FlNRA Rule 3210 – Accounts at other Broker-Dealers and Financial Institutions (the “Rule”) was approved by the SEC in 2016 and became effective April 3, 2017. As approved, the new rule change helps facilitate effective oversight of accounts opened or established by associated persons at firms other than the firm at which they are employed; and consolidates and replaces NASD Rule 305 0, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/ 02.
Based upon prior rules and interpretations, FINRA has long been focused on the supervisory practices of member firms with respect to the monitoring of personal accounts opened or established outside of the firm by its associated persons. However, the new Rule has significant elements that dramatically expand the universe of accounts that member firms are required to maintain documentation for (confirms and statements), along with the obligation to review and monitor those accounts.
Rule 3050 required an associated person, where the associated person has a financial interest or discretionary authority prior to opening an account or placing an initial order with another member to notify both the employer and the executing member. Rule 3210 now requires an associated person to notify the Company and the executing firm in writing, prior to opening a securities account or placing an initial order for the purchase or sale of securities with another member or other financial institution.
In addition to the modifications regarding notification, Rule 3210 now has been expanded to cover any account at a member other than the employer member, or at any other financial institution, any account in which in which securities transactions can be effected and in which the associated person has a “beneficial interest.”
Presumption of Beneficial Interest
The Rule specifies accounts in which an associated person is presumed to have a beneficial interest. Thus, for purposes of the Rule, an associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by:
- the spouse of the associated person;
- a child of the associated person or of the associated person’s spouse, provided that the child resides in the same household as or is financially dependent upon the associated person;
- any other related individual over whose account the associated person has control; or
- any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.
Rebuttal of Presumption
The Rule makes allowance for rebutting the presumption as to specified accounts. Specifically, for purposes of spouse and child accounts as set forth above, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account. However, FINRA has not given specific guidelines with respect to the overcoming the presumption, but they have noted that they expect that an employer member, as a matter of sound supervisory practice, will have policies and procedures in place to make determinations as to accounts subject to the Rule, and to document such determinations as appropriate. Specifically, FINRA stated that Supplementary Material .02 to the Rule is not intended to prescribe specific practices or methodologies that members must use to comply with the rule and, as such, is intended to permit members reasonable flexibility to design policies and procedures that are consistent with their business model and potential risks.
Transactions and Accounts Not Subject to the Rule
You should note that the Rule’s requirements do not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts.
Since the Rule requires written notification from associated persons regarding the accounts that are now subject to the Rule, failure to take action, either obtaining a list of accounts from the associated person and or failure to exempt the accounts and or review and monitor those accounts, will subject the FINRA member firms and their associated persons to sanctions and enforcement.
With that said, member firms should review its supervisory procedures to make sure that they have policies and procedures in place to make determinations as to accounts subject to the Rule.
Additionally, documentation will be necessary to document whether an account is subject to the Rule, including documentation that the firm can utilize to both (i) confirm the inventory of impacted accounts; (ii) make a determination that the associated person derives no economic benefit from, and exercises no control over, the account, and as such, is exempt from the disclosure obligations of the Rule; and or (ii) document its decision to either exempt or not exempt the account from its obligation to monitor account activity and maintain the respective records.