Dual registrant regulatory roundup - April 2025

FINRA Launches a Broad Rule Modernization Initiative

• On March 12, FINRA published Regulatory Notice 25-04 (RN 25-04), which announced FINRA’s launch of a broad review of the regulatory requirements applicable to member firms and associated persons. FINRA announced that the review is being launched with a view toward modernizing its rules and better aligning them with other regulatory requirements. 

• FINRA describes RN 25-04 as the “first step of [its] review” and broadly requests comment on areas FINRA should consider as part of its rule modernization effort. FINRA specifically asks for comment on six topics, with the comment period expiring May 12, 2025: (1) the specific FINRA rules (or groups of rules) that should be a focus for modernization; (2) areas of FINRA’s interpretations or guidance that should be a focus for modernization; (3) changes to FINRA’s rules that would facilitate modernization and the deployment of new technologies; (4) gaps, risks, and challenges that exist where additional FINRA guidance would be helpful; (5) areas where FINRA’s oversight interacts with other non-FINRA requirements in a manner that causes burdens, confusion, etc.; and (6) areas of reporting or data production related to existing rules that should be a focus.

• Finally, the Notice announces that FINRA has already identified two initial areas of focus: (1) capital formation; and (2) the “modern workplace,” each of which is (or will be) subject to its own regulatory notice and request for comment.

FINRA Requests Comment on Proposal Designed to Simplify Reporting of Associated Persons’ Outside Activities

• On March 14, FINRA published Regulatory Notice 25-05, which requests comment on a rule proposal that is designed to simplify requirements regarding the reporting and supervision of associated persons’ outside activities (the Proposed Rule). The Proposed Rule would replace FINRA Rules 3270 (Outside Business Activities of Registered Persons) and Rule 3280 (Private Securities Transactions of an Associated Person) with a single rule – Rule 3290 (Outside Activities Requirements). 

• At a high-level, the Proposed Rule would: (1) narrow the focus of outside business activities (OBAs) and private securities transactions (PSTs) to “investment-related” activities, eliminating the need for registered persons to report lower-risk activities such as refereeing a sports game, driving for a car service, or bartending; (2) explicitly exclude certain specified activities from reporting by registered persons, including a registered person’s personal investments and activities conducted by a registered person on behalf of a broker-dealer’s affiliate; (3) leave untouched a broker-dealer’s supervisory and recordkeeping obligations over investment advisory activities performed by associated persons away from the broker-dealer at an unaffiliated firm.

• FINRA has requested comment on the Proposed Rule by May 13, 2025.

SEC Division of Investment Management Staff Issue Updated Marketing Rule FAQs

• On March 19, SEC Division of Investment Management staff issued two FAQs focused on the Marketing Rule’s requirement to present net performance information. The FAQs focus on two specific areas: (1) the display of performance of one investment or a group of investments in a private fund or other portfolio (an extract); and (2) whether certain portfolio characteristics constitute “performance” under the rule.

• In the first new FAQ, SEC staff note that they would not recommend enforcement action to the Commission under Rule 206(4)-1(d)(1) if an adviser displays the gross performance of an extract in an advertisement without including the corresponding net performance of the extract, provided that: (1) the extracted performance is clearly identified as gross performance; (2) the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the Marketing Rule; (3) the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and (4) the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

• In the second new FAQ, SEC staff acknowledge that advisers may be unsure whether certain investment or portfolio characteristics (i.e., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analysis, Sharpe ratios, Sortino ratios, and similar metrics) constitute “performance” under the Marketing Rule. In response to this uncertainty, SEC staff note that they would not recommend enforcement action to the Commission under Rule 206(4)-1(d)(1) if an adviser chooses to present in an advertisement one or more gross characteristics of a portfolio or investment, even if it does not include the corresponding net characteristics, provided that: (1) the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses; (2) the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule; (3) the total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic; and (4) the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

FINRA Requests Comment on Modernizing FINRA’s Rules to Facilitate Capital Formation

• On March 20, FINRA published Regulatory Notice 25-06 (RN 25-06), which requests comment on modernizing FINRA rules, guidance, and processes to facilitate capital formation. FINRA notes that it is seeking to “reduce unnecessary regulatory costs and burdens impacting the capital-raising process.” 

• FINRA is specifically requesting comments on three areas: (1) capital acquisition brokers (CABs) and other limited purpose broker-dealers; (2) research; and (3) rules and Regulatory Notices setting standards for members’ supporting capital formation. FINRA has requested comment on RN 25-06 by May 19, 2025.

SEC Crypto Task Force Hosts a Roundtable on Security Status

• On March 21, the SEC’s Crypto Task Force hosted a roundtable titled, “How We Got Here and How We Get Out – Defining Security Status.” The roundtable was the first in a series of five roundtables that the SEC has scheduled over the next few months. The roundtables, part of the SEC’s “Spring Sprint Towards Crypto Clarity” are intended to help the SEC develop a “workable regulatory framework for crypto.”

• The next roundtable, scheduled for April 11, will be titled, “Between a Block and a Hard Place: Tailoring Regulation for Crypto Trading.”

SEC Hosts a Roundtable on Artificial Intelligence

• On March 27, the SEC hosted a roundtable discussion on artificial intelligence in the financial industry. The roundtable, which contained remarks by SEC Acting Chairman Mark Uyeda and SEC Commissioners Hester Peirce and Caroline Crenshaw, contained four panels focused on the risks, benefits, and governance of AI in the financial industry. The panels generally expressed the need for regulatory flexibility in the treatment of AI given rapid technological developments in the space.