This is the fourth post in the Red Flag series. As I mentioned yesterday when discussing red flag issues in connection with broker compliance, the "red flag" language is used often when we speak of broker-dealer compliance issues. The regulators particularly like this metaphor, and often speak about the importance of recognizing and responding to red flags in a firm's supervision of brokers and associated persons. Doing so can certainly help keep a firm out of trouble, or can work to minimize problems when possible. As I've mentioned in the other posts in this series, this list of red flags is not an exhaustive or complete list, but it is a good starting point.
When I think of supervisory concerns, written supervisory procedures are at the foundation of the supervision process. And, from the regulators' perspective, they are critically important. So the first red flag that comes to mind is not having a good set of written supervisory procedures. The WSP should be customized and tailored to the business that the firm does and to the manner in which it supervises. And importantly, the WSP should not read as if it was written for (or stolen from) another firm because that other firm's name is sprinkled throughout the pages (Yep, I've seen that. More than once.)
A second red flag is failing to have the WSPs ingrained in the culture of the firm, letting folks know who is responsible for what, and how and when they are to carry out their assigned roles. Here, consistency is important. A lawyer I used to work with would often proclaim that "Consistency is the hobgoblin of little minds." I think that quote, or something similar, is attributable to Ralph Waldo Emerson. I get it. Consistently doing things for the sake of consistency doesn't add up to much. But in a broker-dealer, regarding supervision, consistency can be very important, especially for firms with multiple locations and managers. Ideally, a firm would likely want to ensure that its supervisory policies are consistently and uniformly carried out throughout the enterprise. When they are not, supervision can breakdown.
In addition to the flags that are easy to see such as numerous complaints, arbitrations and regulatory inquiries, other red flags in supervision that arise from time to time are:
* Failing to investigate and respond to outside business activity disclosures.
* Failing to maintain track of outside securities accounts of brokers.
* Patterns of renegs or Reg-T extensions for a particular broker or branch office.
* Patterns of excessive or atypical short-term trading in clients' accounts.
* Evidence of atypical financial trouble experienced by brokers, that might point to issues relating to a variety of problems, including something very serious as involvement in fraud, down to things like selling away or undisclosed OBAs, etc.