On March 29, 2011, the Financial Industry Regulatory Authority (FINRA) published for industry comment a proposed rule clarifying the scope of a member firm's obligations and supervisory responsibilities for functions or activities outsourced to a third-party. 

The proposed Rule ( FINRA Rule 3190 - Third-Party Service Providers) makes clear that:

  • when a member firm outsources a function or activity related to its business as a regulated broker-dealer to a third-party service provider, it does not relieve the member firm of its obligation to comply with applicable securities laws and regulations, and FINRA and Municipal Securities Rulemaking Board (MSRB) rules;
  • the member firm cannot delegate its responsibilities for, or control over, any outsourced functions or activities;
  • a member firm must have supervisory procedures, including due diligence measures, to ensure that its arrangements with third-party service providers are reasonably designed to achieve compliance with applicable securities laws and regulations, and FINRA and MSRB rules.

The proposed rule also imposes additional restrictions and obligations that apply solely to a clearing or carrying member firm and its third-party service provider arrangements.

Effect

Proposed Rule 3190 will for the first time memorialize the guidance set forth in NTM 05-48 in the form of an affirmative set of supervisory obligations for which a broker-dealer and its personnel will be held accountable.  As a result, failure to comply with the new rule would enable FINRA to more readily cite deficiencies on FINRA exams, which could lead to an increase in disciplinary events and fines for member firms.

We strongly recommend that our clients and any other entity that is impacted by the proposed rule take the time to review FINRA's Proposed Rule 3190 and submit comments to FINRA by the May 13, 2011, deadline.  To help guide you in the process, click here to navigate to our "Practice Pointers" where we point out some of the issues and concerns raised by the proposed rule which a member firm or a third-party outsourcer might consider when preparing a response to FINRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.