FINRA Rule 3110 provides the requirements for building and maintaining a supervisory structure that is in compliance with rules and regulations. Among other requirements, this rule addresses the documentation and supervision of supervisory personnel in 3110(b)(6).
What is FINRA Rule 3110(b)(6)?
Rule 3110(b)(6) requires firms to document supervisory functions and responsibilities of each registered supervisory principal. It also establishes procedures to prohibit self-supervision and situations in which the supervisory principal reports to and/or has their compensation or continued employment determined by an individual or individuals that they are supervising. Lastly, it provides a carve-out for those who are unable to meet the requirement due to size or other circumstances.
Overall, the purpose of the rule is to avoid conflicts related to a principal overlooking compliance red flags due to their involvement in a transaction or line of business.
Supervision in Policies and Procedures
Generally speaking, firms should have procedures in place to layer supervisory responsibilities. The rule seeps into many areas of compliance that firms may often overlook. These may include attestations and disclosures, trading, email and social media surveillance, correspondence, and risk reviews. First, firms should survey their current compliance foundations to determine where supervisors may be approving or supervising their own work. Then, policies should be put in place to avoid those conflicts.
Limited Exception to Rule 3110(b)(6)
Small firms may have a limited supervisory structure and only one supervisor in many cases. Other firms’ supervisory personnel positions may make it difficult to comply with the rule. FINRA is understanding of this and provides an exception to the rule on supervising supervisory personnel in circumstances where compliance is not possible because of the firm’s size or a supervisory personnel’s position in the firm.
When relying on this limited exception, firms must document the factors used to reach its determination and how their supervisory arrangement for such supervisory personnel otherwise complies with FINRA Rule 3110’s requirement of having a supervisory system and written supervisory procedures that are reasonably designed to achieve compliance with applicable rules and regulations. FINRA’s FAQ on Supervision and Rule 3110 provides useful guidance for those firms who would like to rely on this exemption.
MasterCompliance provides expert consulting in this space. If you would like to explore additional assistance or services, please contact us.