Broker Dealer- Supervisory Controls Testing
Background
For years, under NASD Rule 3010 and NYSE Rule 342, broker dealers have been required to have supervisory systems and written supervisory procedures in place that are reasonably designed to ensure compliance with applicable rules and regulations. However, NASD Rule 3012, FINRA Rule 3130 and amended NYSE Rule 342 have raised the bar on regulatory expectations regarding supervisory and compliance systems.FINRA Rule 3130 requires every CEO of a broker dealer to certify, no later than December 1 of 2005, that the broker dealer maintains a process to establish, maintain, review, test and modify written compliance and supervisory procedures.
FINRA Rule 3130 also requires that firms prepare a written report to be reviewed by the CEO, CCO and other appropriate officers prior to executing the certification. These reports must also be provided to firms’ boards of directors and audit committees. These reports should include the manner and frequency in which the processes are administered, as well as the identification of officers and supervisors who have responsibility for such administration. Firms’ CEOs and CCOs are required to have at least one meeting annually to discuss the findings of the reports.
NASD Rule 3012 requires your firm to identify one or more principals who have established, maintained and enforced a system of supervisory control policies and procedures that test and verify that the firm’s supervisory procedures are reasonably designed to comply with applicable securities laws and FINRA and NASD rules and amend those procedures when necessary. The identified principal(s) must submit to senior management, no less than annually, a report detailing the firm’s system of supervisory controls, a summary of test results, significant identified exceptions and any additional or amended supervisory procedures created in response to the test results. NASD Rule 3012 also contains specific requirements for supervision of producing managers and supervisory controls for transmittal of customer funds, change of address and changes in customers’ investment objectives.
SCA Program
SCA offers the following program to help firms comply with the rules. SCA’s program is based on feedback from FINRA regarding expectations for program implementation.SCA’s program:
- Develops a list of business activities and applicable rules, regulations and internal controls for each activity;
- Conducts a “gap analysis” of firms' current supervisory procedures by assessing whether their procedures adequately address all applicable rules, regulations and internal policies and controls for each business activity
- Develops new or modified procedures where material gaps in the current procedures exist;
- Develops and implements a verification and testing plan for the firm’s' procedures;
- Develops a reporting model to meet the requirements of NASD Rule 3012 and FINRA Rule 3013; and
- Creates a model that may be used to support the CEO certification and reporting requirements in future years.
