FINRA Supervision Rules: What You Need to Know in 2015

SEGMENT 1:

Kosha Dalal

Associate Vice President and Associate General Counsel   

Financial Industry Regulatory Authority, Inc.        

Lawrence P. Stadulis 

Partner 

Stradley Ronon Stevens & Young, LLP     

            and

Merrill R. Steiner       

Partner 

Stradley Ronon Stevens & Young, LLP     

• This presentation covers the extensive new FINRA consolidated supervision rules, which replace or change the former related NASD supervision rules. 
• The new FINRA Rules are effective on December 1, 2014.
• Consequently, members should, by that date, be aware of the extensive nature of the new FINRA rules and should incorporate the changes in their written supervisory procedures, designate principals and representatives, and implement their procedures as changed.
• New Consolidated Supervision Rule.  The new supervision rule (3110) continues to require a supervisory system “reasonably designed” to achieve compliance with securities laws and regulations, with the following changes, among others:​
  • Supervision in Each Office.  Each OSJ must have an “on-site principal” with a regular and routine physical presence at the OSJ, with a new general presumption that a single principal may not be designated for more than one OSJ.
  • Scheduled Inspections of Locations.  A new presumption is imposed that a non-branch location will be inspected at least every three years, and if the period is longer than that, the member must document the factors used to support the longer period.
  • Preventing Compromise of Office Inspections.  Less prescriptive requirements are imposed to prevent office inspections from being compromised by conflicts of interest and, in most cases, an associated person may not conduct a location’s inspection where either assigned to the location or directly or indirectly supervised by, or reporting to, a person assigned to the location.
  • Written Review of All Transactions.  For the currently required written review of all transactions relating to the member’s investment banking or securities business, the member may now use a reasonably designed risk-based review system that permits focus on the greatest risk areas for violations.
  • Review of Communications With the Public.  New procedures call for review of internal communications with a subject matter that may impact compliance with laws and rules and for undertaking risk-based reviews of whether other additional types of  communications should be subject to review, with new documentation and delegations.
  • Review and Investigation of Potential Insider Trading.  New supervisory procedures must call for review and investigation of potential insider trading, based on review of transactions effected for the member, its associated persons (personal or controlled accounts) at the member’s, or a disclosed member’s location, or certain family members of associated persons, to identify potential insider trading or other manipulative or deceptive devices.
  • Preventing Compromise of Supervision.  New supervisory procedures must prohibit associated persons from supervising their own activities or reporting to, or having their compensation or continued employment determined by, a person they are supervising and must require policies and procedures to prevent conflicts of interest between the supervisor and supervised person that may compromise the supervisory system.
• Supervisory Control System.  The new rule (3120) keeps the requirement to designate and identify to FINRA one or more principals to maintain and enforce, through testing and verification, a supervisory control system designed for the activities of the member and its associated persons, with the following change:
  • For members with more than $200 million in gross annual revenues, the annual report to senior management must include, where applicable, a listing of reports for the year to FINRA of customer complaints and internal investigations, and a description of the prior year’s compliance efforts, including procedures and educational programs relating to certain operating areas, practices and supervision. 
• Holding of Customer Mail.  The new rule (3150) continues to permit a member to hold customer’s mail for up to three months if the customer will not receive mail at the usual address, where certain conditions are met, with the change that customers may request a longer holding period, provided the customer and member meet several conditions.
• Tape Recording of Registered Persons by Certain Firms. The new rule (3170) keeps the previous requirements without any substantive changes, but 
  • includes a definition clarifying the term “tape recording” and requires a member that is notified by FINRA, or otherwise has actual knowledge, that it is a “taping firm” (based on how many of its “registered persons” were associated with a “disciplined firm” during the past 3 years) to have and enforce special written procedures for supervising the telemarketing activities of all of its registered persons, including procedures for tape recording and reviewing all telephone conversations.
  • To assist firms in complying with this new rule, FINRA provides a “Disciplined Firms List” identifying those firms that meet the definition of “disciplined firm.”

SEGMENT 2:

Rogge Dunn   

Partner 

Clouse Dunn LLP

Understanding and Preparing for a Successful OTR (On the Record Interview)

At some time in their career, most Financial Advisors will have to give FINRA an OTR (on the record interview).  An unsuccessful OTR can have disastrous  consequences, including censure, fine and permanent suspension of all FINRA licenses.

This presentation explains why FINRA pursues OTRs, Financial Advisor’s rights and obligations when FINRA requests an OTR, and how to prepare for an OTR to protect your reputation and avoid a fine, censure and/or license suspension.

At an OTR a Financial Advisor must answer any questions asked by a FINRA investigator and/or attorney and produce documents.  The OTR is taken under oath and, like a deposition, a court report makes a permanent stenographic record. 

An OTR can involve your conduct or the conduct of the wirehouse/investment bank where you work, the conduct other Financial Advisors, analysts, actuaries of the wirehouse/investment bank where you work or an insurance company whose financial products you sell.