SEC narrows broker oversight of advisors’ side work

The Securities and Exchange Commission approved a rule this week that narrows broker-dealers’ monitoring of advisors’ outside business activities to those that are investment-related. The rule replaces a broader catchall requirement and gives firms discretion to impose tighter oversight where they identify risk.

The agency described the change as a “floor, not a ceiling,” and kept requirements that firms assess whether an outside activity creates a conflict of interest or could give the impression the activity was conducted through the firm. Firms must decide whether to limit or prohibit such activities and must provide written approval or disapproval when an outside transaction will produce sales compensation for an advisor. The rule also requires firms to investigate any “red flags” indicating problematic activity.

FINRA proposed the revision in March 2025 as part of its FINRA Forward review of existing regulations. The industry argued the prior rules forced firms to track low-risk side jobs such as bartending, umpiring or driving for ride services and asked regulators to cut reporting of what FINRA described as “white noise” activities.

Investor advocates opposed narrowing the monitoring scope. In a June 10 letter, Public Investors Advocate Bar Association President Michael Bixby wrote that PIABA has seen “registered representatives use a variety of outside business activities to solicit investors for financing schemes,” and warned it can be hard to separate investment-related activities from other outside work.

An originally proposed provision that would have required brokerages to supervise dually registered advisors who work at unaffiliated registered investment advisers and place orders through those firms drew resistance from brokers and independent advisers. Regulators removed that requirement. Under the final rule, broker-dealers must provide upfront approvals for proposed trading activity tied to outside firms but have no ongoing monitoring obligation for unaffiliated RIAs.

Mark Quinn, director of regulatory affairs at independent broker-dealer Cetera Financial Group, argued in a letter that ongoing supervision of unaffiliated RIA activities would have been unprecedented and noted that other non-security services such as insurance sales or tax preparation are not subject to continual broker-dealer supervision.

The final rule replaces two existing FINRA rules and reflects a compromise between narrowing the scope of required monitoring and maintaining firms’ duty to guard against conflicts and act on warning signs. The SEC has not announced an effective date. The change follows years in which advisors were fined or suspended under FINRA rules for failing to disclose certain side investments and an industry push to focus supervisory resources on higher-risk activities.