In May 2008, FINRA issued Regulatory Notice 08-24 seeking comments on its proposed supervision rules. FINRA received at least 47 comment letters in response. At FINRA’s Annual Conference, on May 28, 2010, FINRA staff stated that they anticipate filing a rule proposal with the SEC in as soon as two weeks.
The rule proposal is part of FINRA’s consolidation of NASD’s and NYSE’s rulebooks. Many of the proposed changes involve the adoption of rules with minor variances from existing NASD or NYSE rule language. Other proposals, however, represent significant changes from the current rules. Two proposals in particular have garnered a lot of discussion and debate: Proposed FINRA Rule 3110(a)(2), which addresses review of business activities by a supervisory principal, and Proposed FINRA Rule 3110(b)(3), which addresses supervision of outside securities activities.
Current NASD Rule 3010(b) requires a firm to have supervisory procedures for all business activities in which it engages. Proposed FINRA Rule 3110(a)(2) would require the designation of a registered principal to supervise each type of business in which the firm engages, regardless of whether registration as a broker-dealer is required for that activity. FINRA staff stated during the Annual Conference that the upcoming rule filing will revise this proposal so that a registered principal will only have to be designated to supervise those types of business that require registration. Even so, firms would still have to employ policies and procedures reasonably designed to achieve compliance with applicable rules for all business activities, including the anti-fraud provisions of the federal securities laws.
Notably, FINRA’s proposal creates an exception for bank-related securities activities of dual employees that are exempt from registration as a broker or dealer. Accordingly, under Proposed FINRA Rule 3110(b)(3), member firms will not have to supervise bank-related securities activities of dual employees, provided that the member receives written notice of, and approves, such activities. However, member firms must receive written assurance that the bank or supervised bank affiliate will: (1) have a comprehensive view of the dual employee’s securities activities; (2) employ policies and procedures reasonably designed to achieve compliance with the anti-fraud provisions of the federal securities laws; and (3) give prompt notice to the member of any dual employee’s violation of such policies and procedures.
There will be an opportunity to submit additional comments to the SEC after FINRA files its proposal.