What is 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. FINRA Rule 3270 requires registered representatives to provide prompt written notice to their member firm before engaging in any outside business activity.  

An OBA is defined 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 not related to the registered representative’s role at their member firm. 

Once a registered representative has disclosed their OBA to their member firm, the firm must evaluate the activity to determine whether it poses a conflict of interest with the registered representative’s duties to the firm or its customers. If the firm determines that there is 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 OBA can result in disciplinary action by FINRA, which can include fines, suspension, or even termination of registration. Therefore, it’s important for registered representatives to comply with FINRA Rule 3270 and promptly disclose any OBAs to their member firm.  

Examples of Outside Business Activities 

FINRA rule 3270 requires that registered representatives disclose any outside business activities that they engage in. Here are some examples of activities that FINRA considers to be outside business activities: 

• Running a business that is not related 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 that is not related to the representative’s work at their registered firm. 

• Engaging in freelance work or consulting for clients outside of the representative’s work at their registered firm. 

• Participating in any activity that involves compensation beyond a nominal amount and that is not disclosed to the representative’s registered firm. 

How do Outside Business Activities cause harm for investors? 

Who cares if your broker is involved in outside business activities? But 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. 

If a registered individual violates Rule 3270 by engaging in an undisclosed outside business activity, it could harm investors in several ways. For example: 

• Conflict of Interest – The registered individual’s outside business activity may create a conflict of interest with their obligations to their clients. 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 away from their primary duties to their clients. This diversion of attention could result in the registered individual neglecting important responsibilities, such as conducting due diligence on investments or monitoring their clients’ accounts. 
• Misappropriation of Funds -In some cases, the registered individual’s outside business activity may involve the handling of 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 that could result in financial losses or other negative outcomes for clients. 

Regulatory Actions, Broker Misconduct and FINRA 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 businesses 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. 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 the regulator. 

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

In another example, FINRA barred financial advisor Caz Craffy (Carz Levinski Craffey) (CRD#: 5222223) in December 2022, after he reportedly refused to produce information for FINRA 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 Actvities (OBAs).   

FINRA Attorneys for Securities Disputes

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.     

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.