procedures and a system for applying the procedures that should reasonably be expected
Broker-dealers will not be liable for a securities law violation for failing to supervise if the broker or dealer has: (i) established both procedures and a system for applying the procedures that should reasonably be expected to detect and prevent a securities law violation by a person subject to the broker's or dealer's supervision; and (ii) reasonably discharged the duties and obligations imposed by the procedures and system without having reasonable cause to believe that the procedures and system were not being followed.
Under NASD rules,a supervisory system that is tailored specifically to the member's business and that addre
Under NASD rules, firms are required to adopt and implement a supervisory system that is tailored specifically to the member's business and that addresses the activities of all its registered representatives and associated persons.81 Firms are also required to designate appropriate supervisory personnel to assume authority and responsibility for internal supervision, control, and maintenance over their supervisory system.
The SEC found numerous supervisory deficiencies in the firms examined
Many margin violations occurred in branch offices. In addition, several day-trading firms failed to designate appropriate supervisory personnel in these branch offices.Day-trading firms must ensure that they have adequate compliance and supervisory infrastructure to ensure compliance with rules. The SEC and the SROs will rigorously enforce existing supervisory rules.
The volume of electronic trading and the vast number of accounts maintained at typical day-trading firms make manual supervision alone ineffective
The volume of electronic trading and the vast number of accounts maintained at typical day-trading firms make manual supervision alone ineffective. As a result, most day-trading firms rely heavily on automated supervisory systems to perform compliance functions. Day-traders execute transactions utilizing an automated order entry computer system, which provides the means for day traders to effect transactions efficiently from main and branch offices, and from remote trading locations. Day-trading firms are required to have the supervisory capability to monitor electronic customer order entries and trading patterns. The examinations revealed that day-traders at some firms had the ability to by-pass electronic compliance functions. For example:
Written supervisory procedures are a critical part of an overall supervisory system.
Written supervisory procedures are a critical part of an overall supervisory system. The written supervisory procedures document the overall system and identify the individuals with supervisory responsibility to prevent violations of the securities laws and SRO rules.83 Many day-trading firms examined by the Staff failed to maintain written supervisory procedures that adequately addressed all areas of their day-trading operations. For example, some firms did not have written supervisory procedures for: the review of exception reports; the process for opening new day-trading accounts; compliance with short sale rules; supervision of branch offices; and compliance with limit overages and margin maintenance. At some firms, the lack of written policies resulted in no one person being designated with authority or responsibility over particular compliance functions, and no procedures for handling particular compliance matters.
Day-trading firms may not be registering all of their branches as required
Examinations revealed that some day-trading firms may not be registering all of their branches as required by SRO rules. Most day-trading firms allow traders to be physically located in remote trading sites (i.e. , away from the headquarters or registered branch offices of the firm). Day-trading firms use terms such as "remote locations," "satellite offices," and "clusters" to describe these non-branch locations. The Staff found that a number of these remote locations were branch offices that were required to be registered under SRO rules.
Day-trading firms should ensure that branch offices are properly registered with the SEC, SROs and state securities regulat
Finally, the SEC found numerous situations where customers had been granted discretionary authority to trade the accounts of others. Trading with discretionary authority is not unique to day trading. In fact, it is relatively common among family members and between registered representatives and their customers. The Staff is concerned, however, that some of these customers may be acting as investment advisers or broker-dealers requiring registration under the law.
Day-trading firms should ensure that all associated persons and branch offices are properly registered with the SEC, SROs and state securities regulators. Firms also need to be careful not to facilitate the violation of registration requirements by their customers.
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8921 W. Sahara Ave.
Las Vegas, NV
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