3010. Supervision
(a) Supervisory System
Each
member shall establish and maintain a system to supervise the
activities of each registered representative and associated person that
is reasonably designed to achieve compliance with applicable securities
laws and regulations, and with the Rules of this Association. Final
responsibility for proper supervision shall rest with the member. A
member's supervisory system shall provide, at a minimum, for the
following:
(1) The establishment and maintenance of written procedures as required by paragraphs (b) and (c) of this Rule.
(2)
The designation, where applicable, of an appropriately registered
principal(s) with authority to carry out the supervisory
responsibilities of the member for each type of business in which it
engages for which registration as a broker/dealer is required.
(3)
The designation as an office of supervisory jurisdiction (OSJ) of each
location that meets the definition contained in paragraph (g) of this
Rule. Each member shall also designate such other OSJs as it determines
to be necessary in order to supervise its registered representatives
and associated persons in accordance with the standards set forth in
this Rule, taking into consideration the following factors:
(A)
whether registered persons at the location engage in retail sales or
other activities involving regular contact with public customers;
(B)
whether a substantial number of registered persons conduct securities
activities at, or are otherwise supervised from, such location;
(C) whether the location is geographically distant from another OSJ of the firm;
(D) whether the member's registered persons are geographically dispersed; and
(E) whether the securities activities at such location are diverse and/or complex.
(4)
The designation of one or more appropriately registered principals in
each OSJ, including the main office, and one or more appropriately
registered representatives or principals in each non-OSJ branch office
with authority to carry out the supervisory responsibilities assigned
to that office by the member.
(5) The assignment of each
registered person to an appropriately registered representative(s)
and/or principal(s) who shall be responsible for supervising that
person's activities.
(6) Reasonable efforts to determine that
all supervisory personnel are qualified by virtue of experience or
training to carry out their assigned responsibilities.
(7)
The participation of each registered representative, either
individually or collectively, no less than annually, in an interview or
meeting conducted by persons designated by the member at which
compliance matters relevant to the activities of the representative(s)
are discussed. Such interview or meeting may occur in conjunction with
the discussion of other matters and may be conducted at a central or
regional location or at the representative's(') place of business.
(8)
Each member shall designate and specifically identify to the
Association one or more principals who shall review the supervisory
system, procedures, and inspections implemented by the member as
required by this Rule and take or recommend to senior management
appropriate action reasonably designed to achieve the member's
compliance with applicable securities laws and regulations, and with
the Rules of this Association.
(b) Written Procedures
(1)
Each member shall establish, maintain, and enforce written procedures
to supervise the types of business in which it engages and to supervise
the activities of registered representatives and associated persons
that are reasonably designed to achieve compliance with applicable
securities laws and regulations, and with the applicable Rules of this
Association.
(2) Tape recording of conversations
(A)
Each member that either is notified by NASD Regulation or otherwise has
actual knowledge that it meets one of the criteria in paragraph
(b)(2)(H) relating to the employment history of its registered persons
at a Disciplined Firm as defined in paragraph (b)(2)(J) shall
establish, maintain, and enforce special written procedures for
supervising the telemarketing activities of all of its registered
persons.
(B) The member must establish and implement the
supervisory procedures required by this paragraph within 60 days of
receiving notice from NASD Regulation or obtaining actual knowledge
that it is subject to the provisions of this paragraph.
A
member that meets one of the criteria in paragraph (b)(2)(H) for the
first time may reduce its staffing levels to fall below the threshold
levels within 30 days after receiving notice from NASD Regulation
pursuant to the provisions of paragraph (b)(2)(A) or obtaining actual
knowledge that it is subject to the provisions of the paragraph,
provided the firm promptly notifies the Department of Member
Regulation, NASD Regulation, in writing of its becoming subject to the
Rule. Once the member has reduced its staffing levels to fall below the
threshold levels, it shall not rehire a person terminated to accomplish
the staff reduction for a period of 180 days. On or prior to reducing
staffing levels pursuant to this paragraph, a member must provide the
Department of Member Regulation, NASD Regulation with written notice,
identifying the terminated person(s).
(C) The procedures
required by this paragraph shall include tape-recording all telephone
conversations between the member's registered persons and both existing
and potential customers.
(D) The member shall establish
reasonable procedures for reviewing the tape recordings made pursuant
to the requirements of this paragraph to ensure compliance with
applicable securities laws and regulations and applicable rules of the
Association. The procedures must be appropriate for the member's
business, size, structure, and customers.
(E) All tape
recordings made pursuant to the requirements of this paragraph shall be
retained for a period of not less than three years from the date the
tape was created, the first two years in an easily accessible place.
Each member shall catalog the retained tapes by registered person and
date.
(F) Such procedures shall be maintained for a period of
three years from the date that the member establishes and implements
the procedures required by the provisions of this paragraph.
(G)
By the 30th day of the month following the end of each calendar
quarter, each member firm subject to the requirements of this paragraph
shall submit to the Association a report on the member's supervision of
the telemarketing activities of its registered persons.
(H)
The following members shall be required to adopt special supervisory
procedures over the telemarketing activities of their registered
persons:
• A firm with at least five but fewer than ten
registered persons, where 40% or more of its registered persons have
been associated with one or more Disciplined Firms in a registered
capacity within the last three years;
• A firm with at least
ten but fewer than twenty registered persons, where four or more of its
registered persons have been associated with one or more Disciplined
Firms in a registered capacity within the last three years;
•
A firm with at least twenty registered persons, where 20% or more of
its registered persons have been associated with one or more
Disciplined Firms in a registered capacity within the last three years.
For purposes of the calculations required in subparagraph (H), firms should not include registered persons who:
(1)
have been registered for an aggregate total of 90 days or less with one
or more Disciplined Firms within the past three years; and
(2) do not have a disciplinary history.
(I)
For purposes of this Rule, the term "registered person" means any
person registered with the Association as a representative, principal,
or assistant representative pursuant to the Rule 1020, 1030, 1040, and
1110 Series or pursuant to Municipal Securities Rulemaking Board
("MSRB") Rule G-3.
(J) For purposes of this Rule, the term
"disciplined firm" means either a member that, in connection with sales
practices involving the offer, purchase, or sale of any security, has
been expelled from membership or participation in any securities
industry self-regulatory organization or is subject to an order of the
Securities and Exchange Commission revoking its registration as a
broker/dealer; or a futures commission merchant or introducing broker
that has been formally charged by either the Commodity Futures Trading
Commission or a registered futures association with deceptive
telemarketing practices or promotional material relating to security
futures, those charges have been resolved, and the futures commission
merchant or introducing broker has been closed down and permanently
barred from the futures industry as a result of those charges; or a
futures commission merchant or introducing broker that, in connection
with sales practices involving the offer, purchase, or sale of security
futures is subject to an order of the Securities and Exchange
Commission revoking its registration as a broker or dealer.
(K)
For purposes of this Rule, the term "disciplinary history" means a
finding of a violation by a registered person in the past five years by
the Securities and Exchange Commission, a self-regulatory organization,
or a foreign financial regulatory authority of one or more of the
provisions (or comparable foreign provision) listed in IM-1011-1 or
rules or regulations thereunder.
(L) Pursuant to the Rule
9600 Series, the Association may in exceptional circumstances, taking
into consideration all relevant factors, exempt any member
unconditionally or on specified terms and conditions from the
requirements of this paragraph upon a satisfactory showing that the
member's supervisory procedures ensure compliance with applicable
securities laws and regulations and applicable rules of the Association.
(3)
The member's written supervisory procedures shall set forth the
supervisory system established by the member pursuant to paragraph (a)
above, and shall include the titles, registration status and locations
of the required supervisory personnel and the responsibilities of each
supervisory person as these relate to the types of business engaged in,
applicable securities laws and regulations, and the Rules of this
Association. The member shall maintain on an internal record the names
of all persons who are designated as supervisory personnel and the
dates for which such designation is or was effective. Such record shall
be preserved by the member for a period of not less than three years,
the first two years in an easily accessible place.
(4) A copy
of a member's written supervisory procedures, or the relevant portions
thereof, shall be kept and maintained in each OSJ and at each location
where supervisory activities are conducted on behalf of the member.
Each member shall amend its written supervisory procedures as
appropriate within a reasonable time after changes occur in applicable
securities laws and regulations, including the Rules of this
Association, and as changes occur in its supervisory system, and each
member shall be responsible for communicating amendments through its
organization.
(c) Internal Inspections
Each
member shall conduct a review, at least annually, of the businesses in
which it engages, which review shall be reasonably designed to assist
in detecting and preventing violations of and achieving compliance with
applicable securities laws and regulations, and with the Rules of this
Association. Each member shall review the activities of each office,
which shall include the periodic examination of customer accounts to
detect and prevent irregularities or abuses and at least an annual
inspection of each office of supervisory jurisdiction. Each branch
office of the member shall be inspected according to a cycle which
shall be set forth in the firm's written supervisory and inspection
procedures. In establishing such cycle, the firm shall give
consideration to the nature and complexity of the securities activities
for which the location is responsible, the volume of business done, and
the number of associated persons assigned to the location. Each member
shall retain a written record of the dates upon which each review and
inspection is conducted.
(d) Review of Transactions and Correspondence
(1) Supervision of Registered Representatives
Each
member shall establish procedures for the review and endorsement by a
registered principal in writing, on an internal record, of all
transactions and for the review by a registered principal of incoming
and outgoing written and electronic correspondence of its registered
representatives with the public relating to the investment banking or
securities business of such member. Such procedures should be in
writing and be designed to reasonably supervise each registered
representative. Evidence that these supervisory procedures have been
implemented and carried out must be maintained and made available to
the Association upon request.
(2) Review of Correspondence
Each
member shall develop written procedures that are appropriate to its
business, size, structure, and customers for the review of incoming and
outgoing written (i.e., non-electronic) and electronic correspondence
with the public relating to its investment banking or securities
business, including procedures to review incoming, written
correspondence directed to registered representatives and related to
the member's investment banking or securities business to properly
identify and handle customer complaints and to ensure that customer
funds and securities are handled in accordance with firm procedures.
Where such procedures for the review of correspondence do not require
review of all correspondence prior to use or distribution, they must
include provision for the education and training of associated persons
as to the firm's procedures governing correspondence, documentation of
such education and training, and surveillance and follow-up to ensure
that such procedures are implemented and adhered to.
(3) Retention of Correspondence
Each
member shall retain correspondence of registered representatives
relating to its investment banking or securities business in accordance
with Rule 3110. The names of the persons who prepared outgoing
correspondence and who reviewed the correspondence shall be
ascertainable from the retained records and the retained records shall
be readily available to the Association, upon request.
(e) Qualifications Investigated
Each
member shall have the responsibility and duty to ascertain by
investigation the good character, business repute, qualifications, and
experience of any person prior to making such a certification in the
application of such person for registration with this Association.
Where an applicant for registration has previously been registered with
the Association, the member shall review a copy of the Uniform
Termination Notice of Securities Industry Registration (Form U-5) filed
with the Association by such person's most recent previous NASD member
employer, together with any amendments thereto that may have been filed
pursuant to Article V, Section 3 of the Association's By-Laws. The
member shall review the Form U-5 as required by this Rule no later than
sixty (60) days following the filing of the application for
registration or demonstrate to the Association that it has made
reasonable efforts to comply with the requirement. In conducting its
review of the Form U-5 and any amendments thereto, a member shall take
such action as may be deemed appropriate.
Where an applicant
for registration has been previously registered with a registered
futures association ("RFA") member that is or has been registered as a
broker/dealer pursuant to Section 15(b)(11) of the Act
("notice-registered broker/dealer") with the SEC to trade security
futures, the member shall review a copy of the Notice of Termination of
Associated Person (Form 8-T) filed with the RFA by such person's most
recent previous RFA member employer, together with any amendments
thereto. The member shall review the Form 8-T as required by this Rule
no later than sixty (60) days following the filing of the application
for registration or demonstrate to the Association that it has made
reasonable efforts to comply with the requirement. In conducting its
review of a Form 8-T and any amendments, a member shall take such
action as may be deemed appropriate.
(f) Applicant's Responsibility
Any
applicant for registration who receives a request for a copy of his or
her Form U-5 from a member pursuant to this Rule shall provide such
copy to the member within two (2) business days of the request if the
Form U-5 has been provided to such person by his or her former
employer. If a former employer has failed to provide the Form U-5 to
the applicant for registration, such person shall promptly request the
Form U-5, and shall provide it to the requesting member within two (2)
business days of receipt thereof. The applicant shall promptly provide
any subsequent amendments to a Form U-5 he or she receives to the
requesting member.
(g) Definitions
(1)
"Office of Supervisory Jurisdiction" means any office of a member at
which any one or more of the following functions take place:
(A) order execution and/or market making;
(B) structuring of public offerings or private placements;
(C) maintaining custody of customers' funds and/or securities;
(D) final acceptance (approval) of new accounts on behalf of the member;
(E) review and endorsement of customer orders, pursuant to paragraph (d) above;
(F)
final approval of advertising or sales literature for use by persons
associated with the member, pursuant to Rule 2210(b)(1); or
(G)
responsibility for supervising the activities of persons associated
with the member at one or more other branch offices of the member.
(2)
"Branch Office" means any location identified by any means to the
public or customers as a location at which the member conducts an
investment banking or securities business, excluding:
(A) any
location identified in a telephone directory line listing or on a
business card or letterhead, which listing, card, or letterhead also
sets forth the address and telephone number of the branch office or OSJ
of the firm from which the person(s) conducting business at the
non-branch locations are directly supervised;
(B) any
location referred to in a member advertisement, as this term is defined
in Rule 2210, by its local telephone number and/or local post office
box provided that such reference may not contain the address of the
non-branch location and, further, that such reference also sets forth
the address and telephone number of the branch office or OSJ of the
firm from which the person(s) conducting business at the non-branch
location are directly supervised; or
(C) any location
identified by address in a member's sales literature, as this term is
defined in Rule 2210, provided that the sales literature also sets
forth the address and telephone number of the branch office or OSJ of
the firm from which the person(s) conducting business at the non-branch
locations are directly supervised.
(D) any location where a
person conducts business on behalf of the member occasionally and
exclusively by appointment for the convenience of customers, so long as
each customer is provided with the address and telephone number of the
branch office or OSJ of the firm from which the person conducting
business at the non-branch location is directly supervised.
(3)
A member may substitute a central office address and telephone number
for the supervisory branch office or OSJ locations referred to in
paragraph (g)(2) above provided it can demonstrate to the Association's
District Office having jurisdiction over the member that it has in
place a significant and geographically dispersed supervisory system
appropriate to its business and that any investor complaint received at
the central site is provided to and resolved in conjunction with the
office or offices with responsibility over the non-branch business
location involved in the complaint.
[Amended eff. June 12,
1989: Apr. 30, 1992; amended by SR-NASD-97-41 eff. Sept. 4, 1997;
amended by SR-NASD-97-24 eff. Feb. 15, 1998; amended by SR-NASD-98-10
postponed eff. date; amended by SR-NASD-98-31 eff. Apr. 7, 1998,
postponed eff. date of provision in Notice to Members 98-11; amended by
SR-NASD-98-45 postponed eff. date of provision in Notice to Members
98-11; amended by SR-NASD-97-69 eff. Aug. 17, 1998; amended by
SR-NASD-98-86 eff. Nov. 19, 1998; amended by SR-NASD-98-52 eff. March
15, 1999; amended by SR-NASD-99-28 eff. Aug. 16, 1999; amended by
SR-NASD-2002-04 eff. Oct. 14, 2002; amended by SR-NASD-2002-40 eff.
Oct. 15, 2002.]
Selected Notices to Members: 86-65, 88-84, 89-34, 89-57, 92-18, 96-33, 96-59, 96-82, 98-11, 98-52, 99-03.
Selected SEC Decisions
Juan Carlos Schidlowski, SEC Rel. No. 34-23347 (1986).
Wedbush Securities, Inc. (f/k/a Wedbush Noble, Cooke, Inc.), SEC Rel. No. 34-25504 (1988).
Seco Securities, Inc. and Stanley Richards, SEC Rel. No. 34-26054 (1988).