3.4.1 Key Controls and the Separation/Segregation of Duties
The Exchange Act authorizes the SEC to take punitive action against any broker-dealer that has willfully violated securities laws or failed to supervise an employee who violated securities law. The Act goes on to say, however, that supervisors will not have failed in their duties if a supervisory system is in place that can successfully detect and prevent violations.
For this system, each member firm is required to have a written description of supervisory responsibilities and a set of written supervisory procedures (WSPs) that will govern the activities of its registered employees. The firm must make sure that there are supervisory controls and periodic inspections that check that the procedures are being complied with.
A supervisory system must:
- • Define which member offices are designated as Offices of Supervisory Jurisdiction.
- • Describe how the OSJs are to be managed (see next paragraph).
- • Establish a managerial chain of command and attest to the qualifications of the managers it hires.
- • Establish and keep current written supervisory procedures that instruct managers how to carry out their responsibilities.
- • Conduct an annual compliance meeting with each of its principals and representatives.
The overall purpose of the supervisory system is to establish responsibility within the member firm to ensure regulatory and legal compliance.
An OSJ is an office that requires special supervisory attention, either because FINRA deems that the activities conducted there have particular regulatory significance or because the member firm itself believes it prudent or necessary based on certain FINRA guidelines. Under FINRA rules, the execution of any one of the following critical activities requires that an office be designated an OSJ:
- • Order execution or market making
- • Structuring of public offerings or private placements
- • Maintai