Chapter 3: General Supervision - A. Introduction: General Supervision

The foundation of a firm’s supervisory system is its written supervisory manual, also known as the firm’s policy and procedures manual. All members are required to have a policy and procedures manual that outlines the supervisory structure of the firm and that designates a principal to be responsible for each business area of supervision. The policy and procedures manual must include the title, location, and registration status of all supervisors and a copy of the manual must be kept in each office of the firm where supervised activities are conducted. The purpose of the written policy and procedures manual is to ensure compliance with the firm’s rules, as well as the rules of the industry. The manual must be updated to reflect the adoption of new policies, a change in personnel, or new industry regulations. The manual must also clearly outline the way the periodic compliance examinations are conducted and documented. Both the SEC and FINRA can take action against a firm or principal for failing to supervise its operations and agents.

The Role of the Principal

Prior to any firm being admitted as a member of FINRA, they must have a least two principals to supervise the activities of the firm. At a minimum, one must be a principal to supervise employees and the other must be a financial operations principal, or FINOP, to supervise the financial and operational activities of the firm. It is the principal’s responsibility to ensure that all rules in the policy and procedures manual are followed by the firm’s employees. It is also the responsibility of the principal to review and approve all of the following:

  • New accounts
  • Advertising
  • Sales literature
  • Transactions
  • Correspondence

The principal reviews and approves the above listed items in writing by signing or initialing the item. In the case of transactions, a principal may initial each ticket or initial a daily trade run. This supervisor’s initials will evidence the fact that the trades have been reviewed and approved. There is no requirement that a principal approve a trade prior to its execution, but the trade must be reviewed and approved promptly. Each registered representative must be assigned to a specific supervisor. A principal of a member firm who fails to supervise the actions of the agents under their control may be subject to action by both FINRA and the SEC. A principal will not be subject to action if there are written procedures in place that are designed to detect and prevent violations. These procedures must have been enacted and the supervisor must not have reason to believe the system is not operating properly. Additionally, the principal will not be found to have failed to supervise if an agent has employed extreme measures to conceal their actions. Each member firm must designate a principal to review the firm’s supervisory system. This person is responsible for recommending changes in the system to the firm’s senior management and this person must be identified to FINRA as the principal in charge of reviewing the firm’s compliance systems.

Supervisor Qualifications and Prerequisites

People who supervise or train agents generally must register as a principal with FINRA and qualify by training or experience. Prior to taking a principal exam, the individual must have successfully completed the appropriate registered representative examination. A principal of an FINRA member firm will usually take the General Securities Principal exam known as the series 24. Series 24 general securities principals may manage or supervise the firm’s corporate securities business, including investment banking, direct participation programs, investment company products, and variable contracts. A Series 24 does not qualify an individual as a:

  • Registered Options Principal
  • General Securities Sales Supervisor for Options or Municipal Securities
  • Municipal Securities Principal
  • Financial and Operations Principal
  • Introducing Broker/Dealer Financial and Operations Principal

All portions of FINRA administered exams are proprietary and to be held in the strictest of confidence. FINRA considers it a violation of its rules for any individual to:

  • Disclose exam questions or content to anyone
  • Reproduce exam questions
  • Receive exam questions or content from anyone
  • Compromise the content of any exam
  • Remove any portion of an exam from the exam location
B. Continuing Education and Regulatory Element
Related Articles
  1. Personal Finance

    Introduction To Financial Planning Organizations

    Organizations such as the FPA and NAPFA are striving to provide higher standards for the financial planning profession and greater protection for consumers through a combination of community ...
  2. Professionals

    Key Steps To Building A Great Financial Planning Practice

    Following the status quo will kill your financial practice. Find out the tips you need to follow to keep you a step or two ahead of the competition.
  3. Professionals

    A Day In The Life Of An Economist

    We've interviewed three economists with very different job descriptions to give you an idea of the many possibilities this career choice offers.
  4. Professionals

    The Best Training Programs For CFP Exams

    The competition to become a financial planner is hot, and growing hotter. Find out the best way to preparing to land the CFP designation.
  5. Professionals

    The Claritas Investment Certificate: A New Foundation-Level Program From The CFA Institute

    The Claritas Investment Certificate is likely to find growing acceptance as the new foundation-level education and ethics standard for the financial service sector internationally.
  6. Professionals

    CFP

    CFP Exam Guide
  7. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  8. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  9. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  10. Professionals

    Small RIAs: How to Level the Playing Field

    In order to compete with larger firms, small RIAs have to get a little creative. Here are a few ways to kickstart growth.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Open Architecture

    The option offered by an investment firm to let its clients invest ...
  3. Advanced Diploma In Insurance

    A qualification earned by insurance professionals and conferred ...
  4. Associate In Personal Insurance ...

    A designation earned by professionals looking for training in ...
  5. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  6. Associate In Reinsurance (ARe)

    A designation earned by insurance professionals looking for reinsurance ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  2. What are the benefits of financial sampling?

    Financial sampling allows auditors to approximate the rate of error within financial statements. For accounting purposes, ... Read Full Answer >>
  3. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  4. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  5. What are the benefits of hiring a Chartered Financial Analyst (CFA) to be my financial ...

    A Chartered Financial Analyst (CFA) has successfully passed rigorous coursework in the fields of economics, financial analysis, ... Read Full Answer >>
  6. What types of companies hire a chartered financial analyst (CFA)?

    The Chartered Financial Analyst, or CFA, program is a professional certification awarded by the CFA Institute. CFA candidates ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!