The essence of a duty to supervise violation is that the broker-dealer or investment adviser was not sufficiently monitoring its employees to ensure that they were not violating any of its policies and procedures or any securities laws. Pursuing failure to supervise claims therefore enables the SEC to attack an adviser’s or a broker-dealer’s lax or inadequate compliance program. In addition, failure to supervise charges are attractive to the SEC because they only require proof of negligence. An examination of a sampling of recent SEC enforcement actions alleging failures to supervise revealed similar mistakes made by the relevant broker-dealers or investment advisers. 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 second article analyzes failure to conduct adequate trade surveillance and communications surveillance. The third article will explore failure to respond properly to red flags; implement reasonable policies and procedures; and properly train supervisors, traders and salespeople. The first article
in the series reviewed the duty to supervise for both broker-dealers and investment advisers and summarized the duty to supervise violations in these enforcement actions. See “Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices
” (Mar. 27, 2015).