I. Introduction

A.    Overview

 

Sections 29.1(a) and 54.1(b) of the Securities Regulation Code (Code) imposes a duty on every Broker Dealer2 to supervise the activities of its employees for compliance with the Code, rules and regulations adopted thereunder, related orders and directions of the Securities and Exchange Commission (SEC) and designated staff, and rules of any self regulatory organization (SRO) of which the Broker Dealer is a member of or participant in (hereinafter collectively referred to as “regulatory requirements”).  Pursuant to regulatory requirements, supervision occurs through:

  • The employment of a qualified Associated Person/s3;

  • Adoption and implementation of “effective” internal supervision, control and compliance procedures (hereinafter “Procedures”) in conformance with regulatory requirements;

  • Establishment and implementation of an in-house training program to, among other things, educate firm employees on their regulatory duties;

  • On-going surveillance and inspection for compliance; and

  • Enforcement/Discipline where non-compliance/violations are detected.

Section 3.5 of the Code defines an “Associated Person” of a Broker Dealer as an employee who directly exercises control and supervisory authority, but does not include a salesman or an agent or a person whose functions are solely clerical or ministerial.  The qualification requirements and duties of an Associated Person are discussed herein in Chapters II and III.C.2.

 

Section 30.2 of the Code provides the SEC with the power to adopt rules to, among other things, impose standards for the operation of Broker Dealers. Under this Section, the SEC adopted SRC Rule 30.2-6, which:

  • Requires the management of every firm to establish and maintain an “appropriate” and “effective” compliance function within the firm which is “independent” of “all” operational and business functions and which reports “directly” to management.

  • Clarifies the role of the firm’s Associated Person in overseeing the firm’s compliance function and requires such person to “promptly” report to management all occurrences of “material” noncompliance by the firm or its staff with legal and regulatory requirements, and for management to then promptly notify any SRO in which such firm is a member of or participant in and the SEC of occurrences of such material non-compliance by the firm (see discussion in Chapter III, Section K.5);

  • Requires a firm’s supervisory system to, among other things:

  • Establish and implement written Procedures;

  • Be “reasonably designed” to achieve compliance with firm policies and procedures, and regulatory requirements, including all new requirements imposed under the Code and implementing rules unless exemptive relief has been granted by the SEC pursuant to SRC Rule 72.1[General Rules and Regulation for Filing of SEC Forms with the SEC].  Note, unless and until exemptive relief has been granted, regulated persons are required to comply with regulatory requirements – any noncompliance is subject to sanctions and penalties under the Code;

  • Designate one or more Associated Persons to carry out the supervision of its business;

  • Identify the title, registration status and locations of such Associated Person/s and responsibilities;

  • Include written documentation to prove that the firm’s Associated Person is qualified by virtue of experience or training to carry out his assigned supervisory responsibilities;

  • Include written documentation to prove that each person engaged in securities transactions, no less than annually, has participated in an interview or meeting conducted by an Associated Person at which compliance matters relevant to the activities of such person are discussed;

  • Require prompt notification in writing to each person engaged in securities transactions of new or modified compliance obligations;

  • Establish an effective management and organizational structure to ensure that the firm’s business is carried out in a sound, efficient and effective manner;

  • Establish, maintain, and enforce policies and procedures to ensure the proper handling of customer complaints and the taking of appropriate and prompt remedial action. Where a complaint is not remedied promptly, the client should be advised of any further steps which may be available to the client under law. Where possible, complaints should be investigated by the Associated Person performing the compliance function, provided that such person is not directly involved in the subject matter of the complaint.

The duties of an Associated Person under the Code and implementing rules are set forth in Section C.2 of Chapter III.

 

In addition to the establishment and implementation of Procedures and the appointment of a qualified Associated Person, SRC Rule 30.2-7 requires every Broker Dealer to establish, implement and maintain a reasonably comprehensive system of training to, among other things, enable employees to understand the firm’s Procedures, policies, and all applicable regulatory requirements.  The system of training should be properly documented in a manual form, set out details of the training program being implemented, and be regularly updated in line with the development of the securities industry. The training requirement should help ensure that registered salesmen and Associated Persons will be able to demonstrate an on-going understanding of applicable regulatory requirements, which is a condition of registration under SRC Rule 28.1-4 (see discussion below in Chapter II, Section E.2), and comply therewith.

 

 

B.    Role of Model Procedures

 

These model procedures have been prepared by the SEC to assist Broker Dealers in drafting and implementing Procedures under SRC Rule 30.2-6. In general, the Procedures should present a comprehensive and effective approach to attaining the objective of developing a compliance culture for Broker Dealers, their employees, and officers, directors and controlling shareholders who are subject to reporting obligations under the Code and implementing rules, based on strict adherence to high standards of professional ethics.  Such standards require complete and strict adherence to all laws and rules affecting the firm’s business. The Procedures and related firm compliance training should emphasize the fact that rules and regulations without the ability or the will to enforce are useless and undermine the role and credibility of regulation.

 

The Procedures should not be construed as all inclusive, but rather serve as a guide in conducting daily supervisory functions as well as proper dealing with clients and compliance with other regulatory obligations. When examining a Broker Dealer, SEC Staff shall review, among other things, the firm’s compliance with its Procedures. Failure of a firm or its employees to comply with the Procedures will raise a prima facie presumption of a violation of SRC Rule 30.2-6, notwithstanding any contrary disclaimer therein.  To be effective, credible, and perform their intended role, the Procedures need to be followed. Issues that can not be resolved through reference to the Procedures should be referred to the firm’s Associated Person.

 

The importance of supervision and regulatory compliance should not be overemphasized.  The Procedures should emphasize the importance of complying with both the letter and the spirit of the law and rules, and should ensure that any irregularities which arise are promptly resolved in a manner which minimizes financial loss and protects the good name and reputation of the firm. Employees should understand that if they become aware of a possible breach they should immediately inform the firm’s Associated Person. No attempt should be made to evade any regulatory requirement nor should acquiescence of another employee or any client be sought or accepted in an attempt to circumvent any of the requirements. Failure to comply or adequately supervise the activities of a firm’s employees may result in fines, censures and other sanctions against a firm’s registered salesmen, other employees, management, the board of directors, the firm itself, and/or the firm’s Associated Person.

 

 

C.            Updating Procedures

 

Procedures should be reviewed at a minimum on an annual basis and any significant changes to regulatory requirements should result in the prompt distribution to employees of written updates or addendums thereto (see Section D below).  Additions and changes should be announced at least weekly and written copies circulated to all parties concerned. Each page of the Procedures, and all amendments thereto, should be dated, to ensure that persons subject to compliance therewith clearly understand current requirements.

 

Moreover, SRC Rule 28.1-1 requires Broker Dealers, as part of their registration application to submit a copy of their Procedures to the SEC and to update any material changes therein within seven (7) days.  Section 28.10 of the Code requires Broker Dealers to provide the SEC, upon request, with a copy of their current Procedures.

 

 

D.            Internal Distribution of Procedures

 

It is the responsibility of the firm’s Associated Person to distribute written copies of the Firm’s Procedures and all subsequent amendments or additions thereto to all concerned employees. Such issuance should be documented in writing and continued employment with the firm should be conditioned upon written acknowledgement that the person receiving such copy has fully understood and will commit to strict adherence with the Procedures, including any subsequent amendments or additions thereto.

 

 

[2] Note, although under the [Section 11 of the Basic Rules and Regulation to Implement PD 129] expanded commercial banks and investment houses are permitted to act as a Broker Dealer without separate registration under the Code, upon engaging in such activities, pursuant to [SRC Rule 18.1-1] they are subject to regulation as a Broker Dealer under the Code and implementing rules, including the requirement to establish and implement supervision and control procedures under SRC Rule 30.2-6. Thus, throughout these procedures, the term “Broker Dealer” should be interpreted to include these other entities when engaging in regulated activities under the Code.

[3] The term “Associated Person” is used throughout these Model Procedures in conformity with the terminology used in the Code and implementing rules. Notwithstanding, a firm may refer to its Associated Person as a Compliance Officer provided that such person has “supervisory” as well as compliance responsibilities.

 

Note, the singular version of the term “Associated Person” will be used herein, notwithstanding that a firm has employed more than one Associated Person, each with different duties; however, where then more than one such person has been appointed, the firm should designate one Associated Person as the primary Supervisor.