General risk management principles can be applied to a variety of specific issues that broker-dealers must face. These risks come primarily from the following sources.

Hiring Practices

Proper hiring practices are essential to managing and minimizing risk. But how much due diligence is necessary in investigating an employee’s background? Consider that Conduct Rule 3010(e) mandates a “duty” to “investigate,” but, strictly speaking, only requires that an applicant’s most recent Form U-5 be reviewed. Obviously, firms should carefully investigate potential employees’ prior interactions with regulators because the reality is that regulators have prodigious memories. Just because someone has a large book of business, the number of prior associations and other issues with this person should still be carefully scrutinized.

New Products

New products can be inherently risky, but there is a real need to keep up with competitors and the market’s demand for new sales. It is imperative that these new products are covered in a firm’s supervisory policies and procedures, that there is adequate training on the new product to understand its risks and features so that it fits the client and can be clearly explained to the client.

Audit issues

The failure to have adequate written supervisory procedures, failure to follow those procedures, and/or failure to document that the procedures have been followed are problem audit issues. The following are a few of the more common issues encountered during routine audits, including:

  • Surveillance and retention of electronic communications
  • Outside business activities
  • Suitability
  • Special problems presented by branches

It is critical that there be risk management procedures throughout the organization. There must be procedures implemented and adequate staff to ensure compliance with those procedures. It is also critical that all documents be kept is such a way that the broker-dealer can prove its case; documents speak volumes and cases are won on document retention and retrieval. Furthermore, red flags needs to be addressed promptly and completely. Red flags tend to be more apparent in hind sight, but there are usually enough to alert a call to action and investigation.

The Spencer Law Firm has the experience necessary to broker-dealers in taking proactive steps required to identify, assess and reduce areas of risk. The following are some of the areas that need evaluation and review, including:

  • Bookkeeping Records
  • Account Ledgers
  • Trading and Transaction Records
  • New Account Applications
  • Document Retention and Retrieval
  • Customer Complaints and Arbitration matters
  • Associated Persons’ and Representatives’ Files
  • Advertising and Marketing Materials
  • Written Policies and Procedures Manuals
  • Firm Registration Records
  • Client Disclosure Documents and Privacy Notices
  • Anti-Money Laundering and Other Compliance Programs
  • Client Contracts and Account Files
  • Supervisory Compliance Controls

Please contact us today at our toll-free number, (888) 237-4529, for a consultation that can answer your questions related to compliance and risk management issues.