.
If you are concerned that your securities professional might have violated certain disclosure rules, a knowledgeable FINRA arbitration lawyer can help you understand your options.
What is FINRA Rule 3270?
FINRA Rule 3270 prohibits broker-dealers from engaging in any outside business activities that involve the sale of securities unless they have first provided written notice to their employing firm. “Outside business activity” refers to a registered person’s involvement in offering, purchasing, or selling securities outside of their broker-dealer’s regular business activities.
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FINRA Rule 3270 requires the disclosure of outside business activities.
This FINRA regulation is a vital measure for protecting investors and ensuring that their advisor is prioritizing their interests.
What is Considered a FINRA “Outside Business Activity”?
FINRA outside business activities are broadly defined. FINRA Rule 3270 states that they include any paid work performed outside of a securities professional’s employment. This includes:
- Working as an employee for another company;
- Working as an independent contractor for another company;
- Serving as an officer, director, or partner of any outside board or organization;
- Receiving payment for any outside services; and
- Having the reasonable expectation of being paid for any outside business activities.
This rule only requires an investment advisor to notify his or her employer of FINRA outside business activities.
It does not require the investment advisor to do anything beyond provide a notification. Instead, the FINRA member firm makes a determination about what outside business activities are acceptable to the firm and its clients.
The firm decides how or if outside business activities should continue to be carried out.
Common Examples of FINRA Outside Business Activities
Common examples of outside business activities include:
- Acting as both a financial advisor and a certified public accountant;
- Sitting on the board of directors of an outside organization, whether or not this activity is paid work; and
- Advising a start-up company for free but expecting future compensation once the company begins to turn a profit.
Your investment advisor needs to report any of these activities to their employer under FINRA 3270.
The examples above are not exhaustive. An investment adviser also needs to report their wedding photography business or snorkel tour side-gig to their employer under the rules. FINRA rules about outside business activities apply to any paid work.
Investment Losses? We Can Help
Discuss your legal options with an attorney at The Law Offices of Robert Wayne Pearce, P.A.
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Passive Investments Are Not Outside Business Activities
While FINRA Rule 3270 casts a wide net, it allows investment advisers to make passive personal investments. Investing in diversified index funds or private securities transactions is not an outside business activity.
Investment advisers may also put their personal funds into a blind trust. Blind trusts do not allow people to direct how their money is invested.
Other FINRA rules require some disclosure about personal investments to ensure that your broker is being as transparent as possible about their potential conflicts of interest.
FINRA Rule 3280 requires disclosure of private securities transactions. Your securities professional must strictly comply with this rule and its requirements. Your brokerage firm should ensure the investment adviser’s compliance with FINRA Rule 3280.
Responsibility of Brokerage Firms to Clients
Once an investment advisor makes an outside business activities disclosure, the FINRA member firm must take important action. Each firm typically has its own form for reporting and its own protocol for review.
How Do Firms Determine Whether an Outside Business Activity Is Acceptable?
Once a firm receives a disclosure, it needs to decide whether the outside business activities are acceptable. The FINRA member firm reviews all facts surrounding the disclosure. Then the firm answers two key questions to protect investors like you.
First, Rule 3270 asks a FINRA member firm to consider all the circumstances surrounding the outside business activities.
The review includes assessing the type of outside business, reviewing the time spent on the business, and confirming the type or amount of compensation received.
The firm must decide whether outside business activities will interfere with the securities professional’s responsibilities to their employer and/or the firm’s clients.
Second, Rule 3270 asks a FINRA member firm to think about whether outside business activities will be viewed by customers or the public as part of the member’s business.
This review assesses whether a client would confuse the investment adviser’s outside business activities with their securities business.
How Do Firms Address Outside Business Activities That Conflict with an Advisor’s Duties?
If the firm determines that the investment adviser’s outside business activities interfere with their responsibilities to the firm or its clients, then the firm should limit or prohibit the activity.
FINRA Rule 3270 also requires firms to maintain a record of compliance. It is the firm’s responsibility to keep records of all outside business activities disclosures and compliance reviews.
Brokerage firms are responsible to their clients to ensure that they are providing appropriate and conflict-free service in managing client assets.
FINRA member firms must represent that their investment advisers are not engaging in outside business activities that compromise client interests.
If you believe that your brokerage firm has failed to hold investment advisers accountable to FINRA Rule 3270 or otherwise adhere to conflict of interest rules, the firm may be liable for investor losses. Now may be the time to file a FINRA complaint against your advisor or broker.
Have You Been Harmed by Your Investment Advisor’s Outside Business Activities?
If you are an investor with concerns that your investment professional has failed to disclose important information to you, please call The Law Offices of Robert Wayne Pearce, P.A.
Our FINRA arbitration lawyers have successfully represented individuals harmed by broker and investment advisor negligence or misconduct for over 40 years. Cases involving violations of FINRA rules are complex. Attorney Pearce has the expertise and experience to help you navigate any kind of securities or investment dispute.
Contact our team today to discuss an evaluation of your potential case. Our team has recovered over $175 million for our clients, and we want to help you too.
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