Trading Conduct & Supervision
The duties owed by registered persons and their supervisors — conduct standards, supervisory obligations, recordkeeping, and the rules governing customer relationships in the U.S. financial markets.
Overview
Where Market Regulation identifies who has authority over U.S. financial markets, this foundation addresses what those regulators require of registered persons and their employers. The substantive duties impose two related but distinct sets of obligations: individual conduct standards for the registered representatives, traders, and associated persons who deal with customers and the market, and supervisory obligations for the firms that employ them.
These duties flow from the federal statutes administered by the SEC and CFTC and are elaborated in detail through the rulebooks of FINRA and the NFA. The framework is layered: a statutory anti-fraud provision in the Exchange Act or Commodity Exchange Act is implemented through SEC or CFTC regulation, then refined further by SRO rules and interpretations specifying how the duty applies in particular contexts — soliciting orders, recommending investments, or supervising remote employees.
Most enforcement against firms and individuals — whether by regulators or in civil disputes — turns on these conduct and supervisory rules. They are also the principal subject of expert testimony in financial-markets disputes, addressed under Expert Witness Practice.
Conduct Standards
Several substantive conduct duties recur across the federal regulatory regime.
Suitability and Regulation Best Interest. Broker-dealers recommending securities transactions to customers have long been subject to a suitability obligation under FINRA Rule 2111: a recommendation must be suitable in light of the customer’s investment profile. In 2019, the SEC adopted Regulation Best Interest (Rule 15l-1 under the Exchange Act, 17 C.F.R. § 240.15l-1), which raised the standard for retail customer recommendations to “the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the retail customer’s.” Reg BI imposes four component obligations: disclosure, care, conflict of interest, and compliance. Following Reg BI’s adoption, FINRA amended Rule 2111 (in Regulatory Notice 20-18) to provide that the suitability rule does not apply to recommendations subject to Reg BI. The two regimes now divide by customer type: Reg BI governs recommendations to retail customers; Rule 2111 continues to govern recommendations to non-retail customers, including institutions and entities.
Investment advisers, by contrast, are subject to fiduciary duties under the Investment Advisers Act of 1940 — duties of care and loyalty articulated in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), and elaborated in the SEC’s 2019 Commission Interpretation.
In the futures context, NFA Compliance Rule 2-30 imposes “know your customer” obligations on members dealing with non-institutional customers, and Rule 2-29 governs communications. The CFTC’s anti-fraud authority under Section 4b of the Commodity Exchange Act applies to fraudulent or deceptive conduct in connection with futures and swaps.
Best execution. FINRA Rule 5310 requires broker-dealers to use reasonable diligence to ascertain the best market for a security and to execute customer orders so the resulting price is as favorable as possible under prevailing market conditions. The duty applies to both directed and non-directed orders and is enforced through regular reviews of execution quality.
Communications with the public. FINRA Rule 2210 governs broker-dealer communications, distinguishing between retail communications, correspondence, and institutional communications, with progressively stricter principal-approval and recordkeeping requirements. NFA Compliance Rule 2-29 imposes parallel requirements on futures industry members. Both sets of rules prohibit communications that are false, exaggerated, unwarranted, or misleading, and impose specific disclosure requirements for performance information.
Just and equitable principles of trade. FINRA Rule 2010 (formerly NASD Rule 2110) and NFA Compliance Rule 2-4 each require members to observe high standards of commercial honor and just and equitable principles of trade. Sometimes called “catch-all” conduct rules, these provisions give regulators the flexibility to address conduct that is not specifically prohibited elsewhere but is nonetheless contrary to market integrity. NFA Compliance Rule 2-2 is the parallel anti-fraud provision, addressing cheating, fraud, deceit, and related misconduct.
Supervisory Obligations
Federal law and SRO rules require registered firms to supervise their associated persons and to maintain systems reasonably designed to achieve compliance with applicable laws and regulations.
Statutory and regulatory basis. Section 15(b)(4)(E) of the Exchange Act authorizes the SEC to discipline broker-dealers and their associated persons for “failure reasonably to supervise” another person who has committed a violation, unless reasonable procedures were established and followed. The CFTC’s parallel supervisory-failure authority is regulatory rather than statutory: CFTC Regulation 166.3 (17 C.F.R. § 166.3) requires every Commission registrant (except associated persons with no supervisory duties) to diligently supervise the handling of all commodity interest accounts and the activities of partners, officers, employees, and agents relating to the registrant’s business.
Written supervisory procedures. FINRA Rule 3110(b) requires every broker-dealer to establish, maintain, and enforce written supervisory procedures (WSPs) reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules. The WSPs must address, among other matters, supervision of registered persons, supervision of customer accounts, transmittals of customer funds and securities, and customer complaints. NFA Compliance Rule 2-9 imposes a comparable continuing duty of diligent supervision on futures industry members.
Designation of supervisors. Firms must designate qualified principals to supervise associated persons in each line of business. Principals must hold the appropriate Series qualification — Series 24 for general securities principals, Series 30 for branch-office managers in the futures industry. FINRA Rule 3110(a) governs the designation and qualifications of supervisors.
Branch office and remote supervision. Branch office structures and the rise of remote work have prompted significant attention to how supervisory presence is maintained across geographically dispersed personnel. FINRA Rule 3110.18, adopted in 2023, established a Residential Supervisory Location designation for certain remote work arrangements. The CFTC and NFA address remote supervision principally through interpretive guidance.
Annual compliance certifications and reviews. FINRA Rule 3120 requires broker-dealers to conduct an annual review of their supervisory system. Rule 3130 requires the chief executive officer to certify annually that the firm has established and maintains compliance processes reasonably designed to achieve compliance with applicable laws. In the futures industry, NFA Compliance Rule 2-9’s continuing supervisory duty is typically implemented through periodic self-audit and supervisory review procedures consistent with NFA interpretive guidance, including the firm’s annual self-audit questionnaire.
Recordkeeping Requirements
Recordkeeping is a foundational element of the regulatory architecture: it enables firms to demonstrate compliance, regulators to investigate misconduct, and customers to obtain redress. The federal recordkeeping regime is detailed and prescriptive.
For broker-dealers. SEC Rule 17a-3 (17 C.F.R. § 240.17a-3) specifies the books and records every broker-dealer must make, including blotters, ledgers, customer account records, trade confirmations, order tickets, and customer complaint files. SEC Rule 17a-4 (17 C.F.R. § 240.17a-4) prescribes retention periods that vary by record type — generally three to six years, with specified categories (such as blotters and customer ledgers) required to be preserved for six years with the first two years easily accessible, and certain organizational documents preserved for the life of the firm. FINRA Rule 4511 requires FINRA members to make and preserve books and records as required by SEC Rules 17a-3 and 17a-4 and by FINRA rules.
For CFTC registrants. CFTC Regulation 1.31 (17 C.F.R. § 1.31) specifies recordkeeping requirements for CFTC registrants, including retention periods (generally five years for most records, with two years readily accessible) and format requirements. NFA Compliance Rule 2-10 imposes parallel requirements on NFA members.
Electronic communications. Both regimes require preservation of electronic business communications, including emails, instant messages, and increasingly, communications via collaboration platforms. The SEC and CFTC have brought significant enforcement actions in recent years against firms for failures to preserve “off-channel” business communications conducted via personal devices and unapproved messaging applications, with aggregate penalties exceeding several billion dollars.
Customer Relationships
The rules governing customer relationships impose obligations from the moment a relationship is established through its termination.
Account opening. Broker-dealers must obtain customer information necessary to comply with applicable laws, including suitability and anti-money-laundering requirements. FINRA Rule 2090 (Know Your Customer) requires use of reasonable diligence to know the essential facts about every customer. NFA Compliance Rule 2-30 requires futures industry members opening accounts for non-institutional customers to obtain specified information about the customer’s investment experience, financial situation, and trading objectives, and to provide risk disclosure.
Risk disclosures. Several types of accounts and transactions require specific risk disclosures: futures (CFTC-mandated disclosure under Regulation 1.55), options (the Options Disclosure Document), security futures, and certain securities products. Margin agreements and discretionary trading authorizations require separate disclosures and customer acknowledgments.
Customer funds and segregation. A distinctive feature of the futures industry is the requirement to segregate customer funds: futures commission merchants must hold customer funds separately from firm funds and may not commingle customer funds with proprietary funds. Section 4d of the Commodity Exchange Act, CFTC Regulations 1.20–1.30, and NFA’s Financial Requirements govern the segregation regime.
FCM insolvency priorities are governed separately by Subchapter IV of Chapter 7 of the Bankruptcy Code (11 U.S.C. §§ 761–767) and CFTC Part 190 (17 C.F.R. Part 190). Under that framework, segregated customer funds are treated as “customer property” and distributed pro rata to public customers in priority over non-public customers and general creditors, subject only to claims for administration of customer property.
Securities customers are protected by a different mechanism: the Securities Investor Protection Corporation, which administers customer-protection insurance in broker-dealer liquidations under the Securities Investor Protection Act of 1970.
Customer complaints. FINRA Rule 4513 requires retention of records of written customer complaints. NFA Compliance Rule 2-10 imposes parallel requirements. Firms typically maintain internal complaint-handling procedures and timeframes for response.
AML and Anti-Fraud Obligations
Anti-money-laundering obligations are imposed on broker-dealers, FCMs, and other registered firms under the Bank Secrecy Act and its implementing regulations.
AML programs. FINRA Rule 3310 requires broker-dealers to develop and implement a written AML program that includes policies and procedures to detect and report suspicious activity, a Customer Identification Program, customer due diligence, ongoing employee training, and an independent annual audit. NFA Compliance Rule 2-9 imposes parallel AML obligations on futures industry members.
Suspicious activity reporting. Firms must file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) under 31 C.F.R. § 1023.320 (broker-dealers) and § 1026.320 (futures industry).
Anti-fraud authority. The principal federal anti-fraud provisions applicable to financial markets are Section 10(b) of the Exchange Act and SEC Rule 10b-5 thereunder (for securities), Section 4b of the Commodity Exchange Act (for futures and swaps), and Section 6(c) of the CEA (for commodity markets generally). FINRA and NFA each maintain anti-fraud provisions in their rulebooks, and state securities laws contain anti-fraud provisions that operate in parallel.
Frequently Asked Questions
What is the difference between the suitability standard and Regulation Best Interest?
FINRA Rule 2111 requires that a broker-dealer’s recommendation be suitable for the customer in light of the customer’s investment profile. Regulation Best Interest, adopted by the SEC in 2019 with a June 2020 compliance date, established a heightened standard for recommendations to retail customers: under Rule 15l-1, the broker-dealer must act in the retail customer’s best interest and may not place its own interest ahead of the customer’s. Reg BI implements this through four component obligations — disclosure, care, conflict of interest, and compliance. The two rules divide by customer type. Reg BI applies only to retail customers; FINRA Rule 2111 continues to govern recommendations to non-retail customers. For retail recommendations covered by Reg BI, FINRA has stated in Regulatory Notice 20-18 that compliance with Reg BI’s Care Obligation satisfies the suitability rule.
What are written supervisory procedures and who must maintain them?
Written supervisory procedures (WSPs) are the documented procedures every broker-dealer (and futures industry member) must maintain to supervise its associated persons and the firm’s business activities. FINRA Rule 3110(b) requires every FINRA member to establish, maintain, and enforce WSPs reasonably designed to achieve compliance with applicable laws and rules. NFA Compliance Rule 2-9 imposes a comparable obligation on futures industry members. WSPs must address supervision of associated persons, customer accounts, transmittals of funds, customer complaints, and other matters specific to the firm’s business.
How long must broker-dealers retain records?
SEC Rule 17a-4 prescribes retention periods that vary by record type. Specified categories listed in Rule 17a-4(a) — including blotters, customer ledgers, and other foundational records — must be preserved for six years, with the first two years easily accessible. Other categories under Rule 17a-4(b) are preserved for three years. Certain organizational documents (such as partnership articles and certificates of incorporation) must be retained for the life of the firm under Rule 17a-4(d). Records of customer complaints under FINRA Rule 4513 must be preserved for at least four years. The specific retention periods for each record type are listed in Rule 17a-4(a) through (g).
What does the “segregation” requirement mean for futures customers?
Section 4d of the Commodity Exchange Act and CFTC Regulations 1.20–1.30 require futures commission merchants to hold customer funds in segregated accounts, separate from firm funds, and prohibit commingling with proprietary positions. Segregation has two consequences. First, it protects customer funds from misuse or loss in the ordinary course of business — firm losses cannot be paid out of customer funds. Second, in FCM insolvency, segregated customer funds are treated as “customer property” under Subchapter IV of Chapter 7 of the Bankruptcy Code (11 U.S.C. §§ 761–767) and CFTC Part 190 (17 C.F.R. Part 190), and distributed pro rata to public customers in priority over non-public customers and general creditors.
What records of communications must firms preserve?
SEC Rule 17a-4(b)(4) and FINRA Rule 4511 require broker-dealers to preserve originals of all communications received and copies of all communications sent relating to the firm’s business as such, including emails, instant messages, and other electronic communications. CFTC Regulation 1.31 imposes parallel obligations on CFTC registrants. Both regimes have led to significant enforcement actions in recent years for failures to preserve “off-channel” business communications conducted through personal devices and unapproved messaging applications, with firms paying penalties totaling several billion dollars in the aggregate.
Related Foundations
- Market Regulation — the regulators and statutes from which these conduct and supervisory duties derive.
- Disputes & Enforcement — how violations of these duties are pursued through regulatory enforcement, arbitration, and civil litigation.
- Expert Witness Practice — the methodology and qualifications governing expert testimony on industry custom and practice in financial-markets disputes.