Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 3160 governs the conduct of FINRA member firms that are parties to networking arrangements — contractual or other written agreements under which the member offers broker-dealer services on or off the premises of a financial institution such as a bank, savings and loan association, savings bank, credit union, or the service corporation of such an institution.
The rule establishes requirements for physical setting, written agreements, customer disclosure, communications with the public, and termination notifications that together are designed to ensure customers of financial institutions understand precisely who is providing their investment services, what regulatory protections apply, and what risks their investments carry that are absent from the institution's deposit products.
Rule 3160 sits within the 3100 supervisory responsibilities subsection of the 3000 series and was adopted effective February 15, 1998 as NASD Rule 2350 — then known informally as the Bank Broker-Dealer Rule. It was consolidated into the current FINRA rulebook as Rule 3160, effective June 14, 2010, with amendments reflecting the networking exception framework established by the Gramm-Leach-Bliley Act of 1999 and the joint SEC and Federal Reserve rules implementing that Act — known as Regulation R — which became mandatory on the first day of a bank's fiscal year commencing after September 30, 2008.
A further amendment took effect February 4, 2013. The rule has not been amended since that date.
The investor protection problem Rule 3160 addresses is structural and persistent. When a registered representative sits at a desk inside a bank branch — or when a bank employee refers customers to a broker-dealer — there is a material risk that customers will believe they are receiving a product or service offered by the bank itself, subject to FDIC insurance and carrying the implicit backing of the institution.
That belief is mistaken. Securities products sold through broker-dealer networking arrangements are not bank deposits, are not FDIC-insured, and carry investment risk including the potential for total loss of principal. Rule 3160's disclosure requirements exist to make that distinction impossible for any customer to miss.
Understanding Rule 3160 requires understanding the regulatory history that created the bank-broker dealer relationship in its modern form. Prior to the Gramm-Leach-Bliley Act of 1999, banks enjoyed a broad blanket exception from the definition of broker under the Securities Exchange Act of 1934. The Glass-Steagall Act of 1933 had largely separated commercial banking from investment banking, and the regulatory framework reflected that separation by not requiring banks to register as broker-dealers even when they engaged in securities activities.
The Gramm-Leach-Bliley Act fundamentally restructured this framework. It repealed the blanket bank broker exception and replaced it with eleven specific functional exceptions that defined the limited categories of securities activity banks could continue to conduct without registering as broker-dealers.
One of the most commercially significant of these was the networking exception, which allows a bank to enter into a contractual or other written arrangement with a registered broker-dealer under which the broker-dealer offers brokerage services to bank customers on or off bank premises, subject to specified conditions.
The practical consequence of the networking exception is the familiar model in which a registered representative employed by or affiliated with a broker-dealer operates within a bank branch, providing investment services to the bank's retail customer base.
The SEC and the Board of Governors of the Federal Reserve jointly adopted Regulation R in 2007 to implement the Gramm-Leach-Bliley bank broker provisions, including the networking exception. Rule 701 of Regulation R is the specific provision that governs the conditions under which the networking exception applies.
FINRA Rule 3160 incorporates Regulation R Rule 701 by reference — the written networking agreement between a FINRA member and a financial institution must include all broker-dealer obligations as applicable set forth in Rule 701, and the member must comply with those obligations independently of whatever the agreement says. The compliance obligation is not merely contractual; it is regulatory.
Among the significant conditions in Regulation R Rule 701 is the treatment of referral fees. The networking exception generally prohibits banks from paying their unregistered employees incentive compensation for referring customers to the broker-dealer.
A bank employee may receive a nominal one-time cash fee of a fixed dollar amount that is not contingent on whether the referral results in a transaction. Rule 701 provides a separate exemption that allows higher referral fees — beyond the nominal fixed amount — for referrals of customers who qualify as high net worth customers or institutional customers as those terms are defined in the rule, provided the broker-dealer performs an appropriate suitability analysis before paying the referral fee or determines that the customer has the ability to evaluate the relevant investment risk independently and is exercising independent judgment.
Rule 3160(a)(1) establishes the physical conduct standards for members operating on the premises of a financial institution. Three requirements apply when broker-dealer services are offered on-premises. First, the member must be clearly identified as the person providing broker-dealer services and must distinguish its services from the services of the financial institution. Second, the member must conduct its broker-dealer services in an area that clearly displays the member's name. Third, to the extent practicable, the member must maintain its broker-dealer services in a location physically separate from the routine retail deposit-taking activities of the financial institution.
The third requirement — physical separation to the extent practicable — reflects the regulatory judgment that proximity to the teller line is the most dangerous context for consumer confusion. A customer who has just deposited a check and is then approached by a person at a nearby desk to discuss investment products is in precisely the situation most likely to generate the mistaken belief that the investment product carries the same institutional backing as the deposit account.
Physical separation serves as a structural reminder that the two activities are legally and operationally distinct. Where complete separation is not practicable — in smaller bank branches where space does not permit a physically distinct broker-dealer area — the identification and naming requirements take on heightened importance as the primary means of distinguishing the services.
These setting requirements apply only when broker-dealer services are conducted on the financial institution's premises. A networking arrangement may also involve off-premises broker-dealer services — for example, where a bank refers customers to a broker-dealer for services delivered at the broker-dealer's own offices. In that case the setting requirements do not apply, but all other Rule 3160 requirements — written agreement, customer disclosure, communications standards, and termination notification — remain operative.
Rule 3160(a)(2) requires that every networking arrangement between a FINRA member and a financial institution be governed by a written agreement. The written agreement must address three core elements. First, it must set forth the responsibilities of each party.
Second, it must specify the compensation arrangements between the parties, including any referral fees and the conditions under which they will be paid. Third, it must include all broker-dealer obligations as applicable under Regulation R Rule 701.
The rule also requires that the written agreement include a provision ensuring that supervisory personnel of the member and representatives of the SEC and FINRA will be permitted access to the financial institution's premises where the member conducts broker-dealer services in order to inspect the books and records and other relevant information maintained by the member.
This regulatory access provision is critical because FINRA's examination authority over its member firms must extend to wherever those firms conduct their business — including inside bank branches that are not themselves FINRA members. Without a contractual commitment from the financial institution permitting examiner access, FINRA's supervisory reach would effectively stop at the bank branch door.
FINRA's written supervisory procedures requirements under Rule 3110 apply directly to the networking arrangement context. Member firms must have WSPs that specifically address the supervision of registered representatives operating under networking arrangements, including the procedures for ensuring compliance with both Rule 3160 and the applicable provisions of Regulation R, the review of customer accounts opened through networking arrangements, the supervision of any bank employees involved in referring customers, and the monitoring of compensation arrangements to confirm compliance with the referral fee conditions of Regulation R Rule 701.
Rule 3160(a)(3) contains the customer disclosure requirements that are, from a consumer protection standpoint, the heart of the rule.
At or prior to the time a customer account is opened by a member party to a networking arrangement, the member must disclose in writing to each customer three specific facts: that broker-dealer services are being provided by the member and not by the financial institution; that the securities products purchased or sold are not insured by the FDIC; that the securities products are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and that the securities products are subject to investment risks including the possible loss of the principal invested.
When the account is opened on the premises of a financial institution, the member must also make these disclosures orally in addition to in writing.
The oral disclosure requirement for on-premises accounts reflects the heightened consumer confusion risk that physical proximity to a bank creates — a customer sitting down at a desk inside a bank branch to open a brokerage account needs to hear, not merely read, that the product they are purchasing is not a bank product and carries investment risk.
The oral requirement ensures that even a customer who signs disclosure forms without reading them carefully has received the substantive message through a second channel.
The specific content of the required disclosures — FDIC exclusion, non-deposit status, non-guaranteed status, and investment risk including possible loss of principal — maps directly to the most dangerous misconceptions that investors in bank-based brokerage arrangements have historically held. Studies and enforcement actions over the decades since bank-based investment sales became common in the 1990s repeatedly identified these four misconceptions as the ones most likely to result in investor harm: belief that the product was FDIC-insured, belief that it was equivalent to a certificate of deposit, belief that the bank guaranteed it, and failure to understand that principal could be lost. Rule 3160's disclosure requirements were designed specifically to eliminate each of these misconceptions.
Rule 3160(a)(4) extends the disclosure obligations beyond account opening to retail communications and account documents. All member confirmations and account statements must clearly indicate that broker-dealer services are being provided by the member — reinforcing through ongoing correspondence the distinction between the broker-dealer and the financial institution that may have referred the customer or provided the physical setting for the account opening.
Retail communications — defined broadly to include material published or designed for use in radio or television broadcasts, ATM screens, billboards, signs, posters, and brochures — that announce the location of a financial institution where broker-dealer services are provided by the member, or that promote the name or services of the financial institution, or that are distributed by the member on the premises of a financial institution, must include the customer disclosures required by Rule 3160(a)(3).
The rule provides a standardized legend that members may use to satisfy the disclosure requirement in retail communications, provided the disclosures are displayed conspicuously. That legend consists of three statements: Not FDIC Insured; No Bank Guarantee; May Lose Value. This three-line legend, familiar to anyone who has encountered bank-based investment sales literature, was designed to be compact enough to fit in any retail communication format while conveying the three most critical investor protection points.
The rule provides three limited exceptions to the retail communication disclosure requirement. Radio broadcasts of thirty seconds or less are exempt — the time constraint makes it impractical to include meaningful disclosure within the broadcast itself. Electronic signs including billboard-type electronic signs, time and temperature signs, and ticker tape signs are exempt, though television, online services, and ATMs are excluded from this exception and remain subject to the disclosure requirement.
Ordinary signs such as banners and posters used only as location indicators — identifying where broker-dealer services are available rather than advertising or promoting those services — are also exempt. The connecting principle for all three exceptions is that disclosure is not required in communications where omitting it would not render the communication misleading in context. A ticker tape sign running across the side of a building showing a stock price does not mislead investors about FDIC insurance status; a brochure describing available investment products does.
Rule 3160(a)(5) imposes a single but important administrative obligation on the member: prompt notification to the financial institution when any associated person of the member who is employed by the financial institution is terminated for cause.
This requirement reflects the reality that in many networking arrangements, the registered representative operating inside the bank branch is employed by the financial institution itself — the bank pays the person's salary and benefits, while the broker-dealer provides the registration and supervision necessary to conduct securities business. When such a person is terminated for cause by the broker-dealer, the financial institution has a legitimate and immediate need to know, because the person remains its employee and may continue interacting with the institution's customers in a non-securities capacity while no longer being authorized to conduct broker-dealer services.
The termination notification requirement also serves as a compliance checkpoint against the scenario where a terminated representative continues to solicit securities business or makes securities recommendations after their FINRA registration has been placed in a terminated status — a form of unauthorized practice that Rule 3160's notification obligation helps the financial institution prevent. The notification must be prompt, which written supervisory procedures should define with a specific timeframe consistent with the urgency the circumstances require.
The supervisory challenges presented by networking arrangements are substantially greater than those in a conventional broker-dealer branch office context. A registered representative operating inside a bank branch is physically separated from their supervising principal, surrounded by bank employees with different compliance cultures and different regulatory obligations, and interacting with customers who may have an established relationship with the bank that creates implicit trust extending to whatever products the bank environment makes available to them.
FINRA's examination program for networking arrangements focuses on whether member firms have WSPs that specifically address the supervision of representatives operating under these arrangements, whether the written networking agreements are complete and current, whether customer disclosures are being made consistently and in compliance with Rule 3160's written and oral requirements, whether the three-line legend or equivalent disclosures appear in retail communications, whether the member can demonstrate regulatory access to bank branch records as required by the written agreement, and whether the compensation arrangements with the financial institution comply with the conditions of Regulation R Rule 701. The supervisory control testing required by FINRA Rule 3120 should include periodic sampling of networking arrangement compliance as part of the firm's annual testing program.
FINRA Rule 4512's customer account information requirements apply fully to accounts opened through networking arrangements. The requirement to make reasonable efforts to obtain the name of a trusted contact person is particularly relevant in the networking context, where customers are frequently older retail banking customers whose initial contact with the broker-dealer came through their longstanding bank relationship, and who may be at elevated risk of financial exploitation under the framework of FINRA Rule 2165.
Enforcement actions involving Rule 3160 and its predecessor NASD Rule 2350 have most commonly involved failures in the customer disclosure and communications areas.
The most persistent violation pattern has been inadequate or inconsistent delivery of the required disclosures at account opening — particularly the failure to make oral disclosures when accounts are opened on bank premises, or the delivery of disclosure documents that omit one or more of the required elements.
Communications violations have included retail materials distributed at financial institution premises that lack the required legend or include language implying institutional backing for securities products.
Compensation arrangement violations have also appeared in the enforcement record, particularly cases where bank employees involved in referrals received compensation structured to function as incentive-based referral fees beyond the nominal fixed amount permitted under the networking exception's standard conditions, without qualifying for the high net worth or institutional customer exemption available under Regulation R Rule 701. These violations often reflect inadequate compliance review of the economic terms of networking agreements rather than deliberate evasion, but they expose both the broker-dealer member and, potentially, the financial institution to regulatory and civil liability.
The Minor Rule Violation Plan eligible violation list — updated by Regulatory Notice 13-32 — includes certain Rule 3160 violations, reflecting FINRA's recognition that technical non-compliance with the rule's disclosure and documentation requirements can often be addressed through the expedited resolution process rather than full disciplinary proceedings, while reserving the more serious enforcement pathway for violations involving customer harm or systematic non-compliance.
FINRA Rule 3160 is tested on the Series 7 General Securities Representative examination in the context of customer account opening procedures, required disclosures, and the obligations of registered representatives operating in bank and financial institution settings.
The Series 24 General Securities Principal examination tests Rule 3160 in greater depth, covering supervisory obligations, written agreement requirements, the Regulation R compensation framework, and the examination access provisions. The rule also appears on the Series 66 Uniform Combined State Law Examination in the context of broker-dealer regulatory obligations.
Candidates preparing for any examination covering FINRA conduct rules should be familiar with the three-part disclosure legend — Not FDIC Insured, No Bank Guarantee, May Lose Value — as it is among the most examination-testable elements of the rule.
The key points to retain are these: FINRA Rule 3160 governs networking arrangements — written agreements between FINRA members and financial institutions including banks, savings institutions, and credit unions under which the member offers broker-dealer services on or off the institution's premises.
When broker-dealer services are conducted on the premises of a financial institution the member must be clearly identified as the entity providing those services, must conduct its services in an area displaying the member's name, and must maintain its services physically separate from retail deposit-taking activities to the extent practicable; all networking arrangements must be governed by a written agreement setting forth party responsibilities, compensation arrangements, and all applicable broker-dealer obligations under Regulation R Rule 701, and the agreement must ensure regulatory access for FINRA and SEC examiners to the institution's premises; at or prior to opening any customer account.
The member must disclose in writing that broker-dealer services are provided by the member and not the institution and that securities are not FDIC-insured, not deposits or obligations of the institution, not guaranteed by the institution, and subject to investment risks including loss of principal, with an additional oral disclosure required when accounts are opened on the institution's premises; retail communications distributed at or identifying a financial institution location must include the required disclosures, which may be satisfied by the standard three-line legend — Not FDIC Insured, No Bank Guarantee, May Lose Value — displayed conspicuously; the rule provides narrow exceptions from the retail communication disclosure requirement for thirty-second-or-less radio broadcasts, certain electronic signs, and location-indicator signs only; members must promptly notify the financial institution when any associated person employed by that institution is terminated for cause; and the compensation restrictions of Regulation R Rule 701 apply to referral fees paid to bank employees, limiting unregistered employees to a nominal fixed one-time fee unless the referred customer qualifies as a high net worth or institutional customer under the applicable definitions.
