FINRA Rule 3110: 10 Ways To Create Effective Supervision Structures
At the recent FINRA Annual Conference, the mother-of-all broker-dealer rules was inspected at close range. From spreading the love to setting the record straight, here are the key takeaways
“The mother of all rules.” That’s how Elizabeth Page, Vice President and Director of FINRA’s Boston office, described FINRA Rule 3110 at the supervisory body’s recent annual conference. The description is apt. As any broker-dealer knows all too well, Rule 3110 details requirements firms must follow for their written supervisory procedures, and serves as the base leg of the FINRA rule-triad that establishes the overall firm and employee supervision scheme broker-dealers must have in place to be compliant.
The FINRA conference panel session on Rule 3110 was called “Creating Effective Supervision Structures.” Panel members were all experienced compliance professionals—either on the FINRA side or private sector side—and offered sharp insights on how best to achieve and maintain Rule 3110 compliance. Today’s blog contains excerpts from that session, and draws out 10 distinct lessons and takeaways.
1. FIRMS ARE INVESTING IN PEOPLE AND TECH
Ronald Chan is Managing Regulatory Coordinator, Office of Risk Oversight and Operational Regulation, at FINRA. Asked about trends he’s observed of late in the firms under his supervision, Chan offered: “Two things come immediately to mind. One is the investment in people. We’re seeing firms focus more on training, educating the staff, and encouraging rotations, so you produce more well-rounded supervisors. Two, I’d be remiss if I didn’t mention technology. That’s the key, as we at FINRA see it, to driving efficiencies as well as effectiveness. It’s a really good way to augment supervisory processes.”
2. A FLEXIBLE SUPERVISORY APPROACH IS KEY
Asked about his number one consideration when it comes to supervision, one chief compliance officer from a big, global bank replied: “The biggest consideration for us is to have an adaptable supervisory structure. We have multiple business lines to cover, and there are many different approaches to supervision. Even within the same firm, we’re faced with decisions we have to make, where two different supervisory approaches can be equally effective for different business units. One approach isn’t necessarily better than the other.”
3. TEMPLATES ARE FINE, BUT ARE JUST THE START
Dennis Beirne is COO and CCO at People’s Securities, Inc., a medium-sized shop at which human resources can be scarce and people must take on multiple jobs. Hence, efficiencies must be found. “As regards written policy,” says Beirne, “like at many firms we’ve gone out to a vendor and purchased a template solution. But we all know that’s just the starting place. You have to spend a lot of time customizing the forms.”
4. GET OUT AMONGST THE TROOPS
And it’s not just about the time spent customizing the forms; it’s also how you go about customizing them. “Too often,” says Beirne, “when compliance staff start to customize, they write them the way they want them to be rather than getting out into the ranks and observing what’s occurring, and understanding how the processes work in the front office. Only then can written policy be appropriately tailored and proper controls developed around it.” It also can’t be stressed enough that employees must actually know what’s in the written policy. Chan: “Many times, when FINRA staff go into the field, they find that supervisors don’t even know what’s in the forms. In those cases, compliance is checking the box and isn’t really concerned about what’s happening in the real world.”
5. RULE 3110 COMPLIANCE IS A TWO-WAY STREET
At some financial institutions, compliance helps supervisors draft written policy. This extended time spent with supervisors leads to a greater understanding of what they do on a daily basis. It’s a good place for both parties to start. “The first thing we say,” says our global bank CCO, “is let’s give credit to the things you’re already doing, as part of your day-to-day responsibilities, and let’s document and memorialize those. Supervisors are risk managers in their own right, and regulatory risk is just one of many risks they must monitor and manage on a daily basis.”
6. APPOINT A DESIGNATED REG FOLLOWER
As obvious a duty as it may seem, not every firm has someone tasked with keeping an eye on regulatory changes. Again, our big bank CCO: “We have someone designated to follow changes in regs and keep track of new rules and enforcement actions. Make it someone’s job, so you can be sure nothing falls through the cracks. That person doesn’t have be an expert on every regulation, but it’s not too hard to set up emails notifications from FINRA, the SEC, or other SROs your firm may be a member of.”
7. APPOINT A DESIGNATED AWC FOLLOWER
And once new regs are identified, they have to be brought to the business with enough lead time to successfully implement them. Per one of our panelists, this has been easier of late. “Given the current administration, the pace of new regulation has slowed a bit, which has given us a chance to catch our breath. But we also spend time following enforcement matters at other firms: keeping track of what our peer group is settling for, following the AWCs that are published. And then we make sure we don’t have similar issues at our own firms. Peer group issues can sometimes be leading indicators.”
8. SPREAD THE LOVE AND SPREAD THE WORK
When you’re in a position of authority and you need to delegate work, it’s human nature to keep going back to the same person, particularly if that person has demonstrated her reliability, but it can also get you into trouble. “Watch out for too many processes going through or pointing to one individual,” advises our big bank CCO. “Maybe this person’s been with the firm a long time. As a compliance officer, you need to be looking at key individuals and determining if there’s backup. There’s no downside to having additional principals registered, even if they’re not acting as the day-to-day, go-to person.”
9. TECH IS THERE TO AUGMENT THE PROCESS
If you’re a paper-based shop and are either edging into more of a tech-based conflicts monitoring solution or preparing to make a full-on leap, you might be wondering how you can be sure you’re implementing a proper supervisory structure. “Always remember,” says FINRA’s Ronald Chan, “tech is there to augment the process. You’re processing more data, a larger volume, but the basics don’t change. We do look at your peers, as well, to see what tech solutions they’ve implemented.”
10. TECH IS THERE TO SET THE RECORD STRAIGHT
Asked to provide a real life example of an event that triggered a change to the firm supervisory system, one panelist offered this: “We’re a paper-based shop. A few years back we were finding that documentation in our main office folders was different than what was in the branches, where the deals were done. This was concerning. We couldn’t make a determination of what the customer walked out the door with, so we implemented a very detailed error-correction policy. Deal documents have to match up, especially if it ever comes to an arbitration panel.”
