finra supervision rules: what you need to know in 2015 live webcast

Speaker Firms and Organization:

Stradley Ronon Stevens & Young, LLPLawrence P. Stadulis

Partner

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Presented By:

October 24, 2014

1

Partner Firms:

Stradley Ronon Stevens & Young, LLPMerrill R. Steiner

Partner

Financial Industry Regulatory Authority, Inc.

Kosha DalalAssociate Vice President and Associate

General Counsel

Clouse Dunn LLPRogge Dunn

Partner


October 24, 2014

2

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Partner Firms:

October 24, 2014

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Counseling clients since 1926, Stradley Ronon has helped private and public companies – from small businesses to Fortune 500 corporations – achieve their goals by providing pragmatic, value-driven legal counsel. With seven offices throughout the mid-Atlantic region, their responsive team of more than 200 attorneys seamlessly addresses the full spectrum of our clients’ needs, ranging from sophisticated corporate transactions to complex commercial litigation. Stradley Ronon is nationally recognized for having one of the premier investment management practices in the United States, representing investment company clients with more than 1,000 separate mutual funds and assets under management approaching $2 trillion. Stradley’s investment management lawyers have substantial experience representing registered broker-dealers, including handling all aspects of initial formation and registration and interfacing with the SEC, FINRA and the IRS on broker-dealer matters.


Brief Speaker Bios:

Kosha Dalal

Kosha Dalal is Associate Vice President and Associate General Counsel with FINRA’s Office of General Counsel. In this role, she provides legal guidance on various policy initiatives and rule changes/interpretations including, supervision, non-cash compensation, branch office, customer account statements, payments to unregistered persons and corporate actions. She has been with FINRA’s Office of General Counsel since 2000. Ms. Dalal also serves on FINRA’s Diversity Leadership Council. Prior to coming to FINRA, she was an associate with the law firm of Venable in Baltimore, MD, Kalkines Zall in New York, NY and Skaden Arps in New York, NY. Ms. Dalal attended Columbia University in New York, NY where she received a bachelor’s degree in political science and economics. She received her law degree from Brooklyn Law School.

October 24, 2014

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Lawrence P. Stadulis

Lawrence Stadulis is a partner in the Washington, D.C., office of Stradley Ronon, where he heads the firm’s Broker-Dealer Regulatory Practice and is a member of the firm’s Investment Management/Mutual Funds Practice Group. Mr. Stadulis advises clients in matters pertaining to the registration and regulation of broker-dealers, investment advisers and investment companies under federal and state securities laws and FINRA regulations. He handles a broad range of broker-dealer regulatory matters, including membership and continuing FINRA membership applications, written supervisory procedures and supervisory issues, advertising and marketing issues, periodic reporting and regulatory examinations issues. Mr. Stadulis is a frequent lecturer and author on legal matters pertaining to the broker-dealer and investment management industries. Before Stradley Ronon, Mr. Stadulis was a partner at another law firm, and before that, special counsel in the Office of Chief Counsel, Division of Investment Management, U.S. Securities and Exchange Commission.

Brief Speaker Bios:

Merrill R. Steiner

Merrill Steiner is a partner in the Philadelphia office of Stradley Ronon and member of the firm’s Investment Management/Mutual Funds Practice Group. Mr. Steiner focuses his practice on federal and state securities law, advising registered and private investment companies, investment advisers, broker-dealers and commodity trading advisors, as well as other corporations and businesses. His practice includes providing advice regarding compliance with regulations of federal and state securities and commodities regulatory authorities and self-regulatory organizations such as the New York Stock Exchange, the (FINRA) and the National Futures Association.

October 24, 2014

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Rogge Dunn

Rogge Dunn is a trial attorney and counselor for Fortune 500 companies, wirehouses and prominent Financial Advisors, executives and entrepreneurs. Dunn has developed a specialty involving significant matters in the financial industry. This includes regulatory issues, wrongful discharge, moving teams, non-competes, the Protocol for Broker Recruiting, promissory note defense and forfeiture of deferred compensation. He obtained the largest wrongful discharge arbitration award against Goldman Sachs for an FA in California. Dunn has represented a number of FAs who have given FINRA on the record statements. Dunn has won more than $2 billion in judgments and settlements for his clients. He has represented more than 10 FAs in Barron’s top 100 financial advisors nationwide. Dunn has won million dollar jury verdicts or arbitration awards in California, Texas, Louisiana and Arkansas.

► For more information about the speakers, you can visit: http://theknowledgegroup.org/event_name/finra-supervision-rules-what-you-need-to-know-in-2015-live-webcast/

http://theknowledgegroup.org/event_name/finra-supervision-rules-what-you-need-to-know-in-2015-live-webcast/

http://theknowledgegroup.org/event_name/finra-supervision-rules-what-you-need-to-know-in-2015-live-webcast/

In this two-hour LIVE webcast, a panel of distinguished professionals and thought leaders will help broker/dealers and financial advisors implement the new FINRA rules. They will discuss important new provisions of the new FINRA consolidated supervision rules and discuss best practices.

Key topics include:• Supervision (New FINRA Rule 3110)• Supervisory Control System (New FINRA Rule 3120 )• Holding Customer Mail (New FINRA Rule 3150 )• Tape Recording of Registered Persons by Certain Firms (New FINRA Rule 3170 )

And a lot more!

October 24, 2014

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Featured Speakers:

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SEGMENT 1:Kosha DalalAssociate Vice President and Associate General CounselFinancial Industry Regulatory Authority, Inc.

SEGMENT 1:

Lawrence P. StadulisPartnerStradley Ronon Stevens & Young, LLP

SEGMENT 1:

Merrill R. SteinerPartnerStradley Ronon Stevens & Young, LLP

SEGMENT 2:

Rogge DunnPartnerClouse Dunn LLP


Introduction

Kosha Dalal is Associate Vice President and Associate General Counsel with FINRA’s Office of General Counsel. In this

role, she provides legal guidance on various policy initiatives and rule changes/interpretations including, supervision, non-

cash compensation, branch office, customer account statements, payments to unregistered persons and corporate

actions. She has been with FINRA’s Office of General Counsel since 2000. Ms. Dalal also serves on FINRA’s Diversity

Leadership Council. Prior to coming to FINRA, she was an associate with the law firm of Venable in Baltimore, MD,

Kalkines Zall in New York, NY and Skaden Arps in New York, NY. Ms. Dalal attended Columbia University in New York, NY

where she received a bachelor’s degree in political science and economics. She received her law degree from Brooklyn

Law School.

October 24, 2014

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Introduction

Lawrence Stadulis is a partner in the Washington, D.C., office of Stradley Ronon, where he heads the firm’s Broker-Dealer

Regulatory Practice and is a member of the firm’s Investment Management/Mutual Funds Practice Group. Mr. Stadulis

advises clients in matters pertaining to the registration and regulation of broker-dealers, investment advisers and

investment companies under federal and state securities laws and FINRA regulations. He handles a broad range of broker-

dealer regulatory matters, including membership and continuing FINRA membership applications, written supervisory

procedures and supervisory issues, advertising and marketing issues, periodic reporting and regulatory examinations

issues. Mr. Stadulis is a frequent lecturer and author on legal matters pertaining to the broker-dealer and investment

management industries. Before Stradley Ronon, Mr. Stadulis was a partner at another law firm, and before that, special

counsel in the Office of Chief Counsel, Division of Investment Management, U.S. Securities and Exchange Commission.

Stadulis can be reached at [email protected], office: 202.419.8407 or cell: 202.378.8774, or on the Stradley Ronon

website at http://www.stradley.com.

October 24, 2014

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SEGMENT 1:



http://www.stradley.com/


Introduction

Merrill Steiner is a partner in the Philadelphia office of Stradley Ronon and member of the firm’s Investment

Management/Mutual Funds Practice Group. Mr. Steiner focuses his practice on federal and state securities law, advising

registered and private investment companies, investment advisers, broker-dealers and commodity trading advisors, as well

as other corporations and businesses. His practice includes providing advice regarding compliance with regulations of

federal and state securities and commodities regulatory authorities and self-regulatory organizations such as the New York

Stock Exchange (FINRA) and the National Futures Association.

Steiner can be reached at [email protected], office: 215-564-8039 or cell: 610-745-7996, or on the Stradley Ronon

website at http://www.stradley.com.

October 24, 2014

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SEGMENT 1:





The New FINRA Consolidated Supervision Rules

October 24, 2014

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SEGMENT 1:



SEGMENT 1:



Overview

This presentation is intended to cover the modifications to, and additions incorporated in, FINRA’s four new consolidated supervision rules, in the following order:

▫ Timing

▫ Highlights

▫ Organization

▫ Content of the Four Rules: Supervision – 3110

Supervisory Control System – 3120

Holding of Customer Mail – 3150

Taping Rule – 3170

▫ Practical Suggestions

15Stradley Ronon Stevens & Young, LLP

Timing

• All member firms must comply with the new rules by December 1, 2014.

▫ 38 days and counting

• Therefore, firms should make all changes and implement the changes by that date.

• If not already addressed, this is a priority; firms need to act quickly.

• Two of FINRA’s announced priorities in 2013 and 2014 for examinations are branch office supervision and conflicts of interest management policies and practices.


HighlightsWhat Amendments Do

• Rules restate and continue to apply same core supervision concepts.

• Rules codify a number of existing FINRA interpretations.

• Rules add new provisions or guidance, including, among others, in the following areas

▫ Presence of on-site principal for OSJ

▫ Risk-based review principles

▫ Avoiding conflicts of interest in supervision

▫ Calendar year inspection requirements

▫ Increased inspection report content

▫ Inspections by unregistered Persons

▫ Insider trading policies

▫ Increased content of report to senior management for large firms

• Clarification Regarding Supplementary Material. The adopting release states that the supplementary material at the end of Rule 3110 is part of the rule, and a provision’s location as supplementary material is intended to improve the readability of the rule without affecting the weight, significance, or enforceability of the provision.

Stradley Ronon Stevens & Young, LLP17

Highlights (Continued)

What Amendments Do Not Do

• Do not update the definitions of OSJs and branch offices

• Do not require that supervisory system be designed to include supervision of all of a member’s business lines irrespective of whether a particular business line requires registration

• Do not require a designated senior principal to have a physical presence on a regular periodic schedule at a one-person OSJ

• Do not expand the record retention period from three years to six years

• Do not include a requirement to capture and respond to oral complaints

• Do not require elimination of all conflicts of interest in supervision standards, which would in effect impose a strict liability standard


Organization

• The Rules essentially amend and replace existing requirements in previous NASD and NYSE rules and codify various previous provisions and interpretations under the law and rules, as follows: ▫ Supervision, Rule 3110

Replaces NASD Rule 3010 and corresponding provisions of NYSE Rules and Interpretations.

▫ Supervisory Control System, Rule 3120 Replaces NASD Rule 3012 and corresponding provisions of NYSE Rules

and Interpretations.

▫ Holding of Customer Mail, Rule 3150 Relocates NASD Rule 3110(i) into a separate standalone rule.

▫ Taping Rule, Rule 3170 Relocates NASD Rule 3010(b)(2) into a separate standalone rule.


Supervision Rule

Supervisory System Requirements• Main Office Registration. Codifies the long-standing

position that the member’s main office must be registered and designated as a branch office or OSJ

Rule 3110(a)(3)


Supervision Rule

Supervisory System Requirements (Continued)• Designated Principals for OSJ

▫ On-site Principals. The Rule clarifies that each member must designate one or more appropriately registered principals in each OSJ (defined in the Rule as the “on-site principal”) for which the principal(s) has supervisory responsibilities and a regular and routine physical presence at the OSJ.

▫ A Principal May Supervise Only One OSJ. The Rule establishes a new general presumption that a principal will not be designated of assigned to be the on-site principal to supervise more than one OSJ. If necessary to designate and assign one registered principal to be the on-site principal

for two or more OSJs, member must consider, among others, the factors on the next slide. Rule 3110(a)(4)


Supervision Rule

Supervisory System Requirements (Continued)Factors in Designation of Principal to Supervise More Than One OSJ

The Rule adds a list of the following factors, among others, for the member to consider in designating and assigning one registered principal to be the on-site principal for two or more OSJs:▫ Principal’s qualification by experience/training to supervise the activities and

associated persons in each OSJ;

▫ principal’s capacity and time to supervise the activities and associated persons in each OSJ;

▫ whether the on-site principal is a producing registered representative;

▫ proximity of OSJs to ensure the principal is physically present at each on a regular and routine basis; and

▫ nature of activities at each OSJ, including size and number of associated persons, scope of business activities, nature and complexity of products and services, business volume, disciplinary history of assigned persons, and other indicators of irregularities or misconduct. (3110(a)(4); and Supp. Materials .03)


Supervision Rule

Supervisory System Requirements (Continued)

Documentation of Factors

The Rule adds that if the member designates and assigns one on-site principal to supervise more than one OSJ, member

▫ must document in the written supervisory and inspection procedures the factors used to determine the reasonableness of such supervisory structure, and

▫ Member’s determination of reasonableness will be subject to scrutiny by FINRA. (3110(a)(4); and Supp. Materials .03)


Supervision Rule

Supervisory System Requirements (Continued)

Need Not Hold In-Person Annual Compliance Meetings.

• The Rule continues without change the requirement for an annual compliance meeting for each registered principal and registered representative, but codifies existing guidance that members are not required to conduct in-person meetings –

▫ if use other methods, such as on-demand webcast or course, video conference, or other electronic means), must ensure each registered person

attends the entire meeting, using, for example, user IDs and passwords to gain access, technology to track time spent, provide click-as-you go confirmation, with attestation of completion at the end, and

is able to ask questions regarding the presentation and receive answers in a timely fashion. (3110(a)(7); and Supp. Material .04 )


Supervision Rule

Written ProceduresWritten Review of All Transactions

• The Rule continues to require, based on the replaced rule, that the supervisory procedures must provide for the review ▫By a registered principal,

▫Evidenced in writing,

▫Of all transactions relating to the “investment banking or securities business” of the member

"investment banking or securities business" means the business, carried on by a broker, dealer, or municipal securities dealer (other than a bank or department or division of a bank), or government securities broker or dealer, of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer, or of purchasing and selling securities upon the order and for the account of others.” FINRA Corp. Bylaws, Art. I(u).

Rule 3110(b)(2)


Supervision Rule

Written Procedures (Continued)

Written Review of All Transactions (Continued) • Risk-Based Review System. As a new provision, for this required written review of all transactions,

member is not required to conduct detailed reviews of each transaction, but may now use

▫ A reasonably designed risk-based review system

▫ That permits focus on the areas that pose the greatest numbers and risks of violation, but

▫ Principal using the system remains responsible for compliance with Rule and any deficiency in the

system’s criteria. (Supp. Material .05 & Reg Notice 10-14, Section I.B.1.) [TP] • Member Not Engaged in Effecting Securities Transactions. A firm that does not engage in any

transactions relating to its “investment banking or securities business”

(e.g., firm conducting only a mutual fund underwriting business that effects no transactions)

▫ does not have any review obligations and

▫ may comply by acknowledging in its supervisory procedures that

it does not engage in any such transactions and

it must have supervisory policies and procedures in place before doing so. (Supp. Material .05 & Reg Notice 10-14, Section I.B.1.) [TP]

Rule 3110(b)(2)


Supervision Rule


Written Review of All Transactions (Continued)

• Use of Technology-Based Review Systems. In a clarification based on prior guidance, if a firm’s procedures for the review of its transactions include the use of technology-based review systems with parameters designed to assess which transactions merit further review, a principal

▫ must review the parameters and document the review in writing;

▫ remains responsible for the discharge of supervisory responsibilities; and

▫ is responsible for any deficiency in the system’s criteria that would result in the system not being reasonably designed. (Reg Notice 10-14,

Section I.B.1., Citing Reg. Notice 07-53 (Nov 2007)) Rule 3110(b)(2)


Supervision Rule


Review of Correspondence and Internal Communications

• The Rule generally incorporates and expands on the replaced rule requiring members to have supervisory procedures to review correspondence and internal communications relating to the member's “investment banking or securities business,” as follows,

▫ Correspondence. Member must review incoming and outgoing hard copy or

electronic written correspondence to properly identify and handle in accordance with firm procedures, customer complaints, instructions, funds and securities, and

That are communications of a subject matter that require review under FINRA

rules and federal securities laws, and

▫ Internal Communications. The Rule expressly adds that the member must review internal communications to properly identify those communications that are of a subject matter that require review under FINRA rules and federal securities laws.

Rule 3110(b)(4) [TP]


Supervision Rule


Review of Correspondence and Internal Communications (Continued)• Use of term “Correspondence.” The Rule’s use of the term

“correspondence” is to be consistent with FINRA Rule 2210’s (Communications with the Public) definition and use of the term “correspondence.” (Reg Notice 10-14, Endnote 10.)

• Subject Matter Requiring Review. Communications that are of a subject matter that require review under FINRA rules and the federal securities laws include (without limitation):

• Communications between non-research and research departments concerning a research report’s contents (NASD Rule 2711(b)(3) and NYSE Rule 472(b)(3)); • Certain communications with the public that require a principal’s pre-approval (FINRA Rule 2210);• The identification and reporting to FINRA of customer complaints (FINRA Rule 4530) (as further detailed herein, FINRA Rule 3110(b)(5) also affirmatively requires firms to capture, acknowledge and respond to all written (including electronic) customer complaints); and • The identification and prior written approval of changes in account name(s) (including related accounts) or designation(s) (including error accounts) regarding customer orders (FINRA Rule 4515). (Reg Notice 10-14, Endnote 11.) Rule 3110(b)(4)


Supervision Rule

Written Procedures (Continued)Review of Correspondence and Internal Communications (Continued)Codification of Required Manner and Evidence of Review. The Rule continues to require that review be appropriate for the member's business, size, structure, and customers, and codifies existing guidance that reviews are to be ▫ conducted by a registered principal, and

▫ evidenced in writing, either electronically or on paper. (Reg Notice 10-14, Sec. I.B.2)

Use of Risk-based Principles for Review. Rule reflects existing guidance permitting use of risk-based principles to review communications, where member determines that:

▫ Some incoming and outgoing correspondence, having none of the subject matters listed above, is necessary for its business and structure, and does not require review before use or distribution, in which case, the procedures must provide for: the education/training of associated persons of the procedures governing correspondence; the documentation of such education and training; and surveillance and follow-up to ensure such procedures are implemented and followed; and

▫ Some internal communications, having none of the subject matters that requires review by rule or law, are necessary for its business and structure -- Rule and guidance do not require a member to review every internal communication. (Supp. Materials .06; and Reg Notice 10-14, Sec. I.B.2(i) and endnote 13, citing Reg. Notice 07-59.) [TP] Rule 3110(b)(4)


Supervision RuleWritten Procedures (Continued)

Review of Correspondence and Internal Communications (Continued)• Codification of Criteria for Evidence of Review. The Rule codifies existing guidance

that evidence of review must be chronicled either electronically or on paper and clearly identify ▫ the reviewer,

▫ the internal communication or correspondence that was reviewed,

▫ the date of review, and

▫ the actions taken by the member as a result of any significant regulatory issues identified during the review. Merely opening a communication is not sufficient. (Supp. Material .07 and Reg. Notice 14-10, Section I.B.2.

(ii))

• Guidance Clarified for Permitted Use of Lexicon-based Screening Tools or Systems for Electronic Communications. Rule continues to permit members to use lexicon-based screening tools or systems of electronic communications, provided the supervisor▫ understands the limitations of the tools/systems,

▫ remains responsible for the discharge of supervisory responsibilities in compliance with the rule and

▫ is responsible for any deficiency in the system's criteria that would result in the system not being reasonably designed.

(Reg. Notice 14-10, Section I.B.2.(ii) and Regulatory Notice 07-59 – “as noted in Regulatory Notice 07-59 firms using automated tools or systems in the course of their supervisory review of electronic communications must have an understanding of the limitations of those tools or systems and should consider what, if any, further supervisory review is necessary in light of those limitations”.) [TP] Rule 3110(b)(4)


Supervision Rule


Review of Correspondence and Internal Communications (Continued)

• Codification of Permitted Delegation of Review Functions. The Rule codifies existing guidance that a supervisor or principal may delegate review functions to an unregistered person, but supervisor or principal

▫ remains ultimately responsible for the performance of all necessary supervisory reviews,

▫ must take reasonable and appropriate action so that delegated functions are properly executed, and

▫ should evidence performance of their procedures sufficiently to demonstrate overall supervisory

control. (Supp. Mat. .08; Reg. Notice 14-10, Sec. I.B.2(iii)) [TP]

• Alignment of Retention Period for Communications. The Rule adds that a member must retain the internal communications and correspondence of its associated persons as to its “investment banking or securities business” ▫ for the period of time and accessibility specified in SEA Rule 17a-4(b) (three years) and with

names of persons who prepared and reviewed the correspondence.

(Supp. Material .09 and Reg. Notice 14-10, endnote 18: The rule purposefully aligns the record retention period for communications with the SEC’s record retention period for the same types of communications to achieve consistent regulation in this area. ) [TP] Rule 3110(b)(4)



Review of Customer Complaints

• Clarification of Requirements for Review of Customer Complaints. Member review of complaints must include procedures to capture, acknowledge, and respond to all hard copy or electronic written customer complaints.

▫ Rule does not include review of oral complaints because they are difficult to capture and assess and may raise competing views as to the substance of the complaint being alleged.

▫ FINRA encourages firms to provide customers with a form or other format that will allow customers to communicate their complaints in writing.

▫ FINRA also reminds firms that the failure to address any customer complaint, written or oral, may be a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).

▫ To harmonize the NASD and NYSE rules, FINRA amended incorporated NYSE Rule 351(d) (Reporting Requirements) to limit the definition of “customer complaint” to include only written complaints, thereby making the definition substantially similar to that in NASD Rule 3070(c) (Reporting Requirements).

▫ NASD Rule 2340(a) (Customer Account Statements) requires a customer account statement to advise the customer that any oral communications should be re-confirmed in writing to further protect the customer’s rights, including rights under the Securities Investor Protection Act (SIPA)). (Reg. Notice 14-10, Sec. I.B.3 and endnotes 19-20.) Rule 3110(b)(5)


Supervision Rule

Written Procedures (Continued)Documentation and Supervision of Supervisory Personnel.

• Elimination of Two Aspects of Supervision. The Rule eliminates

▫ provisions specifying the supervision of a producing manager's customer account activity and

▫ heightened supervision when any producing manager's revenues rise above a specific threshold.

• Prohibited Supervision Situations. Instead, the Rule expressly requires, with certain exceptions, the written procedures to prohibit APs from

▫ supervising their own activities, and

▫ reporting to, or having their compensation or continued employment determined by, a person(s) they are supervising.

(Reg. Notice 14-10, Sec. I.B.4) [TP] Rule 3110(b)(6)



Documentation and Supervision of Supervisory Personnel (Continued)

• Documentation of Limited Exceptions. The Rule adds a limited exception that if a member cannot, as to any supervisor, comply with a prohibition in the above bullet point (because of the member's size or the supervisor's position with the member), the member must document:

▫ the factors the member used to reach such determination; and

▫ how the supervisory system for such supervisor otherwise complies with paragraph (a) of this Rule.

▫ Rule adds a list of possible factors and reflects FINRA’s expectation that this exception will be used primarily by a sole proprietor in a single-person firm or where a supervisor holds a very senior executive position within the firm.

▫ Member not required to notify FINRA of reliance on this exception. (Firms have in past provided this notification through the FINRA Contact System (FCS). Effective December 1, 2014, firms will no longer be required to provide this information, and FINRA intends to disable FCS’s notification feature.

(Supp. Material .10; Reg. Notice 14-10, Sec. I.B.4(i); and endnote 24) [TP] Rule 3110(b)(6)


Supervision Rule


Documentation and Supervision of Supervisory Personnel (Continued)

• Conflicts of Interest That May Compromise Supervision by Supervisory Personnel. As a new provision, the Rule adds an express requirement that the written supervisory procedures (“WSP”) must be reasonably designed to prevent the member’s supervisory system from being compromised due to

▫ conflicts of interest that may be present with respect to the associated person being supervised, including

the position of such person,

the revenue such person generates for the firm, or

any compensation that the associated person conducting the supervision may derive from the associated person being supervised. (3110(b)(6)(D))

▫ Does not impose a strict liability obligation to eliminate all conflicts of interest,

▫ Rather requires that the WSPs be reasonably designed despite a firm's conflicts of interest.

(Reg. Notice 14-10, Sec. I.B.4(ii).) [TP] Rule 3110(b)(6)


Supervision Rule


Maintenance of Written Supervisory Procedures

• Prompt WSP Amendments and Communication of Amendments. The Rule introduces the term “promptly” in amending, and communicating amendments of, the WSP – each Member

▫ Is required to promptly amend its WSPs to reflect changes in applicable securities laws or rules and in its supervisory system; and

▫ Is required to promptly communicate its WSPs and amendments thereto (“as amended WSPs”) to all associated persons to whom such as amended WSPs are relevant based on activities and responsibilities. Rule 3110(b)(7)


Supervision Rule


Maintenance of Written Supervisory Procedures (Continued)• Use of Electronic Media to Communicate WSPs. Rule adds express

permission for member to use electronic media to communicate its WSP and amendments to the WSP, if

▫ WSP with amendments are communicated on, and are readily accessible through, for example, the member's intranet system;

▫ WSP with amendments are promptly posted to the media;

▫ Notice is given to APs of postings;

▫ Reasonable procedures are effected to monitor and maintain the security of the postings to prevent unauthorized changes; and

▫ Member complies with record retention requirements of SEA Rule 17a-4(e)(7).

(Supp. Material .11; Reg. Notice 14-10, Sec. I.B.5; and endnotes 26-27) Rule 3110(b)(7)


Supervision Rule

Internal Inspections• Internal Inspections. Rule retains same review of businesses and

inspection of locations requirements, except the Rule adds the following:

▫ Annual Calendar Year Basis Review/Inspections. The Rule has a new requirement that the review/inspections be on an annual calendar year basis.

▫ Presumed Requirement for 3-Year Inspection Cycle for Non-Branch Locations. Rule imposes new presumption that member inspect a non-branch location at least every three years, and if the period is longer than that, the member must document the factors used to support the longer period.

(Supp. Materials .13 and Reg. Notice 14-10, Sec. I.C.1.) [TP] Rule

3110(c)(1)


Supervision Rule

Internal Inspections (Continued)Standards for Reasonable Review. Rule adds list of standards for reasonable review -- the member’s WSPs must take into consideration, among other things,

▫ firm's size,

▫ organizational structure,

▫ scope of business activities,

▫ number and location of the firm's offices,

▫ nature and complexity of the products and services offered by the firm,

▫ volume of business done,

▫ number of associated persons assigned to a location,

▫ disciplinary history of registered representatives or associated persons, and

▫ any indicators of irregularities or misconduct (i.e., "red flags"), etc.

• WSPs and reviews must provide that the quality of supervision at remote locations is sufficient to ensure compliance with applicable securities laws and regulations

• Must be especially diligent with respect to a non-branch location where a registered representative engages in securities activities.

• Based on the factors outlined above, may need to ▫ impose reasonably designed supervisory procedures for certain locations or

▫ Provide for more frequent reviews of certain locations. (Supp. Materials .12) Rule 3110(c)(1)


Supervision Rule

Internal Inspections (Continued)

Inspection Report Content. The Rule expands on two of areas of the inspection

report content. The report must include testing and verifying a location's policies and procedures, including supervisory policies and procedures:

▫ As in the prior rule, the areas of safeguarding of customer funds and securities; maintaining books and records; and supervision of supervisory personnel;

▫ As an expansion of the prior rule, in the areas of transmittals of funds or securities from customers to third party accounts; from customer accounts to outside entities; from customer accounts to locations other than a customer's primary residence; and between customers and registered representatives, including the hand-delivery of checks; and

▫ As an expansion of the prior rule, in the areas of changes of customer account information, including address and investment objectives changes, and validation of such changes.

▫ For the areas of transmittals of funds or securities, the Rule clarifies that all transmittals to an account where a customer on the original account is not a named account holder are subject to the rule, as follows: Implements this change by not including replaced NASD Rule 3012's parenthetical text ("i.e., a

transmittal that would result in a change in beneficial ownership"); Provides an important investor protection function by requiring verification that the customer was

aware of the transfer and Codifies provision that a member may use a reasonable risk-based criteria to determine the

authenticity of the transmittal instructions. (Reg. Notice 14-10, Sec. I.C.2; and endnote 34.) Rule 3110(c)(2)


Supervision Rule

Internal Inspections (Continued)Inspection Report Content (Continued)

▫ For the areas of changes of customer account information, the Rule adds that This include means or method of customer confirmation that can be documented and complies

with SEA Rules 17a-3(a)(17)(i)(B)(2) and 17a-3(a)(17) (i)(B)(3); and Member must have procedures to monitor all changes of customer account information and not

only address and investment objective changes, such as changes to a customer's name, marital status, telephone, email or other contact information.

▫ Member may delegate reviews of such changes to an appropriately qualified person who is not a principal, unless another FINRA or SEC rule would require principal review (e.g., FINRA Rule 4515 prohibits an account name or designation change unless authorized by a qualified and

registered principal designated by the firm). (Reg. Notice 14-10, Sec. I.C.2.)

• Documentation of Activities Not Engaged In. The Rule adds that if an inspected location does not engage in all of the activities listed above, firm must ▫ identify activities not engaged in and

▫ document that supervisory policies and procedures must be in place at that location if in the future, location does engage in any such activities. Rule 3110(c)(2)


Supervision Rule


• Preventing Compromise of Office Inspections. The Rule replaces the prior provision prohibiting branch office managers and supervisors and the persons they directly or indirectly supervise from conducting inspections and imposes less prescriptive requirements to prevent office inspections from being compromised by conflicts of interest

▫ In most cases, an associated person (“AP”) may not conduct a location’s inspection where AP is assigned to the location or AP is directly or indirectly supervised by, or reporting to, a person assigned to the

location.

▫ Member must consider factors such as economic, commercial or financial interests in the associated person and businesses being inspected.

▫ Does not prohibit use of compliance personnel assigned to a firm's separate compliance department and supervised solely by the compliance department to conduct a location's inspections. Such an arrangement helps to protect against the potential conflicts of interest the

provision is designed to address. (Reg. Notice 14-10, Section I.C.3.) Rule 3110(c)(3)


Supervision Rule


Preventing Compromise of Office Inspections (Continued)

• The Rule retains with modifications the requirement that if a member determines that it cannot comply with above requirement, ▫ either because of a member's size or its business model,

▫ Member must document in the inspection report both the factors the member used to make its determination and how the inspection otherwise complies with paragraph (c)(1) of the Rule.

• Factors Supporting Limited Exception. Factors indicating it is not possible to comply with Rule as to who is not allowed to conduct a location's inspection generally are:▫ the member has only one office; or

▫ the member has a business model where small or single-person offices report directly to an OSJ manager who is also considered the office’s branch office manager (Supp. Materials .14) Rule 3110(c)(3)


Supervision Rule


Preventing Compromise of Office Inspections (Continued)

• Registered Principal Not Required for Inspection. The Rule eliminates restriction in replaced rule that a firm relying on the exception must have a principal who has the requisite knowledge to conduct the inspection. ▫ Firm has flexibility to assign the most appropriate person who has the requisite knowledge, regardless

of registration status, to conduct a location's inspection, taking into consideration the requirement that a firm's review of its businesses be reasonably designed to detect and prevent violations of, and achieve compliance with, laws and regulations. (Reg. Notice 14-10, Section I.C.4.)

• Not required to eliminate all conflicts of interest for a location's inspections, but ▫ To meet Rule’s requirements, member should be diligent in identifying

potential conflicts of interest and

How they will be addressed to prevent a location's inspection from being compromised. (Reg. Notice

14-10, Section I.C.5)

• Elimination of Heightened Office Inspection Requirements. The Rule eliminates NASD Rule 3010(c)(3)'s heightened office inspection requirements that firms must implement under certain circumstances, replacing this with procedures reasonably designed to avoid compromised inspections. Rule 3110(c)(3)


Supervision Rule

Transaction Review and Investigation

Process for Review of Transactions for Potential Insider Trading . The Rule codifies Section 15(g) of the Securities Exchange Act of 1934 (“SEA”) applicable to broker-dealers and extends NYSE Rule 342.21 beyond NYSE-listed securities and related financial instruments to cover all securities. The Rule requires that the supervisory procedures must include a process

▫ for review and investigation of potential violations of the Exchange Act, rules thereunder or FINRA rules,

▫ to identify potential insider trading or other manipulative or deceptive devices.

• Account Transactions to be Reviewed. Member must review transactions effected for

▫ Accounts of the member;

▫ Accounts introduced or carried by the member in which an AP of the Member has a beneficial interest or the authority to make investment decisions;

▫ Accounts of an AP of the member disclosed to the member pursuant to NASD Rule 3050 or NYSE Rule 407, as applicable; and

▫ “Covered accounts” as newly defined in Rule. [TP] Rule 3110(d)(1)


Supervision Rule

Transaction Review and Investigation (Continued)

Process for Review of Transactions (Continued)• “Covered Accounts” include any account introduced or carried by the

member that is held by:

▫ the spouse of an AP of the member;

▫ a child of the AP of the member or such person's spouse, if the child resides in the same household as, or depends financially on, the AP;

▫ any other related individual over whose account the AP of the member has control; or

▫ any other individual over whose account the AP of the member has control and to whose financial support such AP materially contributes.Rule 3110(d)(1)


Supervision Rule


Process for Review of Transactions (Continued)

• When Prompt Internal Investigation Triggered. Each member must conduct promptly an internal investigation into any identified potential violative trade to determine whether a violation of those laws or rules has occurred. (3110(d)(2))

• Gauging Risk of Insider Trading.

▫ Firms should take the risks of insider trading based on their business model into account when developing their policies and procedures

▫ In implementing a firm’s risk-based approach to these requirements, a firm’s procedures should include establishing guidelines or criteria for taking reasonable follow-up steps to determine

which trades are potentially violative trades and

therefore, merit further review via an internal investigation.

▫ FINRA does not expect that every trade highlighted in an exception or other report would require a firm to conduct an internal investigation. (Reg. Notice 14-10, Section I.[D].2.) Rule 3110(d)(2)


Supervision Rule

Transaction Review and Investigation (Continued)• Filing Written Reports of Internal Investigations with FINRA. Member engaging in

investment banking services must file with FINRA, written report, signed by member’s senior officer,

▫ Each Calendar Quarter. Within ten business days of the end of each calendar quarter,

a report describing each internal investigation initiated in the previous calendar quarter with

the identity of the member, the date each internal investigation commenced, the status of each open internal investigation, the resolution of any internal investigation reached during the previous calendar quarter, and, with respect to each internal investigation, the identity of the security, trades, accounts, APs of the member (including APs with respect to a covered account) under review, and a copy of the member's WSPs required by Rule 3110(d)(1).

If a firm did not have an open internal investigation, or either initiate or complete an internal investigation during a particular calendar quarter, the firm is not required to submit a report for that quarter. (Reg. Notice 14-10, Section I.[D].2(i)) Rule 3110(d)(2)&(3)


Supervision Rule


Filing Written Reports of Internal Investigations with FINRA (Continued).

• “Investment Banking Services” A firm engages in “investment banking services” if it, without limitation,

acts as an underwriter;

participates in a selling group in an offering for the issuer or otherwise acts in furtherance of a public offering of the issuer;

acts as a financial adviser in a merger or acquisition; or

provides venture capital or equity lines of credit or serves as placement agent for the issuer or otherwise acts in furtherance of a private offering of the issuer. (Reg. Notice 14-10, Section I.[D].2.)

• Upon Completion of an Internal Investigation. Within five business days of completion of an internal investigation that determines that a violation of the law or rules prohibiting insider trading and manipulative and deceptive devices has occurred, member engaging in investment banking services must file with FINRA, written report, signed by member’s senior officer,

detailing the completion of the investigation, including

the results of the investigation, any internal disciplinary action taken, and

any referral of the matter to FINRA, another self-regulatory organization, the SEC, or any other federal, state, or international regulatory authority. Rule 3110(d)(3)


Supervisory Control SystemRule 3120

• Change in Requirement For Supervisory Control System. The Rule is based on the prior rule but adds a provision with respect to maintaining and enforcing the supervisory control system, as follows:

• Content of Annual Report for Certain Members. For members with more than $200 million in gross annual revenue, the annual report to senior management must include, where applicable, a

▫ listing of reports for the year to FINRA of customer complaints and internal investigations, and

▫ description of the prior year’s compliance efforts, including procedures and educational programs relating to certain enumerated operating areas, practices and supervision. [ TP]

• Definition of “Gross Revenue”. The Rule adds a definition of “gross revenue” that generally subtracts commodities revenue, if applicable, from total revenue as reported in the FOCUS report.


Holding of Customer MailRule 3150

Changes to Requirements for Holding Customer Mail. The Rule eliminates the strict time limits in the prior rule and generally allows a firm to hold a customer’s mail for a specific time period in accordance with the customer’s written instructions if the firm meets several conditions.

• Conditions for Holding Mail. The Rule continues to permit a member to hold customer’s mail for up to three months ▫ as requested by written instructions of the customer

▫ if the customer will not receive mail at the usual address.

• Longer Holding Period. Under the Rule customers may request a longer holding period,

▫ if the customer's instructions include an acceptable reason for the request (e.g., safety or security concerns), not just convenience. [TP]


Holding of Customer MailRule 3150

Changes to Requirements for Holding Customer Mail (Continued)

• Conditions for holding a customer’s mail. The member must

▫ Inform the customer in writing of any alternate methods, other than holding the customer’s mail, such as email or access through the member's website, to receive or monitor account activity and information; and

▫ Obtain the customer's confirmation of the receipt of such information;

▫ Verify at reasonable intervals that the customer's instructions still apply;

▫ Be able, while the member is holding the mail, to communicate with the

customer in a timely manner, as necessary; and

▫ Take actions reasonably designed to ensure that the customer's mail is not tampered with,

held without the customer's consent, or

used by an AP of the member in any manner violating FINRA rules or federal securities laws.


Taping RuleRule 3170

• Previous Taping Requirements Kept. The Rule reconstitutes NASD Rule 3010(b)(2) without any substantive changes and adds some provisions, as follows:

• Added Definition of Term “Tape Recording”

• Added Requirements for “Taping Firms.” The Rule requires a member

▫ that is notified by FINRA, or otherwise has actual knowledge, that it is a “taping firm” (based on how many of its “registered persons” were associated with a “disciplined firm” during the past 3 years)

▫ to have and enforce special written procedures for supervising the telemarketing activities of all of its registered persons,

▫ including procedures for tape recording and reviewing all telephone conversations.

• FINRA’s “Disciplined Firms List” To assist firms in complying with the Rule, FINRA provides a “Disciplined Firms List” identifying those firms that meet the definition of “disciplined firm.”


Practical Suggestions

Member’s written supervisory procedures must be updated for the changes in Rule 3110 and other new FINRA rules.

Designate appropriately registered principal(s) for supervised persons and for office locations.

Will need to report changes and implementation in meetings with management for annual Rule 3130 certification and report to Board

Ensure that all registered personnel are notified of the changes before the changes go into effect for compliance and so the changes can be implemented in a timely manner.

Annual Calendar Year Basis Review/Inspections. The Rule has a new requirement that the review/inspections be on an annual calendar year basis. Does this mean if member has not done review this year yet, review must be done between Dec. 1 and 31, 2014?

FINRA Retrospective Review. Let FINRA know if the new rules cause difficulties, as FINRA indicates that the new rules will be subject to FINRA retrospective review for appropriateness and possible adjustment.


Introduction

Rogge Dunn is a trial attorney and counselor for Fortune 500 companies, wirehouses and prominent Financial Advisors, executives and entrepreneurs. Dunn has developed a specialty involving significant matters in the financial industry. This includes regulatory issues, wrongful discharge, moving teams, non-competes, the Protocol for Broker Recruiting, promissory note defense and forfeiture of deferred compensation. He obtained the largest wrongful discharge arbitration award against Goldman Sachs for an FA in California. Dunn has represented a number of FAs who have given FINRA on the record statements.

Dunn has won more than $2 billion in judgments and settlements for his clients. He has represented more than 10 FAs in Barron’s top 100 financial advisors nationwide. Dunn has won million dollar jury verdicts or arbitration awards in California, Texas, Louisiana and Arkansas.

Dunn can be reached at [email protected], 214-220-0077 or on his website at http://www.cdklawyers.com/rogge_dunn.html

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http://theknowledgegroup.org/%22mailto:[email protected]/%22

http://theknowledgegroup.org/%22http:/www.cdklawyers.com/rogge_dunn.html/%22

8310. Sanctions for Violation of the Rules(a) Imposition of Sanction

After compliance with the Rule 9000 Series, FINRA may impose one or more of the following sanctions on a member or person associated with a member for each violation of the federal securities laws, rules or regulations thereunder, the rules of the Municipal Securities Rulemaking Board, or FINRA rules, or may impose one or more of the following sanctions on a member or person associated with a member for any neglect or refusal to comply with an order, direction, or decision issued under the FINRA rules:

(1) Censure a member or person associated with a member;(2) Impose a fine upon a member or person associated with a member;(3) Suspend the membership of a member or suspend the registration of a person associated with a member for adefinite period or a period contingent on the performance of a particular act;(4) Expel a member, cancel the membership of a member, or revoke or cancel the registration of a personassociated with a member;(5) Suspend or bar a member or person associated with a member from association with all members;(6) Impose a temporary or permanent cease and desist order against a member or a person associated with amember; or(7) Impose any other fitting sanction.(b) Assent to SanctionEach party to a proceeding resulting in a sanction shall be deemed to have assented to the imposition of the sanctionunless such party files a written application for appeal, review, or relief pursuant to the Rule 9000 Series

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8310. Sanctions for Violation of the Rules

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(1) Censure

(2) Impose a fine.

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(3) Suspend Membership

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(4) Expel

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(5) Suspend or bar a member

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(6) Impose a temporary or permanent cease and desist order

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(7) Impose any other fitting sanction.

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FIRST RESPONSE/NOTICE

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You receive ITR requesting documents and OTR

First, hire and meet with your attorney

Notify compliance same day you receive OTR

If possible, delay meeting with compliance until after you’ve received your attorney’s advice

Enlist the aid of your branch manager

MEETING/CALL WITH YOUR ATTORNEY

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Fully disclose all possible issues to your attorney

Discuss all anticipated areas of inquiry/questioning

Discuss positioning your situation with Firm/compliance

ANALYZE YOUR SITUATION

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Are you and your Firm Adverse?

Will the Firm make you a scapegoat?

Is issue “financial products” or account handling

MEETING WITH COMPLIANCE

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Don’t volunteer

Answer all questions directly/honestly.

REACHING OUT TO FINRA

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Have your attorney try to learn FINRA’s stated and ulterior goal(s).

DEVELOP YOUR TALKING POINTS

LEARN YOUR BUOYS

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CLIENT MADE CONSCIOUS, INFORMED CHOICE

The “C” word

I warned client many times about

Client’s knowing choice, against your repeated advice

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CONTRITION, BUT ONLY WHERE APPROPRIATE

I know I made a mistake

I'm very sorry

It will never happen again

I have taken the following (specific) steps to ensure never happens again

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HOMEWORK BEFORE OTR

Review your Talking Points

Review docs you will be bringing to the OTR

Review docs you, your attorney and compliance anticipate you will be questioned about

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CLEAR YOUR MIND

Relax take one or two days off before OTR

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MOST IMPORTANT

Get a good night's sleep!

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October 24, 2014

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► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type your

question in the box that appears and click send.

► Questions will be answered in the order they are received.

Q&A:

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SEGMENT 1:

Kosha DalalAssociate Vice President and Associate General Counsel

Financial Industry Regulatory Authority, [email protected]

SEGMENT 1:

Lawrence P. StadulisPartnerStradley Ronon Stevens & Young, [email protected]

SEGMENT 1:

Merrill R. SteinerPartnerStradley Ronon Stevens & Young, [email protected]

SEGMENT 2:

Rogge DunnPartnerClouse Dunn [email protected]






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