September 26, 2000

The SEC brought failure to supervise charges against four broker-dealers and seven persons registered with those firms. While these cases involve broker-dealers, they offer valuable insights to how an investment adviser should structure its compliance program and supervisory system. Each of the presidents of the broker-dealers was charged with failure to supervise.

The SEC alleged an assortment of misconduct, including unauthorized and unsuitable trading, churning and theft of client funds. In bringing these cases, the SEC emphasized the importance of broker-dealers utilizing unannounced, internal inspections of their employees' activities. Lessons that can be learned form the cases include:

:

• Senior management must ensure that adequate compliance procedures are in place and that sufficient resources are devoted to implementing those procedures;
• Supervisory responsibilities must be periodically reassessed;
• Special supervision should be given those personnel who have disciplinary histories;
• There must be adequate delineation of supervisory responsibilities and a system of follow-up and review; and
• Customer complaints must be thoroughly investigated.