Quick Answer
The FINRA outside-account rule governs accounts associated persons open outside their firm: the rep must get prior written employer consent and notify the executing firm in writing of the employment relationship. The FINRA transaction-review framework requires firms' WSPs to include procedures to review securities transactions for insider trading and manipulation, with reporting deadlines for investment-banking firms.
These two requirements form the surveillance backbone of an associated-person personal-trading program. The outside-account requirement lets the firm see what trading the rep is doing outside the firm. The transaction-review framework defines what the firm must do with the trading data once it has it.
Accounts at Other Broker-Dealers and Financial Institutions
An associated person may not, without the prior written consent of the employer member, open or establish an account in which securities transactions can be effected and in which the associated person has a beneficial interest.
Where the Rule Reaches
The rule covers accounts at any of the following:
- FINRA member firms (other broker-dealers that are FINRA members)
- Other domestic or foreign broker-dealers (non-FINRA)
- Other financial institutions, including:
- Investment advisers
- Banks
- Insurance companies
- Trust companies
- Credit unions
- Investment companies (mutual funds, including 401(k) accounts that allow self-directed brokerage)
What "Beneficial Interest" Means
The rep has a beneficial interest in any account where the rep:
- Owns the assets directly
- Has trading authority (discretionary or non-discretionary) over a third party's account
- Is a joint owner (e.g., joint account with spouse)
- Is a beneficiary of a trust the rep controls
The "beneficial interest" trigger captures spousal accounts, joint accounts, and trust accounts where the rep has discretion or beneficial-owner status.
What the Rep Must Do
| Step | Requirement |
|---|---|
| Notify the employer firm | Obtain prior written consent from the employer member before opening the account |
| Notify the executing firm | Notify the executing firm in writing of the rep's association with the employer member, before the account is opened |
| Pre-existing accounts | If the account was opened before the rep joined the employer, the rep has 30 calendar days after associating to obtain employer's written consent and notify the executing firm |
What the Employer Firm Considers
When deciding whether to consent, the employer firm must consider:
- The firm's ability to obtain duplicate confirmations and statements from the executing firm (a non-FINRA executing firm or foreign broker may not deliver duplicates routinely)
- Whether the account presents conflicts of interest with the rep's customer obligations
- Whether the rep's prior trading history suggests heightened risk
Exam Tip: Gotchas
- The outside-account requirement reaches beyond brokerage accounts. An associated person who opens a brokerage IRA at a bank, or has trading authority over a spouse's investment-adviser account, must obtain employer consent if they have a beneficial interest. The "beneficial interest" trigger captures spousal, joint, and trust accounts.
- Pre-existing accounts get a 30-day grandfather window. A rep who joins a new firm with existing personal-trading accounts has 30 calendar days to obtain consent and notify the executing firm. Day 31 without consent is a violation.
Supervisory Transaction Review and Investigation
Each member firm's written supervisory procedures (WSPs) must include procedures to review securities transactions reasonably designed to identify trades that may violate Exchange Act provisions, SEC rules, or FINRA rules prohibiting insider trading and manipulative or deceptive devices.
What Trades the Firm Must Review
The review must reach trades effected:
- For the member's own account (proprietary trading)
- For accounts of associated persons (the rep's personal accounts at the firm)
- For the rep's outside accounts at other firms disclosed under the outside-accounts rule
- For covered accounts introduced or carried by the member: a spouse, a child in the same household or financially dependent, a related individual whose account the rep controls, and another person whose account the rep controls and whose financial support the rep materially contributes to
The Risk-Based Approach
A risk-based approach is permitted. The firm may scope review based on:
- Its business model (a pure agency retail firm has different risks than an investment-banking firm)
- Departments most likely to encounter MNPI (research, IB, M&A advisory)
- Account-specific risk (a rep with prior compliance issues warrants more review than a clean rep)
The risk-based approach lets the firm focus surveillance resources where MNPI exposure is highest, but the firm cannot exclude entire business lines from review.
Internal-Investigation Requirement
When the review identifies potentially violative trades, the firm must promptly conduct an internal investigation. The investigation determines whether a violation occurred and what action (if any) the firm must take.
Reporting Requirements (Investment-Banking Firms Only)
Members engaged in investment-banking services have specific reporting deadlines:
| Trigger | Deadline | Reported To | Content |
|---|---|---|---|
| Internal investigation identifies a violation | Within 5 business days of completing the investigation | FINRA (written report) | Description of the violation and the firm's response |
| End of each calendar quarter | Within 10 business days of quarter-end | FINRA (written report) | Description of each internal investigation initiated during the prior quarter, regardless of outcome |
Two Different Reports
The two reports cover different events:
- 5-business-day report: Triggered only when an investigation identifies a violation. Reports the violation
- 10-business-day quarterly report: Triggered every quarter. Reports each investigation initiated during the prior quarter, even if the investigation concluded nothing was wrong
Memory Aid:
- 5 business days for violations found (urgent: a violation is happening or happened)
- 10 business days quarterly for investigations initiated (recurring administrative report)
Exam Tip: Gotchas
- the transaction-review framework reporting is not triggered by every internal review. The 5-day report only applies when the investigation identifies a violation; the quarterly report covers any investigation initiated, even if it concludes nothing was wrong.
- The 5-day and 10-day reports apply only to investment-banking firms. A pure retail firm with no investment-banking services still has a transaction-review obligation but no FINRA reporting obligation under this rule. The exam tests the IB-services qualifier.
What Should You Check on Exam Day?
- Do you know opening an outside account requires prior written employer consent and written notice to the executing firm before the account opens?
- Can you state the 30 calendar day grandfather window a rep has to get consent and notify the executing firm for a pre-existing account?
- Can you distinguish beneficial interest, which reaches spousal, joint, and trust accounts, from simple direct ownership of an outside account?
- Do you know an investment-banking firm must report a violation within 5 business days, and every investigation initiated within 10 business days of quarter end?