The Supervisory System (FINRA Rule 3110)
FINRA Rule 3110 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 Rule 3110 establishes the system, principal designation staffs it, office classification structures it, and WSPs document it. Each layer builds on the one before.