NASD Rule 3012 and FINRA Rule 3130
NASD Rule 3012(a)(1)(A) requires FINRA members to perform an annual test to verify that procedures are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA/NASD rules. The review must take into account the activities in which the FINRA member and its associated persons and registered representatives engage. And, if the test indicates a need, FINRA requires that its members create additional supervisory procedures (or make amendments to existing procedures) as required based on the review. Following the test, FINRA requires that each member prepare a report that is provided to senior management detailing that member’s supervisory controls, the summary of the test results, any significant identified exceptions, and any additional or amended supervisory procedures created as a result of the test.
FINRA Regulatory Notice 14-10 outlined changes to FINRA’s Supervision Rule, and specifically, the requirements of new FINRA Rule 3110 which replaces NASD Rule 3010 effective December 1, 2014. Key changes include: paragraph (b)(6) of Rule 3110 which eliminates “heightened supervision” requirements and imposes a requirement to review conflicts, paragraph (d)(3)(B) of Rule 3110 which requires a review of transactions with a view toward detecting insider trading, requirements to investigate and document reviews thereof, and specific requirements for the annual report including the firm’s system of supervisory controls, summaries of test results, and details of any additional or amended procedures required. Also, in response to FINRA’s report on conflicts (October 2013), Rule 3110 requires firms to have procedures in place to identify and mitigate conflicts, particularly in the instance of branch office inspections and supervision of personnel also responsible for supervising others. New Supplementary Material 3110.03 impacts OSJ supervision and requires an “on-site” principal at each OSJ. Rule 3110(e) requires firms to justify, in writing, why a supervisor can or must supervise more than one OSJ (if applicable).
FINRA Rule 3130 requires, among other things, that the CEO certify annually that the FINRA member has procedures in place to maintain, review, test and modify written compliance policies and procedures reasonably designed to achieve compliance with applicable rules and regulations.
Many FINRA members utilize outside consultants to conduct the NASD Rule 3012 review so that the executives of the broker-dealer can rely on the report of the consultant in order to make the required certification under FINRA Rule 3130. These assessments are required by Rule 3012 to be conducted every 12 months, unlike the AML Independent Test which is required to be conducted on a calendar year basis.
Mitch Atkins, FINRA’s former South Region Director, has over 21 years of experience in working with broker-dealer supervisory systems, assessing compliance, and preparing reports. Contact Mitch Atkins by calling FirstMark Regulatory Solutions at 561-948-6511.