§ 305.011. Supervision of agents, investment adviser representatives and employees.
(a) Every broker-dealer and investment adviser registered under section 301 of the act (70 P.S. § 1-301) shall exercise diligent supervision over the securities activities and securities related activities of its agents, investment adviser representatives and employees by:
(1) Establishing and maintaining written procedures and a system for applying and enforcing those written procedures which are reasonably designed to:
(i) Achieve compliance with the act and this title.
(ii) Detect and prevent any violations of statutes, rules, regulations or orders described in any of the following:
(A) Section 305(a)(v) and (ix) of the act (70 P.S. § 1-305(a)(v) and (ix)).
(B) The Conduct Rules of FINRA.
(C) An applicable fair practice or ethical standard promulgated by the Securities and Exchange Commission or by a National securities exchange.
(2) Accepting final responsibility for proper supervision.
(b) Every issuer who employs agents registered under section 301 of the act shall be subject to the supervision requirements of subsection (a) with respect to those agents.
(c) As evidence of compliance with the supervisory obligations imposed by this section, a broker-dealer or investment adviser shall:
(1) Implement written procedures, a copy of which shall be kept in each location at which the broker-dealer or investment adviser conducts business.
(2) Establish, maintain and enforce those written procedures designed to achieve compliance with the act and this title and to detect and prevent violations described in subsection (a).
(d) The written procedures required under subsection (c), at a minimum, must address all of the following:
(1) The supervision of every agent, investment adviser representative, employee and supervisor by a designated qualified supervisor.
(2) The methods to be used to determine that all supervisory personnel are qualified by virtue of character, experience and training to carry out their assigned responsibilities.
(3) The methods to be used to determine the good character, business repute, qualifications and experience of any person before making application for registration of that person with the Department and hiring that person.
(4) The review and written approval by the designated supervisor of the opening of each new customer account.
(5) The frequent examination of customer accounts to detect and prevent violations, irregularities or abuses.
(6) The prompt review and written approval of the handling of customer complaints.
(7) The prompt review and written approval by the designated supervisor of all securities transactions and all correspondence pertaining to the solicitation or execution of all securities transactions.
(8) The review and written approval by the designated supervisor of the delegation by a customer of discretionary authority with respect to the customer’s account and frequent examination of discretionary accounts to prevent violations, irregularities or abuses.
(9) The participation of each agent and investment adviser representative either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the broker-dealer or investment adviser at which compliance matters relevant to the activities of the agents and investment adviser representatives are discussed. Written records shall be maintained reflecting the interview or meeting.
(10) The periodic inspection of each location in this Commonwealth from which business is conducted to ensure that the written procedures and systems are enforced.
(e) The periodic inspections referenced in subsection (d)(10) shall occur according to the following time frames:
(1) At least annually for an office of supervisory jurisdiction of a broker-dealer.
(2) In accordance with an inspection cycle established in the broker-dealer’s written supervisory procedures for branch offices and nonbranch locations of a broker-dealer.
(i) In establishing an inspection cycle, the broker-dealer and investment adviser shall give consideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done and the number of agents or investment adviser representatives assigned to the location.
(ii) The obligation of diligent supervision required under this section may require that one or more locations of a broker-dealer or investment adviser in this Commonwealth receive more inspections or be on a periodic inspection cycle different than other locations of the broker-dealer or investment adviser in this Commonwealth and that inspections be unannounced.
(f) It is the responsibility of the broker-dealer or investment adviser to ensure through inspections of each location in this Commonwealth that the written procedures and systems are enforced and the supervisory obligations imposed by this section are being honored.
(g) Written records shall be maintained reflecting each inspection conducted.
(h) In acquitting their obligations under this section, registrants are to consult FINRA Notice to Members 98-38 (May 1998) and Securities and Exchange Commission Release No. 34-38174 (January 15, 1997).
(i) In accordance with FINRA Notice to Members 98-38, unannounced visits may be appropriate if there are indicators of misconduct including any of the following:
(1) Significant customer complaints.
(2) Personnel with disciplinary records.
(3) Excessive trade corrections, extensions, liquidations or variable contract replacements.
(j) Records required under this section:
(1) Shall be maintained for 5 years.
(2) Shall be maintained in an easily accessible place for the first 2 years.
(3) May be retained and preserved on microfilm, computer disks or tapes, or other electronic medium if adequate facilities are maintained for examination of facsimiles.
(k) To the extent that this section imposes any recordkeeping requirement on an investment adviser registered under section 301 of the act, the recordkeeping requirement does not apply if the investment adviser meets the following conditions:
(1) Has its principal place of business in a state other than this Commonwealth.
(2) Is licensed as an investment adviser in the state where it has its principal place of business.
(3) Is in compliance with the recordkeeping requirements of the state in which it has its principal place of business.
Authority The provisions of this § 305.011 amended under sections 305(a) and (f) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. § § 1-305(a) and (f) and 1-609(a)); section 202.C of the Department of Banking and Securities Code (71 P.S. § 733-202.C); and section 9(b) of the Takeover Disclosure Law (70 P.S. § 79(b)).
Source The provisions of this § 305.011 adopted March 29, 1974, effective March 30, 1974, 4 Pa.B. 582; amended September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551; amended July 11, 2003, effective July 12, 2003, 33 Pa.B. 3365; transferred and renumbered from 64 Pa. Code § 305.011, December 14, 2012, effective December 15, 2012, 42 Pa.B. 7533; amended January 12, 2018, effective January 13, 2018, 48 Pa.B. 389. Immediately preceding text appears at serial pages (364769) to (364771).
Notes of Decisions Standard of Care
The required supervision under this section over agents and employees of broker dealers and of investment advisers does not create a new cause of action nor establish a standard of care for investment brokers; even if considered relevant to establish a standard of care, the duty to supervise would not extend to employee activities unknown to the employer and beyond the employee’s scope of employment. Cover v. Cushing Capital Corp., 497 A.2d 249 (Pa. Super. 1985).
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