FINRA Issues Guidance on Heightened Supervision for Persons with a History of Past Misconduct

Monday, June 11, 2018

To reiterate the supervisory obligations of FINRA member firms regarding associated persons with a history of past misconduct that may pose a risk to investors, FINRA recently published Regulatory Notice 18-15.
FINRA Rule 3110 (Supervision) requires member firms to establish and maintain systems to supervise activities of associated persons to comply with applicable securities laws and FINRA rules. Member firms have a fundamental obligation to implement a supervisory system that is tailored to the member firm’s business and addresses the activities of all its associated persons.
Notice 18-15 highlights particular instances where heightened supervision of an associated person may be appropriate. Firms are encouraged to adopt the practices that are outlined in Notice 18-15 to strengthen their supervisory procedures. Notice 18-15 is one of several FINRA initiatives focused on associated persons with a history of past misconduct that pose a risk to investors and the firms that employ them. These initiatives are designed to strengthen oversight through guidance, rule changes, and surveillance programs.
In Notice 18-15, FINRA instructs that a firm should routinely evaluate its supervisory procedures to ensure they are appropriately tailored for each associated person and consider, among other things, the person’s activities and history of industry and regulatory-related incidents. When an associated person of the firm has a history of industry or regulatory-related incidents, the firm must determine whether its standard supervisory and educational programs are adequate to address the issues such person’s history raises or whether the firm should develop tailored heightened supervisory procedures to address such issues. The failure to assess the adequacy of its supervisory procedures in light of an associated person’s history of industry or regulatory-related incidents will be closely evaluated in determining whether the firm itself should be subject to disciplinary action for a failure to supervise should that person be the subject of a future industry or regulatory related incident.

In short, firms can’t rely on ordinary garden variety supervisory processes and procedures when a broker has a pattern of misconduct. 

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