FINRA Rule 3120, also known as the "Supervisory Control System" rule, is a regulation enforced by the Financial Industry Regulatory Authority (FINRA) in the United States. It requires broker-dealer firms to establish and maintain a system of supervisory control policies and procedures (SCPs) to ensure compliance with securities laws and regulations. Here's a breakdown of the rule:
What it does:
Tests and verifies: Rule 3120 mandates firms to have SCPs that test and verify the effectiveness of their existing Written Supervisory Procedures (WSPs). These WSPs outline the firm's specific policies and procedures for supervising the activities of its associated persons.
Identifies and addresses gaps: Through testing, firms must identify any shortcomings or gaps in their existing supervisory practices.
Enhances compliance: By testing and addressing weaknesses, firms aim to achieve and maintain compliance with applicable securities rules and regulations.
Key requirements:
Designated principals: Firms must designate one or more principals responsible for establishing, maintaining, and enforcing the SCPs.
Annual testing: Designated principals must conduct testing of the firm's supervisory procedures at least annually.
Reporting: A report summarizing the testing results, identified exceptions, and any necessary changes to supervisory procedures must be submitted to the firm's senior management annually.
Focus areas: Testing should cover various areas, including suitability, anti-money laundering, market manipulation, and other relevant regulations.
It's important to note:
Not a standalone rule: FINRA Rule 3120 complements FINRA Rule 3110, which requires firms to establish and maintain WSPs.
Not static: Firms must adapt their SCPs as their business evolves and as regulations change.
Additional resources:
FINRA Rule 3120: https://www.finra.org/rules-guidance/rulebooks/finra-rules/3120
FINRA Supervision FAQ: https://www.finra.org/rules-guidance/rulebooks/finra-rules/3120