Rule 342 Offices — Approval, Supervision and Control
This rule is no longer applicable. Incorporated NYSE Rule Interp. 342 has been superseded by FINRA Rule 3110. Please consult the appropriate FINRA Rule.
(a)(b)
/01 Application — Table of Supervision
The purpose of this rule is to insure that each area of the member organization's activities is properly supervised and that lines of supervisory responsibility are clear. In order to make certain that the lines of supervisory responsibility are at all times explicitly delineated, member organizations must maintain, for use and inspection, a written and dated "table of supervision" identifying the person with overall responsibility for the organization's internal supervision and control and compliance with applicable regulations as well as those individuals to whom such specific duties have been delegated. Both the individual and the specific duty entailed (by geographic area, department and business activity) must be evident. Such table should be maintained on a current basis and superseded pages retained.
The purpose of this rule is to insure that each area of the member organization's activities is properly supervised and that lines of supervisory responsibility are clear. In order to make certain that the lines of supervisory responsibility are at all times explicitly delineated, member organizations must maintain, for use and inspection, a written and dated "table of supervision" identifying the person with overall responsibility for the organization's internal supervision and control and compliance with applicable regulations as well as those individuals to whom such specific duties have been delegated. Both the individual and the specific duty entailed (by geographic area, department and business activity) must be evident. Such table should be maintained on a current basis and superseded pages retained.
/02 Titles and Positions
When an office of a member organization has more than one manager, the person having primary authority must be clearly designated as "in charge."
Anyone having a title or position that implies supervisory responsibility for registered personnel who are functioning as registered representatives, must qualify as a supervisory person under Rule 342.13.
The person or persons designated to direct day-to-day compliance activity or who directly supervise ten or more persons who carry out that activity (e.g., Compliance Officer, Partner or Director) should have overall knowledge of the Securities Laws and Exchange Rules and must pass the Compliance Official Examination ("Series 14"). Compliance Directors of member organizations that conduct a Specialist business must pass the Series 14A Examination.
A member organization engaged in a public business in addition to a Specialist business is required to have a qualified Compliance Official who has passed the Series 14A and Series 14 Examinations. Those member organizations whose activities are solely related to execution of orders on the Floor and who do not conduct any business with the public must designate a Compliance Officer; however, such Compliance Officer is exempt from taking and passing the Series 14 Examination.
Compliance Officials at member organizations whose commissions and other fees from their public business (retail and institutional) are under $500,000 in the preceding calendar year and who introduce to another broker-dealer, are exempt from the Series 14 Examination requirement.
Supervisors of ten or more persons whose compliance responsibilities are limited to the registration of member organization employees with the various regulatory and self-regulatory authorities are also exempt from the Series 14 Examination requirement.
When an office of a member organization has more than one manager, the person having primary authority must be clearly designated as "in charge."
Anyone having a title or position that implies supervisory responsibility for registered personnel who are functioning as registered representatives, must qualify as a supervisory person under Rule 342.13.
The person or persons designated to direct day-to-day compliance activity or who directly supervise ten or more persons who carry out that activity (e.g., Compliance Officer, Partner or Director) should have overall knowledge of the Securities Laws and Exchange Rules and must pass the Compliance Official Examination ("Series 14"). Compliance Directors of member organizations that conduct a Specialist business must pass the Series 14A Examination.
A member organization engaged in a public business in addition to a Specialist business is required to have a qualified Compliance Official who has passed the Series 14A and Series 14 Examinations. Those member organizations whose activities are solely related to execution of orders on the Floor and who do not conduct any business with the public must designate a Compliance Officer; however, such Compliance Officer is exempt from taking and passing the Series 14 Examination.
Compliance Officials at member organizations whose commissions and other fees from their public business (retail and institutional) are under $500,000 in the preceding calendar year and who introduce to another broker-dealer, are exempt from the Series 14 Examination requirement.
Supervisors of ten or more persons whose compliance responsibilities are limited to the registration of member organization employees with the various regulatory and self-regulatory authorities are also exempt from the Series 14 Examination requirement.
/03 Sales Contests
Member organizations that want to conduct sales contests must use proper judgment and follow good business practices in conducting these contests.
At a minimum, member organizations shall address the following areas when conducting a sales contest:
Member organizations that want to conduct sales contests must use proper judgment and follow good business practices in conducting these contests.
At a minimum, member organizations shall address the following areas when conducting a sales contest:
1. appropriate disclosure to customers — if an entity other than the member organization is financing the contest or otherwise providing remuneration, proper disclosure should be made where necessary (See SEA Rule 10b-10 for disclosure or remuneration by a broker or dealer on customers' transactions);
2. consistency with customer investment objectives — the member organization should establish guidelines for determining the appropriateness of the particular securities, funds or other investment vehicles for the customer accounts to be solicited; and
3. supervisory controls — a) the member organization should specifically determine whether it should place restrictions on the types of accounts which may participate, such as discretionary accounts, personal accounts of employees and accounts of employees' relatives; b) the member organization must take special measures to ensure appropriate supervision, disclosure and control over the selling efforts of its employees.
Member organizations must also determine that such contests comply with state and federal laws and whether they may be deemed to constitute a public offering of securities.
See also NASD Rule 2830 (k) and (1) relating to investment company shares.
See also NASD Rule 2830 (k) and (1) relating to investment company shares.
(b) BRANCH OFFICES
/01 Approval
In order to obtain approval for a new branch office, an application form prescribed by the Exchange must be completed and submitted to the Exchange through the CRD System.
In order to obtain approval for a new branch office, an application form prescribed by the Exchange must be completed and submitted to the Exchange through the CRD System.
/02 Acquisition, Merger or Consolidation
In the event of an acquisition, merger or consolidation, the application form referred to in /01 must be furnished, together with:
In the event of an acquisition, merger or consolidation, the application form referred to in /01 must be furnished, together with:
• The financial and other terms of the arrangements;
• A description of how the member organization will instruct new personnel in its policies and practices;
• The approximate number of new accounts (cash and margin) to be serviced or carried;
• The anticipated increase in aggregate indebtedness;
• A list of any additional accounting points to be established; and
• A description of any change in business activities (e.g., participation in underwriting, commodity accounts).
Additionally, arrangements must be made to register the sales and supervisory personnel of the acquired entity.
(c) BRANCH OFFICES
/02 Acquisition, Merger or Consolidation (continued)
Attention should also be given to the necessity of obtaining customers' consent to transfer accounts.
If a person associated with a non- member firm is to become a general partner or officer in the member organization, an Exchange examiner may visit the non- member firm prior to the effective date of the acquisition, merger or consolidation.
Attention should also be given to the necessity of obtaining customers' consent to transfer accounts.
If a person associated with a non- member firm is to become a general partner or officer in the member organization, an Exchange examiner may visit the non- member firm prior to the effective date of the acquisition, merger or consolidation.
(e) SUPERVISION: EXTENSION OF CREDIT AND CONCENTRATIONS OF RISK
/01 Application
The Exchange expects all member organizations to have in place a system whereby the concentrations of risk in proprietary, customer and other accounts and extension of credit to customers and others are under the formal supervision, evaluation and control of one or more general partners or principal executives. These responsibilities and authority may be delegated to other qualified principals or employees. The general partner or principal executive shall establish a separate system of follow-up and review to determine whether the delegated authority and responsibility is being properly exercised. Such systems shall be in place for each product line or risk activity, however, one person may be delegated responsibility for more than one product line or risk activity.
Each member organization should maintain a listing at its principal office each registered branch office and each non-registered location of those individuals designated responsibility for each business activity and product line for review by Exchange examiners.
The types of product lines and risk activities that should be specifically included in the delegation and review of responsibilities should include, but not be limited to, the following:
The Exchange expects all member organizations to have in place a system whereby the concentrations of risk in proprietary, customer and other accounts and extension of credit to customers and others are under the formal supervision, evaluation and control of one or more general partners or principal executives. These responsibilities and authority may be delegated to other qualified principals or employees. The general partner or principal executive shall establish a separate system of follow-up and review to determine whether the delegated authority and responsibility is being properly exercised. Such systems shall be in place for each product line or risk activity, however, one person may be delegated responsibility for more than one product line or risk activity.
Each member organization should maintain a listing at its principal office each registered branch office and each non-registered location of those individuals designated responsibility for each business activity and product line for review by Exchange examiners.
The types of product lines and risk activities that should be specifically included in the delegation and review of responsibilities should include, but not be limited to, the following:
• Trading limits — should be established and reviewed for each trader, department and the organization as a whole;
• Concentrations — parameters should be established to detect, monitor and evaluate risks of accumulations of large positions in introduced accounts as well as customers, non-customers (e.g. partners and principal executives), trading brokers and employees;
• Credit — Procedures should be established to:
(i) monitor limits and types of credit extended in customers' and non-customers' and other credit accounts
(ii) formulate house margin requirements
(iii) review the need for additional margin, mark-to-market and collateral deposits for all accounts;
• Compliance — systems should be in place to review compliance with applicable regulatory and in-house requirements;
• Risk — should include procedures to review risk potential individually and collectively in all types of commitments; and
• to review risk in all open or unpaid transactions, general ledger accounts and contractual and contingent commitments.
The above review should include but not be limited to: cleared and uncleared regular way and open contractual commitments including delayed delivery, "DVP", underwriting, when issued/when distributed, repurchase, standbys, commodity spot (cash), futures and forward contracts.
Supervisory and review procedures shall be maintained in writing, copies of which shall be maintained at the organization's principal office and at each branch office in accordance with existing Exchange interpretations of Rule 342. (See Rule 342.16/02)
Reports must be made to the Exchange when concentrations in securities or commodities positions, commitments or other contingencies could reasonably be expected to result in a significant loss, capital or liquidity problem.
See also Rule 401/05 — Early Reporting of Developing Problems.
Supervisory and review procedures shall be maintained in writing, copies of which shall be maintained at the organization's principal office and at each branch office in accordance with existing Exchange interpretations of Rule 342. (See Rule 342.16/02)
Reports must be made to the Exchange when concentrations in securities or commodities positions, commitments or other contingencies could reasonably be expected to result in a significant loss, capital or liquidity problem.
See also Rule 401/05 — Early Reporting of Developing Problems.
.10 REGISTERED REPRESENTATIVE OPERATING FROM RESIDENCE
/01 Special Supervision
Registered representatives operating from small offices (see Interpretation to Rule 342.15) shall be subject to special supervision by the member organization for the two-month period immediately following completion of the prescribed training period (as such training is required by Rule 345).
Member organizations are required to develop and implement special written supervisory procedures for this purpose that, at a minimum, provide for the following:
Registered representatives operating from small offices (see Interpretation to Rule 342.15) shall be subject to special supervision by the member organization for the two-month period immediately following completion of the prescribed training period (as such training is required by Rule 345).
Member organizations are required to develop and implement special written supervisory procedures for this purpose that, at a minimum, provide for the following:
• Daily review of all correspondence including prior approval of all outgoing correspondence;
• Review of all incoming and outgoing electronic communications, e.g., Internet use and electronic mail;
• Daily review of all customer account activity; and
• An on-site inspection by the Branch Office Manager (or qualified designee) responsible for supervision of the small (as defined in Section .15 of this Interpretation) office in the two-months following the prescribed training period.
Member organizations should advise registered representatives operating from small offices of the nature of, and time period that, the special supervision will be in place. It is important that member organizations retain records evidencing the special supervision.
.13 ACCEPTABILITY OF SUPERVISORS
/01 Qualifications
Every branch office or sales manager must have a creditable record and must pass the General Securities Sales Supervisor Qualification Examination ("Series 9/10").
Every branch office or sales manager must have a creditable record and must pass the General Securities Sales Supervisor Qualification Examination ("Series 9/10").
.15 SMALL OFFICES
/01 Application
Small offices that serve an order-taking function only and have no operational facilities are not required to have a qualified resident manager if they are under the close supervision of the main office or other designated branch office.
Small offices that serve an order-taking function only and have no operational facilities are not required to have a qualified resident manager if they are under the close supervision of the main office or other designated branch office.
/02 Limitation and Experience
Small offices are limited to a total of three registered representatives, one of whom is to be designated "in charge." Six months experience as a registered representative is considered sufficient for the person in charge in view of limitations on duties and responsibilities.
The requirement to designate a registered representative "in charge" will not apply to a small office with only one registered representative employed at the branch location (e.g., a registered representative operating from a residence office or other such small office). Close supervision and control of such one-person small offices by the main office or other designated branch office having a qualified Branch Office Manager on premises will be required and such procedures must be made part of the member organization's written plan of supervision. (See also Interpretation /05 be low and Interpretation /03 to Rule 342.11 concerning required special supervision for one-person offices).
Small offices are limited to a total of three registered representatives, one of whom is to be designated "in charge." Six months experience as a registered representative is considered sufficient for the person in charge in view of limitations on duties and responsibilities.
The requirement to designate a registered representative "in charge" will not apply to a small office with only one registered representative employed at the branch location (e.g., a registered representative operating from a residence office or other such small office). Close supervision and control of such one-person small offices by the main office or other designated branch office having a qualified Branch Office Manager on premises will be required and such procedures must be made part of the member organization's written plan of supervision. (See also Interpretation /05 be low and Interpretation /03 to Rule 342.11 concerning required special supervision for one-person offices).
/03 Limited Purpose Offices
An office with more than three registered representatives can be designated a "limited purpose office" if demonstrated to the satisfaction of the Exchange that, because of the limited scope and type of its business activities, it does not require a qualified on-site resident branch office manager. However, all limited purpose offices must otherwise be under the close supervision and control of a qualified person as defined under Rule 342.13.
The Exchange will consider various factors in determining whether a location is a limited purpose office, including: (i) the number of registered persons in the office, their registration category and the functions they perform; (ii) the scope and types of business activities conducted; (iii) the nature and complexity of products and services offered; (iv) the volume of business done; (v) the adequacy of procedures to supervise the limited purpose office activities; and (vi) the adequacy and independence of systems and supervisory persons for regular and "for cause" internal and third party inspections and audits.
Member organizations are responsible for maintaining a readily available, current and accurate list of all locations approved and designated by the Exchange as a limited purpose office. Further, any material change with respect to the representations made by any member organization pursuant to this Interpretation with respect to any location so approved and designated must be promptly brought to the attention of the Exchange for reconsideration.
An office with more than three registered representatives can be designated a "limited purpose office" if demonstrated to the satisfaction of the Exchange that, because of the limited scope and type of its business activities, it does not require a qualified on-site resident branch office manager. However, all limited purpose offices must otherwise be under the close supervision and control of a qualified person as defined under Rule 342.13.
The Exchange will consider various factors in determining whether a location is a limited purpose office, including: (i) the number of registered persons in the office, their registration category and the functions they perform; (ii) the scope and types of business activities conducted; (iii) the nature and complexity of products and services offered; (iv) the volume of business done; (v) the adequacy of procedures to supervise the limited purpose office activities; and (vi) the adequacy and independence of systems and supervisory persons for regular and "for cause" internal and third party inspections and audits.
Member organizations are responsible for maintaining a readily available, current and accurate list of all locations approved and designated by the Exchange as a limited purpose office. Further, any material change with respect to the representations made by any member organization pursuant to this Interpretation with respect to any location so approved and designated must be promptly brought to the attention of the Exchange for reconsideration.
/04 Booths
Information booths may be established by member organizations solely for the purpose of distributing literature.
Information booths may be established by member organizations solely for the purpose of distributing literature.
/05 Special Supervision
Registered Representatives operating from small, one-person offices shall be subject to the special supervision as prescribed in Interpretation /01 to Rule 342.10 (see page 3410).
Registered Representatives operating from small, one-person offices shall be subject to the special supervision as prescribed in Interpretation /01 to Rule 342.10 (see page 3410).
.16 SUPERVISION OF REGISTERED REPRESENTATIVES
/01 Registered Representative Correspondence — Review and Retention of Incoming Communications
The handling of incoming business communications is an important part of a member organization's compliance responsibilities. Rule 342, as interpreted by the Exchange, requires that member organizations have reasonable procedures for the review of incoming communications (inc luding electronic mail). With respect to incoming communications addressed to registered representatives, such review procedures shall specifically provide for the review of all such communications (except electronic mail which shall otherwise be included in the organization's overall review procedures).
It is the understanding and view of the Exchange that member organizations possess the legal capacity to insist that mail addressed to their offices be deemed to be related to their business, even if marked to the attention of a particular associated person, if they advise associated persons that personal communications should not be received at the firm. Member organizations are reminded that SEA Rule 17a-4(b)(4) requires that "originals of all communications received...by the member, broker or dealer...relating to its business as such..." must be preserved for not less than three years.
Some mail that can be readily identified from its envelope or otherwise be identified as being regulatory bulletins, research or promotional material, advertising or fund-raising appeals need not be deemed as incoming communications subject to this Interpretation.
In establishing procedures for carrying out supervisory responsibilities with regard to incoming mail directed to registered representatives, member organizations should:
The handling of incoming business communications is an important part of a member organization's compliance responsibilities. Rule 342, as interpreted by the Exchange, requires that member organizations have reasonable procedures for the review of incoming communications (inc luding electronic mail). With respect to incoming communications addressed to registered representatives, such review procedures shall specifically provide for the review of all such communications (except electronic mail which shall otherwise be included in the organization's overall review procedures).
It is the understanding and view of the Exchange that member organizations possess the legal capacity to insist that mail addressed to their offices be deemed to be related to their business, even if marked to the attention of a particular associated person, if they advise associated persons that personal communications should not be received at the firm. Member organizations are reminded that SEA Rule 17a-4(b)(4) requires that "originals of all communications received...by the member, broker or dealer...relating to its business as such..." must be preserved for not less than three years.
Some mail that can be readily identified from its envelope or otherwise be identified as being regulatory bulletins, research or promotional material, advertising or fund-raising appeals need not be deemed as incoming communications subject to this Interpretation.
In establishing procedures for carrying out supervisory responsibilities with regard to incoming mail directed to registered representatives, member organizations should:
1. assign designated persons to open such mail before the registered representative receives it, or
2. open such mail in the presence of the registered representative, or
3. have the registered representative open the mail in the presence of a designated person.
A program calling for incoming communications to be voluntarily submitted by registered representatives to supervisors will not suffice, since such a system does not assure the member organization that all business communications are, in fact, being reviewed and retained.
The Exchange has determined after careful examination of this matter that these suggested procedures do not conflict with existing postal regulations and do not interfere with asserted rights to privacy. Moreover, the public interest factors would appear to outweigh any inconvenience incurred.
The Exchange has determined after careful examination of this matter that these suggested procedures do not conflict with existing postal regulations and do not interfere with asserted rights to privacy. Moreover, the public interest factors would appear to outweigh any inconvenience incurred.
/02 Written Statement of Supervisory Procedures
The duty to maintain a written statement of supervisory procedures should be reflected in a distinct and specifically identifiable manual of such procedures, whose provisions are to be enforced by the member organization. A copy of this manual is to be kept at the principal office and at each branch office of the member organization.
The duty to maintain a written statement of supervisory procedures should be reflected in a distinct and specifically identifiable manual of such procedures, whose provisions are to be enforced by the member organization. A copy of this manual is to be kept at the principal office and at each branch office of the member organization.
/03 Compliance Manual
A principal method for ensuring that member organization personnel are aware of and comply with the organization's internal procedures, Exchange requirements, SEC regulations, and other applicable provisions of law, is by the maintenance of a timely, accurate and complete written manual of procedures and practices with which all member organization personnel are expected to comply. Accordingly, member organizations are expected to maintain a form of compliance manual appropriate to the type of firm involved, its size and product lines engaged in and to make copies thereof available to all appropriate member organization personnel.
A principal method for ensuring that member organization personnel are aware of and comply with the organization's internal procedures, Exchange requirements, SEC regulations, and other applicable provisions of law, is by the maintenance of a timely, accurate and complete written manual of procedures and practices with which all member organization personnel are expected to comply. Accordingly, member organizations are expected to maintain a form of compliance manual appropriate to the type of firm involved, its size and product lines engaged in and to make copies thereof available to all appropriate member organization personnel.
.30 ANNUAL REPORT AND CERTIFICATION
(d) Designation of Chief Compliance Officer
/01 Chief Compliance Officer Qualifications
1. The chief compliance officer must have adequate knowledge of (1) the products, services or line functions that need to be the subject of written compliance policies and written supervisory procedures; (2) the relevant rules, regulations, laws and standards of conduct pertaining to such products, services or line functions based on experience and or consultation with those persons who have a technical expertise in such areas of the member organization's business; (3) developing, or advising business persons charged with the obligation to develop, policies and procedures that are reasonably designed to achieve compliance with those relevant rules, regulations, laws and standards of conduct as prescribed by the applicable self-regulatory organizations and the SEC; (4) the process of supervision by line managers who are responsible for the execution of compliance procedures; and (5) developing programs to test compliance with the member organization's policies and procedures.
2. The requirement to designate a chief compliance officer does not preclude such person from holding any other position with the member organization, including the position of chief executive officer, provided that such person can discharge the duties of chief compliance officer in light of his or her other additional responsibilities.
(e) Annual Certification
/01 Requirements and Guidelines
1. Any certification made by a chief executive officer under circumstances where the chief compliance officer has concluded, after consultation, that there is an inadequate basis for making the annual certification would be, without limitation, conduct in violation of Rule 401 (Business Conduct).
2. The requirement that a member organization's processes include a review of the report by the board of directors and audit committee does not apply to member organizations that do not utilize these types of governing bodies and committees in the conduct of their business.
3. Compliance with the time and content requirements of Rule 342.30(e)(ii) pertaining to meetings between the chief executive officer (or equivalent officer) and the chief compliance officer does not necessarily satisfy the full extent of the obligations under such rule, which will vary with the facts and circumstances of a member organization's business activities and organizational structure.
4. The report required in Rule 342.30(e)(iii) must be produced prior to execution of the certification and be reviewed by the chief executive officer (or equivalent officer), chief compliance officer and any other officers the member organization deems necessary to make the certification and must be provided to the member organization's board of directors and audit committee.
5. The report required in Rule 342.30(e)(iii) must document the member organization's processes for establishing, maintaining, reviewing, testing and modifying compliance policies that are reasonably designed to achieve compliance with applicable Exchange rules and federal securities laws and regulations. Any allied member or other person designated by the member organization pursuant to Rule 342(b) may prepare the report. The report should include the manner and frequency in which the processes are administered, as well as the identification of officers and supervisors who have responsibility for such administration.
6. The report may be combined with any other compliance report or other similar report required by any other self-regulatory organization provided that (1) such report is clearly titled in a manner indicating that it is responsive to the requirements of the certification; (2) a member organization that submits a report for review in response to an Exchange request must submit it in its entirety; and (3) the member organization must make such a report in a timely manner as required by the rule.
| Amendment. Amended by SR-FINRA-2008-036 eff. Nov. 11, 2008. Amended by SR-FINRA-2008-030 eff. Dec. 15, 2008. Selected Notices: 08-57, 08-64. |