Q: My record is, unfortunately, not perfectly clean. While I’m by no means a bad person, through various circumstances and some bad luck, I’ve had a few customer complaints and a couple of arbitration actions as well as a FINRA fine and (brief) suspension. My current firm has indicated that I have to agree to a heighted supervision plan. What does that mean exactly?

A: FINRA requires member firms to establish and maintain supervisory systems for each of their associated individuals. Firms are also required to test their procedures on an annual basis and verify that those procedures are reasonable. In considering whether procedures are reasonable, however, member firms must tailor their supervisory procedures for their individual reps and sometimes that means crafting heightened supervisory procedures for some associated people

FINRA and the SEC have emphasized the need for heightened supervision when a member firm associates with people who have a history of industry or regulatory-related incidents. As part of those systems, FINRA has said that firms should update their procedures for hiring, monitoring brokers and investigating red flags suggestive of misconduct. Even so, the issue of whether heightened supervisory procedures are necessary is a very fact-specific question. In a recent regulatory notice (number 18-15) for example, FINRA said “A firm that hires an associated person with a recent history of customer complaints, disciplinary actions involving sales practice abuse or other customer harm, or adverse arbitration decisions should determine whether it needs special supervisory procedures for that associated person, or whether its existing supervisory procedures are sufficient.”

Toward that end, most firms will routinely evaluate their supervisory procedures to ensure they are properly tailored for each associated person and take into consideration the person’s history of regulatory incidents. In that same regulatory notice, FINRA provided a number of factors that firms should think about including in a heightened supervision plan. It should be noted that these factors are not all inclusive and FINRA will not consider them to be a “safe harbor” if they determine that other factors should have been included. With that said, FINRA has stated that an effective heightened supervision plan should include, at minimum:

  • Designating a principal with the appropriate training and experience to implement and enforce the plan;
  • Requiring appropriate additional training for the person subject to the plan to address the nature of incidents resulting in the plan;
  • Requiring the written acknowledgment of the heightened supervisory plan by the person subject to the plan and the designated supervisory principal; and
  • Periodically reviewing the heightened supervision plan to assess its effectiveness.
  • Providing heightened supervision of the associated person’s business activities, including customer-related activities, employee personal trading accounts, outside business activities and private securities transactions;
  • Assessing the proximity of the supervisor to the associated person;
  • Requiring more frequent contact between the supervisor and the associated person;
  • Requiring more frequent review of the associated person’s communications, particularly with customers;
  • Requiring more frequent monitoring or inspection of the associated person’s offices; and
  • Expediting the handling of customer complaints related to the associated person.

These are the sort of issues that you may likely see in a heightened supervision plan that your employer crafts for you. Depending on your particular circumstances, your specific plan may not have all these items listed, or it may include other procedures that haven’t been addressed above.

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a senior consultant and vice president at NCS Regulatory Compliance, and a partner at the law firm of Dew Foxman & Haugh in Delray Beach, Florida.