The Financial Industry Regulatory Authority (FINRA) enacted Rule 3110, also known as the Supervision Rule, to protect investors and ensure market integrity. It requires financial institutions and investment firms to develop, maintain, and implement a system to supervise the activities of all associated persons.

Rule 3110 compliance starts with the hiring process and includes implementing various workforce management practices. HR and talent professionals must have a plan to assess applicants, conduct comprehensive background checks, and ensure quality hires.

Failure to comply with these regulations can result in hefty fines, penalties, increased regulatory monitoring, civil litigation, or even expulsion from the FINRA. This article takes a closer look at the Supervision Rule and the steps firms can take to achieve compliance.

Overview of FINRA Rule 3110

The Financial Industry Regulatory Authority was established in 2007 to consolidate the regulatory bodies of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) into one comprehensive agency.

FINRA created a Consolidated Rulebook Project to combine NYSE and NASD regulations already in place and include additional rules. Regulations in this rulebook, including Rule 3110, were enacted on December 1, 2014.

These regulations work to protect investors receiving financial services and brokerage firms from potential civil litigation. Securities and exchange investment firms, including sole proprietors, enterprise companies, and governmental agencies, are obligated to follow these rules or face stiff penalties.

Key Compliance Expectations and the Role of HR

As mentioned above, Rule 3110 requires brokerage firms to develop, maintain, and enforce a system for supervising the activities of all associated persons.

Who is considered an associated person? According to Rule 3110, this includes anyone working or associated with the firm who is required to comply with applicable FINRA rules and regulations.

HR teams, designated supervisors, and company leaders play vital roles in ensuring compliance. These key players must work together to ensure that all rules pertaining to supervision, document management, policy creation, and audits comply with all Rule 3100 regulations.

There are a few key requirements of Rule 3110 that an investment and securities business should understand.

Creation of Written Supervisory Procedures (WSP)

Each securities and exchange investment firm or financial institution is required to develop clear guidelines detailing how it intends to comply with applicable securities laws like FINRA Rule 3110. This guideline, called Written Supervisory Procedures (WSP), is typically compiled by the company’s HR team.

The WSP guidelines should address how the firm conducts various activities, such as handling customer complaints, maintaining transactional and communication records, assessing candidates, monitoring background checks, and addressing conflicts of interest.

HR departments often use WSP procedures as a guide when creating other policies regarding hiring, training, promoting, and monitoring employees.

Designation of Registered Principals Within Organizations

Applicable organizations are also required to designate employees to serve as supervisors over WSP procedures and ensure Rule 3110 compliance.

However, designated parties must have the right qualifications and training to fill this role properly. Typically, HR is responsible for assessing and confirming that all Rule 3110 supervisors have the right qualifications and receive ongoing training.

Ongoing Inspection of Transactions and Communications

Financial investment firms and banks must also develop a process for monitoring and storing incoming and outgoing communications between the firm and customers, including text messages, emails, and social media communications.

It must also monitor and store financial transactions and conduct frequent office inspections. The goal of these inspections and ongoing monitoring is to prevent fraudulent activities and identify potential risks within the company.

Monitoring Outside Business Activities

It’s the firm’s duty to supervise all associated persons’ outside business activities (OBA), such as board memberships, personal businesses, or consulting services, to ensure there is no conflict of interest.

The HR department often handles this process by creating relevant policies, conducting regular assessments, and documenting all potential conflicts. Depending on the situation, this may require processing disclosures, ensuring the employee is compliant, reporting potential conflicts of interest, or terminating the party’s employment.

Annual Internal Audits

A comprehensive review and audit of internal records must be conducted at least once a year. Companies with past compliance issues or potential red flags may be required or enticed to conduct audits more frequently.

This inspection process should include reviewing any policies related to Rule 3110, such as the internal WSP guidebook, and examining personnel records, communications and investment records, and supervisor training records.

Process for Handling Customer Complaints

It’s absolutely necessary to have a formal customer complaint system in place. This process should detail how and to whom customers can file a complaint, how these complaints are examined and investigated, and how customers are updated about the status of their complaints.

Not only is this a Rule 3110 requirement, but it’s also a good business practice.

Impact of Rule 3110 on Background Checks and Screenings

The role of HR in Rule 3110 compliance begins at the recruitment phase. It’s the firm's obligation to do their due diligence to ensure they hire qualified, competent, and honest employees.

Compliance requires having a comprehensive background screening. This process should have numerous checkpoints in place, including:

• • Criminal background checks
  • Past employment history verification
  • Education verification
  • Professional license and certification verification
  • Checks for any regulatory complaints or disciplinary actions
  • Fingerprint screening for certain supervisory roles

It’s also important to have a process in place for handling any red flag issues, such as minor criminal records, errors in work history, or prior regulatory complaints. Having a system in place before a red flag issue occurs creates a fair, unbiased hiring process and improves FINRA compliance.

For instance, does your company have a zero-tolerance policy regarding criminal records? Keep in mind that minor issues may not prevent a candidate from being hired, but they may require heightened supervision for a period.

Under Rule 3110, firms must also complete a Uniform Application for Securities Industry Registration or Transfer (U4) filing through FINRA’s Central Registration Depository (CRD) system.

This U4 form requires firms to provide a wealth of information about new employees, including:

• • Name
  • Social Security number
  • Address history
  • Employment history
  • Criminal records
  • Customer complaints
  • Regulatory actions
  • Civil actions
  • Professional qualifications

Firms are expected to update this information as quickly as possible, typically within 30 days of any change.

A comprehensive applicant screening and candidate onboarding process can ensure your firm complies with all regulatory requirements.

Common Challenges and Best Practices in Rule 3110 Compliance

While HR's role in Rule 3110 compliance begins at the recruitment phase, it also requires ongoing monitoring. Proper workforce management and efficient business processes must also be in place to ensure compliance.

As with most regulatory regulations, Rule 3110 compliance provokes numerous challenges for firms. Fortunately, there are several business practices firms can implement to help overcome these issues.

Rule 3110 Compliance Challenges

There are several common challenges employers face regarding Rule 3110 compliance.

Inconsistent Hiring Practices

Inconsistent hiring practices can quickly lead to Rule 3110 compliance issues. Without a structured process, HR staff, hiring managers, and supervisors may forget or forgo vital compliance portions of the hiring process.

For instance, because it’s the firm’s responsibility to ensure every employee is “fit and proper,” failure to verify the new hire’s licensure or educational experience could put the firm out of compliance.

Gaps in Documentation

Documentation is a key element of Rule 3110 compliance. Firms without a seamless system in place for collecting and storing these documents can become overwhelmed.

First, Rule 3110 requires firms to monitor internal and external documents regularly. Conducting these audits without a document storage process could be extremely time-consuming or even impossible.

Secondly, documents could be necessary when handling customer complaints. Lack of evidence could hinder the firm’s ability to conduct a full investigation and put it at risk for civil litigation.

Finally, FINRA inspections require an examination of company documents. Having easy access to the right documents creates a smoother process and decreases the risk of compliance issues.

Failure to Update U4 Filings

New hires can’t perform services involving investments and securities until they register with the FINRA or some other self-regulatory organization (SRO). This requires a complete and accurate U4 filing.

Inaccurate or incomplete filings could prolong the registration process and prevent your new hire from performing daily duties. Other penalties include fines, suspensions, and registration terminations.

Dealing With Red Flag Issues

As mentioned above, you can hire candidates with red flag issues, such as minor criminal records, past violations, or other risk factors. However, heightened supervision must be provided for a set timeframe.

This can be confusing if anyone involved, including HR professionals, supervisors, and new hires, fails to understand their role.

Best Practices for FINRA Rule 3110 Compliance

If this sounds all too familiar, there are several things you can do to streamline the background screening process and minimize compliance issues.

1. Develop Standard Hiring Practices

Standard hiring practices can enhance Rule 3110 compliance in several ways. It can ensure the hiring of qualified candidates by creating an unbiased and comprehensive hiring process.

Additionally, consistent protocols can decrease the risk of inaccurate and incomplete U4 filings. Finally, proper onboarding ensures that all new hires understand FINRA regulations and their role in maintaining compliance.

2. Leverage Today’s Technology

Fortunately, today’s technology can help streamline the onboarding and Rule 3110 compliance processes. For instance, workforce management software can help you track employee records, including training dates, complaints issues, and past violations.

Working with third-party vendors with advanced technologies can provide faster, more accurate results. They can also ensure your firm receives and maintains all the relevant documentation needed to make sound hiring decisions.

3. Conduct Regular Audits

Conducting regular planned and unannounced audits is essential. These examinations can help your firm detect and fix compliance issues before they become bigger, more costly problems.

Comprehensive audits can also help identify potential risks within the company, conflicts of interest, or a lack of documentation. This evaluation gives your firm time to address any issues and improve its efficiency.

4. Strengthening Compliance Efforts Through Training and Expert Guidance

Rule 3110 rules and regulations can be complex and confusing. Your HR team should receive regular compliance training to stay up to date on the latest changes and other regulatory issues.

Working with third-party vendors, such as a professional background screening company, can also improve compliance and efficiency. These service companies specialize in compliance and have a firm understanding of all regulatory compliance requirements, including Rule 3110.

For instance, Cisive specializes in working with clients in highly regulated industries, such as the finance sector. Our team receives frequent training to ensure they stay current on the latest guidelines.

In addition, our Cisive platform helps to streamline the background screening process while prompting your HR team to take relevant actions. Our platform allows you to perform complete and accurate background checks, but it also obtains all the necessary documentation to maintain compliance.

Cisive handles everything from criminal background checks and past employment verifications to drug testing and licensure checks.

Most importantly, we offer consulting and advisory services to help your business develop a structured hiring process that improves hiring and compliance outcomes. 

Partner With a Professional Background Screening Company

Don’t risk hefty penalties related to Rule 3110 compliance issues. Instead, contact Cisive to find out how our professional background screening services can streamline the hiring process while improving compliance.

Reach out to a Cisive expert today to learn more about our efficient background screening solutions tailored for financial services firms.