FINRA Rule 3270 Outside Business Activities 

The Financial Industry Regulatory Authority (FINRA), the regulator that oversees financial advisors and brokerage firms, requires registered representatives to disclose any outside business activities (OBAs) to their member firm, which is the firm that employs them. Rule 3270 requires registered representatives to provide prompt written notice to their member firm before engaging in any outside business activity.

Table of Contents

• What is FINRA Rule 3270 Outside Business Activities?
• Examples of Outside Business Activities 
• How do Outside Business Activities cause harm to investors? 
• Regulatory Actions, Broker Misconduct, and FINRA Rule 3270 
• FINRA Attorneys for Securities Disputes

FINRA Rule 3270 defines an OBA as any business activity that a registered representative engages in that is not conducted on behalf of their member firm. Examples of OBAs can include consulting work, teaching, or even running a small business. The key distinction is that the activity is unrelated to the registered representative’s role at their member firm.

Once a registered representative has disclosed their OBA to their member firm, FINRA Rule 3270 requires the firm to evaluate the activity to determine whether it conflicts with the registered representative’s duties to the firm or its customers. If the firm determines a conflict, it may prohibit the registered representative from engaging in the activity. If the firm approves the activity, the registered representative must continue to disclose any material changes to the activity and receive ongoing approval from the firm.

It’s important to note that failure to disclose an outside business activity may be considered a violation of Rule 3270 and can result in disciplinary action by FINRA, which can include fines, suspension, or even termination of registration. Therefore, registered representatives should comply with Rule 3270 and promptly disclose any OBAs to their member firm.

Examples of Outside Business Activities 

Rule 3270 requires that registered representatives disclose any OBAs that they engage in. Here are some examples of activities considered outside business by FINRA Rule 3270:

• Running a business unrelated to the securities industry, such as a retail store or restaurant. 
• Serving as an officer or board member of a nonprofit organization, unless the organization is related to the securities industry. 
• Working for another financial services firm in a capacity unrelated to the representative’s work at their registered firm. 
• Engaging in freelance work or consulting for clients outside the representative’s work at their registered firm. 
• Participating in any activity that involves compensation beyond a nominal amount, as defined by FINRA Rule 3270, and that is not disclosed to the representative’s registered firm.

How do Outside Business Activities cause harm to investors? 

Who cares if your broker is involved in OBAs? However, this rule is designed to protect investors by ensuring that registered individuals do not engage in activities that may compromise their professional responsibilities, cause conflicts of interest, or divert their attention from their primary duties to their clients.

A registered individual violating FINRA Rule 3270 by engaging in an undisclosed outside business activity could harm investors in several ways. For example:

• Conflict of Interest – The registered individual’s OBA may create a conflict of interest with their client obligations. This conflict of interest could result in the registered individual making recommendations or taking actions that benefit their outside business activities at the expense of their clients’ interests. 
• Diversion of Attention – Engaging in an outside business activity without approval may also divert the registered individual’s attention from their primary duties to their clients. FINRA Rule 3270 seeks to prevent this diversion of attention because it can result in the registered individual neglecting essential responsibilities, such as conducting due diligence on investments or monitoring their clients’ accounts. 
• Misappropriation of Funds -In some cases, the registered individual’s OBA may involve handling client funds or securities. If the registered individual misappropriates these funds or securities for their own benefit, it could harm investors and result in financial losses.

Violating FINRA Rule 3270 could harm investors by creating conflicts of interest, which could result in financial losses or other negative outcomes for clients.

Regulatory Actions, Broker Misconduct, and Rule 3270

In November 2022, a former Merrill Lynch broker in Minnesota reportedly agreed to a six-month suspension and $10,000 fine after his growing array of outside business activities, ranging from auto recycling to restaurants, was discovered, according to public documents from the Financial Industry Regulatory Authority.

The broker, who was in the securities industry for 26 years, allegedly operated three undisclosed outside businesses (OBAs) without seeking approvals from Merrill Lynch, thus violating FINRA Rule 3270. According to the regulator, his purported activities included using two commercial properties for rental income, buying a parcel of land in Texas to develop an auto recycling business, and three automobile salvage companies.

According to his BrokerCheck report, a customer also reportedly filed an arbitration claim against him in September 2020, seeking $20 million in damages in connection with “an outside business activity relating to a personal loan that the customer provided the broker to purchase real estate. “

In another example of a broker failing to follow FINRA Rule 3270, FINRA barred financial advisor Caz Craffy (Carz Levinski Craffey) (CRD#: 5222223) in December 2022 after he reportedly refused to produce information for them during an investigation that stemmed from a customer complaint.

FINRA was reportedly investigating Craffy’s potential conversion of customer money, loans, or gifts from customers, active trading in customer accounts, and failure to fully disclose certain Outside Business activities (OBAs).

FINRA Attorneys for FINRA Rule 3270 Violations

If you have a securities-related dispute, the FINRA attorneys at the White Law Group may be able to help you. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases, including cases involving violations of FINRA Rule 3270.

For a free consultation with a securities attorney, please call the offices at 888-637-5510 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois, and Seattle, Washington.  For more information on The White Law Group and its representation of investors, please visit WhiteSecuritiesLaw.com.

Frequently Asked Questions 

Do FINRA’s OBA rules require brokers to disclose unpaid activities to their employers? 

Yes, FINRA Rule 3270 extends beyond compensated business activities. The rule focuses on the activity rather than whether the broker received payment for participating. In essence, the law aims to create an environment in which brokers share any potential conflicts of interest so their employer can assess any associated risks. This includes whether the broker holds a leadership position in a non-profit organization.

What guidance does FINRA Rule 3270 offer on passive investments?
Rule 3270 does not require disclosing passive investments, such as possessing stock in publicly traded companies or investments in assets. Generally speaking, the rule is intended to govern outside activities related to employment, such as a broker holding a management or ownership role with a separate company.

How does a member firm determine if an outside business activity presents a conflict of interest?

Firms typically consider several factors when determining whether one of their employees’ OBAs constitutes a conflict of interest. First and foremost, they usually assess whether the outside business activity is with a firm they compete with. They may also evaluate whether the activity could influence investment recommendations made to their clients. In some cases, the appearance of impropriety on the part of a broker alone could be considered a conflict of interest and thus subject to corrective action by the firm.