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
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