FINRA Rule 3110 Supervision requires a firm to establish and maintain a system to supervise the activities of its associated persons. Furthermore, the supervisory process seeks to achieve compliance with the applicable securities laws and regulations and FINRA rules.
In light of the coronavirus outbreak (COVID-19), FINRA released a very valuable resource, FAQ Related to Coronavirus Pandemic. On April 16th, FINRA released important updates to this resource related to relief for certain broker-dealer supervision requirements. Broker-dealers and their employees are braving a whole new world with various work from home, virtual meeting, and operations challenges. With office doors closed and employees no longer in central locations, supervision may be more difficult than ever. Below are a few items where FINRA has provided areas of relief.
A firm may choose to direct or forward firm mail to an associated person’s residence. This is in cases where firms do not have the option of collecting it in a central location for principal review and handling. This relief is given to ensure that the firm continues to have a level of required principal supervision over the process in accordance with FINRA Rule 2210 Communications with the Public.
If possible, the firm should have mail forwarded directly to the principal’s residence for further review. Alternately, under extenuating circumstances where that is not possible, FINRA dictates that “the firm must ensure that it has implemented a supervisory structure reasonably designed to supervise the activities of its associated persons, including implementing controls for the handling of customer correspondences received so that a principal may complete the appropriate reviews.” This includes proper documentation of procedure changes including risks, privacy of client information, and books and records.
Depending on the activities conducted at the residence during this time, it may qualify as a branch office under FINRA Rule 3110(f)(2) Supervision. However, as provided in Regulatory Notice 20-08, a firm is not required to file a Form BR to register a temporary branch office resulting from an emergency relocation due to the pandemic.
Timelines for FINRA Rule 3120 and 3130 Certification Reports
FINRA Rule 3120 requires a detailed report to be prepared by a designated principal(s), no less than annually, detailing the firm’s supervisory control system and submit it to senior management. A firm may decide to work throughout the year to test and identify areas and mitigation actions for the report; however, the report submitted to senior management must include a summary of the test results and significant identified exceptions and any additional or amended supervisory procedures created in response to the test results.
FINRA Rule 3130 requires the firm’s chief executive officer(s) (CEO(s)) to certify annually that the firm has in place processes to establish, maintain, review, test, and modify policies and procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. A report must evidence this process for the firm’s board of directors and audit committee (or its equivalent). The CEO(s) must further certify to having met with the CCO(s) in the preceding 12 months to discuss the firm’s processes and other specified matters.
FINRA granted temporary relief for some firms regarding both FINRA Rule 3120 and FINRA Rule 3130. For 3120 Reports, members whose annual deadline for submitting the report falls between March 1 and May 1, 2020 now have until May 31, 2020 to complete and submit the report.
For 3130 Certifications, the deadline for executing the certification is no later than the anniversary date of the previous year’s certification. As such, members may have different deadlines for their next certification. A member whose deadline falls between March 1 and May 1, 2020 have until May 31, 2020 to complete the certification process. Additionally, any meetings between the CCO and the CEO may also be conducted virtually.
FINRA makes updates to the FAQs, so it is important to check back often for the most up-to-date information.
Please contact us today if you would like to learn more about how our expert consultants can help your firm and its supervisory process.
For additional considerations for firms during these unprecedented times, check out our previous blog posts related to COVID-19.