FINRA Rule 3110, commonly referred to as the “Supervision Rule,” mandates that member firms implement and uphold a supervisory system for their personnel.
The “Supervision Rule” sets forth several critical requirements for brokerage firms, including:
- Supervisory System. The establishment of a supervisory system to monitor associated persons’ activities, ensuring adherence to FINRA and SEC guidelines, alongside federal and state laws.
- Written Procedures. The creation of comprehensive written supervisory procedures that encompass all facets of the firm’s supervisory obligations.
- Internal Inspections. Designation of specific individuals for conducting reviews, detailing supervisory actions, review frequencies, and ensuring that supervisors are adequately trained and licensed.
The objective of these mandates is to bolster the regulatory oversight, compliance, and risk management practices within brokerage firms, safeguarding investor interests and upholding market integrity.
Written Supervisory Procedures
This rule specifies that firms must craft written supervisory procedures (WSPs) tailored to oversee the myriad activities within their operations. These WSPs are expected to cover the oversight of supervisory staff, scrutiny of investment banking ventures, examination of correspondences, internal communications, and handling of customer grievances.
FINRA Rule 3110(b)(4): Review of Correspondence and Internal Communications
FINRA Rule 3110(b)(5): Review of Customer Complaints
FINRA Rule 3110(b)(6): Documentation and Supervision of Supervisory Personnel
FINRA Rule 3110(b)(7): Maintenance of Written Supervisory Procedures
It’s essential for firms to document who oversees each review, the supervisory tasks to be conducted, and how often these reviews will occur.
Failure to Supervise: The Implications of Non-Compliance
Failing to comply with the “Supervision Rule” can have significant repercussions for member firms, including:
Non-compliance can result in
- Regulatory penalties and fines from FINRA for not properly supervising associated persons’ activities
- A heightened risk of harming investors due to insufficient supervision, which may lead to customer complaints, regulatory probes, and damage to the firm’s reputation
- Legal liabilities from breaches of FINRA and SEC regulations, as well as federal and state laws, potentially resulting in financial penalties and legal proceedings against both the firm and its associated individuals
These potential outcomes underscore the critical importance of adhering to FINRA Rule 3110, highlighting the need for rigorous supervision and compliance to protect investor interests within the brokerage industry.
Related regulations governing the supervision of electronic communications
- FINRA 3120 & 3130
- SEC 206(4)-7
- IIROC NI 31-103
- CFTC 1.31
Additional resources for broker-dealers
Guide: Compliance Made Easy for RIAs and Broker-Dealers
Webinar: How to Supervise Your Suddenly-Remote Broker-Dealers & Investment Advisers
Checklist: Electronic Communications Compliance for Broker-Dealers
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