Supervisory Failures on the Increase at Broker-Dealers


State regulators continue to see an increase in supervisory failures at broker-dealers, according to a review of 236 exams conducted in the first half of this year. In addition to failure to follow written supervisory policies, the top 5 violations involve unsuitability of investments, misleading and/or unmonitored correspondence and e-mail sent to customers, failure to properly maintain customer account information, and failure to conduct proper internal audits. (“Supervision lacking at broker-dealers: NASAA,” by Dan Jamieson, InvestmentNews).

The North American Securities Administrators Association (NASAA) is a group of state regulators. NASAA recently published its 2012 Broker-Dealer Coordinated Examinations Project report. Among other things, NASAA reported the following:

The types of violations found by state regulators in 2012 are:

Books and Records 29%
Supervision 27%
Sales Practice 24%
Registration & Licensing 14%
Operations 6%.

The NASAA report revealed that supervision violations increased from 20% of the violation types in 2010 to 27% in 2012.

With regard to the Supervision violations, the top five violations involved:

Failure to Follow Written Supervisory Procedures 49%
Internal Audits 25%
Maintaining Current Written Supervisory Procedures 22%
Adequate Written Supervisory Procedures 16%
Use of Professional Designations 5%.

With regard to the Sales Practice Violations, the top five violations involved:

Unsuitability of Investments in general 40%
Unsuitability of Variable Products 20%
Selling Away
(transactions away from the firm to avoid supervision) 19%
Unauthorized or excessive trading 9%
Variable Annuity 1035 Exchanges 8%.

“We are concerned about [broker-dealers’] having enough staff to service regulatory inquiries and [provide] customer service,” William Reilly, special assistant to the director of Florida’s Office of Financial Regulation, was quoted as saying, adding: “It is a concern, with the staff reductions at firms.”

Among other things, regulators warned that brokerage firm compliance personnel should speak with customers who have a complaint, rather than just the broker involved, and should not compromise internal audits by giving a heads-up to the branch being audited.

In many cases, “there are no meaningful branch office audits” being conducted, Mr. Reilly was quoted as saying.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.