The Financial Industry Regulatory Authority (FINRA) is publicly defending its proposal to revamp how broker-dealers supervise outside business activities (OBAs), responding directly to what it calls “mischaracterizations” of its regulatory intent and scope.
For wealth management professionals, particularly those overseeing compliance functions, the clarification underscores FINRA’s attempt to modernize an outdated rule set while reducing unnecessary oversight burdens.
The regulator’s initiative seeks to streamline firm-level supervisory obligations for registered representatives engaged in activities outside their core brokerage role. FINRA says the proposed changes aim to ease compliance demands by excluding from mandatory reporting any activity that is not investment-related or likely to raise a potential conflict of interest.
While the rule rewrite has drawn praise from compliance officers seeking regulatory relief, it has also generated sharp criticism. In particular, an opinion piece by Ric Edelman, founder of Edelman Financial Engines, published in ThinkAdvisor, alleged that the proposed rule could lead to significant overreach.
According to Edelman’s interpretation, brokers would need to obtain employer approval before purchasing Bitcoin, buying a vacation home, or even opening a basic savings account.
In an unusual move, FINRA has directly responded to those critiques. The self-regulatory organization (SRO) disputes the claims and emphasizes that its proposal explicitly excludes personal, non-securities financial decisions from its scope.
“These statements are false,” FINRA says in a statement issued last week. “The proposal explains that these types of personal activities are, in fact, excluded from the rule.”
For broker-dealer firms and registered investment advisors (RIAs), understanding the nuance is critical. FINRA clarifies that the proposal is designed to narrow—not broaden—the range of activities requiring disclosure. The revised definition of OBAs focuses on those that could reasonably present a conflict of interest with the individual’s responsibilities at their employing firm.
As such, gig-economy roles like bartending or ride-sharing would no longer need to be reported. Instead, FINRA wants to concentrate regulatory scrutiny on higher-risk areas such as unapproved cryptocurrency sales or participation in private placements.
This shift is a notable departure from the current framework under FINRA Rule 3270 and Rule 3280, which have long been criticized by industry participants as overly expansive and burdensome.
Under the current rules, many firms interpret the requirement as obligating advisors to disclose nearly any activity generating outside income, even if it has no relation to financial services. FINRA’s proposed approach aims to eliminate such low-risk disclosures while enhancing oversight in more relevant areas.
A central aspect of the debate centers on how the rule treats personal investments. In its statement, FINRA says plainly that personal transactions in non-securities assets, such as buying Bitcoin for one’s own portfolio or purchasing real estate for personal use, would not trigger a disclosure obligation.
The organization cites the exclusions section of the proposal to reinforce its point, asserting that these types of transactions do not fall under the rule’s purview.
Edelman, who originally accused the rule of being “absurd” and “stupid,” has softened his position in light of FINRA’s clarification. He now acknowledges that the agency’s language suggests the final version of the rule may be more measured than initially feared.
“Based on FINRA’s clarifying language, it appears that the final rule will not impose the objectionable undue burden that I wrote about,” Edelman said. “This is a welcome development.”
FINRA is also addressing broader criticisms that the proposed rule would expand firms’ compliance obligations—particularly when it comes to interactions with outside investment advisors.
According to the regulator, the proposal does not impose new responsibilities regarding unaffiliated investment advisor activity. Instead, FINRA says it is asking whether existing supervisory obligations for such arrangements should be reduced or eliminated altogether.
“There are no new reporting and approval requirements,” FINRA says. “In fact, the proposal significantly reduces reporting obligations that have been in existence for decades.”
This statement will likely resonate with compliance professionals at broker-dealer firms, many of whom have long argued that the current rules are overly complex and create duplicative monitoring duties, especially for dual-registered advisors who already report such activities under SEC and state guidelines.
Notably, the proposal maintains a distinction between investment-related OBAs and personal investment decisions. For instance, if a broker is soliciting clients for a side venture involving private securities or digital assets, that activity would still fall under firm supervision.
However, passive personal investing, including in cryptocurrencies or real estate, is outside the rule’s intent unless the advisor is soliciting clients or otherwise conducting business in that space.
The rule also continues to reinforce firms’ core supervisory role in preventing conflicts of interest and protecting investors. However, it signals a regulatory shift toward more risk-based oversight, allowing firms to focus supervisory resources on the activities most likely to cause harm.
This is particularly important in today’s environment, where advisors are increasingly involved in entrepreneurial ventures and alternative asset classes.
Without modernized guidelines, firms are left interpreting legacy rules in ways that often result in over-reporting and compliance gridlock. FINRA’s proposal attempts to relieve that burden while preserving investor protections.
Still, some firms may hesitate to ease internal procedures until the final rule is adopted. The challenge for chief compliance officers will be to reconcile the more targeted approach described in FINRA’s public statements with the existing culture of risk aversion that dominates supervisory practices.
The proposal remains open for public comment through May 13. FINRA has encouraged industry participants to submit feedback, noting that input from practitioners is critical in shaping the final rule.
For wealth management firms, particularly those with hybrid or dually registered reps, this rule change could represent a meaningful step toward regulatory modernization. However, it also places increased importance on internal policy alignment, documentation standards, and advisor education.
If implemented as currently proposed, the rule would reduce administrative complexity, clarify the definition of “relevant” outside activity, and potentially lower firms’ legal exposure tied to inadvertent non-disclosures. That said, compliance officers will need to remain vigilant in tracking how the final rule evolves and preparing for potential implementation challenges.
In sum, FINRA’s proposal to overhaul the outside business activity framework aims to strike a balance between regulatory oversight and operational efficiency. The regulator’s decision to publicly address misinformation reflects both the stakes involved and the agency’s desire to build consensus ahead of a potentially consequential rule change.
RIAs and broker-dealers alike would be wise to review the proposed language carefully and consider submitting feedback, as the final version of the rule could have lasting implications for advisor oversight, firm liability, and overall compliance strategy.
