13.3  FINRA Member Supervisory Responsibilities

The Exchange Act authorizes the SEC to take punitive action against any broker-dealer that has willfully violated or failed to supervise a violator of securities law and regulations under her employ. The Act goes on to say, however, that supervisors will not have failed in their duties if a supervisory system and procedures have been established and dutifully applied to prevent and detect such violations.

FINRA Rule 3110, accordingly, outlines in some detail a procedural framework to identify a supervisor’s responsibilities and facilitate their execution. Each member firm is required to establish in writing a clear delineation of supervisory responsibilities and a set of written supervisory procedures to govern the activities of its registered employees. Compliance with these procedures will be assured by certain supervisory controls, periodic inspections and reviews.

But first some pertinent definitions.

Supervisory system. A supervisory system is a defined structure that specifies how, where, and by whom a member firm’s oversight responsibilities for the activities of its employees are carried out. As defined by FINRA Rule 3110, a supervisory system must (1) define which member offices are designated Offices of Supervisory Jurisdiction (OSJs) and how they are to be managed, (2) establish a managerial chain of command and attest to the qualifications of the managers it hires, (3) establish and keep current written supervisory procedures that instruct managers how to carry out their responsibilities, and (4) conduct an annual compliance meeting with each of its principals and representatives. A prerecorded webcast can be used to satisfy this requirement as long as the personnel are informed of the opportunity to submit questions and receive answers in a timely fashion. The overall purpose of the supervisory system is to establish responsibility within the member firm to ensure regulatory and lega