Heightened Supervision
Quick Answer
Heightened supervision is a tailored, written supervisory program imposed when a member firm associates with a statutorily disqualified (SD) person under a Form MC-400 application, when an associated person has a pattern of customer complaints or regulatory disclosures that signals elevated risk, or as part of a disciplinary settlement. Typical terms include a designated supervisor, daily or weekly transaction review, pre-approval of new accounts and communications, product-type restrictions, and on-site visits. The plan must be in writing and incorporated into the firm's written supervisory procedures (WSPs).
The MC-400 path produces an SD person who can stay in the industry only under heightened supervision. The Series 24 has to know when heightened supervision is required, what terms are typical, and what happens if the firm fails to follow the plan.
When Heightened Supervision Is Required
Three triggers force a member firm into a heightened-supervision posture:
- MC-400 approval: Imposed (and approved by the National Adjudicatory Council, or NAC) when a member firm associates with a statutorily-disqualified person under a Form MC-400 application
- Risk-pattern flag: Required when an associated person has a pattern of customer complaints, regulatory disclosures, or disciplinary history that signals elevated risk, flagged under the supervisory-system requirement generally
- Disciplinary order: Imposed by the SEC or FINRA as part of a disciplinary settlement or order
Think of it this way: Heightened supervision is not a punishment on the supervised person; it is a structural commitment by the firm to do more than the baseline supervisory-system work. The firm volunteers extra controls in exchange for being allowed to keep the person on the books.
Typical Heightened Supervision Terms
The exact terms vary with the risk profile, but the NAC-approved package usually includes most of the following:
- Designated supervisor with no other supervisory responsibilities for the person being heightened-supervised
- Daily or weekly transaction review with documented sign-off
- Pre-approval of new accounts, marketing materials, and customer correspondence
- Restrictions on product types (for example, no options, no penny stocks, no discretionary accounts)
- Periodic on-site visits by senior compliance personnel
- Periodic written attestations of compliance from the supervised person and the supervisor
- Plan must be in writing and incorporated into the firm's WSPs
| Element | What It Looks Like |
|---|---|
| Designated supervisor | A specific principal with name in the plan; cannot have unrelated supervisory load |
| Transaction review | Documented daily review of trade blotter for the SD person's accounts |
| Pre-approval of new accounts | Principal sign-off before any new customer account is opened |
| Product restrictions | Categorical bars on options, margin, discretionary trading as risk dictates |
| On-site visits | Quarterly in-person inspections by compliance |
| Written attestations | Annual sign-off by both supervisor and supervised person confirming compliance |
Failure to Follow the Plan
A heightened-supervision plan is binding on both the firm and the named supervisor. Failure to follow the plan exposes:
- The named supervisor to a personal failure-to-supervise charge under the Exchange Act's failure-to-supervise provision
- The firm itself to supervisory-system enforcement
- The supervised person to revocation of the MC-400 approval (and removal from the industry)
Exam Tip: Gotchas
- Heightened supervision is not optional once imposed. A firm that fails to follow the MC-400 supervisory plan exposes both the supervisor and the firm to failure-to-supervise charges under the Exchange Act's failure-to-supervise provision and FINRA's supervisory-system requirement.
- The designated supervisor cannot have other supervisory duties for the SD person. Adding the SD person to a generalist principal's existing book breaks the separation that the NAC required.
Integration with the WSPs
Heightened supervision is not a stand-alone document in a binder somewhere. The plan must be embedded in the firm's WSPs and treated as part of the firm's ordinary supervisory framework:
- WSPs identify the supervised person, the designated supervisor, and the specific review steps
- WSPs cover what records of the heightened review must be kept
- WSPs reference the underlying MC-400 approval or disciplinary order as the authority for the plan
Exam Tip: Gotchas
- Heightened supervision plans live in the WSPs, not in a separate file. A standalone document outside the WSPs leaves the supervisor without the procedural backbone that the supervisory-system requirement demands.