Quick Answer
Every broker-dealer must run a supervisory system reasonably designed to catch violations, built on written supervisory procedures (WSPs), registered principals assigned to each office, and regular inspections. Offices split into three types: Office of Supervisory Jurisdiction (OSJ), branch office, and non-branch location, each with its own inspection schedule.
The USA's post-registration duties (books, records, reports) cover what a firm keeps. FINRA's supervision requirements cover who watches the firm's own people. This is the broker-dealer's core supervisory obligation and one of the most heavily tested topics in this unit.
What Must a Firm's Supervisory System Do?
Every broker-dealer must establish and maintain a supervisory system reasonably designed to achieve compliance with securities laws, regulations, and FINRA rules.
- The system must be reasonably designed. Perfection is not required, but the firm needs meaningful, working procedures
- Final responsibility for proper supervision rests with the member firm, not with any one supervisor
- The obligation covers every associated person (agent) and every type of business the firm conducts
- At minimum, the system must provide for:
- Written supervisory procedures (WSPs)
- A registered principal assigned to each type of business
- Registration and designation as an OSJ or branch office of each location that meets one of those two definitions
- A qualified supervisor assigned to each registered person
- An annual compliance meeting or interview with each registered representative and principal
Exam Tip: Gotchas
"Reasonably designed" is not "guaranteed to work." A single missed violation does not by itself prove the supervisory system failed; the exam tests whether the firm had a sensible system in place and followed it, not whether every bad outcome was prevented.
What Do Written Supervisory Procedures (WSPs) Need to Cover?
WSPs must specify, for each supervisory review:
- The specific individual(s) responsible for the review
- The supervisory activities those persons will perform
- The frequency of the review
- The manner of documentation
WSPs must also address:
| Area | Requirement |
|---|---|
| Investment banking and securities business | Principal review of transactions, evidenced in writing |
| Correspondence and internal communications | Review of incoming and outgoing written and electronic correspondence, and internal communications, by a registered principal |
| Customer complaints | Procedures to promptly capture, acknowledge, and respond to every written or electronic complaint |
| Supervisory personnel | A record of who is designated as supervisory personnel and when, kept at least 3 years (first 2 years easily accessible) |
WSPs must be updated promptly as the firm's business changes or as new regulatory requirements arise, and a copy must be kept at each OSJ and at each location where supervisory activities occur.
Exam Tip: Gotchas
A supervisor generally cannot supervise their own activities or report to (or have pay/employment decided by) someone they supervise. A firm too small to avoid this must document why the conflict is unavoidable and how it otherwise complies.
Who Has to Supervise Each Line of Business?
- BDs must designate appropriately registered principals with authority to supervise each type of business conducted
- A principal supervising a particular line of business must hold the matching registration for that business
- Each OSJ needs one or more registered principals; each non-OSJ branch office needs at least a registered representative or principal with supervisory authority
- Each registered person must be assigned to a specific supervisor responsible for that person's activities
What Is an OSJ, a Branch Office, and a Non-Branch Location?
FINRA's supervision requirements sort every firm location into one of three tiers, and the tier drives how often it must be inspected.
| Office Type | Definition | Supervisory Requirements |
|---|---|---|
| Office of Supervisory Jurisdiction (OSJ) | A location where any of these occur: order execution/market making, structuring public offerings or private placements, custody of customer funds/securities, final approval of new accounts, review/endorsement of customer orders, final approval of retail communications (narrow exception for offices that solely approve research reports), or supervising associated persons at other branch offices | Registered principal with regular on-site presence; inspected annually (calendar-year basis) |
| Branch office | Any location where one or more associated persons regularly conduct BD business (effect transactions, or induce or attempt to induce a purchase or sale) | Designated supervisor; if this branch also supervises one or more non-branch locations, it is inspected annually like an OSJ; otherwise, inspected on a firm-set cycle, at least every 3 years |
| Non-branch location | A location that does not meet the branch office definition (common example: an agent's home office where no customers are met and no funds/securities are handled) | Supervised through the firm's WSPs; inspected on a regular schedule the firm sets, with a general presumption of at least every 3 years |
Exam Tip: Gotchas
The "OSJ vs. branch office" distinction on the exam usually turns on one of the OSJ-defining functions in the table above, most often final order approval or custody of funds. A location that only meets with customers, without doing any of those functions, is typically a branch office, not an OSJ.
A branch office is not automatically inspected only every 3 years. If that branch supervises other, smaller locations, it takes on the OSJ's annual inspection schedule even though it is not itself an OSJ.
How Often Must Offices Be Inspected?
- OSJs and any branch office that supervises non-branch locations: inspected at least annually, on a calendar-year basis
- All other branch offices: inspected at least every 3 years, on a schedule the firm sets based on a risk assessment (business complexity, volume, headcount)
- Non-branch locations: inspected on a regular periodic schedule the firm sets, generally presumed to be at least every 3 years
- Every inspection must be reasonably designed to detect and prevent violations
- Inspection results must be documented in writing and the report kept as part of the firm's records
How Must Firms Review Correspondence and Communications?
- Firms must have procedures for reviewing incoming and outgoing correspondence (written and electronic) with the public relating to investment banking or securities business
- The review must be performed by a registered principal. A principal may delegate certain review tasks to an unregistered person, but the principal stays ultimately responsible for the review getting done
- Firms must also review internal communications between associated persons to catch compliance issues
- Electronic communications (email, text, social media) are subject to the same review requirements as paper correspondence
What Should You Check on Exam Day?
- Know the difference between an OSJ, a branch office, and a non-branch location, and match each to its inspection frequency
- Remember that a non-OSJ branch office still gets annual inspection if it supervises a non-branch location
- WSPs must name who reviews what, how often, and how the review is documented, not just that a review happens
- The firm bears final responsibility for supervision; individual supervisors do not absorb that responsibility away from the firm