FINRA’s Consolidated Supervision Rules and Regulatory Notice 14-10

by Eversheds Sutherland (US) LLP
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On December 23, 2013, the Securities and Exchange Commission (SEC) approved proposed changes to the Financial Industry Regulatory Authority’s (FINRA) supervision rules.  On March 19, 2014, FINRA issued Regulatory Notice 14-10, announcing that the consolidated supervision rules (the Consolidated Supervision Rules) approved by the SEC will become effective on December 1, 2014.1 The Consolidated Supervision Rules will replace existing NASD2 Rules 3010 and 3012 (the NASD Supervision Rules) in the FINRA Consolidated Rulebook with FINRA Rule 3110 (Supervision) and FINRA Rule 3120 (Supervisory Control System).3

Regulatory Notice 14-10 clarifies some important differences between the NASD Supervision Rules and the FINRA Consolidated Supervision Rules.  Set forth below is a chart that highlights the key distinctions between the old and new rules. 

Given the changes described above, chief compliance officers should consider the steps needed to implement the changes called for by the Consolidated Supervision Rules.

2NASD stands for the National Association of Securities Dealers, Inc., which was the predecessor organization to FINRA.

3The proposing release for the Consolidated Supervision Rules is available at http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p286229.pdf, and the adopting release for the Consolidated Supervision Rules is available at http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p418696.pdf.

4FINRA Rule 3110.03.

5See SEC Division of Market Regulation, Staff Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) (reminding broker-dealers that small, remote offices require vigilant supervision and specifically noting that “[n]o individual can supervise themselves”).

6FINRA Rule 3110.04.

7FINRA Rule 3110.05.

8See FINRA Regulatory Notice 07-53 (November 2007), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037421.pdf.

9When FINRA first proposed the Consolidated Supervision Rules, it proposed deleting NASD Rule 3040 and replacing it with new provisions in FINRA Rule 3110(b)(3) that would have required an associated person to obtain the firm’s prior written approval before engaging in any private securities transactions, regardless of whether the associated person receives any compensation.  FINRA subsequently reserved this aspect of the rulemaking with a view to addressing it as a separate proposal in the future.

10FINRA Rule 3110.06.

11Id.

12FINRA Rule 3110.07.

13See FINRA Regulatory Notice 07-59 (December 2007), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037553.pdf.

14FINRA Rule 3110(b)(5), requiring firms to have supervisory procedures to capture, acknowledge, and respond to all written customer complaints.

15FINRA Rule 3110.11.

16FINRA Rule 3110(b)(7).

17FINRA Rule 3110.13.

18Under FINRA Rule 3120(b), the annual report to senior management must include the following additional details if the member firm reported $200 million or more in gross revenue in the prior calendar year: (1) tabulation of the reports pertaining to customer complaints and internal investigations made to FINRA during the prior year; and (2) a discussion of the prior year’s compliance efforts, including procedures and educational programs, in each of the following areas:

  • trading and market activities;
  • investment banking activities;
  • antifraud and sales practices;
  • finance and operations;
  • supervision; and
  • anti-money laundering.

 

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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