Finra bails on plan to supervise reps' outside businesses

Controversial proposal dropped in updated supervisory rules

Jun 27, 2013 @ 3:13 pm

By Dan Jamieson

Finra has dropped a controversial idea to extend its supervisory rules.

The Financial Industry Regulatory Authority Inc. filed a new package of updated supervisory rules last Friday with the SEC. Gone from the latest list: a hotly debated plan requiring broker-dealers to supervise non-securities-related businesses. An earlier version of the package, filed with the SEC in June 2011, was yanked amid protests from industry commenters who warned about an illegal expansion of Finra's jurisdiction.

The much-discussed provision to supervise unregistered businesses was included within supplementary material in that original filing. But in its new filing last week, Finra said it had “decided that the best course is to eliminate the proposed supplementary material from the proposed rule.”

Finra warned, though, that its broad-based Rule 2010, requiring high commercial standards, and just and equitable principles of trade, still applies to the “non-securities activities of members and their associated persons.”

Other proposed supplementary material in the new proposal, which would have the full force of a rule, would require independent broker-dealers to tighten up on the supervision of far-flung offices.

First, Finra is clarifying what it says is existing guidance that a registered principal cannot effectively supervise his or her own sales activities. As a result, the regulator is proposing that an “appropriately registered [senior] principal” would have to “regularly supervise the activities of [another] on-site producing principal” with regular, periodic on-site supervision.

“While the senior principal is not required to be physically present full time at the one-person [office of supervisory jurisdiction], the member must be able to demonstrate 'effective supervision and control' of the activities of the on-site principal,” the filing says.

Furthermore, Finra wants to establish “a general presumption that a principal will not be assigned to supervise more than one OSJ,” Finra states in the filing. “There is a further general presumption that a principal supervising more than two OSJs is unreasonable and … will be subject to greater scrutiny.”

Firms with principals supervising more than one OSJ must consider “whether the OSJ locations are sufficiently close in proximity to ensure that the principal is physically present at each location on a regular and routine basis,” the proposal says.

Finra is not setting an exact time frame for how often supervisory principals will have to stop by an office. George Smaragdis, a spokesman for the SRO, declined to comment on the filing.

“While we are pleased that FINRA implemented some of our critical changes, we remain very concerned with the provisions related to OSJ oversight,” said Financial Services Institute Inc. spokesman Chris Paulitz, in an email.

A spokesperson the Committee of Annuity Insurers, a group of insurance companies, was not able to provide an immediate comment.

Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, said the group was still getting feedback from its members about the proposal and had no comment.

The three industry organizations were prominent critics of the original 2011 proposal.

Finra's filing is part of its continuing effort to consolidate legacy New York Stock Exchange and NASD rules. The SEC soon is expected to publish the rule change for comment. The broad-based proposal also covers areas such customer complaints and mail, trade reviews, written procedures and inspections.


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