The Securities and Exchange Commission (“SEC”) has recently approved the Financial Industry Regulatory Authority’s (“FINRA’s”) proposed new consolidated rules for Supervision and Supervisory Control Systems. These FINRA rules – issued as Rules 3110, 3120, 3150, and 3170, to replace regulatory Rules 3010, 3012, and 3110(i) go into effect on December 1, 2014.
One of these areas, the new FINRA Rule 3110 which governs Supervision, is perhaps the most complex. The Rule is broken down into five (5) key sub-sections:
3110(a) is focused on establishing a set of minimum requirements that a firm must follow in its required Supervisory System for its associated personnel and includes: establishing/maintaining written procedures; designating and qualifying principals and offices of supervisory jurisdiction (“OSJ”); designating OSJ and Non-OSJ branch principals; establishing supervisory procedures for OSJ principals, including One-Person OSJs; and participating in an annual compliance meeting.
3110(b) which is based on NASD 3010(b), further defines the making and maintenance of Written Procedures for supervising business and personnel actions. This includes: investment banking transaction review through a risk-based system; supervisory procedures and risk-based review for incoming and outgoing business communications, with evidence, delegation and retention of review and correspondence as requirements; customer complaint reviews; and supervision of supervisory personnel.
3110(c) concentrates on the need for firms to inspect and review their business engagements, with requirements such as: mandatory inspection cycles; requirements for inspection reports; requirements for associated individuals who conduct inspections; and defining of conflicts of interest.
3110(d) requires a supervisory process for reviewing securities transactions with the aim to more readily identify trades that violate Exchange Act provisions or FINRA rules on insider trading. This includes identifying violative trades on covered accounts and performing internal investigation reporting.
3110(e) is maintaining the NASD Rule 3010(g) definitions of a “branch office,” an “office of supervisory jurisdiction (OSJ)” and “business day.”
In next week’s blog post, CCLS will further review new FINRA Consolidated Supervision Rules, including Rules 3120, 3150 and 3170.
For further information on this and other related subjects, please contact us at (619) 278-0020.
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