On June 21, 2013, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the SEC to adopt the consolidated FINRA supervision rules.
The proposed consolidated rule change retains many of the existing requirements for supervisory systems, including the establishment and maintenance of written supervisory procedures, the designation of principals, and the registration of branch offices and Offices of Supervisory Jurisdiction (OSJs). The new rule clarifies, however, that a registered principal assigned to a one-person OSJ cannot supervise his or her own activities if he or she is engaged in business activities other than the supervision of associated persons.
The registered principal of a one-person OSJ must also be under the supervision of another registered “senior principal” who is responsible for supervising and conducting on-site supervision of the OSJ on a “regular periodic schedule” to be determined by the member firm. In establishing this “regular periodic schedule,” member firms “shall consider, among other factors, the nature and complexity of the securities activities for which the location is responsible, the nature and extent of contact with customers, and… disciplinary history.”
What does all that mean? Essentially, FINRA wants firms to increase their supervision of advisors, and is especially concerned with producing one-person OSJs engaged in self-supervision. The majority of firms do not allow self-supervision, however, and have robust remote supervision systems that ensure effective compliance and monitoring. The proposed rule change may require some firms to hire new full-time compliance staff to act as “senior principals” to One-Person OSJs, which will increase costs to clients and advisors. FSI submitted a comment letter opposing many of these proposed changes, and requesting additional clarity on other aspects of the rule. Click here to read our comment letter.
Stay tuned for more on this proposed rule change – we’ll be writing a follow-up piece dealing with the changes pertaining to the review of internal communications, records, and insider trading.
In the meantime, feel free to share your thoughts on the rule as it would apply to your business and your clients in the comments section.