Compliance Matters: Meet the New Rules from FINRA


On March 19, 2014, the Securities and Exchange Commission approved several compliance rules proposed by the Financial Industry Regulatory Authority (FINRA). Among the rule adoptions, FINRA Rule 3110 (Supervision) will replace current NASD Rule 3010, while FINRA Rule 3120 (Supervisory Control System) will replace NASD Rule 3012. Although the new rules are not effective until December 1, 2014, firms are encouraged to become familiar with these changes and begin instituting required adjustments to their supervisory system and structure in advance of the effective date. We have highlighted just two examples of some modifications that firms may need to focus on in the coming months.

While FINRA Rule 3110 is not a departure from the existing NASD Rule 3010, the rule change does offer clarifications and expectations, particularly for offices of supervisory jurisdiction (OSJs). While the existing and new rules both require at least one principal to supervise the activity of each OSJ, the new rule makes clear that FINRA expects each OSJ principal to maintain a routine physical presence at the OSJ. Effectively, the new rule presumes that a single principal should not be designated to supervise more than one OSJ, absent special circumstances. The new rule specifically warns that firms using one principal to supervise more than one OSJ will be subject to scrutiny. FINRA expects firms to document the considerations that make this practice reasonable for the firm. These considerations include the size of the OSJ, number of clients, experience and training of the principal, and location and proximity of the OSJs to one another. Firms that currently rely on this special circumstance, or will in the future, are strongly encouraged to document the special circumstance.

As discussed in an earlier blog post, FINRA and the SEC remain concerned with conflicts of interest throughout the industry. The amended rule takes another step toward eliminating or reducing conflicts of interest. FINRA Rule 3110(b)(6) will eliminate NASD Rule 3012, which currently requires heightened supervision for producing managers. According to FINRA, the new rule is designed to encompass all supervisory personnel, instead of only the producing managers. While FINRA and the SEC have already taken positions against self-supervision, this new rule makes clear that supervisory personnel cannot supervise their own activities or report to (or have their employment or compensation determined by) the individual the supervisor is supervising. The new rule will require many firms to expand their current procedures to include all supervisory personnel.

These are only two examples of changes that the new rules will bring about. All firms are encouraged to read the new rules carefully and review their current procedures so that they can make any necessary changes by December 1, 2014. The new rules may be found here.

Please continue to follow our blog for the latest information regarding these and other rule changes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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