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Finra’s Push to Reform Outside Business Rules Still Stalled: Exec

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The Financial Industry Regulatory Authority’s bid to revise its rules governing brokers’ outside business has “foundered,” Robert Colby, the industry’s self-regulatory organization’s chief legal officer, said on Wednesday. 

A major sticking point for Finra is how it will define broker-dealers’ obligations to supervise independent registered investment advisory firms of dually registered brokers, Colby said during a panel at Finra’s 2024 Annual Conference in Washington, D.C.

“That’s very difficult because there’s a difference of views about whether this is something you inherently have to supervise,” Colby said. 

Those who consider RIA supervision requirements “crazy” argue: “We can’t supervise this. We have no tools and no authority, and so we should be freed from having to oversee this,” Colby said.

Finra does not supervise investment advisors, who fall under jurisdiction of the Securities and Exchange Commission and state regulators, but it requires broker-dealers to have some supervisory and recordkeeping responsibility for outside investment advisor activities. 

Finra has been mulling a reform of its private securities transaction rule and outside business activity rule, which its own board members have knocked as outdated, for more than six years. 

In 2018, Finra proposed revising its Rules 3270 and 3280 to narrow what qualifies as an outside activity and exempting them from supervisory and record-keeping requirements tied to their brokers’ unaffiliated RIAs. That rule, which generated mixed reviews and alternative proposals from the industry, stalled without approvals. 

Meanwhile, compliance officials remain frustrated by other questions about what constitutes an outside business, Colby acknowledged. During a meeting with about 40 lawyers in New York, one raised a possibly apocryphal scenario of a broker raising goats for fun and profit, Colby said. The lawyer asked if compliance officials had to supervise that type of outside business.

Finra may find quicker success in updating its rules by focusing its discussions on that “goat-herding” type question rather than tackling the issue of RIA supervision, Colby said. 

Another member of the panel suggested audience members expect to learn more at Finra’s 2025 conference. But some may have reacted to that forecast with skepticism, since at last year’s event, imminent OBA reform also sounded likely. 

Robert Cook, Finra’s president and chief executive, told the 2023 audience that his self regulatory organization was on the case. 

“There was a lot of stuff and everyone kind of agreed it would be good to update, provide some more clarity and really have focus on the activities that really need to be reported, not [just] anything,” Cook said previously.

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