Proposed Rule 3290 does not address the transition from Rule 3270 to the proposed rule. Specifically, to what extent and for how long would a previous notification and approval of an outside business activity under Rule 3270 satisfy the requirements of the proposed rule? Previous notifications and approvals under Rule 3270 should continue to be applicable or the new rule creates a new opportunity for new compliance violations where none previously existed. If FINRA intends for new notifications and approvals to be required under Rule 3290, the new rule should be explicit on that point and address the timing for generating such requests and approvals.
Footnote 4 in Regulatory Notice 25-05 states that the most common “buying away” transactions are personal investments in private placements; yet, there is no evaluation of why these transactions or which of these transactions warrant continuation of the existing compliance regime. Under the proposed rule, purchases of private placements continue to require notification and pre-approval even in cases where there is little or no reason regulatory concern about the transaction as in the case where the individual is purchasing the interest on the same basis as other passive investors, e.g., the registered person (1) receives no selling compensation, (2) does not participate in the formation, organization, or management of the entity, (3) does not control the entity, (4) does not sell or promote sales of the entity, and (5) receives only distributions, tax benefits, etc. based on its ownership interest on the same as other similarly situated passive investors. Transactions such as these are unlikely to create regulatory concerns but create substantial compliance obligations and opportunities for unnecessary compliance violations. Like the refereeing of sports games example of outside business activities, these transactions are also “white noise” in securities compliance activities that distract from more important activities and undermine the overall objectives of the compliance function. The proposed rule does not balance any minor regulatory concern for these transactions with the cost of compliance. These purchases should be exempted from the definition of outside securities transactions.
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Gary Cutson Comment On Regulatory Notice 25-05
Re: FINRA Proposed Rule 3290
Proposed Rule 3290 does not address the transition from Rule 3270 to the proposed rule. Specifically, to what extent and for how long would a previous notification and approval of an outside business activity under Rule 3270 satisfy the requirements of the proposed rule? Previous notifications and approvals under Rule 3270 should continue to be applicable or the new rule creates a new opportunity for new compliance violations where none previously existed. If FINRA intends for new notifications and approvals to be required under Rule 3290, the new rule should be explicit on that point and address the timing for generating such requests and approvals.
Footnote 4 in Regulatory Notice 25-05 states that the most common “buying away” transactions are personal investments in private placements; yet, there is no evaluation of why these transactions or which of these transactions warrant continuation of the existing compliance regime. Under the proposed rule, purchases of private placements continue to require notification and pre-approval even in cases where there is little or no reason regulatory concern about the transaction as in the case where the individual is purchasing the interest on the same basis as other passive investors, e.g., the registered person (1) receives no selling compensation, (2) does not participate in the formation, organization, or management of the entity, (3) does not control the entity, (4) does not sell or promote sales of the entity, and (5) receives only distributions, tax benefits, etc. based on its ownership interest on the same as other similarly situated passive investors. Transactions such as these are unlikely to create regulatory concerns but create substantial compliance obligations and opportunities for unnecessary compliance violations. Like the refereeing of sports games example of outside business activities, these transactions are also “white noise” in securities compliance activities that distract from more important activities and undermine the overall objectives of the compliance function. The proposed rule does not balance any minor regulatory concern for these transactions with the cost of compliance. These purchases should be exempted from the definition of outside securities transactions.
Thank you for your consideration of my comments.
Gary Cutson