NASD Guidance On Supervisory Responsibilities

If you are a broker dealer or a supervisor at a broker dealer, I’m sure you have come across the terms Written Supervisory Procedures, Supervisory Procedures, and Compliance Systems. How many of you really know the difference, and before your eyes glaze over the rest of the article, how many of you know how to properly execute these concepts…. I’ll wait…….

Great! Now that I have your attention, there is no need to panic. The following post will walk you through the differences, some key concepts, practice pointers, and other factors you need to be aware of.

Compliance Procedures vs. Supervisory Procedures

Notice to Members 99-45 (“NTM 99-45”) defines Compliance Procedures as a document that sets forth the applicable rules and policies that must be adhered to and describes specific practices that are prohibited. This is distinct from the Written Supervisory Procedures that document the system established to ensure compliance with the guidelines set forth in the Compliance Procedures. These procedures help lay out steps to prevent and detect prohibited practices. In short, Compliance Procedures are the rules to follow and practices to avoid. The Written Supervisory Procedures are the written steps that the Supervisor and the Firm will take to follow the compliance rules and to detect anyone not following them.

Supervisory System vs. Written Supervisory Procedures

The Supervisory System is the infrastructure built by the Firm (through i.e. exception reports, blotters, checklists, audits and other tools to monitor for exceptions to the Rules). The Written Supervisory Procedures would instruct the Supervisor on what tools are used, how the tools should be used, and what to do if exceptions are found.

Additional Considerations from NTM 99-45

The remainder of the NTM 99-45 specifically breaks down considerations for the Supervisory System and Written Procedures subject to 3010(a) and 3010(b).

Use the NTM 99-45, its examples, and its considerations to help your Firm consider elements to build, restructure, and/or audit your existing program. Based on our experience, clients often miss some key practice pointers that are discussed in detail in this NTM 99-45. In case you don’t have time to read all 9 pages, we have outlined a few takeaways.

Written Supervisory Procedures

Written Supervisory Procedures must be in writing, as well as any corresponding supervisory systems, processes, etc. Not only does it create consistency, but it is also vital during audits of your program and is useful to transition responsibilities. Make sure all Registered Persons have access and knowledge of the procedures and any changes as the Firm makes updates.

Take Advantage of Tools

The Firm may use tools to aid in execution of the Supervisory System, but they must be reasonable and not violate securities laws. Firms can and should take advantage of tools offered by their custodian (i.e. exception-based reports for trading and money movements) ensuring the Firm provides proper training to get the greatest benefit out of these reports.

Designation of Supervisors

The Firm should designate a supervisor for all areas of business, branches, non-branches and product lines. The Supervisor must be appropriately qualified (think registration), trained, and granted the actual authority to execute their responsibilities. Putting someone on a Supervisory Matrix and in the procedures is not enough. They must be given the tools and authority to execute their role per your written procedures.

Training for Registered Persons

The Firm should provide training for your Registered Persons. 3010(a)(7) of the Rule requires that each Registered person participate in a meeting at least once each year where relevant compliance matters are discussed. The delivery method is flexible (video, podcast, or in person meeting). However, the format must allow all persons to ask questions and engage in dialog (aka: interactive communication). Finally, the Firm must take attendance and document their attendance (yes, this is for you verbal role call Firms out there).

Internal Inspections

Everyone’s favorite word…. audits. Just kidding. But FINRA does lay out some key gems here in 3010(c) of the Rule that many Firms often overlook. The Firm must review the business it conducts annually. These inspections of the supervisory procedures and system must be “reasonably designed to assist members in detecting and preventing and violating securities laws.” The Firm should have a schedule for all offices and know how offices are designated (unregistered, OSJ’s etc.). As the Firm evolves, the Firm must ensure that its schedule is accurate.

Unregistered Firms are highlighted in NTM 99-45 as these locations may slip through the cracks when it comes to inspections. NTM 99-45 notes that these locations are prime compliance red flag targets since they might be involved in other businesses, such as insurance, real estate, or tax. Consequently, problems may not be as quickly identified in these offices as in larger centralized offices. Finally, NTM 99-45 wants you to at least CONSIDER unannounced visits for any indications of misconduct, especially if the office has potential red flags.

In Conclusion

Understanding your compliance program includes understanding your system, procedures, and processes. This understanding will in turn allow you to build an infrastructure that will allow for flexibility, documentation, and most importantly, more positive regulatory audit results.

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