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Financial Services Law Insights and Observations

FINRA reminds firms of third-party supervisory obligations

Agency Rule-Making & Guidance FINRA Compliance Third-Party Risk Management Vendor Management

Agency Rule-Making & Guidance

On August 13, the Financial Industry Regulatory Authority (FINRA) reminded member firms of their supervisory obligations related to outsourcing to third-party vendors. Regulatory Notice 21-29 reiterates that supervisory obligations under FINRA Rule 3110 extend to member firms’ outsourcing of certain “covered activities” and reminds firms that under Regulatory Notice 05-48, “‘outsourcing an activity or function to … [a vendor] does not relieve members of their ultimate responsibility for compliance with all applicable federal securities laws and regulations and [FINRA] and MSRB rules regarding the outsourced activity or function.’” Emphasizing that “member firms have continued to expand the scope and depth of their use of technology and have increasingly leveraged [v]endors to perform risk management functions and to assist in supervising sales and trading activity and customer communications,” FINRA reminds member firms that supervisory systems and associated written supervisory procedures extend to the “outsourced activities or functions” of their vendors. The notice also cites examples of violations uncovered during previous examinations linked to third-party vendors related to data integrity, cybersecurity and technology governance, and books and records requirements. These include instances where firms’ vendors failed to implement technical controls or failed to properly manage customers’ nonpublic information. Member firms are encouraged to take a “risk-based approach” to vendor management and to assess whether their supervisory procedures for third-party vendors are “sufficient to maintain compliance with applicable rules.”

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