Dandridge Law Firm

 Broker-Dealer Supervision

A lack of adequate broker-dealer supervision remains a HOT TOPIC for the securities regulation and enforcement staff.  Does the broker-dealer’s compliance program provide a proper designation of supervisory duties.  Does the compliance program mandate a periodic review of the broker-dealer’s supervisory system?   

The following questions and answers are taken from an actual NASD Securities Arbitration where the customer alleged that the broker-dealer failed to adequately supervise its “rogue” broker, among other things.          

ARBITRATOR:  The new account form, if I’m reading this right, it says that the client has previously traded equities and has seven years’ experience in equities?           

THE BROKER:  Right.   

ARBITRATOR:   Was that your understanding that she had seven years’ experience in trading equities?   

THE BROKER:  My – you know, I don’t remember specifically filling this out.  My sense is, I mean, my memory about the process of that (inaudible) was just copying everything off the FORMER BROKER DEALER’S forms that we [the new broker dealer] had, you know, that had been created over the years, 250, 300 accounts.  So I can’t tell you specifically whether that was copied from that.  I don’t know.     

ARBITRATOR:  Well, how about your recollection right now, this [New Account form] was filled out in what, 1993?   

THE BROKER: Right.   

ARBITRATOR:  As of 1993, do you think she had seven years of equity trading experience?   

THE BROKER: No.  I would – as of 1993, we hadn’t traded equities in the account.   

ARBITRATOR:  Do you know who signed that margin agreement?  

THE COMPLIANCE OFFICER: No.

ARBITRATOR: There’s been a lot of reference to [the broker’s] disciplinary history.  I understand these arbitrations are reportable events on the U-4 disclosure reporting page.  Is there a – were there disciplinary actions [against the broker] that followed these that you know of?           

THE COMPLIANCE OFFICER: No.  

ARBITRATOR: There were a couple of checks that THE BROKER wrote that went into [the customer’s] account.  Did you see these checks?  Do you remember seeing these checks paid by THE BROKER to one of his clients?    

THE COMPLIANCE OFFICER: No.  

ARBITRATOR: Did you look at statements in the course of your supervision; did you look at customer statements and look into the source of checks going into [customers’] accounts?  

THE COMPLIANCE OFFICER: Probably not through every customer statement, especially clients that, you know, statements (inaudible) smaller accounts, probably not.       

Prevent your compliance officer or broker from succumbing to a similar regulatory inquiry.

The Dandridge Law Firm provides answers and solutions.

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