A review of recent SEC enforcement actions against broker-dealers and investment advisers alleging violations of their respective duties to supervise their employees provides practical guidance to fund managers on how they can avoid similar SEC allegations. With the circumstances of these enforcement actions as the backdrop, the second and third articles in this three-part series discuss five common duty to supervise traps. This third article explores failure to respond properly to red flags; failure to implement reasonable policies and procedures; and failure to properly train supervisors, traders and salespeople. The second article
analyzed failures to conduct adequate trade surveillance and to conduct adequate communications surveillance. The first article
reviewed the duty to supervise for both broker-dealers and investment advisers and summarized the violations in those enforcement actions. See “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?
” (Nov. 30, 2017).