After two unsuccessful attempts to implement consolidated supervisory rules, the Financial Industry Regulatory Authority, Inc. (FINRA), on June 21, 2013, filed with the Securities and Exchange Commission (SEC) a long-anticipated notice of proposed Rules 3110 (Supervision) and 3120 (Supervisory Control System). The proposed rules would replace and consolidate several pre-existing supervisory rules, and would significantly impact the scope of a supervisor’s duties.

FINRA’s two prior attempts at supervisory rules crashed and burned. In 2008, FINRA first published proposed supervision rules and requested comment. After generally negative comments from the industry, FINRA declined to implement the proposed rules. In 2011, FINRA again proposed consolidated rules that sought to address the comments made in the 2008 filing. Amid a flurry of comments criticizing the proposed expansion of supervisory scope and regulatory authority to include “non-securities activities,” FINRA withdrew the 2011 proposal. FINRA’s third rule proposal attempts to address several of the criticisms levied on the prior two notices, while maintaining the fundamental supervisory structures outlined in the prior notices.

The hot-button scope of the supervision issue remains a moving target in the new proposal. In response to comments from 2011, the proposal removed heavily criticized language about the supervision of “non-securities activities” as well as “all business lines.” On the other hand, the proposal rejected a comment proposing limits to the scope of supervision solely to “securities activities.” Instead, the notice leaves the door open to regulatory interpretation by outlining the scope of supervision by referring to FINRA’s Rule 2010 standard of “just and equitable principles of trade.”

The SEC has yet to open up the rules for comment, but the public likely will soon have an opportunity to weigh in on FINRA’s third supervisory rule proposal.


Research and drafting assistance for this post was provided by Reed Smith Summer Associate Paula A. Salamoun.