CSG Law Alert: FINRA’s March 2024 Monthly Disciplinary Actions Report – FINRA Focuses on Outside Business Activity Cases

In its 2024 Annual Regulatory Oversight Report, FINRA (as it had in previous years) identified “Outside Business Activities and Private Securities Transactions” as a priority of its Examination and Risk Monitoring Programs. New in the 2024 Report were findings pertaining to firms’ review and recordkeeping of crypto asset-related outside business activities (OBAs) and private securities transactions (PSTs), suggesting that FINRA might be increasing its scrutiny of OBAs and PSTs, particularly in that space.

Accordingly, it should come as no surprise that FINRA’s March 2024 Monthly Disciplinary Actions Report features: (a) three cases against registered representatives for engaging in undisclosed OBAs; (b) one case against a registered representative for refusing to comply with Rule 8210 requests in connection with an investigation into his potential participation in a PST involving crypto assets; and (c) one case against a firm for failing to have supervisory systems and procedures reasonably designed to achieve compliance with the rules governing OBAs. Firms can draw the following lessons from the case against the firm:

  1. The requirements set forth in FINRA Rule 3270 Supplementary Material .01 (FINRA Rule 3270.01) must be followed. The firm Letter of Acceptance, Waiver, and Consent (AWC) (like several similar AWCs issued by FINRA over the last year) quotes the entirety of FINRA Rule 3270.01, which requires that firms consider: whether the proposed OBA will interfere with or compromise the registered representative’s responsibilities to his/her firm and/or customers; whether the proposed OBA might be viewed as part of the member firm’s business; whether the proposed activity should be considered an OBA or a PST; and whether the firm should impose any conditions or limitations on the proposed activity or prohibit it outright.
  2. FINRA is scrutinizing firms’ written supervisory procedures (WSPs) to make sure that they include all of the requirements of FINRA Rule 3270.01. The AWC found that the firm had WSPs that required it to consider whether a proposed OBA interfered with the firm’s business, used firm resources, or presented a potential conflict of interest. But FINRA still charged the firm for having unreasonably designed WSPs because it did not have written procedures requiring it to evaluate whether a proposed activity should be considered an OBA or a PST, nor did it have procedures requiring that the firm’s review and evaluation of proposed OBAs be documented.
  3. Firms must document their reviews of proposed OBAs. The firm AWC makes a point of saying that the firm failed to document its evaluation of proposed OBAs. Although the AWC states that the firm also failed to evaluate the proposed OBAs, it leaves open the possibility that in the future, a formal disciplinary action could be brought against a firm that properly evaluated, but failed to document, proposed OBAs.

Firms should make sure that they have WSPs that address each and every component of FINRA Rule 3270.01 and that they are documenting their consideration of each component of the Rule. It is also a good time to review the relevant section of the 2024 Report (pages 26-28) to make sure that firms are evaluating—and can prove that they are evaluating—the considerations listed in the Report, including the following, which, in our view, may often be overlooked:

  • What methods firms are using to proactively identify individuals involved in undisclosed OBAs and PSTs;
  • What controls firms are employing to confirm that associated persons adhere to any limitations that firms placed on their OBAs and PSTs;
  • How firms are monitoring for signs that registered persons might be engaged in undisclosed OBAs or PSTs, “including conducting regular, periodic background checks and reviews of: correspondence (including social media); fund movements; marketing materials; online activities; customer complaints; financial records (including bank statements and tax returns); branch office activities; and gifts and gratuities logs.”

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