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'Heightened Supervision' Plans Are a Must for BDs: NASAA

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State securities regulators are warning broker-dealers to ensure their firms have policies and procedures in place related to “heightened supervision” of registered reps.

Thirty state securities regulator members of the North American Securities Administrators Association’s broker-dealer section recently conducted 165 coordinated exams of 121 broker-dealers — which included wirehouse, independent and introducing firms — and found that nine had no policies or procedures related to heightened supervision, and 34 firms had no criteria for assessing whether heightened supervision would be appropriate for new hires. An equal number had no criteria for currently associated reps.

As the coordinated exams revealed, “heightened supervision plans are effective,” NASAA stated in the report, as 90% of the examined firms with a registered rep on a heightened supervision plan reported no complaints against that rep.

“Broker misconduct is a recurring threat for investors,” said Michael Pieciak, NASAA’s president and Vermont commissioner of financial regulation, in releasing the exam findings. “Registered representatives with prior records of misconduct are three times more likely to be repeat offenders than their peers. Heightened supervision of risk-prone registered representatives is a crucial obligation of broker-dealer firms.”

Pieciak said he’s asked NASAA’s Broker-Dealer Section “to look into complaints regarding individuals who are on heightened supervision to determine what can be done to ensure investor protection responsibilities are met.”

According to the exam findings, nearly half (49%) of the examined firms that had heightened supervision procedures in place had no policies and procedures regarding how a registered rep could be removed from heightened supervision; 14 of these firms had at least one registered rep on heightened supervision, and one firm had 13.

Overall, the coordinated exams found that of the 121 examined firms, 51 had at least one registered rep on a heightened supervision plan.

“While customer complaints are the primary reason why a registered rep was placed on heightened supervision, state-required heightened supervision also was a significant factor,” the NASAA report states.

Twenty-three firms had at least one registered rep on a heightened supervision plan because it was required by a state regulator as a condition precedent to registration in that jurisdiction, according to the report.

NASAA President-elect Frank Borger-Gilligan, who oversaw the coordinated exams as chair of the Broker-Dealer Section, noted that less than 25% of the examined firms maintained supervisors on site who were responsible for enforcing heightened supervision plans.

Further, he said, about 20% of firms (both large and small), failed to enforce the procedures they had developed.

NASAA states in the report that common sense should dictate how heightened supervision plans are tailored, as there’s no plan that is “one-size-fits-all.”

Heightened supervision plans, NASAA states, should be designed to ensure that misconduct is prevented in the future and, at a minimum, should address:

  • the conduct for which the registered rep had received scrutiny;
  • the records (commission runs, trade blotters, employee trading accounts, e-mails, etc.) related to the registered rep’s business that will be part of the review; and
  • the frequency of the review.


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