#supervisory liability

[sylviascottattorney]

Ensuring Compliance and Avoiding Supervisory Liability

Sylvia M. Scott is a Freeman, Freeman & Smiley, LLP, partner with the firm’s Los Angeles office. A SuperLawyer award winner, Sylvia M. Scott provided practical advice on avoiding supervisory liability in a 2012 NSCP Currents article. With regulatory authorities such as FINRA and the SEC taking an increasingly aggressive stance, a line must be drawn between financial advisors and the legal and compliance staff who inform them. In particular, it should be explicitly stated that the latter staff members do not hold a supervisory role over the financial personnel. It also makes sense to carefully document red flags, such as employee misconduct, as they arise. Whether in a written report, email, or memorandum, state the process by which the issue will be addressed. Also make clear which direct-line supervisors will handle the monitoring of the employee’s conduct. Because red flag events are sensitive by their very nature, it makes sense to obtain legal guidance when deciding on a particular compliance path to take.

[sylviascottattorney]

Sylvia M. Scott: Three Tips for Avoiding Supervisory Liability

Freeman, Freeman & Smiley, LLP Partner Sylvia M. Scott, a former SEC and NASD (FINRA) regulator, represents clients in securities regulatory matters, as well as securities industry employment matters. Ms. Scott, who has previously written on how the SEC and FINRA determine whether a supervisor is accountable for employee misconduct, offers the following tips: - Create clear and concise written supervisory procedures (WSPs). Investigators rely heavily on WSPs when determining liability. - When red flags occur, document them and your response to them. Chief compliance officers, direct line supervisors, and employees responsible for flagged actions should all be made aware of red flags, and their awareness should be documented. - When your job duties are expanded, check to see whether they include supervisory responsibilities. If they do, any violations in your area may cause you to incur liability. - Training: Make sure you are continuing to receive adequate training and support to enable you to do your job. - Escalate: Unresolved compliance issues should be escalated up the chain of command. - Alternative Products: If your firm sells alternative products (Reg D offerings, private placements, etc.): 1) make sure your firm has a rigorous and ongoing due diligence program; and 2) consider creating a short, “plain language” disclosure form for each customer to sign that spells out that they under the product is high risk and that the investor could lose all of his/her money.