Demystifying FINRA Rule 3110: A Comprehensive Overview

What is FINRA Rule 3110?

FINRA Rule 3110, one of FINRA’s most important rules and a rule that factors in nearly every one of its examinations, requires a member firm to establish and maintain a system to supervise the specific activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules.

The rule details requirements for a firm to have reasonably designed written supervisory procedures (WSPs) to supervise the activities of its associated persons and the types of business in which it engages.

CCO Responsibilities

A firm’s supervisory obligations under Rule 3110 rest with the firm and its president, and flow down by delegation to the firm’s designated supervisors. The firm’s president, not its CCO, takes ultimate responsibility for compliance with all applicable requirements unless and until particular functions are delegated to another person in the firm.

A CCO is a primary advisor to the firm on its overall compliance scheme and the particular rules, policies, and procedures that the firm adopts; responsibility for operating the business in a compliant fashion rests with the firm’s management and supervisors. Neither Rule 3110 nor Rule 3130 attach specific supervisory responsibilities to a CCO.

In a broker-dealer, the supervisory program and written procedures, largely manifested through the WSPs or compliance manual, are just one input into the supervisory system, a large one perhaps, but only one. The other components shaping supervision are the firm’s culture, the example and message from executive management, the firm’s incentive structure, hiring and firing, and staffing.

Key Components of FINRA Supervision Rule 3110

Insufficient WSPs for New or Amended Rules

Some firms did not adequately address newly adopted or amended rules by developing controls to address the new requirements applicable to their business and updating their WSPs accordingly.

Limited Supervision and Internal Inspections

Some firms did not have reasonably designed branch supervision and inspection programs. In particular, some firms did not adequately understand the activities being conducted through their branch offices and failed to address the unique risks of each branch location.

Inadequate Supervision of Account Statements, Consolidated Account Reports and Other Forms

FINRA found that some firms did not consistently maintain accurate information in account documents, which impacted their ability to reasonably supervise account activity.

Insufficient Supervision for Specific Types of Accounts

Some firms failed to update timely their watch and restricted lists, or reasonably identify and restrict account activity susceptible to insider trading.

Reasonable designed WSPs must describe:

• the specific individual(s) responsible for each review,
• the supervisory activities such persons will perform,
• the frequency of the review, and
• the manner of documentation.

Further, WSPs must be regularly updated to address compliance with new or amended rules (such as Reg BI, Form CRS, CAT reporting, and remote branch office inspections, among others) and changes in the firm’s businesses, structure and organization, personnel, and governance.

FINRA 3110 Common Deficiencies

FINRA has noted in its examinations, the following supervisory deficiencies:

• Insufficient WSPs for New or Amended Rules. Some firms did not adequately address newly adopted or amended rules by developing controls to address the new requirements applicable to their business and updating their WSPs accordingly.

• Limited Supervision and Internal Inspections.  Some firms did not have reasonably designed branch supervision and inspection programs. In particular, some firms did not adequately understand the activities being conducted through their branch offices and failed to address the unique risks of each branch location.
• Inadequate Supervision of Account Statements, Consolidated Account Reports and Other Forms.  FINRA found that some firms did not consistently maintain accurate information in account documents, which impacted their ability to reasonably supervise account activity.
• Insufficient Supervision for Specific Types of Accounts.  Some firms failed to update timely their watch and restricted lists, or reasonably identify and restrict account activity susceptible to insider trading.

Empower Your Team With Comprehensive Compliance

Oyster Consulting’s  broker-dealer compliance consultants understand the complexity of achieving compliance with FINRA Rule 3110. We are former regulators and industry leaders who know the issues you face, and provide reasonable, practical compliance solutions.

Our experts assist in creating and updating procedures and compliance manuals to align with the requirements outlined in FINRA Rule 3110. Our team will evaluate your firm’s existing supervisory systems and recommend improvements to ensure they meet regulatory standards. This includes implementing robust oversight mechanisms and establishing processes for monitoring and addressing compliance issues.

Modernize Your Compliance Program

Today’s industry demands an efficient and effective compliance program.  Oyster Solutions’ powerful integration and automation provide the surveillance tools your firm needs, accurate supervision and the reporting structure that regulators demand, all while giving your employees a streamlined, easy to follow experience.