NASAA Series 63Regulation of Broker-Dealers and AgentsMedium
A state securities examiner discovers that an agent at Broker-Dealer ABC engaged in extensive unauthorized trading in client accounts over several months. The examiner also finds that ABC had no system in place to review trade blotters, order tickets, or account activity that would have revealed the pattern. Under the Uniform Securities Act, ABC is most likely to be found:
- ANot liable, because only the agent who executed the trades violated the Act
- BLiable only if it is proven that ABC had actual knowledge of the specific unauthorized trades
- CLiable for failing to establish and maintain reasonable supervisory procedures
- DLiable, but only to the extent clients suffered a demonstrable financial loss
Show answer & explanationAnswer & explanation
Correct answer: C. Liable for failing to establish and maintain reasonable supervisory procedures
The Uniform Securities Act imposes an ongoing post-registration duty on broker-dealers to establish, maintain, and enforce reasonable supervisory procedures over their agents. A failure to have any system to detect red flags such as unauthorized trading exposes the firm to disciplinary action independent of whether it had actual knowledge or clients suffered loss.
Why the other options are wrong
- A. Incorrect — BDs bear independent supervisory liability, separate from the agent's misconduct.
- B. Incorrect — actual knowledge is not required; failure to reasonably supervise is a standalone violation.
- D. Incorrect — supervisory liability does not depend on quantifiable client loss.
Duty to Supervise
Broker-dealers must establish and enforce reasonable supervisory systems to detect and prevent agent misconduct; failure to do so is a violation even absent proof of actual knowledge.
- A post-registration, ongoing obligation
- Reviewed items include order tickets, trade blotters, correspondence
- Failure to supervise can trigger BD discipline separate from agent's violation
Memory trick: No System, No Excuse