Quick Answer
A supervisory system is the firm's structure for assigning and carrying out supervision, and written supervisory procedures document how that system works. The firm must establish, maintain, enforce, and promptly update them. The chief executive officer certifies the firm's processes each year.
The firm needs both a working supervisory structure and written instructions that explain how people carry out that structure.
How Do the Supervisory System and Written Procedures Differ?
| Item | What it does |
|---|---|
| Supervisory system | Organizes the people, offices, assignments, and processes used to supervise the firm's business and associated persons. The system must be reasonably designed for compliance, and final responsibility remains with the firm. |
| Written supervisory procedures (WSPs) | Document how the firm supervises its business and associated persons. The firm must establish, maintain, and enforce them as part of the supervisory system. |
Designated principals separately establish, maintain, and enforce a system that tests and verifies whether the WSPs are reasonably designed. The Key Controls and Segregation of Duties lesson covers that supervisory-control cycle.
Exam Tip: Gotchas
- The system and the procedures are not interchangeable. The system is the operating structure; the WSPs document how that structure carries out supervision.
- Final responsibility remains with the firm. Assigning a registered principal does not transfer the firm's responsibility for proper supervision.
What Must the Supervisory System Include?
The system must include these minimum elements:
| System element | Operative requirement |
|---|---|
| Written procedures | Establish and maintain WSPs. |
| Compliance discussion | At least annually, persons designated by the firm conduct an individual or group meeting or interview for each registered representative and registered principal. They discuss compliance matters relevant to each participant's activities. |
What Must the Written Procedures Show and Where Must They Be Kept?
The WSPs must set out the firm's supervisory system.
The firm preserves the supervisory-personnel record for at least three years and keeps it easily accessible for the first two years.
The firm must promptly amend its WSPs when applicable securities laws, regulations, or FINRA requirements change. It must also amend them promptly when its supervisory system changes. The firm must promptly communicate each procedure and amendment to associated persons whose activities and responsibilities make it relevant.
Exam Tip: Gotchas
- The update triggers are regulatory changes and supervisory-system changes. The rule does not make the WSP update an annual-only event.
- An amendment must reach the relevant people. Updating the central document without promptly communicating the change does not complete the requirement.
- The supervisory-personnel record has two retention conditions. Preserve it for at least three years and keep it easily accessible for the first two years.
What Must the Annual Compliance Discussion Cover?
Each registered representative and registered principal must participate at least annually. Persons designated by the firm conduct the discussion as an individual interview or a group meeting. The discussion must address compliance matters relevant to each participant's activities.
Exam Tip: Gotchas
- The firm designates the people who conduct the annual discussion. They may use individual interviews or group meetings and must discuss relevant compliance matters.
What Does the Annual Certification Cover?
Each year, the chief executive officer or an equivalent officer certifies that the firm has processes to establish, maintain, review, test, and modify written compliance policies and WSPs reasonably designed for compliance.
Exam Tip: Gotchas
- The annual certification covers processes, not perfect compliance. It does not replace the firm's continuing duty to establish, maintain, and enforce its WSPs.
What Should You Check on Exam Day?
- Separate the supervisory system from the WSPs that document it.
- Keep final supervisory responsibility with the firm, even when it assigns supervisors.
- Preserve the supervisory-personnel names and designation dates for at least three years, with easy access during the first two years.
- Promptly amend WSPs for regulatory or supervisory-system changes, then promptly communicate them to the associated persons who need them.
- Each year, require the chief executive officer or equivalent officer to certify the firm's compliance and WSP processes after meeting with the chief compliance officer.