Super­vi­si­on and Surveillance 

A DLT net­work desi­gned to faci­li­ta­te secu­ri­ties tran­sac­tions may pre­sent new and uni­que chal­lenges rela­ted to main­tai­ning appro­pria­te super­vi­so­ry poli­ci­es and pro­ce­du­res and sur­veil­lan­ce sys­tems in accordance with appli­ca­ble rules (see, e.g., FINRA Rules 3110 and 3120). 

For exam­p­le, FINRA’s super­vi­so­ry rules requi­re the review of cus­to­mer account acti­vi­ty as well as the review of post-trade tran­sac­tions, such as account desi­gna­ti­on chan­ges, to cor­rect order errors. When estab­li­shing and main­tai­ning super­vi­so­ry and com­pli­ance sur­veil­lan­ce sys­tems in a DLT net­work, bro­ker-dea­lers would need to con­sider whe­ther appro­pria­te super­vi­so­ry and com­pli­ance per­son­nel have suf­fi­ci­ent levels of access to DLT net­work records. Moreo­ver, bro­ker-dea­lers may wish to con­sider whe­ther such sys­tems would pro­vi­de evi­dence of review that is pro­per­ly recor­ded and attri­bu­ta­ble to desi­gna­ted super­vi­sors, or whe­ther a bro­ker-dea­ler would deve­lop its own par­al­lel process. 

As noted ear­lier, some mar­ket par­ti­ci­pan­ts are con­tem­pla­ting offe­ring cen­tra­li­zed faci­li­ties on DLT net­works to per­form cer­tain repe­ti­ti­ve and shared func­tions (e.g., having a node on the net­work ser­ve as a veri­fier of investor’s accre­di­ta­ti­on sta­tus, set­ting up a cen­tra­li­zed iden­ti­ty manage­ment func­tion, etc.). To the ext­ent bro­ker-dea­lers choo­se to out­sour­ce any func­tions to the­se faci­li­ties on the net­work, they would be requi­red to include in their writ­ten super­vi­so­ry pro­ce­du­res how they will ensu­re com­pli­ance with appli­ca­ble secu­ri­ties laws and regu­la­ti­ons and FINRA rules (see, e.g., Noti­ce to Mem­bers 05–48 (Out­sour­cing)). Bro­ker-dea­lers may also want to review the cover­ed func­tions first, to ensu­re that the func­tions are not pro­hi­bi­ted from being outsourced. 

Firms may also wish to con­sider pro­vi­ding spe­cia­li­zed trai­ning to super­vi­so­ry per­son­nel and inter­nal audi­tors, so that they can reason­ab­ly navi­ga­te the sys­tem and effec­tively per­form their assi­gned functions.

Link: Dis­tri­bu­ted Led­ger Tech­no­lo­gy: Impli­ca­ti­ons of Block­chain for the Secu­ri­ties Industry

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