CLIENT ALERT

CSG Law Alert: Does a Recent Settlement Signal a Change in FINRA’s Approach to Charging Violations of FINRA’s Private Securities Transaction Rule?

Is a broker-dealer required to “supervise” representatives’ outside investment advisory activities?

For years, FINRA has struggled to answer this question. However, a recent FINRA settlement may shed light on FINRA’s current approach.

FINRA Rule 3280 provides that when a broker-dealer approves a person’s participation in a private securities transaction for selling compensation, it must record the transaction on its books and records and supervise the person’s participation in the transaction “as if the transaction were executed on behalf of the member.” This requirement isn’t new; it has existed since at least the mid-1980s when the National Association of Securities Dealers (NASD), FINRA’s predecessor, included an identical requirement in NASD’s Rules of Fair Practice. And through a series of Notices to Members issued in the 1990s, FINRA made clear that member firms’ obligation to supervise such transactions encompassed representatives’ outside investment advisory (IA) activities.

From the beginning, however, this requirement raised practical questions for broker-dealers. How would a broker-dealer “supervise” investment advisory activities conducted at an unaffiliated investment advisor? How would such a broker-dealer even get access to the records required to do so? More fundamentally, why should a FINRA-registered broker-dealer be required to supervise activities that already are supervised by an SEC-registered investment advisor, particularly when the investors are not even customers of the broker-dealer?

In a 2018 regulatory notice, FINRA conceded that requiring broker-dealers to supervise representatives’ outside IA activities had resulted in “significant confusion and practical challenges.”¹ FINRA therefore proposed eliminating member firms’ supervisory and recordkeeping obligations with respect to representatives’ outside IA activities: “the proposed rule would not impose a general supervisory obligation over the IA activities and would not require the member to record on its books and records transactions resulting from such IA activities.”² Ultimately, however, FINRA, abandoned the proposal.

In March 2025, FINRA published a new proposal to “reduce unnecessary burdens” imposed on broker-dealers under FINRA’s private securities transaction rule.³ Curiously, while continuing to recognize the practical difficulties in requiring a broker-dealer to supervise outside IA activities, FINRA’s new proposal does not eliminate or otherwise modify that requirement.⁴ Accordingly, currently and for the foreseeable future, member firms remain saddled with this onerous, and arguably unnecessary, obligation.

All of which brings us to the Letter of Acceptance, Waiver, and Consent (AWC) FINRA recently issued in the case of Muhammad R. Wahdy, 2023078977001 (April 2025). In the AWC, FINRA alleged that Wahdy engaged in outside IA activities without approval from his employing broker-dealers. FINRA alleged that during the four-year relevant period Wahdy:

• was registered with three separate broker-dealers;
• owned an SEC-registered IA firm through which he provided investment advice to between 15 and 30 investors (none of whom were his brokerage clients);
• received compensation from the IA firm, including advisory fees, totaling approximately $148,000; and
• never received approval from any of his employing broker-dealers to participate in private securities transactions through his IA firm.

On these facts, Wahdy violated FINRA Rule 3280. But FINRA did not charge Wahdy’s unapproved participation in these IA activities as a violation of Rule 3280. Instead, FINRA charged Wahdy with violating FINRA’s outside business activities rule, Rule 3270.⁵ Why is this significant?

First, the sanctions FINRA imposes for violations of Rule 3270 are typically less serious than the sanctions it imposes for violations of Rule 3280. From January 1, 2024 to the present, the average suspension FINRA imposed against individuals for standalone violations of Rule 3270 was 2.2 months. During the same period, the average suspension FINRA imposed against individuals for standalone violations of Rule 3280 was 10.7 months, nearly five times higher.

Second, FINRA’s decision to forego charging Rule 3280 may evidence FINRA staff’s discomfort with the Rule’s requirement that associated persons disclose and firms supervise outside IA activities, even if the Rule technically still requires it.

Indeed, FINRA appears to be caught in a Catch-22 of its own making. On the one hand, FINRA repeatedly has acknowledged the practical difficulties in requiring member firms to supervise outside IA activities. On the other hand, FINRA has thus far been unsuccessful in removing this requirement from Rule 3280 and, for the present, appears to have given up trying.

For now, FINRA’s solution to this Catch-22 may be to exercise its “prosecutorial discretion” not to charge a failure to report, receive approval for, or supervise outside IA activities as a violation of Rule 3280.

¹ FINRA Regulatory Notice 18-08.

² Id.

³ FINRA Regulatory Notice 25-05.

⁴ “The Proposal incorporates concepts from the Prior Proposal that were widely considered improvements over the existing rules. However, the Proposal does not alter members’ obligations for outside IA activities, unless the activities are performed at an IA affiliated with the member, which are excluded under the Proposal.” Id. at 4.

⁵ In the AWC, FINRA did charge Wahdy with a violation of FINRA Rule 3280—but not for his participation in the securities transactions affected by his IA. FINRA also charged Wahdy with opening and maintaining undisclosed outside brokerage accounts, in violation of FINRA Rule 3210.

Lisa M. Colone

Christopher J. Kelly