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Supervision is a critical aspect of maintaining integrity and compliance within the securities industry. To ensure the proper oversight of broker-dealer firms and their associated persons, FINRA has established a three-part regulatory scheme to ensure proper oversight, with FINRA Rule 3110 serving as the cornerstone. This guide delves into the purpose of FINRA Rule 3110 and the obligations it imposes on firms, including recent proposed changes for remote work.
Rule 3110: The Foundation of Supervision
At its core, FINRA Rule 3110 aims to ensure that broker-dealer firms have a robust system in place to supervise the activities of their associated persons. The rule stipulates that the system of supervision should be reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules.
Key Elements of Rule 3110
Under this rule, firms must create and maintain Written Supervisory Procedures (WSPs). These procedures should:
- Specify the individuals responsible for each review.
- Outline the supervisory activities to be performed.
- Define the frequency of reviews.
- Detail the documentation requirements.
The rule also requires firms to properly designate and register branch offices and Offices of Supervisory Jurisdiction (OSJs) to ensure consistent supervision across all business locations.
Internal Inspections & Transaction Reviews
To maintain effective supervision, firms must conduct regular internal inspections and reviews. These include:
- Internal Inspections: Regular reviews of branch offices and other locations to ensure compliance.
- Transaction Reviews: Monitoring transactions for red flags like potential insider trading and ensuring compliance with customer confirmation requirements for fund transfers, address changes, and changes in investment objectives.
Proposed Changes for Remote Inspections & Work
The COVID-19 pandemic reshaped the way we work, and regulatory bodies like FINRA were not immune to this transformation. As broker-dealer firms across the financial industry adjusted to remote work environments, regulators faced the challenge of accommodating these changing work practices and adapting their inspection processes. Last summer, in response to calls from prominent broker-dealer firms, such as Charles Schwab and Wells Fargo, FINRA filed a proposed pilot program with the SEC that would allow for remote inspections of certain branch offices and locations, eliminating the need for some onsite visits.
FINRA's Re-Proposed Amendments: The Residential Supervisory Location (RSL)
In a re-proposal, FINRA introduced the concept of a Residential Supervisory Location (RSL). This would allow firms to conduct supervisory activities at a private residence without classifying it as an OSJ.
The proposed amendments include key guardrails and restrictions to protect investors, such as:
- A strict prohibition on handling customer funds or securities at an RSL.
- A ban on customer meetings or sales activities at the location.
- A three-year inspection frequency, in contrast to the annual requirement for OSJs.
How Rule 3110 Affects Individual Advisors
While the rule primarily applies to firms, it has a direct impact on individual financial advisors, especially those working remotely.
- Enhanced Supervision: You may experience increased monitoring and oversight by your firm.
- Compliance with WSPs: You must adhere to the firm’s written supervisory procedures, which may require new routines for recordkeeping and communication.
- Ethical Standards: The rule reinforces the need for high ethical standards and for you to act in the best interest of your clients.
The Future of Supervision
The SEC's evaluation of these proposed changes will shape the future of supervision and work arrangements in the securities industry. The goal is to strike a balance between maintaining effective oversight and embracing the flexibility of remote work.
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