SEC Says Broker-Dealers Are Not Following Supervisory Procedures

Mary Ann Gadziala, an associate director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, says that broker-dealers often do not follow written supervisory procedures.

Speaking to an audience on broker-dealer regulation at the ALI-ABA conference on January 11, Gadziala says that this finding often comes up during examinations. She also said that although firms may have good written procedures, the practices were not necessarily consistent, but that she was reluctant to recommend the outsourcing of the creation of these written procedures that tended to be standardized-and that these procedures were not in compliance with the law if they did not cover the firm’s actual business activities.

Gadziala commented that she thought centralized or automated surveillance, rather than manual monitoring processes, should be used by high-volume firms. She did, however, say that the SEC has been working to develop manual (as opposed to electronic) monitoring for branch office supervision, procedures and staffers, and the suitability of products that were sold to clients.

Gadziala noted that there are over 172,000 broker-dealer branch offices in the US and that the supervision at these branches offered certain challenges. She noted that many branches were in remote areas, had staffers with disciplinary problems, and that the supervisors there were often independent contractors rather than employees. She says that the SEC is recommending that firms create specific roles and responsibilities at these branches, monitor outside business activities procedures, centralize electronic supervision, conduct surprise inspections, and screen employees for any wrongdoing.

Other areas of concern for the SEC were the suitability of certain investments, such as structured transactions and hedge funds, as well as risk management, which Gadziala says needs to reflect the changing business environment. Terror cyber attacks were one problem that she encouraged firms to watch out for.

With law offices across the country, including Chicago, Dallas, New York, Houston, and Phoenix, Shepherd Smith Edwards & Kantas LTD LLP has represented thousands of U.S. investors in recovering their losses in the securities industry as a result of broker misconduct, including churning, unsuitability, overconcentration, misrepresentation, and omissions. Contact Shepherd Smith Edwards & Kantas LTD LLP to schedule a free consultation.

Related Web Resources:

ALI-ABA Broker-Dealer Regulation Brochure (PDF)

U.S. Securities and Exchange Commission