For the past several years, FINRA has engaged in a process to revise and consolidate its supervision rules. In a June 2013 filing,3 FINRA abandoned its prior proposal to require broker-dealers to supervise under proposed Rule 3110(a) its lines of business outside of the securities industry. The proposed rules, which were originally filed with the SEC in 2011, had initially included supplemental material providing that for a member’s supervisory system required by proposed FINRA Rule 3110(a) to achieve compliance with FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade), it must include supervision for all of the member’s business lines regardless of whether they require broker-dealer registration.
Proposed FINRA Rule 3110 is based primarily on existing requirements in NASD Rule 3010 and Incorporated NYSE Rule 342 relating to, for example, supervisory systems, written procedures, internal inspections, and review of correspondence. Proposed FINRA Rule 3110 also incorporates provisions in other NASD rules relating to supervision, such as NASD Rule 3012. Proposed FINRA Rule 3110(a) requires a member to have a supervisory system for the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA and Municipal Securities Rulemaking Board rules.
According to the June 2013 filing, FINRA has decided that the best course is to eliminate the proposed supplementary material relating to other business lines from the proposed rule. Instead, FINRA will continue to apply FINRA Rule 2010’s standards to non-securities activities, consistent with existing case law. Rule 2010 is FINRA’s general requirement of broker-dealers: "a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade."
In the structured product market, many broker-dealers market structured CDs, which are not securities, using a manufacturing and distribution methodology that is similar to that used for structured notes, which are subject to FINRA’s supervision rules. Often, the personnel and processes involved in the structured CDs overlap with the personnel and processes for structured securities. Accordingly, as a practical matter, while the proposed FINRA rules would not require a supervision system for the structured CD line of business, most broker-dealers manage and monitor that business in a manner that is consistent with their structured CDs. And in light of continuing regulatory attention from FINRA and other regulators to these products, that degree of careful supervision remains appropriate.