Supervision and Compliance of Brokerage Firms
PIABA 24th Annual Meeting Materials (2015)
17 Pages Posted: 15 May 2018
Date Written: October 24, 2015
Brokerage firms have certain obligations to ensure that their employees comply with applicable securities regulations. The Securities Exchange Act of 1934 (the “‘34 Act”) imposes liability on a brokerage firm for an employee’s violation of applicable rules and regulations under section 15(b)(4)(E), unless the firm can demonstrate that the firms has established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect any such violation by the firm. Additionally, a firm may also be culpable as a control person under section 20(a) of the ‘34 Act for an employee’s violation of applicable securities regulations if the firm has failed to establish an adequate system of supervision.
In addition, FINRA rules, promulgated pursuant to federal law, require that “[e]ach member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”
FINRA has two types of supervision rules. There are rules specifically dedicated to supervision, and there are other rules which contain aspects of them which pertain to supervision. This article will first discuss the general supervisory rules, explaining what is required by the rules. The article will then discuss other FINRA rules which touch on supervision and inform a firm’s overall supervisory and compliance responsibilities. This includes rules regarding specific products, including equity securities, options, variable annuities, and direct participation programs. They also include rules governing aspects of the brokers’ business including private securities transactions and outside business activities. Finally, FINRA offers guidance and best practices with respect to supervision in certain areas. The article will conclude by discussing guidance as to the firms’ obligations with respect to supervising “problem brokers,” accounts of senior investors, and the development of new products.
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