FINRA’s Supervision Rules: The Sequel

Pointing-Out-Rules-in-BookIn our last post, we detailed the provisions of FINRA’s June 2st proposed supervision rule changes concerning One-Person OSJs.

As promised, this post will address additional sections of the proposed rule that deal with the review of internal communications, maintaining records, and supervisory procedures with respect to insider trading.

Monitoring Communications
The proposed rule changes maintain existing requirements for firms to have supervisory procedures to review written and electronic correspondence with the public. However, FINRA has proposed additional requirements for firms to review its internal communications relating to investment banking or securities business. Firms can use a risk-based approach to implement this new requirement. Registered principals would be required to review these types of communications and record their reviews in writing. The proposed changes require firms to capture the internal communications and correspondence of associated persons relating to investment banking or securities business and make those records available to FINRA upon request. For customer complaints, firms are required to include procedures to capture, acknowledge, and respond to all written and electronic issues, though oral complaints do not have to be recorded the same way.

Insider Trading
Another section of the proposed rule changes is designed to increase firms’ requirements to monitor potential insider trading activity. Members would have to alter their supervisory procedures in order to review securities transactions of advisors and other “covered accounts” to identify trades that may violate provisions of the Securities Exchange Act, SEC insider trading rules, or FINRA rules. The proposed definition of “covered account” is very broad, and includes accounts held by the following:

  • The advisor’s spouse, domestic partner, child (including adult children), parent, sibling, son-in-law, daughter-in-law, father-in-law, and mother-in-law;
  • Any account introduced or carried by the firm in which the advisor has a beneficial interest;
  • Any account introduced or carried by the firm over which the advisor has the authority to make investment decisions; and
  • Any account of an advisor that is disclosed to the member pursuant to NASD Rule 3050 (Transactions for or by Associated Persons) or NYSE Rule 407 (Transactions – Employees of Members, Member Organizations of the Exchange).

FSI commented that the expansive definition of “covered accounts” will contribute significantly to the substantial compliance burden of firms and advisors while contributing little to insider trading detection. In contrast, FINRA has touted the superior capabilities of its own electronic surveillance systems, which is the primary source of insider-trading leads.

What are your thoughts on this new rule? Let us know in the comments section!


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