Supervision

It is mandatory by The National Association of Securities Dealers (NASD) which mandates that member firms supervise all registered representatives under Rule 3010. It mandates that members retain transaction records in a format and customer records that can be reviewed. A system must be created by the member companies for monitoring representatives, developing a system of record keeping for communications with the public, educating employees about procedures and reporting client complaints to the NASD. A frequent transgression which is noted by the NASD is the companies’ tendencies to keep inadequate documentation of procedures. Often, the supervisory procedures are not included. The NASD recommends that supervisory procedures include how the supervision will be conducted, who is responsible for supervision, when supervision will occur and how it will be documented.

Supervision Required for protecting the Investors

There are rules of conduct set for every member or member firm, including NASD Rule 3010 for Supervision, by the National Association of Securities Dealers (NASD). It is required by this rule that member firms establish and maintain a system in order to supervise the activities of each registered representative.

All broker-dealers, individuals and registered representatives that trade securities or act as brokers for traders are subject to the regulations. Organizationally, these include stock brokerage firms, securities firms and financial institutions that deal in the trading of securities of any type which are governed by the Securities Exchange Commission (SEC). These include any entities which fall under the jurisdiction of the NASD.

It is required by a part of NASD Rule 3010 to create policies and procedures for supervisory review of brokers and for the education of brokers on regulatory issues. It is also specified by NASD Rule 3110 that the transaction data and the retention of customer records in a review-able format to assist in the determination of appropriate supervision.

The following are some simplified requirements of Rule 3110 and NASD Rule 3010. Under these rules, the brokers must enact the policies, procedures and implement those technologies that encompass:

• Developing supervisory procedures for the operational issues.

• Designing procedures for public correspondence.

• Monitoring and ensuring the policies which are implemented and effective and updating any necessary revisions which should be there.

• Providing training to some appropriate employees and updating the training programs as policies change.

• Specifying the firm’s policies and procedures for supervisory review of different types of correspondence, all recommendations to customers and the minimum frequency of the reviews for each type.

• Identifying how the supervisory reviews are conducted and documented and what types of correspondence will be pre- or post-reviewed. Identifying the organizational position responsible for review of the different types of correspondence.

• Reviewing the complaints and disciplinary histories of registered brokers, representatives and other employees.

• Providing that all the customer complaints would be reported to the NASD in compliance with Rule 3070(c).

Members are required to maintain, establish and enforce written supervisory procedures (WSPs), according to NASD Conduct Rule 3010(b). One of the most common problems which the NASD has uncovered in the 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 is what the firm will do to supervise the activities. Many are also missing many supervisory procedures.

The NASD has recommended that supervisory procedures also need to include:

• Who is responsible for supervision?

• What are the steps that person will take to ensure that the firm complies with the rule?

• When will the supervisory steps be taken?

• How the supervision will be evidenced?

A notice was sent out by the NASD to Members 99-45 that addresses this specific issue. The member firms that do not comply with these recommended procedures are at risk. Those customers who experience losses in their investment accounts, because they believe there was no proper supervision in place, or due to some other violations of a supervisory compliance, may be able to recover their losses.