United States: SEC Approves New Consolidated FINRA Supervision Rules And FINRA Establishes An Effective Date


Last week, FINRA issued a Regulatory Notice describing changes to its supervision rules and announcing an effective date of December 1, 2014.1 The new rules were approved by the SEC late last year, and will replace NASD Rules 3010 and 3012 and certain incorporated NYSE rules with FINRA Rules 3110 (Supervision) and 3020 (Supervisory Control System) (collectively, the "FINRA Supervision Rules").  

The adoption of the FINRA Supervision Rules follows two earlier attempts by FINRA to adopt consolidated supervision rules. First, in May 2008, FINRA published Regulatory Notice 08-24, proposing new FINRA supervision rules that drew a large number of comment letters. FINRA addressed the comments and filed a rule proposal with the SEC in 2011, but withdrew it a little more than three months later.

While the FINRA Supervision Rules incorporate many features of existing NASD and NYSE rules and some provisions are likely to be helpful to firms, certain aspects of the new rules could require significant changes to current supervisory practices. As such, although the effective date is months away, firms should start assessing their current policies and procedures and identifying areas that may require new processes and additional controls. We focus on the key revisions to the FINRA Supervision Rules below that are most likely to require changes in firms' policies and procedures.

New FINRA Rule 3110 (Supervision)

FINRA Rule 3110 will replace NASD Rule 3010, incorporating much of that rule's substance. The principal requirements of Rule 3010(a), namely that members establish and maintain a system to supervise the activities of their associated persons reasonably designed to achieve compliance with applicable laws and regulations, are retained with minor modifications.
Notably, FINRA Rule 3110 does not retain the controversial supplementary material that FINRA proposed in 2011, which would have required members' supervisory systems to provide for supervision of all business lines, including those not related to securities. FINRA did note in its filing, however, that it would continue to apply Rule 2010 (Standards of Commercial Honor and Principles of Trade) to non-securities activities of members and their associated persons.2
Additional requirements imposed by FINRA Rule 3110 are discussed below.

1. Review of Member's Securities Transactions

Similar to NASD Rule 3010(d)(2), and as proposed in 2008, FINRA Rule 3110(b)(2) requires principal review, evidenced in writing, "of all transactions relating to the investment banking or securities business of the member." Supplementary Material .05 states that members may use a risk-based system to comply with this review requirement. In its filing with the SEC, FINRA noted that it intended the term "risk-based" to describe "the type of methodology a member may use to identify and prioritize for review those areas that pose the greatest risk of potential securities laws and SRO rule violations."3 Members may prioritize their review processes "due to the volume of information that must be reviewed by using a review methodology based on a reasonable sampling of information in which the sample is designed to discern the degree of overall compliance, the areas that pose the greatest numbers and risks of violation, and any possible needed changes to firm policies and procedures." 

a. Principal Responsibility for Defective Risk-Based Review Criteria

While FINRA Rule 3110(b)(2) permits firms to use risk-based systems to review investment banking and securities transactions, if such review involves certain parameters to assess whether transactions merit further review, firm principals remain responsible for review and documentation of these parameters. Further, under the new rules, all responsibility for deficiencies in a risk-based system's review parameters and criteria remains on firm principals. 

b. Parameters for Heightened Risk

At a recent webinar on supervision, FINRA staff noted that parameters for considering whether a heightened risk is present included the size of the transaction, transactions where associated fees are higher than normal, the type of investors, whether the firm conducts and publishes related research, whether there are any factors related to particular brokers and their disciplinary histories, and any other relevant red flags that firms may have noticed.4

2. Internal Investigations

FINRA Rule 3110(d)(1) incorporates and expands upon the requirements of NYSE Rules 342.21 and 351(e). NYSE Rule 342.21 requires member organizations to review proprietary, employee and employee-related trading and conduct "internal investigations" of trades in NYSE-listed securities and related financial inst ruments that may violate securities laws and rules prohibiting insider trading and use of manipulative or deceptive devices. NYSE Rule 351(e), as interpreted in NYSE Information Memo 06-6, requires member organizations to make quarterly filings to report the commencement of an internal investigation, provide progress reports for ongoing investigations, and report on the conclusion of investigations. If no investigations were active during the preceding quarter, member organizations are nonetheless required to make a filing certifying that they have procedures for reviewing trades pursuant to Rule 342.21 and have no reasonable cause to believe that any trades subject to the rule in the prior quarter violated the laws or rules against insider trading or manipulation.

a. Requirements for Covered Accounts

The new rule differs from Rule 342.21 in several respects, including broadening the requirement to review all trading in all securities—not only NYSE-listed securities and related financial instruments. It also applies to all FINRA members—not just NYSE member firms. Under Rule 3110(d)(1), members must have supervisory procedures to review transactions that are affected for the member's account or the accounts of associated persons or certain other "covered accounts" for potential insider trading or use of manipulative or deceptive devices. As under NYSE Rule 342.21, members are required to promptly conduct an internal investigation into any identified trade that appears to be violative.
The term "covered account" includes any account introduced or carried by the firm that is held by (1) the spouse of a person associated with the firm; (2) a child of the person associated with the firm or such person's spouse, provided that the child resides in the same household as or is financially dependent upon the person associated with the firm; (3) any other related individual over whose account the person associated with the firm has control; or (4) any other individual over whose account the associated person of the firm has control and to whose financial support such person materially contributes.

b.  Internal Review and Reporting Requirements

Under FINRA Rule 3110(d)(3)(A), members that engage in investment banking services are required to make written reports of internal investigations similar to those reports required by NYSE Rule 342.21 and Information Memo 06-6. The rule requires members that engage in investment banking services to file written quarterly reports providing details of any internal investigations opened or remaining open during the quarter, and the resolution of any investigations closed during the quarter, with or without any finding of a violation.
Accordingly, any time an "internal investigation" is undertaken, firms are required to report it even if an innocuous explanation for the trade giving rise to the investigation is ultimately identified. Members do not need to file a certification following quarters in which no internal investigations were active.
The Rule also requires members that engage in investment banking services to make a written report within five business days of the completion of any internal investigation that identifies a violation of Exchange Act provisions or rules thereunder, or FINRA rules prohibiting insider trading or manipulative and deceptive devices. As FINRA noted in its filing, FINRA Rule 4530(b) also requires such a filing, but only if the violation is committed by the member or an associated person (and not by an associated person's family members). The timeframe for the Rule 4530 filing, however, is 30 days, rather than the five-day requirement of Rule 3110(d)(3)(B). FINRA did not indicate that making a filing under Rule 3110(d)(3)(B) would excuse firms from being required to also make a filing under Rule 4530(b), but firms may wish to seek clarification of this point.
Firms should consider implementing clear policies describing the circumstances in which they will commence an "internal investigation," a term left undefined (as it is under NYSE Rule 342.21). Presumably, not every routine follow-up or inquiry into the circumstances surrounding a trade should constitute an internal investigation. These inquiries generally develop along a continuum from informal to formal as they become more serious and at some point along that continuum will be considered "internal investigations" for Rule 3110(d)(1) purposes.
Information Memo 06-6 provides some guidance for firms with respect to developing criteria that indicate circumstances in which the steps taken to conduct a follow-up inquiry will be deemed an "internal investigation" for Rule 342.21 purposes, and this guidance may be useful to firms making this determination under proposed Rule 3110(d)(1). FINRA-only members—for whom this requirement will be new—may also want to consider, by analogy, the factors they review when answering Question 7B on Form U5, which asks whether a terminated individual is or was at termination under internal review for certain kinds of misconduct.
Firms will not only need to have policies that clearly indicate which inquiries will be deemed internal investigations, they will also need processes to track internal investigations to ensure that they are reported properly, as required by the new rule. Firms will also need to consider the relationship between reporting required by Rule 3110(d)(2)(A), Rule 4530(b) and Form U5 Questions 7B and 7F. For example, while a filing on Form U5 would obviate the need for a filing pursuant to Rule 4530(b), it would not obviate the need for quarterly filings under Rule 3110(d)(2)(A). Note too that unlike Rule 4530(b), the Rule 3110(d)(2)(A) filing with respect to a particular "internal investigation" needs to be updated each quarter through the quarter in which the "internal investigation" is terminated. Conceivably, firms could be required to make quarterly and closing reports under Rule 3110(d)(2)(A) while at the same time providing information in response to Rule 8210 requests triggered by the 4530(b) or U5 filings.

3. Review of Correspondence, Including Internal Communications

FINRA Rule 3110(b)(4) requires a firm to have supervisory procedures to review incoming and outgoing written (including electronic) correspondence and internal communications relating to its investment banking or securities business. The new rule explicitly requires monitoring of internal communications. The procedures must require review of incoming and outgoing correspondence and internal communications that are of a subject matter that require review under FINRA rules and federal securities laws. These include, without limitation, certain communications between research and non-research personnel (NASD Rule 2711(b)(3) and NYSE Rule 472(b)(3)), certain communications with the public that require a principal's preapproval (FINRA Rule 2210), and identification and reporting of customer complaints (FINRA Rule 4530). Firms that have not already done so may need to identify FINRA and other securities rules that require review of communications and adjust their review protocols accordingly.
Note that consistent with existing FINRA guidance in Regulatory Notice 07-59 on supervising internal communications, a supervisor or principal may delegate certain review functions to persons who need not be registered. 

4. Reporting of Customer Complaints

The new FINRA Rule 3110(b)(5) requires a firm to have supervisory procedures to capture, acknowledge and respond to all written (including electronic) customer complaints. In line with prior pronouncements, FINRA recognized that oral complaints are "difficult to capture and assess, and may raise competing views as to the substance of the complaint being alleged," and did not include oral complaints in the new requirements. In addition, FINRA is encouraging firms to facilitate reporting of written customer complaints.

5. Supervision of Supervisory Personnel

The FINRA Supervision Rules eliminate explicit producing manager supervisory requirements in favor of procedures designed to address conflicts more generally. Instead, a firm must have procedures to prohibit its supervisory personnel from (1) supervising their own activities; and (2) reporting to, or having their compensation or continued employment determined by, a person the supervisor is supervising. FINRA noted that it believes addressing the supervision of all supervisory personnel, rather than just producing managers, is better designed to prevent supervisory situations from occurring that would not lead to effective supervision.
FINRA Rule 3110(b)(6) also requires a firm to have procedures reasonably designed to prevent the required standards of supervision from being compromised by conflicts of interest. Conflicts of interest may arise from the supervised person's position, the amount of revenue such person generates for the firm or any compensation that the supervisor may derive from the associated person being supervised. Importantly, FINRA noted that this provision does not impose a strict liability obligation to eliminate all conflicts of interest, but rather requires that the supervisory procedures be reasonably designed despite the firm's conflicts of interest.
At the Supervision Webinar, FINRA personnel explained that for small firms, multiple principals should review key firm documents such as FOCUS reports to ensure compliance with the new rule.

New FINRA Rule 3120 (Supervision)

For firms with $200 million or more in gross revenue, the new rules added specific topics that must be covered in supervisory control reports. New FINRA Rule 3120(b) adds specific content requirements for the annual report to senior management for members with reported gross revenues of more than $200 million (total revenue less, if applicable, commodities revenue) on their prior year's FOCUS reports, based largely on requirements in NYSE rule 342.30. These firms are required to include in the report detailed information about customer complaints and internal investigations made to FINRA during the preceding year, as well as the year's compliance efforts in a number of specific areas, and supervision and anti-money laundering efforts.

1In addition, new FINRA Rules 3150 (Holding of Customer Mail) and 3170 (Tape Recording of Registered Persons by Certain Firms) replace NASD Rules 3110(i) and 3010(b)(2) (often referred to as the "Taping Rule"), respectively. Consolidated Supervision Rules; Regulatory Notice 14-10, March 2014, available at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p465940.pdf
2 Financial Industry Regulatory Authority; Notice of Filing of a Proposed Rule Change to Adopt Rules Regarding Supervision in the Consolidated FINRA Rulebook, 78 Fed. Reg. 40792 (Jul. 8, 2013) ("Proposal"), at 40801.
3 Proposal at 40803.
4 See http://www.finra.org/Industry/Education/OnlineLearning/Webinars/P441139 ("Supervision Webinar").

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions