Supervision Guidelines for Broker-Dealers

PURPOSE: This rule provides guidance for reasonable supervision by broker-dealers. (1) The phrase “failed reasonably to supervise” under section 409.4-412(d)(9) of the Missouri Securities Act of 2003 (the Act) is a standard allowing each broker-dealer (firm) the flexibility to fashion procedures and systems that address its particular organizational and management structure. Yet the following are guidelines that provide guidance to broker-dealers of factors considered by the commissioner in evaluating reasonable supervision. (2) The following guidelines shall be factors in considering what is reasonable supervision, whether: (A) The firm has established current procedures and systems for supervising the activities of agents, employees, and Missouri office operations that are reasonably designed to achieve compliance with applicable state and federal securities laws and regulations, and, if applicable, the rules of the Financial Industry Regulatory Authority (FINRA); (B) The firm has established current procedures and systems that could reasonably be expected to allow a supervisor reasonably discharging his/her supervisory duties under such established procedures to prevent and detect violations of the Act, and the firm regularly reviews these procedures and systems; (C) The firm has reasonably implemented the procedures and systems referred to in subsections (A) and (B) above; (D) The firm provides appropriate initial and periodic refresher training to supervisors, employees, and agents regarding the firm’s procedures and systems and additional initial and periodic training to supervisors in the procedures and systems referred to in subsections (A) and (B) above; (E) The firm reasonably follows up on indications of wrongdoing, “red flags.” Such red flags may consist of, but are not limited to, activities of unauthorized personnel, churning, unauthorized trading, low level of production but high expenses, regulatory actions, prior disciplinary history of one (1) or more customer complaints, and recent customer complaints; (F) The firm has an adequate system to track and monitor the status of customer complaints; (G) The firm has designated a qualified supervisor of the broker-dealer for each agent or employee; (H) The designated supervisor of agents located in Missouri maintains a principal place of business in Missouri, or in a location that allows the supervisor to visit the premises of supervised agents in Missouri within a reasonable time; (I) The designated supervisor is responsible for supervising no more agents at any one (1) time than would allow the supervisor to effectively execute his/her supervisory duties. The appropriate number of agents which one (1) person can reasonably supervise is dependent on the nature of the business conducted by the persons supervised, technical resources available to the supervisor, additional personnel available to assist the supervisor, and other resources made available to assist the supervisor; (J) The firm conducts annual compliance examinations of supervisory locations with effective deficiency and follow-up procedures. Unannounced examinations may be reasonable if there are compliance issues concerning agents or activities; (K) The firm reasonably audits for compliance including reasonable follow-up and proof, independent of the agent, that mail is reviewed for customer complaints and other red flags; (L) The firm has and implements procedures and systems for reasonable oversight of supervisors; and (M) The firm has a reasonable policy for disciplinary and progressive supervisory action, which is reasonably implemented. AUTHORITY: sections 409.4-412(d)(9) and 409.6-605, RSMo Supp. 2008.* Original rule filed Jan. 23, 2004, effective July 30, 2004. Amended: Filed May 21, 2009, effective Nov. 30, 2009. *Original authority: 409.4-412, RSMo 2003 and 409.6-605, RSMo 2003.