Supervisory Control System (FINRA Rule 3120)
Financial Industry Regulatory Authority (FINRA) Rule 3110 establishes the supervisory system. Rule 3120 adds another layer: it requires the firm to test whether that system is actually working. Think of it as the "supervision of supervision."
Designated Principal
- Each firm must designate one or more principals who are specifically identified to FINRA
- These designated principals are responsible for establishing, maintaining, and enforcing a system of supervisory control policies and procedures
- This is a distinct role from the day-to-day supervisory principals under Rule 3110
Exam Tip: Gotchas
The designated principal under Rule 3120 is a specific role identified to FINRA, not just any principal. The exam may test whether you know this is a distinct designation from routine supervisory principals.
Testing and Verification
The designated principal(s) must:
- Test and verify that the firm's supervisory procedures are reasonably designed to achieve compliance
- Where testing reveals gaps, create additional or amend existing supervisory procedures
- This is an active, ongoing obligation, not a one-time review
Exam Tip: Gotchas
Rule 3110 = establish the supervisory system; Rule 3120 = test whether it works. The exam loves this distinction. Having procedures on paper (Rule 3110 compliant) is not the same as verifying they are effective (Rule 3120).
Annual Report to Senior Management
The designated principal(s) must submit a report to the firm's senior management at least annually. The report must include:
- A description of the firm's supervisory control system
- A summary of test results and significant identified exceptions
- Any additional or amended supervisory procedures created in response to the test results
Exam Tip: Gotchas
The annual report goes to the firm's senior management, not to FINRA directly. This is a common trap on the exam.
Enhanced Reporting for Large Firms
Firms with $200 million or more in gross revenue (per Financial and Operational Combined Uniform Single (FOCUS) report from the prior calendar year) must include additional content in the annual report:
| Standard Report (All Firms) | Additional Content ($200M+ Firms) |
|---|---|
| Description of supervisory control system | Tabulation of customer complaints and internal investigations reported to FINRA |
| Summary of test results and exceptions | Discussion of compliance efforts across six areas |
| Amended supervisory procedures |
The six compliance areas for large firm reporting:
- Trading and market activities
- Investment banking
- Antifraud and sales practices
- Finance and operations
- Supervision
- Anti-money laundering
Exam Tip: Gotchas
The $200 million threshold is based on the prior calendar year FOCUS report, not the current year. Also, Rule 3120 tests the supervisory SYSTEM, not individual trades or accounts. A firm can be Rule 3110 compliant (has written procedures) but still violate Rule 3120 if it never tests whether those procedures actually work.