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FINRA 3130: the role of the Chief Compliance Officer

When firms are instructed by the regulators to supervise themselves, it’s not like leaving a kid alone in a candy shop. Instead, regulators like FINRA give specific instructions for broker-dealers to follow in rule 3130. For example, on how to monitor communications, sales and even the management of third party relationships.  

Article
17 June 2024 5 mins read
By Jennie Clarke

So while the responsibility is technically on the firm, this FINRA rule is clearly defined and fairly easy to follow. It means that when broker-dealers are caught violating such rules, they suffer the consequences in the form of fines, suspensions and more.

What is the FINRA 3130 rule?

The 3130 rule is part of a trifecta of regulations aimed at broker-dealers (also known as the capital acquisition broker category). 

3110 is the framework for written supervisory procedures, with 3120 mandating the reporting and documentation requirements. But this rule, 3130, works to ensure that the C-suite assumes responsibility over supervisory regulations and is involved enough to certify their firm’s compliance. 

  1. Designation of chief compliance officer
  2. Annual certification requirement
  3. Certification

Designation of chief compliance officer

The first section of this rule is about designating an individual to become the Chief Compliance Officer. The main responsibilities of this duty include:

  • Communicating the requirements of compliance processes to the regulated parties
  • Becoming the primary advisor to the organization around its compliance
  • Developing the policies and procedures for compliance
  • Evidencing the supervision required by line managers
  • Designing test programs to measure and scenario-test compliance

The 3130 rule also has the provision to designate a second, co-Chief Compliance Officer in the case that an organization requires it.

Annual certification requirement

Part b of FINRA’s 3130 rule requires the Chief Compliance Officer(s) to regularly evidence their compliance processes. They must sign off on the fact that the organization has everything in place to meet regulatory requirements, and that they are reasonably designed. 

Finally, the annual part of this requirement is that the Chief Compliance Officer(s) must meet at least every twelve months with the Chief Executive Officer (CEO) to discuss these compliance processes. 

Certification

The third of the key topics for FINRA 3130 is the certification itself. This is undersigned by the CEO, and establishes that the firm:

  • Have the systems in place to establish, maintain and review policies for compliance with regulations
  • Can react and change their policies as environment and legislation evolves
  • Regularly test the effectiveness of those policies against regulatory scenarios

Moreover, the Chief Compliance Officer and CEO should evidence their processes within a report, no more than 45 days later than the certification date. This is after consulting with external experts, such as lawyers or compliance professionals to ensure that their plans are indeed designed to comply with regulatory standards. 

Rule consolidation and amendments

Like many other FINRA institute rules, 3130 is a consolidation of a couple of regulations that came before. Specifically, this rule consolidated ideas from NASD rule 3013 and NYSE 324 / 311. 

There were four big parts of the regulation that were consolidated:

  1. FINRA member firms must report processes within 45 days of certification
  2. Flexibility on certification deadline dates of annual compliance report (not necessarily  on April 1st each year)
  3. Reports do not have to be submitted to the Securities and Exchange Commission, but instead kept by the firm for inspection
  4. Firms do not require the SEC to approve supervisory activities, instead its up to firms themselves to define and allocate compliance supervisory activities

These amendments were able to merge the prior rules, and give FINRA the most conclusive visibility into the operations of brokers while also allowing these businesses to self-supervise.

Compliance and enforcement actions

FINRA’s 3130 applies to broker-dealer firms operating within the US. As parts A and C of the rule suggest, it’s the Chief Compliance Officer and Chief Executive Officer who are the most relevant industry professionals for this rule. 

In the context of the applicable rules 3110 and 3120, FINRA 3130 fits as the final piece of the puzzle as it brings the regulators back into play after having the broker-dealers set their own supervision processes. It’s about building a meaningful relationship between the financial firms and their regulators through best practices.

Enforcement action: Planner and Santos

Planner International Inc was a member firm with offices in New York, and the firm appointed Santos as its CEO. But between 2015 and 2018, Planner failed to “reasonably design, establish and implement an anti-money laundering (AML) compliance program to detect suspicious transactions”. 

That violated FINRA’s 3110 rule. 

And while Santos delegated the AML compliance to a designated officer, he was aware that this individual hadn’t performed his supervisory responsibility, and hadn’t taken any action to address failures in their detection system. It meant that Santos had violated FINRA 3130, after he failed to test supervisory control systems and failed to “document the process for establishing, maintaining, reviewing, testing and modifying compliance policies”.

Due to this failure, Planner was found to have had at least one customer engaging in a wash sale, and at least two more engaging in market manipulation. As a broker-dealer firm, they were at the heart of the economy, and regulators couldn’t risk ongoing malpractice. 

So, Santos himself received a regulatory notice, $10,000 fine and was suspended for one month. And the Planner firm was fined $50,000, received a censure, and was instructed to hire an independent contractor who could overhaul their supervisory and compliance processes. 

Compliance support for compliance officers

Since FINRA 3130 has such clear cut rules around supervisory responsibilities for the CEO and Chief Compliance Officer, you also need very specific support. At Global Relay, we work with CCOs and CEOs to provide an integrated solution, ensuring you meet your regulatory requirements without compromise. 

For FINRA 3130 in particular, we offer supervisory support for communications, and an AI-powered archive for ongoing compliance. When suspicious activity is detected, you can benefit from our leading escalation workflows.

Partner with Global Relay to support your firm’s success in regulatory compliance.

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Published 17 June 2024

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