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Settlement & Operations by Loffa Interactive Group

Key-Person Risk in Settlement and Compliance Operations: What FINRA Rule 3110 Expects

A guide holding the only lantern leads four cavers with backpacks toward a fork of dark tunnels in a cave.

Updated October 2026. First published April 2024.

The 2024 version of this post tied the "Great Resignation" to T+1 and predicted a rise in compliance violations within 12 to 24 months. We've taken the prediction out. Nobody measured it, and we can't point to data that confirms it. The risk underneath it is older than 2021 and still current: a settlement or compliance process that works because one person knows how it works.

What Key-Person Risk Looks Like

It rarely shows up as a broken rule. It shows up as a step nobody else knew existed. In settlement and compliance operations, the knowledge that tends to live with one person includes:

  • which desk at a large custodian takes Letters of Free Funds for which account range;
  • the order of work in the quarterly 17a-13 securities count, and which aged fails need a confirmation;
  • when a Regulation T extension request has to go in, since the rule requires it to be filed and acted on before the payment period ends;
  • the one contact at a counterparty who answers when a prime brokerage form is missing.

T+1 made these gaps harder to absorb. The Regulation T payment period is now three business days after trade date, and institutional trades have to be affirmed by 9 p.m. ET on trade date. When the person who knows is out, there's less time to find someone else who does.

What FINRA Rule 3110 Expects

FINRA Rule 3110 doesn't use the phrase "key person." It does require the things that keep a process from living in one head:

  • a system to supervise every associated person, including written procedures (Rule 3110(a));
  • a designated, appropriately registered principal for each type of business the firm does (Rule 3110(a)(2));
  • written procedures to supervise the types of business the firm engages in and the activities of its associated persons (Rule 3110(b)(1));
  • prompt amendments to those procedures when the supervisory system changes, communicated to the people who need them (Rule 3110(b)(7)).

When the person your procedures name as a reviewer leaves, your supervisory system has changed. Rule 3110(b)(7) expects the procedures to change with it, promptly, and a firm that waits for the annual review is behind.

FINRA Rule 3120 adds the test. Designated principals have to test and verify that the supervisory procedures are reasonably designed, amend them where testing shows a need, and report the results to senior management at least once a year. A procedure only one person can follow is a fair finding for that testing to produce. Rule 4370(f) covers the narrowest version of the problem: the firm's two emergency contacts on file with FINRA have to be updated promptly after a material change.

Supervisory Procedures Aren't Desk Procedures

Most written supervisory procedures say who reviews what and how often. They rarely say which screen to open, which file comes from the clearing firm at what time, or which custodian still wants its letters by fax. Both documents matter. The supervisory procedures show a regulator that supervision exists. The desk procedure is what a new hire follows at 8 p.m. If you only have the first, the second is in someone's head.

A Plan You Can Finish This Quarter

  1. List your recurring settlement and compliance tasks with the name of each person who can do them. Every task with one name is on your list.
  2. For each, write the desk procedure: inputs, steps, deadline, and who to call. Keep counterparty contacts in a shared system, not a personal inbox.
  3. Train a second person, then have that person run the task for a full cycle (a day, a week, or a quarter) while the first one watches. That's a test you can document under Rule 3120.
  4. Put the deadlines in a shared calendar or workflow system that doesn't depend on anyone's memory.
  5. When someone leaves, treat it as a change to the supervisory system. Update the procedures, reassign reviews, remove system access the same day, and keep the person's business records retrievable under SEC Rule 17a-4. Our post on a FINRA case over departed representatives' access shows what slow access removal can cost.

The same people often carry the evening work T+1 created, which makes it worth reading this list next to our posts on what T+1 changed for the people who settle trades and on business continuity near a T+1 deadline.

Some tasks will still have one name and no realistic second person. That's where outside help fits. Loffa's Compliance Service Desk runs work such as 17a-13 quarterly counts and Letter of Free Funds processing under the client's own procedures, with documentation for audits and exams.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.

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