FINRA's supervision rule is the foundational supervision rule. Every other supervisory requirement builds on it, so understanding its structure is essential before diving into specific approval requirements.
Core Obligation
- Every member firm must establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules
- The system must include:
- Written supervisory procedures (WSPs)
- Designation of supervisory personnel
- Assignment of each registered person to an appropriately registered supervisor
- Supervisory responsibilities cannot be delegated to unregistered persons
Remember: The standard is "reasonably designed" - not perfection. The firm must demonstrate a thoughtful, implemented system, not guarantee that no violation ever occurs.
Exam Tip: Gotchas
"Reasonably designed" does not mean "guarantees compliance." If an exam question asks whether a firm with a solid supervisory system that still had a violation is in compliance, the answer is yes - as long as the system was reasonably designed and properly implemented. Also, supervisory duties cannot be delegated to unregistered persons, even experienced administrative assistants.
Designation of Principals
- The firm must designate appropriately registered principals for each type of business it conducts
- Each Office of Supervisory Jurisdiction (OSJ) must have at least one on-site registered principal
- Supervisory personnel must be qualified by passing the appropriate principal-level exam:
| Principal Exam | Designation | Supervises |
|---|---|---|
| Series 24 | General Securities Principal | Overall securities business |
| Series 4 | Registered Options Principal | Options activities |
| Series 9/10 | General Securities Sales Supervisor | Sales practices |
| Series 53 | Municipal Securities Principal | Municipal securities activities |
Offices of Supervisory Jurisdiction (OSJs)
An OSJ is the highest level of supervisory responsibility within a firm's office structure. A location qualifies as an OSJ if any of these activities occur there:
- New accounts are approved
- Order execution or market making takes place
- Customer funds or securities are maintained
- Customer orders are reviewed and endorsed
- Retail communications are reviewed and approved
- Supervision of other branch offices is conducted
- Public offerings or private placements are structured
Branch Office vs. Non-Branch Location
| Classification | Definition | Registration Required? |
|---|---|---|
| OSJ | Location with new account approval authority and/or supervisory responsibility over other offices | Yes - highest level |
| Branch office | Location where one or more associated persons regularly conduct securities business | Yes |
| Non-branch location | Location exempt from branch office registration | No |
Locations exempt from branch office registration include:
- Primary residences (limited to one or same-family associated persons, with conditions)
- Locations used fewer than 30 business days per year
- Non-sales back-office or customer service locations
- Offices of convenience (no securities sales)
- Exchange trading floors
- Temporary business continuity locations
Exam Tip: Gotchas
Not every branch office is an OSJ, but every OSJ is a branch office. The key distinction is that OSJs have new account approval authority and supervisory responsibility over other offices. If an exam question describes a location that approves new accounts, that location is an OSJ.
Think of it this way: The supervisory system follows a logical chain: FINRA's supervision rule establishes the system, principal designation staffs it, office classification structures it, and WSPs document it. Each layer builds on the one before.