6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition

Introduction: The Boundary Between Firm Representation and Personal Conduct

When an individual registers with FINRA through a member firm, the broker-dealer assumes supervisory and legal responsibility for their professional conduct. Outside activities, personal investments, and undisclosed side businesses can compromise representative loyalty, generate severe conflicts of interest, and expose customers to unvetted investment schemes. To maintain supervisory integrity, FINRA has established detailed rules governing outside business activities, private securities transactions ("selling away"), personal accounts at other firms, customer lending arrangements, and account sharing.

Series 26 principals must recognize red flags and enforce supervisory procedures under FINRA Rules 3270, 3280, 3210, 3240, and 2150 to ensure that all outside financial activities are identified, reviewed, and appropriately regulated.

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FINRA Rule 3270: Outside Business Activities (OBA)

FINRA Rule 3270 dictates that no registered person may be an employee, independent contractor, sole proprietor, officer, director, or partner of another person or entity, or receive compensation (or have the reasonable expectation of compensation) from any other person or entity as a result of any business activity outside the scope of the relationship with their member firm, unless they have provided prompt prior written notice to the member firm.

Scope and Triggering Activities

The rule applies broadly to any outside commercial endeavor, whether or not it involves financial services or securities. Triggering activities include:

• Acting as an outside tax preparer, accountant, or estate planner;
• Serving as an officer, director, or managing member of an outside LLC, corporation, or partnership;
• Providing paid consulting or public speaking services;
• Engaging in outside real estate sales or property management for a commission or fee;
• Operating a commercial retail business or secondary online storefront.

The Passive Investment Exception

Rule 3270 explicitly excludes passive personal investments. A registered person does not need to provide notice to their firm to buy and hold publicly traded equities, mutual funds, municipal bonds, or passive limited partnership interests, provided the representative does not participate in the management, direction, operation, or solicitation of the enterprise.

Supervisory Obligations of the Member Firm

Upon receiving an OBA notification, a Series 26 principal must conduct a thorough supervisory evaluation before acknowledging the activity:

1. Customer Confusion: Will clients believe the outside activity is sponsored, vetted, or guaranteed by the broker-dealer? The firm must ensure clear separation between the firm's business and the outside activity.
2. Time Commitment and Interference: Will the outside activity interfere with the representative's duties, responsiveness, and availability to brokerage customers?
3. Potential Recharacterization: Does the outside activity actually involve securities transactions that must be governed by Rule 3280 (selling away)? For example, a representative claiming an OBA as a "real estate syndication consultant" who is actually raising investor capital is engaged in a private securities transaction.
4. Supervisory Action: The member firm has the unilateral authority to approve the OBA, impose conditions or limitations (such as prohibiting solicitation of firm clients), or prohibit the activity entirely. Under Rule 3270.01, the firm must keep a record of how it met these obligations for each written notice, preserved for the period in SEC Rule 17a-4(e)(1).

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FINRA Rule 3280: Private Securities Transactions (PST / "Selling Away")

A Private Securities Transaction (PST)—commonly known across the industry as "selling away"—is defined under FINRA Rule 3280 as any securities transaction outside the regular course or scope of an associated person's employment with a member firm. Selling away is a primary driver of customer harm, as representatives may solicit clients to invest in high-risk, unvetted private placements, promissory notes, real estate syndications, or startup stock that the broker-dealer has not approved for sale.

Mandatory Prior Written Notice

Before participating in any private securities transaction in any manner, the associated person must provide detailed prior written notice to the member firm. The notice must thoroughly describe:

• The proposed transaction and offering structure;
• The specific security being offered (e.g., LLC units, convertible debt, private shares);
• The proposed role and activities of the associated person;
• An explicit statement as to whether the associated person has received or will receive selling compensation.

Definition of Selling Compensation
Rule 3280(e)(2) defines selling compensation as any compensation paid directly or indirectly, from whatever source, in connection with or as a result of the purchase or sale of a security, including commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits or dissolution proceeds, as a general partner or otherwise; and expense reimbursements.

Transactions Involving Selling Compensation

If the associated person has received or expects to receive selling compensation, strict statutory requirements apply:

1. Mandatory Written Approval: The member firm must provide prior written approval or disapproval. The associated person is strictly prohibited from participating in any way until formal written approval is executed.
2. Disapproval Mandate: If the firm disapproves the transaction, the associated person cannot participate, directly or indirectly, in the offering.
3. Books, Records, and Supervision: If the firm approves the transaction, the firm MUST record the transaction on its books and records (trade blotters, account records, and files) and supervise the associated person's participation as if the transaction were executed on behalf of the member firm itself.

This means the member firm assumes full supervisory and legal liability for the private securities transaction. The firm must conduct product due diligence, evaluate customer suitability under Reg BI / Rule 2111, review offering memorandums, verify accredited investor status, and inspect transaction documentation.

Transactions NOT Involving Selling Compensation

If the associated person will not receive selling compensation (such as investing their own personal capital in a private company or helping a family member's private business without receiving fees or equity):

• Detailed prior written notice is still mandatory.
• The member firm must provide prompt written acknowledgment of the notice.
• The firm retains the authority to impose specific written conditions or restrictions on the person's participation (such as prohibiting the use of firm computers, email, stationery, or premises, and forbidding solicitation of firm clients).

Excluded Transactions

Rule 3280(e)(1) excludes transactions subject to the Rule 3210 outside-account notice requirements, transactions among immediate family members for which no associated person receives selling compensation, and personal transactions in investment company and variable annuity securities.

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Approved Rule 3290 and the Current Transition

On September 15, 2026, the SEC approved FINRA Rule 3290, which will replace Rules 3270 and 3280 and adopt a risk-based framework for outside activities. The approval does not itself make Rule 3290 operative. FINRA stated that it will announce the effective date in a Regulatory Notice. Until that date, firms and associated persons must continue to comply with Rules 3270 and 3280.

Principals should prepare inventories, forms and risk criteria for the transition without prematurely retiring current procedures. An exam question that specifies a date or says the new rule is effective should be answered under that premise; absent such a premise, apply the rule actually in effect.

Supervisory Workflow

Require a detailed written description of the entity, role, duties, time commitment, customers, compensation, ownership, products, solicitation and use of firm resources. Search communications, expense reports, outside accounts and public records for omissions. For a compensated PST, the firm must record and supervise the transaction as if executed on its own behalf. A denial should state the reason and prohibit participation; silence is not approval.