The Vanishing Supervisor

Abstract

This Article begins with two stories that are emblematic of related trends in broker-dealers: the importance of compliance officers and the significance of technology in the oversight of brokers and their activities. The stories also point to the lessening role of the supervisor who is “on the ground” in the branches of the firms. This diminished mid-level supervisor is surprising, even shocking, in the federal regulation of broker-dealers. The history of this regulation reveals that Congress, the Securities and Exchange Commission (“SEC”) and self-regulatory organizations (“SROs”) like the Financial Industry Regulatory Authority (“FINRA”) sought to prevent broker abuses of customers by enhancing the role and competence of mid-level broker-dealer supervisors, best exemplified by the branch manager. Indeed, the Securities Exchange Act of 1934 did something that was not in the common law of agency or in the regulation of businesses under corporate or other business organization law: it imposed a direct liability upon broker-dealer supervisors for their failure to supervise those under their control who commit securities law violations. This focus on the intermediate supervisor was both a business and regulatory reaction to the growth of broker-dealers as large organizations with numerous employees and multiple offices spread across the entire country to serve the growing number of new investors in the post-World War II years. The SEC and the SROs took advantage of the new managerial position to ensure that brokers would follow the law and, through their regulation and enforcement, sought to “professionalize,” and raise the standards of, this position. Recognizing, however, that the supervisory tasks were too much for typical mid-level supervisors, the SEC, the SROs and the broker-dealers themselves provided them with the assistance of compliance officers and technology. Yet these aids are now threatening to push the intermediate supervisor aside, for business and regulatory reasons: the “flattening” of the managerial hierarchy in broker-dealers, partly made possible by technology, and the fact that the SEC and the SROs have established, and have more confidence in, compliance officers to assist in the performance of supervisory tasks in broker-dealers. As a result, broker-dealers are pressuring regulators to allow technologically-enhanced compliance officers, generally operating remotely in the main office under the direction of senior supervisors, to conduct the work of the intermediate supervisor. The Article contends that to replace, or even to downplay the importance of, this kind of supervisor would remove a key player in effective compliance for broker-dealers. There is considerable value for compliance in maintaining the broker-dealer supervisor who has securities experience, who is close to and even participates in the securities activities of brokers and who thus understands the pressures that they face. The Article argues that the SEC and FINRA must resist this dangerous trend of the elimination of the mid-level supervisor, a process to which they are themselves contributing with their emphasis upon compliance officers, and it offers several steps that they can take to bring these supervisors into the compliance conversation.