FINRA requires all member firms to establish and maintain a comprehensive supervisory system to oversee the business activities of their registered representatives. To achieve this, the firm must develop written supervisory procedures that clearly outline how each type of business is monitored. The firm must also designate qualified principals who hold specific responsibility for supervising each business area and overseeing associated personnel.
Internal Inspection Standards and Review Cycles
Supervision is an ongoing operational requirement that includes mandatory internal reviews and periodic office inspections. Each member firm must conduct an annual review of its businesses to ensure compliance with applicable securities laws and regulatory rules.
As part of this oversight, the firm must periodically examine customer accounts to detect and prevent irregularities or abuses. Office inspections are conducted on structured schedules:
- Every Office of Supervisory Jurisdiction must undergo a formal inspection at least annually.
- Every branch office must be inspected according to a defined cycle established within the written supervisory and inspection procedures of the firm.
Distinguishing a Branch Office from an Office of Supervisory Jurisdiction
FINRA establishes clear definitions to distinguish general operating locations from supervisory hubs based on the functions performed at each location.
A branch office is defined as any location identified by any means to the public or customers as a place where the member firm conducts investment banking or securities business.
An Office of Supervisory Jurisdiction is a specialized firm location where one or more key supervisory or operational functions take place. A location is designated as an Office of Supervisory Jurisdiction if it performs any of the following seven functions:
- Order execution or market-making activities.
- Structuring of public offerings or private placements.
- Maintaining custody of customer funds or securities.
- Final acceptance and approval of new accounts on behalf of the firm.
- Review and endorsement of customer orders.
- Final approval of advertising or sales literature for use by associated persons.
- Direct responsibility for supervising the activities of associated persons at one or more branch offices.