Supervisory System Framework (FINRA Rule 3110)

Every new account opened, every change made to an account, and every transaction entered in an account ultimately depends on a registered principal's review and approval. Function 2.4 tests the framework that makes those approvals binding.

The rule framework sits on three pillars:

• FINRA Rule 3110 (Supervision): the supervisory system itself
• FINRA Rule 3120 (Supervisory Control System): testing that the 3110 system works
• MSRB Rule G-27 (Supervision): the municipal-securities analog

This section covers the core Rule 3110 framework that every Series 6 firm builds on.

What are the core FINRA Rule 3110 supervisory system requirements?

Each member firm must establish and maintain a system to supervise the activities of each associated person. That system must be reasonably designed to achieve compliance with applicable securities laws, SEC regulations, and FINRA rules.

At a minimum, the system must include:

• Written supervisory procedures (WSPs): reasonably designed for the firm's business
• Designation of registered principals: with authority to carry out supervisory responsibilities for each type of business conducted
• Designation of an on-site principal at each Office of Supervisory Jurisdiction (OSJ): with regular and routine physical presence
• Assignment of each registered representative and principal to an appropriately registered supervisor
• Annual review of each registered representative's activities
• Recordkeeping of the names of all associated persons designated as supervisors and the dates the designation was effective

Think of it this way: Rule 3110 is not a single checklist. It is an entire supervisory architecture with written procedures, named supervisors, a designated on-site principal at every OSJ, an annual review of each rep, and a paper trail documenting who supervised whom and when.

Exam Tip: Gotchas

• Rule 3110 requires an on-site principal at each OSJ with regular and routine physical presence. Absent qualifying circumstances, one principal generally should not be responsible for supervising more than one OSJ. Remote supervision from a distant office does not satisfy the on-site requirement.

What must written supervisory procedures (WSPs) cover?

WSPs are the written playbook for how supervision actually happens at the firm.

WSPs must be reasonably designed to supervise:

• The activities of associated persons
• The types of businesses the firm engages in

WSPs must address four questions for every supervisory activity:

• Who: the specific named individuals or positions performing the review
• What: the supervisory activities those persons will perform
• Frequency: how often the review occurs
• Documentation: how the review is evidenced in writing (paper or electronic)

WSPs must also cover the supervision of supervisory personnel itself. Supervisors have to be supervised too.

The firm must amend WSPs as needed when:

• The business changes
• Rules change
• Rule 3120 testing identifies gaps

Exam Tip: Gotchas

• WSPs are not boilerplate. They must be reasonably designed for the firm's actual business. A WSP that ignores a line of business the firm actually conducts (for example, variable annuity replacements without 2330-specific procedures) fails Rule 3110 even if it looks comprehensive on paper.

Who may be designated as a supervising principal?

A principal is an associated person registered in a principal capacity who has been delegated supervisory authority by the firm.

For a Series 6 firm (investment company and variable contracts business), the principals who may supervise this business include:

• General Securities Principal (Series 24): broad authority across the firm
• Investment Company and Variable Contracts Products Principal (Series 26): authority over investment-company and variable-contracts business (the Series 6 product universe)

Firms may also designate supervisors who are not themselves principals for specific day-to-day functions. But final approval authority rests with the registered principal.

Firms may delegate specific supervisory functions to non-registered persons, but the designated principal remains responsible for the performance of those reviews.

Exam Tip: Gotchas

• Supervisor and principal are not interchangeable. A supervisor can conduct day-to-day oversight and delegated reviews. But statutorily required written approvals (new account opening, changes in account designation, discretionary authority, advertising, correspondence review) must be signed by a registered principal with the appropriate license. "My supervisor approved it" is not the same as "the principal approved it."

What is an Office of Supervisory Jurisdiction (OSJ)?

An OSJ is an office where specific high-oversight functions occur, including:

• Final approval of retail communications
• Market making, underwriting, or securities trading
• Final approval of new accounts
• Review and endorsement of customer orders
• Final approval of advertising and sales literature
• Supervision of one or more branch offices

Each OSJ must have a designated on-site principal with a regular and routine physical presence. The on-site requirement is the reason a single principal generally cannot supervise multiple OSJs.

What are the most tested FINRA Rule 3110 supervisory framework concepts?

Exam Tip: Gotchas

• Rule 3110 is the supervisory SYSTEM rule. It is not a single procedure; it is the entire framework (WSPs, designated principals, OSJ on-site principals, annual review of reps, recordkeeping).
• WSPs must be reasonably designed for the firm's actual business. Generic WSPs do not satisfy the rule.
• The designated on-site OSJ principal must be physically present on a regular and routine basis. Remote supervision of an OSJ generally does not qualify.
• Principal approval is not the same as supervisor approval. Statutorily required written approvals require a registered principal; supervisors may conduct delegated day-to-day oversight but not final written approval.