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, correspondence review, and regular inspections. Higher-risk and supervisory locations warrant closer, more frequent oversight, and supervision must remain independent.
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 of each qualifying office location
- 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 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. Supervision must remain independent.
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 registered person must be assigned to a specific supervisor responsible for that person's activities
Which Locations Get the Closest Oversight?
A firm's supervisory obligation reaches every location where its associated persons conduct business, but the intensity of oversight scales with risk. A location that carries supervisory significance, or that performs higher-risk activities, warrants closer, more frequent oversight than a location where an agent simply meets clients. The firm assigns each location its level of oversight from a documented risk assessment.
What Must Every Inspection Achieve?
- Every firm location is inspected on a regular periodic schedule the firm sets and documents; no location is exempt
- Inspection frequency scales with risk: higher-risk and supervisory locations are inspected more often, on a cycle the firm sets from a risk assessment (business complexity, volume, headcount)
- 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?
- A supervisory system must be reasonably designed, with WSPs, designated principals, and correspondence review; perfection is not required
- Oversight scales with risk: higher-risk and supervisory locations warrant closer, more frequent inspection, and supervision must be independent
- 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