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Securities Law Require Supervision to Protect Investors
The National Association of Securities Dealers (NASD) has rules of conduct for every member or member firm, including NASD Rule 3010 for Supervision. This rule requires that member firms establish and maintain a system to "supervise" the activities of each registered representative.
All broker-dealers, registered representatives, and individuals that trade securities or act as brokers for traders are subject to the regulations. Organizationally, these include securities firms, stock brokerage firms, and financial institutions that deal in the trading of securities of any type that are governed by the Securities Exchange Commission (SEC). These include any entities that fall under the jurisdiction of the NASD.
Part of NASD Rule 3010 requires the creation of policies and procedures for supervisory review of brokers and for education of brokers on regulatory issues. NASD Rule 3110 also specifies the retention of customer records and transaction data in a review-able format to assist in the determination of appropriate supervision.
The following are some simplified requirements of NASD Rule 3010 and Rule 3110. Under these rules, brokers must enact policies, procedures and/or implement technologies that encompass:
- Developing supervisory procedures for operational issues.
- Designing procedures for public correspondence.
- Monitoring and ensuring policies are implemented and effective and updating any necessary revisions.
- Providing training to appropriate employees and updating training programs as policies change.
- Specifying firm's policies and procedures for supervisory review of different types of correspondence, the minimum frequency of the reviews for each type, and all recommendations to customers.
- Identifying how supervisory reviews are conducted and documented, what types of correspondence will be pre- or post-reviewed and the organizational position(s) responsible for review of the different types of correspondence.
- Reviewing the compliant and disciplinary history of registered representatives/brokers and other employees.
- Providing that all customer complaints be reported to the NASD in compliance with Rule 3070(c).
According to NASD Conduct Rule 3010(b), members are required to establish, maintain, and enforce written supervisory procedures (WSPs). One of the most common problems the NASD has uncovered in recent years is that the written procedures adopted by firms are often inadequate. In general, the issue is that the procedures do not describe exactly what the firm will do to supervise activities. Many are also missing many supervisory procedures.
The NASD has recommended that supervisory procedures need to include:
- Who is responsible for supervision.
- What steps that person will take to ensure the firm complies with the rule.
- When the supervisory steps will be taken.
- How the supervision will be evidenced.
The NASD sent out a Notice to Members 99-45 that addresses this specific issue. Member firms that do not comply with these recommended procedures are at risk. Customers who experience losses in their investment accounts, because they believe there was not the proper supervision in place, or due to other violations of a supervisory compliance, may be able to recover their losses.
