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XI. Supervision [Version up to Mar. 22, 2011]

Disqualified Persons—Failure to Discharge Supervisory Obligations

FINRA Rule 2010 and NASD Rule 3010

Principal Considerations in Determining Sanctions Monetary Sanction Suspension, Bar or Other Sanctions
See Principal Considerations in Introductory Section
1. Extent of disqualified person's misconduct and the existence of "red flag" warnings.
2. Whether disqualification resulted from financial and/or securities misconduct.
Fine of $10,000 to $100,000. Consider suspending responsible principal in any or all capacities for up to one year.

If disqualified person is involved in egregious misconduct about which the supervisor knew or should have known, consider a longer suspension (of up to two years) or a bar.

Supervision—Failure to Comply With Taping Rule Requirements (continued)

FINRA Rule 2010 and NASD Rule 3010(b)(2)

Principal Considerations in Determining Sanctions Monetary Sanction Suspension, Bar or Other Sanctions
See Principal Considerations in Introductory Section
1. Whether respondents were responsible for an unjustified delay in complying with the requirements of the rule.
2. The quality of the taping system that the firm installed.
3. The degree of the firm's implementation of follow—up and supervisory procedures.

In cases in which the failure to comply with tape recording requirements enabled problematic trading practices to occur, consider nature and extent of the underlying problematic conduct and the potential for resulting harm to the public or to a member firm.
4. In cases involving a failure to report to FINRA or the filing of an inaccurate, untimely or incomplete report, consider whether firm's misconduct concealed from FINRA or other regulatory authorities potential wrongdoing.
Failure to Establish, Maintain or Enforce Tape Recording Procedures

Fine of $10,000 to $75,000.
Failure to Establish, Maintain or Enforce Tape Recording Procedures

Consider suspending responsible individual in all principal capacities for 30 business days and limiting the activities of the affected branch office for up to 30 business days. Also consider requiring the firm or affected branch office to comply with the tape recording and reporting requirements of NASD Rule 3010(b)(2) for an additional period equal to the time specified in Rule 3010(b)(2).

In egregious cases, consider suspending the responsible individual for a longer period in all principal capacities, suspending the responsible individual in all capacities or barring the responsible individual, and limiting the activities of the branch office for a longer period or suspending the firm with respect to any or all activities or functions for a period of up to 30 business days. Also consider requiring the firm or affected branch office to comply with the tape recording and reporting requirements of NASD Rule 3010(b)(2) for an additional period equal to the time specified in Rule 3010(b)(2).

In cases involving a firm's steadfast refusal to implement, maintain or enforce tape recording procedures, consider barring the responsible individual and suspending the firm in all capacities for a longer period (of up to two years) or expelling the firm.

Supervision—Failure to Comply With Taping Rule Requirements

FINRA Rule 2010 and NASD Rule 3010(b)(2)

Principal Considerations in Determining Sanctions Monetary Sanction Suspension, Bar or Other Sanctions
See Principal Considerations in Introductory Section Failure Timely to Implement Procedures

Fine of $5,000 to $50,000.

Failure to Report to FINRA or Filing of an Inaccurate, Untimely or Incomplete Report

Fine of $1,000 to $25,000.
Failure Timely to Implement Procedures

Consider requiring the firm or affected branch office to comply with the requirements of NASD Rule 3010(b)(2) for an additional period of time equal to the period during which the firm delayed implementation of taping procedures.

In egregious cases, consider limiting the activities of the affected branch office for up to 30 business days or suspending the firm with respect to any or all activities or functions for a period of up to 30 business days. Also consider suspending the responsible individual in any or all capacities for up to two years or barring the responsible individual. Also consider requiring the firm or affected branch office to comply with the requirements of NASD Rule 3010(b)(2) for an additional period of time equal at least to the period during which the firm delayed implementation of taping procedures.

Failure to Report to the FINRA or Filing of an Inaccurate, Untimely or Incomplete Report

In egregious cases, consider suspending the responsible individual in any or all principal capacities for up to 30 business days and limiting the activities of the affected branch office for up to 30 business days. In cases involving the fabrication of a report, consider suspending the responsible individual for a longer period in all principal capacities, suspending the responsible individual in all capacities or barring the responsible individual, and suspending the firm for a lengthier period or expelling the firm.

Supervision—Failure to Supervise

FINRA Rule 2010 and NASD Rule 30101

Principal Considerations in Determining Sanctions Monetary Sanction1 Suspension, Bar or Other Sanctions
See Principal Considerations in Introductory Section
1. Whether respondent ignored "red flag" warnings that should have resulted in additional supervisory scrutiny. Consider whether individuals responsible for underlying misconduct attempted to conceal misconduct from respondent.
2. Nature, extent, size and character of the underlying misconduct.
3. Quality and degree of supervisor's implementation of the firm's supervisory procedures and controls.
Fine of $5,000 to $50,000.2

Consider independent (rather than joint and several) monetary sanctions for firm and responsible individual(s). Consider suspending responsible individual in all supervisory capacities for up to 30 business days. Consider limiting activities of appropriate branch office or department for up to 30 business days.
In egregious cases, consider limiting activities of the branch office or department for a longer period or suspending the firm with respect to any or all activities or functions for up to 30 business days. Also consider suspending the responsible individual in any or all capacities for up to two years or barring the responsible individual. In a case against a member firm involving systemic supervision failures, consider a longer suspension of the firm with respect to any or all activities or functions (of up to two years) or expulsion of the firm.

1 This guideline also is appropriate for violations of MSRB Rule G-27.

2 As set forth in General Principle No. 6, Adjudicators may increase the recommended fine amount by adding the amount of a respondent's financial benefit.


Supervisory Procedures—Deficient Written Supervisory Procedures

FINRA Rule 2010 and NASD Rule 30101

Principal Considerations in Determining Sanctions Monetary Sanction Suspension, Bar or Other Sanctions
See Principal Considerations in Introductory Section
1. Whether deficiencies allowed violative conduct to occur or to escape detection.
2. Whether the deficiencies made it difficult to determine the individual or individuals responsible for specific areas of supervision or compliance.
Fine of $1,000 to $25,000. In egregious cases, consider suspending the responsible individual(s) in any or all capacities for up to one year. Also consider suspending the firm with respect to any or all relevant activities or functions for up to 30 business days and thereafter until the supervisory procedures are amended to conform to rule requirements.

1 This guideline also is appropriate for violations of MSRB Rule G-27.


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