Effective December 1, 2014, three FINRA rules form a general overarching regulatory scheme for the supervision of firms and their associated persons.
- FINRA Rule 3110 (Supervision)
- FINRA Rule 3120 (Supervisory Control System)
- FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes)
FINRA Rule 3110 (Supervision)
FINRA Rule 3110 requires a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules. The rule details requirements for a firm to have reasonably designed written supervisory procedures (WSPs) to supervise the activities of its associated persons and the types of businesses in which it engages. Among other things, a firm's WSPs must address supervision of supervisory personnel and provide for the review of a firm's investment banking and securities business, correspondence and internal communications, and customer complaints. The rule further sets forth requirements to designate and register branch offices and offices of supervisory jurisdiction (OSJs), conduct internal inspections and review transactions for insider trading.
FINRA Rule 3120 (Supervisory Control System)
FINRA Rule 3120 requires a firm to have a system of supervisory control policies and procedures (SCPs) that tests and verifies a firm's supervisory procedures. It is essential for a firm to recognize that FINRA Rule 3120's requirement to have specific SCPs differs from the requirement for WSPs. A firm not only needs to maintain WSPs, but the firm also must have SCPs to test and verify, at least annually, that its WSPs are reasonably designed with respect to the firm's and its associated persons' activities to achieve compliance with applicable securities laws and regulations and FINRA rules, and to create additional or amend WSPs as identified by such testing and verification. Risk-based methodologies and sampling may be used to determine the scope of testing. The testing ensures that a firm's supervisory procedures are reviewed and amended regularly in light of changing business and regulatory environments.
Pursuant to Rule 3120, a firm must designate principal(s) to be responsible for establishing, maintaining and enforcing a firm's SCPs. The designated principal(s) also must prepare, at least annually, a report detailing the firm's supervisory control system and submit it to senior management (Rule 3120 Report). The Rule 3120 Report must include a summary of the test results and significant identified exceptions, and any additional or amended supervisory procedures created in response to the test results.
If a firm has reported $200 million or more in gross revenue on its FOCUS report in the prior calendar year, FINRA Rule 3120 requires that the firm's annual report include specified additional content, to the extent applicable to the firm's business.
FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes)
FINRA Rule 3130 requires a firm to designate and identify to FINRA on Schedule A of Form BD one or more principals to serve as a chief compliance officer (CCO). The rule also requires the firm's chief executive officer(s) (CEO(s)) to certify annually that the firm has in place processes to establish, maintain, review, test and modify policies and procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. A firm's processes must be evidenced in a report that must be submitted to the firm's board of directors and audit committee (or equivalent bodies). The CEO(s) must further certify to having met with the CCO(s) in the preceding 12 months to discuss the firm's processes and other specified matters.
The intent of Rule 3130 is to increase attention to firms' compliance programs by requiring substantial and purposeful interaction between business managers and compliance officers throughout the firm.
Please visit our e-learning courses page to register for one or more of the following courses.
- Ethical Considerations for Supervisors
- Retail Branch Office Supervision: Compliance with Regulations
- Retail Branch Office Supervision: Understanding Supervisory Responsibilities
- Retail Supervision: Sales to Senior Investors
- Supervision: Obligations for Firms with Institutional Clients
Find below more information on Rules 3110, 3120 and 3130, including rulemaking activities, notices, guidance and educational resources.
|FINRA Fines Morgan Stanley Smith Barney and Scottrade a Total of $950,000 for Failing to Supervise the Transmittal of Customer Funds to Third-Party Accounts||News Release||06-22-2015|
|FINRA Sanctions LPL Financial LLC $11.7 Million for Widespread Supervisory Failures Related to Complex Products Sales, Trade Surveillance and Trade Confirmations Delivery||News Release||05-06-2015|
|FINRA Orders RBC to Pay Fine and Restitution Totaling More Than $1.4 Million for Unsuitable Sales of Reverse Convertibles||News Release||04-23-2015|
|FINRA Sanctions Three Firms for Inadequate Supervision of Consolidated Reports||News Release||03-30-2015|
|FINRA Sanctions Oppenheimer & Co. $3.75 Million for Supervisory Failures||News Release||03-26-2015|
|FINRA Sanctions First New York Securities L.L.C. $916,000 for Illegal Short Selling in Advance of 14 Public Offerings||News Release||03-25-2015|
|Rule 3120 (Supervisory Control System)||Rule||01-28-2015|
|Rule 3150 (Holding of Customer Mail)||Rule||01-28-2015|
|Rule 3110 (Supervision)||Rule||12-01-2014|
|Rule 3170 (Tape Recording of Registered Persons by Certain Firms)||Rule||12-01-2014|
|Military Spouses Receive Fellowships to Conduct Financial Counseling||News Release||08-12-2014|
|Regulatory Notice 14-10|
SEC Approves New Supervision Rules
|Regulatory Notice 13-45|
FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers
|Regulatory Notice 12-55|
Guidance on FINRA’s Suitability Rule
|Regulatory Notice 12-03|
Heightened Supervision of Complex Products
|Regulatory Notice 11-54|
FINRA and the SEC Issue Joint Guidance on Effective Policies and Procedures for Broker-Dealer Branch Inspections
|Regulatory Notice 11-52|
FINRA Reminds Firms of Their Obligations Regarding the Supervision of Registered Persons Using Senior Designations
|Regulatory Notice 11-39|
Guidance on Social Networking Websites and Business Communications
|Regulatory Notice 10-41|
FINRA Reminds Firms of Their Sales Practice and Due Diligence Obligations When Selling Municipal Securities in the Secondary Market
|Regulatory Notice 10-22|
Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings
|Regulatory Notice 10-19|
FINRA Reminds Firms of Responsibilities When Providing Customers with Consolidated Financial Account Reports
|Regulatory Notice 10-09|
FINRA Reminds Firms of Their Sales Practice Obligations With Reverse Exchangeable Securities (Reverse Convertibles)
|Regulatory Notice 10-06|
Guidance on Blogs and Social Networking Web Sites
|Regulatory Notice 09-41|
SEC Approves Rule Change Creating New Limited Representative – Investment Banker Registration Category and Series 79 Investment Banking Exam