Financial Industry Regulatory Authority (FINRA) Rule 3210, which supersedes the previously used NYSE Rule 407, was approved by the Securities and Exchange Commission (SEC) in April of 2016, and rolled out in April, 2017 to ensure that member companies, brokers and advisors maintain ethical standards.
This means the rules have changed in the investment industry when it comes to declaring a personal interest in newly opened accounts at financial institutions other than where you may be employed or registered. According to FINRA, the new Rule 3210 replaces NASD Rule 3050, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02. Here's a look at the new rule and what it means for advisors and brokers.
What Are the Requirements Under the New Rule?
Although the rule may be new, the regulatory standard is not. This rule replaced Rule 3050 which is enforced by the National Association of Securities Dealers (NASD), as well as similar rules at the New York Stock Exchange. The former rules referred to transactions for or by associated persons, while the new rule expands on the existing policies.
Rule 3210 aims to govern accounts opened or established by advisors and brokers at firms other than the member firm where they are employed or registered. Accounts that financial advisors and brokers have with their employer are easily monitored. The new rule focuses on external accounts with other broker-dealer firms. It requires all licensed employees to declare investment accounts that are held with other financial institutions. Under the new rule, advisors and brokers are also required to notify their employer, in writing, of their intent to open a new account as well as declare all accounts where they have a financial or beneficial interest. (For more, see: Financial Regulators: Who They Are and What They Do.)
All employees must now declare intent and obtain prior written consent from their employer if they wish to open or maintain an investment account at any other financial institution where securities transactions take place, and the employee has a beneficial interest in the opening and maintenance of the account. Advisors and brokers are also required to notify their employer in writing of any accounts opened by associated persons with other financial institutions other than their employer. Associated persons include people who are related to the employee such as spouses, children and other family members. (For more, see: Ethical Standards You Should Expect From Financial Advisors.)
What Does Rule 3210 Mean for Advisors and Brokers?
The new rule will work in combination with standard transaction review and investigation practices (as per existing FINRA Rule 3110). FINRA member firms are already responsible for managing conflicts of interest in their businesses and maintaining supervision of accounts in compliance with existing FINRA rules.
At any given time, member firms can request that employees provide copies of account documentation, such as transaction confirmations and account statements. Therefore, advisors and brokers should keep records of all account information and transactions.
It is not only newly-established accounts that are governed under the new rule. If an employee has existing accounts and becomes a new employee of a member firm, they will be required to declare such accounts. Within 30 calendar days of becoming employed with a FINRA-member firm, the employee must obtain written consent from their employer to maintain the accounts. The new employee is also required to notify the financial institution where the accounts are held of their new association and employment with the member firm.
(For related reading, see: DOL Fiduciary Rule Explained as of April 10, 2017.)