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.