FINRA Rule 3120 — Supervisory Control System

Overview

FINRA Rule 3120 requires broker-dealers to maintain a supervisory control system that tests and verifies the effectiveness of the firm's supervisory procedures established under Rule 3110. While Rule 3110 requires firms to have supervisory procedures, Rule 3120 goes a step further by requiring firms to test whether those procedures actually work.

The rule mandates annual testing of supervisory procedures and the preparation of an annual report to senior management summarizing the test results and any recommended changes. This creates a feedback loop that helps firms continuously improve their compliance infrastructure.

Official citation: FINRA Rule 3120

Who It Applies To

Rule 3120 applies to all FINRA member firms. Larger firms may be subject to additional requirements regarding the scope and depth of their annual supervisory control testing and reporting.

Key Requirements

Annual testing: Firms must conduct annual testing and verification of their supervisory procedures to assess whether they are reasonably designed to achieve compliance.
Annual report to senior management: A written report summarizing the test results must be submitted to senior management at least annually, including any deficiencies found and recommendations for improvement.
Testing and verification: Testing and verification by designated principals should be conducted with objectivity, separate from the areas being tested where practical.
Requirements for larger firms: Larger firms are expected to include more in their annual report, with additional detail on the scope and results of supervisory control testing.
Remediation tracking: Firms must track and document the remediation of any deficiencies identified during testing.
Scope of testing: Testing must cover all areas of the firm's business, including correspondence review, trade surveillance, branch office supervision, and customer complaint handling.

How Loffa Helps You Comply

Freefunds Verified Direct (FVD)

Testable records: FVD's audit trail records every action on each request, with the user and the time, so a tester can check whether your procedures were followed.
Reports on demand: FVD generates regulatory-ready reports on demand from the same records.
Exceptions: FVD logs each exception, such as a denial or a mismatch, and its escalation in the audit trail.

Prime Broker Integrated Network (PBIN)

Agreement compliance testing: PBIN's records of agreement reviews and approvals provide a testable data set for verifying that prime brokerage supervisory procedures are functioning effectively.
Reports: PBIN generates compliance reports on demand, and each agreement's complete history and audit trail is available to testers.
Control verification: PBIN's audit trails allow independent testers to verify that supervisory controls were applied consistently across all prime brokerage relationships.

Recent Updates

Regulatory focus: FINRA has emphasized meaningful testing over box-checking and expects firms to demonstrate that their annual testing actually improves supervisory effectiveness.
Remote supervision testing: With the increase in remote work, firms must now test whether their supervisory controls remain effective in remote and hybrid environments.