ENIGMAS; TWO OF MANY

June 20, 2024

When will FINRA Rules 3270 and 3280 Reflect Today’s Industry Trend?

By Stephen Kohn
June 20, 2024

From the desk of Stephen Kohn, Founder and Chair of the Financial Professionals Coalition  (www.finprocoalition.com) and a 25-year veteran owner of a FINRA broker-dealer, a former member of FINRA’s National Adjudicatory Council and a Former Governor on FINRA’s Board.

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The Enigmas: FINRA Rule 3270: Outside Business Activities
of Registered Persons and
FINRA Rule 3280: Private Securities Transactions of an Associated Person

I often ask myself this question.  “Why is there a rule that requires a Broker/Dealer to supervise and carry trades on their books, made by a dually registered rep on behalf of clients unknown to the BD, at  an RIA, away from the BD, while earning no compensation?”  Let me ask you the question.  Should a BD be responsible for supervising, and carrying a dually registered rep’s trades made at an RIA, away from the BD?

A logical mind would say no, the supervision and reporting of trades should be done by the BD or RIA that executes and is compensated for those trades. 

But that’s not the intent of 3270 and 3280.  In fact, it’s just the opposite.

I don’t think the author of these rules had any idea of their ramifications on the Small BD  employing dually Registered Reps.  While a small BD may do, for argument’s sake, 100 trades a day, when an RIA rebalances, depending on its customer account base, it could amount to ten times, or more, than that.  Based on the rules, the BD must supervise and record these trades on its books in addition to the executing RIA.  Why the need for this regulatory duality when the RIA has the same obligation as the BD?  And who’s to bear the cost of all of this regulatory paranoia?  You guessed it, the small Broker/Dealer who can ill afford any additional draconian restrictions.

Let’s take this one step further.  How can the BD supervise trades in accounts without knowing the clients’ Personal Identifiable Information (“PII”) to determine suitability?  Wouldn’t sharing PII with the BD require the clients’ permission, in writing?  Wouldn’t unauthorized access to the IA’s clients’ PII expose the BD, the RIA, the Rep and management of both entities to serious liability?  One would think so.

Is the RIA that also employs the dually registered person required to carry all of his/her commission business, executed at the BD, on their books and have the responsibility of supervision for them?  Can you hear my resounding NO?

All of this falls on the BD that has not seen one penny of fee-based revenue to offset the inherent cost of supervising and booking trades, executed on behalf of phantom clients, by a dually registered representative.  And FINRA is charged with the enforcement…

Just as an aside, the SEC is responsible for RIA oversight, as we all know.  Do they have a reciprocal “Rule,” on that requires the dually registered IA’s RIA to supervise all commission-based trades done away and carry the trades on their books?  Of course not, but I had to ask the question.

Having owned and run a FINRA Member Firm for a quarter of a century, and employing dually Registered Reps, I was a victim of FINRA Rules 3270 and 3280. I have been vocal about the impractical application of both of these rules and the inherent inequity of their application to FINRA members in general and small Broker/Dealers in particular.

Rules 3270 and 3280 have been a conundrum for years.  In 2016, as a then small firm owner, I brought the rules to the attention of FINRA’s President and CEO.  And, here we are, eight years later, with no resolution in sight.  In fact, in a not so recent article in a trade publication, It appears that FINRA is no closer to revising 3270 and 3280 as they were, almost a decade ago.  Robert Cook, FINRA's President and Chief Executive Officer, told the audience at the 2023 FINRA Annual Conference, that FINRA was on the case.

A year later, at FINRA’s 2024 Annual Conference, Robert Colby, FINRA's chief legal officer said the Financial Industry Regulatory Authority’s bid to revise its rules governing brokers’ outside business has “foundered.”  It appears that FINRA is back to square one, again with no resolution to the 3270/3280 conundrum in sight.

In the meantime, only FINRA knows how many small firms are struggling with these archaic, Outside Business Activities of Registered Persons and Private Securities Transactions of an Associated Person, rules. 

So now, the open question is, at least in my mind, will the extant rules continue to be prosecuted or will Enforcement set them aside until a viable solution to the puzzle is found?  If I were a betting man…

The opinions presented herein reflect those of the author only and do not, in any way,
represent those of DMK Advisor Group, Inc.