FINRA Rule 3110: an overview
FINRA Rule 3110 plays a key part in controlling the operations and management of securities and exchange investment firms. The rule focuses on requirements for supervising. It exists as part of a larger framework to prevent fraudulent transactions, prevent criminal activity and protect the integrity of the markets.
What is FINRA Rule 3110?
FINRA Rule 3110 is sometimes known as the supervisory responsibility rule. It requires firms to establish and maintain a system to properly supervise activities. This is designed to detect and prevent the likes of internal fraud and money laundering.
Rule 3110 requires firms to supervise the activities of their associated persons. As defined by FINRA, “associated persons” include anybody required to comply with the FINRA network. This includes the likes of sole proprietors, employees of enterprise companies and government agencies, as well as branch managers and directors acting on behalf of their companies.
This rule was introduced in 2014 as a consolidation of previous rules. However, alongside the replacement of older rules, FINRA 3110 introduced some new requirements, such as the Offices of Supervisory Jurisdiction. Learn more about this nuance, and the rest of the requirements, by reading on.
Principles
The primary principle of FINRA 3110 is the creation of Written Supervisory Procedures (WSPs). They are similar to Standard Operating Procedures (SOPs), with which most regulated companies should already be familiar.
Compliant parties are required to design their own WSPs in order to address the supervision of supervisory persons and their review. Moreover, there should be WSPs for:
- An investment banking and securities review
- Company correspondence and internal communications
- Customer complaints (and how to deal with them)
- And more
Under the regulation, firms are required to conduct internal inspections and review transactions for signs of insider trading. While this step is more of a detection mechanism, the WSPs act as prevention – forming a well-rounded strategy against money laundering.
Another of the key topics for this rule is that parties must include customer confirmation within certain transactions. These transactions involve the transmission of customer finds, change of address, or change of investment objective, for example.
Rule 3110 also states that compliant parties are required to designate certain offices as Offices of Supervisory Jurisdiction (OSJs). These branches will hold extra responsibility within the business, for example by having final approval or denial rights over new accounts. They are also required to be visited and inspected from time to time.
Proposal for 3110: amendments
With the ongoing popularity of the work from home model, FINRA has proposed rule changes to Rule 3110 in 2023. This change aimed to modernize the requirements to fit current society.
To summarize the change, FINRA suggested expanding the definition of OSJ’s to include Residential Supervisory Locations (RSLs). It means that home offices would be subject to more frequent home visits, as per the regulation, and that firms could select their associated persons to host RSLs.
However, the proposed amendment has arrived with criticism. For example, the current frequency of inspections for OSJ’s is once every year. But the proposed frequency of RSL inspections is once every three years. This places significant risk on the appointment of RSL’s, and has drawn in criticism about their lack of effective supervision.
Moreover, in order to designate an RSL, the proposal is that firms must meet stringent conditions. For example, that:
- the associated person has at least one year of supervisory experience
- the firm is related to financial crime
- the firm has proper record-keeping which is not maintained at the RSL location but can be promptly accessed by the supervisory party
To learn more about the FINRA proposal (and what it could mean to your firm), click here.
Background on FINRA
FINRA stands for the Financial Industry Regulatory Authority. Headquartered in Washington DC, it’s a regulatory board for the investments and securities sector. The purpose of the overall organization is dedicated to protecting investments and safeguarding the integrity of the markets.
It’s a different entity to the SEC (formed in 1934), although both are regulatory bodies. That’s because the SEC is a government agency with a broader scope, and the power to make enforcements. Alternatively, FINRA was established much more recently in 2007, and it’s a private organization that focuses just on securities and exchanges regulation.
In fact, FINRA exists to license and validate agents, and to ensure their compliance with the rules, and the SEC regulations.
Context for Rule 3110
Rule 3110 in particular was introduced to prevent insider trading or money laundering. For example, by specifying the procedures for customer confirmation, employees shouldn’t be able to submit unauthorized trades without the customer’s knowledge, or permission.
Moreover, one part of the old rule that has been effectively eliminated by the consolidation is NASD 3102 (a) (2). This rule meant that the producing manager’s account activity must be supervised, especially when the activity reached over a certain threshold.
Instead, the introduction of Rule 3110 addresses abuses by all members of staff, not just the producing manager. This includes the rules that supervisors can’t:
- Supervise their own activity
- Report to the employee that the supervisor is supervising
- Supervise anybody who has a say in their employment or compensation (you can’t supervise your boss)
By removing the old rules and instead replacing them with the new requirements, FINRA 3110 covers a broader range of scenarios and can better protect both investments, and market integrity.
Compliance and enforcements
In March 2022, FINRA issued a regulatory notice to remind members of their obligations to supervise the activities of Chief Compliance Officers (CCO). This came after a high-profile enforcement action at Cantone Research Inc.
The CCO was found to have failed in her responsibility to supervise the President in connection with various private placements. In her role, she was tasked with:
- Reviewing the emails and correspondence of the company President
- Maintaining the WSPs
- Ensuring that her firm completed thorough due diligence in all areas
After detecting some signs of misconduct, she failed to effectively supervise the President. This led to her two-year suspension from FINRA and an individual fine of $73,000.
Get help with compliance
Non-compliance with FINRA rule 3110 isn’t an option for firms. It’s clear that they are focusing on this rule, and are willing to investigate and penalize associated parties that don’t comply.
Global Relay exists to help firms stay ahead of the evolving regulatory landscape, with fully integrated solutions at every stage of the compliance communications process.
Rely on an end-to-end regulatory solution when you book a demo.