FINRA Regulatory Risk on the Flipside: When Firms Receive Written Notice of Outside Business Activities

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In the world of outside business activity (OBA) disclosure, many FINRA enforcement actions center on whether a registered person gave, or did not give, prior written notice of those activities to their member firm.  These types of disclosure violations against representatives tend to be “low hanging fruit” for FINRA Enforcement, oftentimes involving a fairly straightforward analysis of whether the representative gave written notice before engaging in an OBA.  FINRA Rule 3270 presently defines an OBA as being “an employee, independent contractor, sole proprietor, officer, director or partner of another person, or [being] compensated, or [having] the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm.” If a representative does not give the required notice pursuant to Rule 3270, he or she may be faced with disciplinary action, resulting in fines, suspensions or even a bar from the industry.

But what about the cases where the registered person does give the written OBA notice in full compliance with Rule 3270? Does the buck stop there? According to FINRA Rule 3270.01, the representative’s disclosure is only the first half of the equation. Indeed, entitled “Obligations of Member Receiving Notice,” Rule 3270.01 requires a FINRA member firm who receives such notice to consider whether the proposed OBA will:    

(1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers; or

(2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered.

The rule also requires that based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's OBA, including where circumstances warrant, prohibiting the activity.  Furthermore, the rule states that a “member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280.”  Finally, the rule requires that firms keep records of their compliance with these obligations with respect to each written notice received.

In its response to comments submitted as part of the adoption of Rule 3270, FINRA indicated that Rule 3270.01 emphasizes a firm’s important regulatory responsibility to evaluate the potential impact of its registered persons’ OBAs. FINRA Rule 3270 stems from a combination of retired NASD Rule 3030 and retired NYSE Rule 346, portions of which were fused into FINRA Rule 3270 as part of the FINRA rulebook. Former NASD Rule 3030 did not have a member obligations provision, while former NYSE Rule 346(e) did. It should be noted that FINRA has issued a rule proposal in Regulatory Notice 25-05, which seeks to reduce unnecessary burdens and to simplify requirements regarding associated persons’ outside activities (both OBAs and private securities transactions).  Presently, that proposal contains assessment factors which are consistent with existing rule 3270.01, save for the proposed additional requirement that firms must also consider whether customers of the firm are involved.    

A selection of FINRA Acceptance, Waiver and Consent (AWC) settlements over the past few years illustrates how firms can be disciplined if they fall short of the requirements of Rule 3270.01. In an AWC settlement, a respondent in a FINRA disciplinary action consents to sanctions and the entry of findings by FINRA without admitting or denying those findings. 

FINRA Enforcement has handled these violations in differing ways. Based on the selected cases, some have been charged as Rule 3270.01 violations and, at least one has been charged solely under FINRA Rule 3110 (covering supervisory obligations for firms, including but not limited to establishing and maintaining a supervisory system and written procedures to comply with applicable regulatory requirements and also requiring firms and individual supervisors to investigate and reasonably respond to “red flags” of potential misconduct). Other cases have been charged as both Rule 3270.01 and Rule 3110 violations combined. In each instance, however, FINRA has consistently charged violations of FINRA Rule 2010 (which requires adherence to standards of commercial honor and just and equitable principles of trade).  In addition, while sanctions in the selected cases appear to mostly take the form of censures and fines against firms, some have included required undertakings to remediate the underlying OBA review issue and supervisory system deficiencies. One settlement also named an individual who was acting as both a CEO and Chief Compliance Officer, requiring that individual to satisfy an undertaking as discussed more fully below. The selected cases are as follows:   

• In a 2021 AWC, a firm was censured and fined $20,000 for failing to conduct an evaluation on whether one of its representative’s disclosed proposed sales of structured cash flow investments constituted securities transactions that should have been treated as OBAs. Instead, the firm determined the disclosure to be related to the representative’s previously disclosed insurance d/b/a without any investigation into the cash flow product, whose owner was charged with mail and wire fraud.  As a result, the firm violated Rules 3270.01 and Rule 2010. 
• In a 2023 AWC, a firm and its CEO (who was also the firm’s Chief Compliance Officer and who had supervisory responsibility for reviewing and approving OBAs) were disciplined for failing to establish, maintain and enforce a supervisory system, including written supervisory procedures, that were reasonably designed to achieve compliance with the requirements governing OBAs. Two of the firm’s registered persons disclosed to the firm that they were involved with private placement offerings through three investment funds that raised $60 million from 200 investors. The representatives characterized the funds as OBAs, although the firm and CEO understood them to be investment-related private placements.  The firm and its CEO, however, failed to evaluate the activities in accordance with Rule 3270.01 and the firm’s procedures did not reference or otherwise require compliance with Rule 3270.01.  The firm and its CEO thereby violated Rules 3110, 3270.01, and 2010.  The firm was censured, fined $75,000 jointly and severally with the CEO, and agreed to an undertaking to remediate the issues and implement a supervisory system to achieve compliance with Rule 3270.01.  Interestingly, the CEO was suspended for six months in a principal capacity and required to satisfactorily complete 50 hours of continuing education concerning supervisory responsibility including in the OBA and private securities transaction areas.  Both the firm and its CEO had settled a prior disciplinary action for supervisory failures involving excessive trading and customer compliant reporting.      
• In a 2024 AWC, a firm was censured, fined $100,000, and agreed to an undertaking for, among other violations cited, its failure to adequately document its consideration of the factors in Rule 3270.01 during its reviews of five different representatives' written OBA notices. The representatives were employed by an affiliate of a company which created a potential conflict of interest because the firm recommended and sold securities of that company to the firm’s customers. At first, the firm did not require four of the representatives to provide written notice of the activity, which was eventually provided. The firm also failed to adequately document that it reasonably considered the factors in Rule 3270.01 during its review of these disclosures. Even though the firm acknowledged that the outside activities might be viewed by customers or the public as part of the firm’s business and that they may involve giving advice or directing investments in securities, the firm did not consider whether conditions or limitations should be imposed on those activities to mitigate any potential conflict of interest or customer confusion, in violation of Rules 3270.01, 2010, and 3110. 

• In another 2024 AWC, a firm was censured and fined $60,000 for failing to establish, maintain and enforce a supervisory system that was reasonably designed to achieve compliance with Rules 3270 and 3270.01. The firm failed to enforce its written supervisory procedures on those rules since it did not require its representatives to provide written disclosure of their significant and ongoing e-commerce and digital real estate OBAs. FINRA noted that the failure was contrary to the firm’s obligations to evaluate those activities under Rule 3270.01. As a result, the firm violated Rules 3110 and 2010.    
• In a 2025 AWC, a firm was censured and fined $35,000 for treating a registered person’s disclosed investment-related limited partnerships business as an OBA, without considering the requirements of Rule 3270.01. The firm knew that the activities were investment related, but failed to: reasonably evaluate whether they would interfere with or otherwise compromise the registered person’s responsibilities to the firm or the firm’s customers; be viewed by customers or the public as part of the firm’s business; evaluate prohibiting or imposing specific conditions or limitations on the person’s activities; or determine whether they were properly characterized as OBAs or as outside securities activities.  In addition, the firm’s written supervisory procedures for OBAs did not address Rule 3270.01.  As a result, the firm violated Rules 3110, 3270.01 and 2010.       

• In another AWC from 2025, a firm was censured and fined $45,000 for failing to conduct an evaluation of a registered representative’s disclosed OBA which involved a promissory note capital raising venture. The firm did not evaluate whether the activity should have been treated as a private securities transaction subject to Rule 3280 and instead approved the activity as an amendment to the representative’s previously disclosed OBA in violation of Rules 3270.01 and 2010.  

Based on these recent AWC settlements and the discussion of Rule 3270 in FINRA’s 2025 Annual Regulatory Oversight Report, member firms should be on alert that Rule 3270.01 violations could be a focus during routine and other examinations. Indeed, the Oversight Report notes FINRA’s findings in this area which include lack of or insufficient OBA notice reviews, deficient written supervisory procedures which do not require these reviews, and review documentation deficiencies. FINRA has also specifically noted findings of firms “failing to approve or follow required rule steps with respect to crypto asset-related” OBAs (and private securities transactions). 

What might firms do to mitigate regulatory risk in this area?  In addition to taking a “lessons learned” approach from enforcement actions (including, but not limited to, the AWCs mentioned above), firms should also note the “Effective Practices” section of the Oversight Report on this topic.  Among other things, that Report mentions the use of questionnaires, initial and ongoing due diligence, and monitoring, which according to FINRA may help firms in tailoring compliance programs depending on their business model, size and preference.  Specifics are discussed in more detail in the Oversight Report, which also contains a call out for controls covering conditions, limitations, and evaluations on crypto asset-related OBAs (and private securities transactions).         

Jonathan M. Prytherch is a shareholder in Maynard Nexsen’s Financial Services group.  His practice focuses on regulatory defense, counseling, and investigations for securities broker-dealers and their registered representatives.