A firm’s supervisory system serves as its foundation to building a robust compliance program. It is important that firms tailor their supervisory system to their business activities, how the firm is organized and operated, regulatory requirements, and other key considerations determined by the firm.
The minimum requirements of a supervisory system include:
- Designating Principals Responsible for Supervision;
- Designating Offices of Supervisory Jurisdiction;
- Assigning Supervisors for Registered Representatives and Designating OSJ/Non-OSJ Branch Supervisors;
- Determining Qualifications of Supervisory Personnel;
- Annual Compliance Meeting; and
- Review of Supervisory System.
Written Supervisory Procedures
Developing a supervisory system is the first step. Next, firms must document their supervisory system. Written supervisory procedures are critical for firms as they document the supervisory system that a firm has established to ensure that compliance guidelines are being followed and to prevent and detect prohibited practices. Additionally, written supervisory procedures provide stability and continuity as personnel take on different responsibilities or leave the firm.
FINRA Rule 3120
In order for a firm to truly know whether its supervisory system and written procedures are adequately designed to achieve compliance, firms must test them. FINRA Rule 3120 requires that each member firm designate and specifically identify to FINRA one or more principals who shall establish, maintain, and enforce a system of supervisory control policies and procedures that:
- test and verify that the member’s supervisory procedures are reasonably designed with respect to the activities of the member and its associated persons, to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules; and
- create additional or amend supervisory procedures where the need is identified by such testing and verification.
A Rule 3120 report must be prepared and submitted to the firm’s senior management no less than annually. The report must detail the firm’s system of supervisory controls, the summary of the test results, and any significantly identified exceptions. The firm must also include in the Rule 3120 report whether it implemented any additional supervisory procedures or amended its supervisory procedures in response to the test results.