Rule 3110. Supervision

(a) Supervisory system.

Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. The final responsibility for the establishment and maintenance of an adequate supervisory system rests with the member. The supervisory system shall provide, at a minimum, for the following:

1. The establishment and maintenance of written procedures as required by this Rule; 2. The designation, where applicable, of an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker-dealer is required; 3. The designation as an Office of Supervisory Jurisdiction (OSJ) of each location that meets the definition contained in paragraph (f) of this Rule and the designation of one or more other locations as a branch office, as defined in paragraph (f); 4. The designation of one or more appropriately registered principals in each OSJ and one or more appropriately registered representatives or principals in each non-OSJ branch office with authority to carry out the supervisory responsibilities assigned to that office by the member; 5. The assignment of each registered person to an appropriately registered representative(s) or principal(s) who shall be responsible for supervising that person's activities; 6. The use of reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities; and 7. The participation of each registered representative and registered principal, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) and principal(s) are discussed.

(b) Written supervisory procedures.

Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. The written supervisory procedures (WSPs) must:

1. Set forth the supervisory system established by the member pursuant to paragraph (a); 2. Identify the titles, registration status, and locations of the required supervisory personnel and the responsibilities of each supervisory person as these relate to the types of business engaged in, applicable securities laws and regulations, and applicable FINRA rules; 3. Be amended as appropriate within a reasonable time after changes occur in applicable securities laws and regulations, including FINRA rules, and as changes occur in the member's supervisory system; and 4. Be communicated to all associated persons to whom they are relevant.

A member that fails to update its WSPs to reflect changes in applicable rules has been the subject of disciplinary action, even where the failure is identified in advance of any related substantive violation.

(c) Internal inspections.

(1) Inspection cycles.

Each member shall conduct a review, at least annually (on a calendar-year basis), of the businesses in which it engages, which review shall be reasonably designed to assist the member in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations, and with applicable FINRA rules. Each member shall:

- (A) Inspect at least annually every Office of Supervisory Jurisdiction and every branch office that supervises one or more non-branch locations; - (B) Inspect at least every three years every branch office that does not meet the definition of an OSJ and is not a supervisory branch office; and - (C) Inspect every non-branch location on a regular periodic schedule, presumed to be at least every three years, except that a member may apply a less frequent or different schedule if it documents in its WSPs the factors used to set the schedule and the basis for departing from a three-year cadence.

(2) Reduced cadences.

The Rule has been the subject of multiple temporary remote-inspection relief orders by FINRA, most recently the Remote Inspections Pilot Program that allows members satisfying certain conditions to conduct branch and OSJ inspections remotely (i.e., without an in-person visit). The pilot program is subject to specific eligibility criteria, ineligible-activity exclusions, and recordkeeping requirements set forth in FINRA Rules 3110.18 and 3110.19; members electing to participate must opt in to the pilot through the prescribed process.

(3) Inspection content.

Each inspection must consider, at a minimum:

- The activities at the location since the last inspection; - Any indication of unusual customer complaint activity; - The supervisory function performed at the location, including reviews of customer accounts, securities transactions, and correspondence; - The transmittal of customer funds and securities; - The validation of customer change-of-address requests; and - The handling of customer change-of-investment-objective requests.

(4) Inspection reports.

The inspection of each location must be documented in a written inspection report, which must include the testing and verification of the member's policies and procedures, including supervisory policies and procedures relating to the items listed in paragraph (c)(3). The inspection report must be retained for at least three years and must be made available to FINRA on request.

(d) Transaction review and investigation.

Each member shall include in its supervisory procedures a process for the review of:

1. Securities transactions reasonably designed to identify trades that may violate the provisions of the Securities Exchange Act of 1934, the rules thereunder, or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected for: (A) the account(s) of the member; (B) the account(s) introduced or carried by the member in which a person associated with the member has a beneficial interest or the authority to make investment decisions; (C) a covered account; and 2. Promptly conducting an internal investigation into any such trade to determine whether a violation has occurred.

The member must report quarterly to FINRA all trades that have been escalated for internal investigation pursuant to this paragraph; the report is filed via FINRA Gateway by the 15th day of the second month after the calendar quarter to which the report relates.

(e) Qualifications investigated.

Each member shall ascertain by investigation the good character, business reputation, qualifications, and experience of an applicant for registration before the member makes such a certification in the applicant's Form U4. The investigation must include, at a minimum:

- A search of reasonably available public records regarding criminal, regulatory, and civil judicial actions against the applicant; and - A review of any prior employer information that the applicant has disclosed.

The investigation must be completed before the member files the Form U4 or no later than 30 calendar days after the Form U4 is filed.

(f) Definitions.

Branch office.

Any location where one or more associated persons of a member regularly conducts the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or is held out as such, excluding certain locations identified in subparagraphs.

Office of Supervisory Jurisdiction.

Any office of a member at which any one or more of the following functions take place:

- Order execution and/or market making; - Structuring of public offerings or private placements; - Maintaining custody of customers' funds and/or securities; - Final acceptance (approval) of new accounts on behalf of the member; - Review and endorsement of customer orders, pursuant to FINRA Rule 3110.15 or other applicable rule; - Final approval of retail communications for use by persons associated with the member, pursuant to FINRA Rule 2210(b)(1), other than the approval of designated regional advertising managers' approved retail communications; or - Responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.

(g) Supervision of persons producing business at certain locations.

Special supervisory rules apply to representatives whose primary production exceeds specified thresholds (the so-called "taping rule" under Rule 3170 and the heightened supervision provisions under Rule 3110(d)), and to persons subject to statutory disqualification.

Supplementary Material — selected items

.03 One-person OSJ.

A member that designates a single principal at an OSJ to supervise that office may not assign that principal to supervise his or her own activities. The member must designate a different principal as the supervisor of the principal-in-charge of the OSJ.

.04 Effective dates of supervisory procedures.

When supervisory procedures are amended, the member shall communicate the amendments to all associated persons to whom they are relevant within a reasonable period of time after the amendments take effect.

.15 Temporary remote inspections (Pilot Program).

Permits members satisfying eligibility criteria to conduct inspections required by paragraph (c) remotely, subject to data-collection and reporting obligations to FINRA.