The Public Investors Advocate Bar Association on Wednesday submitted rebuttal comments regarding the Financial Industry Regulatory Authority‘s proposed rule 3290, which would combine and supersede two existing rules separately pertaining to oversight of outside business activities and private securities transactions.
The rule, which was amended in January and submitted to the Securities and Exchange Commission for review in May, erodes significant protections and creates “unneeded supervisory exemptions that will almost certainly increase the number of fraudulent schemes, Ponzi schemes, and other misconduct,” Piaba President Michael Bixby wrote in the comment letter, dated Wednesday.
Bixby took particular issue with the January amendment, which removed the requirement for Finra-registered broker-dealers to record all securities transactions the broker-dealer executed on behalf of Finra-associated persons for customers at unaffiliated registered investment advisory firms.
Per the amendment, such transactions would be considered an “outside activity” and require broad approval by the Finra member firm but would not be considered an “outside securities transaction” requiring record preservation.
“PIABA and its members have seen firsthand how registered representatives use a variety of outside business activities to solicit investors for financing schemes, with a variety of outside businesses often described as non-investment related being used as the impetus for solicitation of investments,” Bixby wrote.
Finra in January said the amended proposal was intended to “bolster members’ review of these activities while reducing unnecessary burdens.”
“In sum, PIABA believes this proposed rule change will create substantial investor harm, trading some minor convenience for the securities industry,” Bixby countered in his letter.
Piaba wasn’t alone in that stance.
Massachusetts’ chief securities regulator, William Galvin, wrote in a separate letter that the “notion that any ‘burden’ imposed on registered firms relative to OBAs or PSTs under the current framework is ‘unnecessary’ is especially troubling.”
Galvin cited his agency’s investigation of a broker-dealer that failed to detect that customers of dually registered representatives were incurring significant losses through long-term holdings of short-term leveraged exchange-traded funds.
The proposed rule’s “removal of any supervision requirements pertaining to both unaffiliated and affiliated investment advisers is the antithesis of investor protection,” Galvin added.
Others, including the Securities Industry and Financial Markets Association, disagreed.
In a letter written by its Assistant General Counsel Alyssa Pompei and its Associate General Counsel Bernard Canepa, Sifma argued that registered investment advisors have their own regulatory obligations for monitoring such transactions and noted that broker-dealers still “retain the discretion to impose prohibitions, conditions, or limitations on the activity based on their risk assessment.”
Though not addressed in January’s amendment, rule 3290 would also narrow the definition of an outside business activity to exclude securities transactions executed on behalf of immediate family members for which the associated person receives no selling compensation, personal investments in non-securities, and the purchase, sale, rental or lease of a main home and as many as two secondary homes, subject to certain guidelines.
Sifma also backed this change, with Pompei and Canepa writing that the narrowed definition of outside business activities would relieve firms from having to “report and assess a large number of low-risk items that create white noise, diverting firm time and money from high-risk activities more likely to cause customer confusion or harm.”
Others supporting the amended rule 3290 included LPL Financial and Cetera.
In all, the SEC received hundreds of comments and rebuttal comments in response to its filing of the amended rule proposal. The comment period closed Wednesday.