Quick Answer
Every broker-dealer must run a supervisory system reasonably designed to catch violations, documented in written supervisory procedures. Offices split into three tiers with different inspection cycles. Failure to reasonably supervise is a standalone violation, and the defense requires procedures that were in place, reasonably enforced, and followed in good faith.
The whole unit on one sheet: how a firm supervises its own people, how often it inspects, and what happens when supervision fails.
What Must the Supervisory System Include?
- A system reasonably designed to catch violations, with written supervisory procedures (WSPs) naming who reviews what, how often, and how the review is documented.
- Final responsibility for supervision rests with the firm, not with any one supervisor.
- Designated principals must test and verify that the WSPs actually work, address the firm's specific business activities and risks, and report results to senior management at least annually.
- The CEO certifies annually, after at least one meeting with the Chief Compliance Officer in the prior 12 months, that the firm has processes to establish, maintain, review, test, and modify its procedures. It is due on the certification's own anniversary date.
How Do the Three Office Tiers Differ?
| Tier | What makes it one |
|---|---|
| Office of Supervisory Jurisdiction (OSJ) | Order execution or market making, structuring offerings or private placements, custody of funds or securities, final new-account approval, order review or endorsement, final retail-communications approval, or supervising other branch offices |
| Branch office | Regularly conducts broker-dealer business |
| Non-branch location | Everything else |
How Often Must Each Be Inspected?
- OSJs: annually.
- A branch office that itself supervises a non-branch location: annually, taking on the OSJ cycle even though it is not an OSJ.
- Other branch offices: at least every 3 years.
What Is Failure to Supervise?
- The Administrator may deny, suspend, or revoke for failure to reasonably supervise agents or employees, all of them, not only the wrongdoers, alongside the required public-interest finding.
- Liability reaches partners, officers, and directors who held supervisory responsibility and did not exercise it.
Which Gotchas Are Tested Most?
- A branch office is not automatically on a 3-year cycle. If it supervises a non-branch location, it moves to annual.
- The defense needs all three parts: WSPs in place, reasonably enforced, and a violation that happened despite good-faith effort. Having the procedures on paper is not enough.
One-Breath Recap
Every broker-dealer must run a supervisory system reasonably designed to catch violations, written down as procedures naming who reviews what and how often, tested by principals and certified annually by the CEO. Offices split into supervisory jurisdictions inspected annually, and branch offices inspected at least every three years unless they supervise a non-branch location. Failure to reasonably supervise stands on its own and reaches responsible partners, officers, and directors, and the only defense is procedures in place, reasonably enforced, and a violation that happened anyway despite good-faith effort.
Need more than the recap? Read the full Broker-Dealer Agent Supervision unit.