Frequently Asked Questions

 

Rule 3012 Report

 

Q: Do the designated principals have any reporting requirements once they have completed testing and verifying the member's supervisory procedures?

A. Yes. Rule 3012 requires the designated principals to submit, no less frequently than annually, a report to the member's senior management that details the firm's system of supervisory controls, the summary of the test results and any additional or amended supervisory procedures that have been created in response to those results.

 

Q: What is the difference between the Rule 3012 report and the Rule 3013 report?

A. The NASD Rule 3013 report identifies the processes a firm follows to establish, maintain, review, test and modify its written compliance policies and written supervisory procedures. FINRA typically reviews the 3013 report so that the staff can understand the processes that a firm follows to establish and update written policies and procedures. The Rule 3013 report is the work plan (a detailed outline of steps) that a firm uses to adopt and keep current supervisory policies and procedures under Rule 3010 and to adopt SCPs required under Rule 3012. FINRA recommends that firms review the results of their 3012 report in considering whether their Rule 3013 processes are sufficient. For example, if a firm's Rule 3012 report consistently notes a firm's failure to adopt WSPs around new regulatory requirements, then a firm should consider whether its Rule 3013 processes adequately take into account new regulatory requirements.

 

In contrast, the Rule 3012 report is not a work plan (except to the extent it identifies amendments that need to be made), but, rather it is the work product of the result of the testing and verification of the sufficiency of the firm's scheme of supervisory policies and procedures. The Rule 3012 report:

 

  1. details the manner, method and review for testing and verifying that a firm's system of supervisory polices and procedures are designed to achieve compliance with applicable rules and laws;

  2. provides a summary of the test results and the gaps found; and

  3. identifies the changes a firm made or will need to make to its supervisory procedures.


Q: Can the report required by Rule 3013 be combined with the report required by Rule 3012?

A. Yes, as long as the timetables of the respective reports are followed, and it is clear from reading the document that the reporting requirements of both Rule 3012 and Rule 3013 are met.


Q: What are the timetables for the Rule 3012 and 3013 reports and the Rule 3013 certification?

A.

  Rule 3012 Report Rule 3013 Report & Certification
Frequency At least annually Annually
Time Period Covered by Report 12 months or for a shorter time period if the firm elects 12 months (no later than the anniversary date of the previous year's certification)
Submit to Firm's senior management Firm's board of directors and audit committee (or equivalent bodies) at the earlier of their next scheduled meetings or within 45 days of the annual Rule 3013 certification

 

Q. How does Rule 3012 apply the definition of a producing manager in the following scenarios?

  • A producing manager who services retail accounts vs. only "institutional accounts"
  • A. While the method of supervisory oversight and review may differ as a matter of firm policy depending on the type of business being conducted, the rules apply to producing managers regardless of the nature of the accounts they service.

  • Someone who only services a few accounts for family and friends
  • A. The number of accounts or the fact that a manager services only accounts belonging to family and friends is not relevant for determining whether a manager is a producing manager. Nor is there a minimum amount of revenue or customer account activity that must occur for a manager to be considered a producing manager. The relevant factor is whether the producing manager is servicing customer accounts or the accounts depend on the manager for certain services. Firms should be aware that even if the accounts are assigned to a registered representative, if the manager is the person who handles and/or makes recommendations for the accounts, the manager is considered a producing manager by virtue of that activity. As a producing manager, the person is subject to all of Rule 3012's provisions, including, if applicable, the heightened supervision requirements. The only exception to the foregoing is stated below in the discussion of handling accounts occasionally on an accommodation basis.

     

  • A manager who only receives overrides or is paid only a salary
  • A. The method of compensation is not the determining factor. If a manager services customer accounts, he or she would be considered a producing manager regardless of the compensation scheme in place at the firm.

     

  • A manager who is not assigned customer accounts and only services customer accounts that are "house accounts"
  • A. If a manager services customer accounts in a capacity requiring registration, he or she would be considered a producing manager regardless of how a firm allocates or designates accounts.

     

  • A registered person who occasionally enters orders as an accommodation to a producing manager
  • A. If a registered person occasionally engages in customer account activity in rare instances solely as an accommodation to a producing manager who is out of the office for a short duration (e.g., vacation, travel, illness), that person would not be deemed to be a producing manager solely by virtue of such accommodation. Similarly, if a supervisory person (i.e., branch office manager, sales manager, regional or district sales manager, or any person who performs a similar supervisory function) who does not service customer accounts occasionally enters orders as an accommodation to another registered person who is out of the office for a short duration, the supervisory person would not be deemed to be a producing manager solely by virtue of that activity. Whether such status is warranted, however, is a facts and circumstances question to be reasonably determined by the firm. Any sales activity of persons must be appropriately supervised by another qualified person (not the individual who is being accommodated) under the general supervisory requirements of Rule 3010.

     

    Firms, however, should be looking for business denoted as "accommodation transactions" that in reality represent a manager servicing an account. For example, accounts assigned to registered representatives that are handled by a manager in making a series of recommendations may represent ongoing sales activities by the manager and should not be reviewed by the manager. This does not mean that every time a transaction is solicited it is definitive evidence that the manager is doing more than accommodation business; there may be times in a registered representative's absence where because of market action, material news or the request of a customer that a manager may need to recommend a course of action and that is a distinct set of facts from those instances where a manager is the person who, with some regularity in the absence of some compelling circumstances of the nature discussed, makes recommendations to an account under the guise of accommodation.


Q: Does customer account activity for the purposes of the producing manager provisions of Rule 3012 include stock lending or prime brokerage activity?

A. No. However, such activities remain subject to the general supervisory requirements of Rule 3010.


Q: What type of supervision is required for producing managers under Rule 3012?

A. Rule 3012 specifically requires firms to review and supervise the customer account activity conducted by the firms' producing managers. A firm should perform these reviews and supervision on the same day-to-day basis that it uses to supervise and review the rest of the firm's production. Such reviews must be conducted by someone who is either senior to or otherwise independent of the producing manager under review. Unless supervision is conducted by a person who is otherwise independent of the producing manager, Rule 3012 requires a member to have procedures that provide heightened supervision over the activities of its producing managers who are responsible for generating 20 percent or more of the revenue of the business units supervised by their supervisors over the course of a rolling, 12-month period.


Q: Who is an otherwise independent person for purposes of Rule 3012?

A. An otherwise independent person is someone who:

  • Does not report either directly or indirectly to the producing manager under review;
  • Is situated in an office other than the producing manager;
  • Does not otherwise have supervisory responsibility over the activity being reviewed-this includes not being directly compensated, either in whole or in part, from the revenues accruing from those activities; and
  • Alternates his or her review responsibility with another qualified person every two years or less.

Q: If someone sits in the same building or on the same floor as a producing manager, is it possible for the person to be considered otherwise independent of the producing manager?

A. Yes. For example, when a member has one physical location that includes multiple business units and departments, such as, technology, equity trading, municipal trading, etc., someone in the same building or on the same floor, but in a different unit or department, could be considered otherwise independent of the producing manager.


Q: Who is considered senior for purposes of Rule 3012?

A. Determination of seniority for purposes of deciding who should conduct a producing manager's supervisory reviews is a facts and circumstances test. For example, a firm may consider someone to be senior to a producing manager if the person does not report to the producing manager; if the person's compensation is not determined in whole or part by the producing manager (but who may, nevertheless, be paid on the revenues generated by the producing manager, based on the determination of the person to whom the senior person reports); and if the person has authority to oversee, direct and correct the activities of the producing manager and take all necessary remedial actions, including termination or recommending termination.


A person may also be considered senior to a producing manager if that person holds a superior position in the same chain of authority as the producing manager. For example, a firm may have a producing manager reporting to a regional manager who, in turn, reports to a national sales manager. Both the regional manager and the national sales manager would be considered senior to the producing manager since they occupy superior positions to the producing manager.


Q: Does the senior or otherwise independent person have to be a principal?

A. No. Under the general supervisory review requirement, a senior or otherwise independent person is not required to be a principal.


Q: Does someone who is reviewing a producing manager under the limited size and resources exception have to be a principal?

A: Yes. If the firm is so limited in size and resources that there is no qualified person senior to, or otherwise independent of, the producing manager to conduct the producing manager reviews, the firm may rely on Rule 3012's limited size and resources exception and have the reviews conducted by a principal who is sufficiently knowledgeable of the firm's SCPs.