The SEC has repeatedly emphasized that the duty to supervise is a critical component of the federal regulatory scheme. Registered broker-dealers and investment advisers must not only adopt effective supervisory policies and procedures, but also provide adequate staffing and resources; training; and a system of testing and review to ensure that duty is being fulfilled. Since the beginning of 2018, the SEC has released settlement orders for several enforcement actions that all include violations of the duty to supervise by broker-dealers and investment advisers. This three-part series examines the duty to supervise and common themes in these violations of this duty. The first article reviews the duty to supervise for both broker-dealers and investment advisers and summarizes the facts that led to the violations in four of these enforcement actions. The second
articles will explain how to avoid five traps related to the duty to supervise, with input from a compliance consultant and a lawyer with in-house experience. For enforcement actions involving duty to supervise charges against individuals, see “Charges of Fraudulent Valuation, Insider Trading and Failure to Supervise Employees Cost Manager and CFO More Than $10 Million in SEC Settlement
” (Jun. 14, 2018); and “Despite His ‘Bad Acts,’ Issuers Beneficially Owned by Steven A. Cohen Are Not Precluded From Private Offerings Based on the Bad Actor Rule
” (Jan. 21, 2016).
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