Pictured: FINRA sign in lobby at Brookfield Place in New York. Photo: FINRA
The Financial Industry Regulatory Authority plans to file an amended outside business activities proposal with the Securities and Exchange Commission, according to a report from the regulator's September board meeting.
Industry officials are bracing to see if FINRA's new plan includes any changes to supervisory requirements for outside RIA activity.
The proposed rule change — published in March — would combine current FINRA Rules 3270 and 3280 into a new Rule 3290 and would narrow the kinds of activities that are subject to the requirements. Comments were due on the first plan by May 13.
FINRA applies private securities transaction requirements to outside IA activities. The proposal seeks feedback on whether to exclude unaffiliated outside investment advisory activity from the rule altogether.
Robinhood told FINRA it its comments that "IAs primarily are regulated by the SEC and states," and that FINRA member oversight of outside IA activities "is therefore redundant and creates unnecessary compliance costs and burdens without corresponding benefit to the investing public."
LPL Financial agreed in its comment letter that "FINRA’s requirements to supervise unaffiliated investment adviser activities are duplicative and onerous."
The SEC's Regulation Best Interest "was implemented with careful consideration to provide disclosure that distinguishes between brokerage recommendations subject to Reg BI and investment advice provided under the Investment Advisers Act of 1940," LPL continued in its comment letter. "The disclosure is designed to inform retail investors of, among other things, which set of rules the financial professional is subject to in the capacity they are acting, and who ultimately is responsible for oversight of the activity. Requiring broker-dealers to supervise outside investment activity of an unaffiliated investment adviser detracts from this by creating the perception that the broker-dealer is somehow responsible for investment advice provided by the investment adviser firm."
The North American Securities Administrators Association, meanwhile, took a different stance. NASAA said that "FINRA member firms can and should continue to be held to these responsibilities because they have unique insights into the day-to-day activities of their associated persons, and the availability of records from FINRA member firms helps to enable effective and efficient regulation of the industry."
If anything, NASAA said, "FINRA should modernize its rules to require that FINRA member firms supervise and maintain records of these activities regardless of the manner in which an advisory client chooses to implement the associated person’s investment advice."
State securities regulators "conduct routine oversight of these firms and individuals through robust programs involving licensing, examinations, and enforcement where appropriate," NASAA told FINRA. "But even the strongest regulatory oversight is no substitute for day-to-day supervision by FINRA member firms of their own associated persons."
Both regulation and supervision "are necessary to protect investors," NASAA continued. "Regulators provide oversight, but it is firms, not regulators, that have the best access to the day-to-day activities of their associated persons. This is why NASAA previously stated, and we reiterate here, that '[e]liminating FINRA firms’ responsibilities in this area would place investors at risk by eliminating day-to-day oversight in favor of routine, but intermittent state and federal securities regulatory oversight to identify or prevent misconduct.'”
Courtesy photo
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