Frequently Asked Questions

 

Heightened Supervision


Q. Can you provide examples of heightened supervision?

A. Heightened supervision may include, but is not limited to:

  • Unannounced supervisory reviews;
  • An increased number of supervisory reviews by different reviewers within a certain period;
  • A broader scope of activities reviewed and/or number of transactions reviewed;
  • Having one or more principals approve the supervisory review of producing managers.

  • For more information, please refer to NASD Notice to Members 04-71.

Q: How does a firm perform the 20-percent calculation in order to determine if the heightened supervision requirements of Rule 3012 apply to a producing manager who is being supervised by a person senior to the producing manager?

A. To determine if heightened supervision requirements apply to a producing manager, the firm must start by identifying the person senior to the producing manager who is conducting the supervision and then perform the following calculation:

  • (1) First, calculate the total revenue generated over the preceding 12 months by the supervisor and every individual and business unit the supervisor oversees. For example, if the CEO of a firm supervises a particular producing manager as well as all business units of the firm, the total revenue of the firm would be used to determine the total revenue of the CEO and the individuals and business units he or she supervises. (Supervisor's total revenue)

    (2) Second, determine the total revenue generated by or credited to the producing manager, and every individual and business unit the producing manager supervises. (Producing manager's total revenue)


    (3) Divide the producing manager's total revenue by the supervisor's total revenue. If the resulting percent is greater than or equal to 20 percent, then this producing manger requires heightened supervision.

     

    Example
    Karen, services retail customer accounts, and is also the Head of Equity Trading. She reports directly to the firm's CEO, Nicole. The Equity Trading business contributed a total of $100,000 in revenues over the last 12 months, and includes revenues personally generated by Karen. Nicole oversees all of the firm's business activities and those activities generated $2 million in revenues over the last 12 months. According to this example:

     

  • Nicole oversees a total of $2 million in revenue.
  • Karen is responsible for $100,000 of the $2 million in revenue, or about 5 percent of the revenues her supervisor, Nicole, oversees.
  • Karen is not subject to heightened supervision under Rule 3012.

Q: Should my firm use gross or net revenue in making the 20-percent calculation?

A. The term revenue in this context means the total dollar payment for goods and services before any deductions or offsets. An analysis of cost allocations, margins and net income is not relevant for determining the benchmarks for heightened supervision.

 

Q: How should a firm define "business unit" as it is used in Rule 3012?

A. Firms should understand that "business unit" is simply meant to denote all of the areas of production revenue overseen by a producing manager's supervisor to determine heightened supervision.

  • Example
    Joe supervises one of the firm's three proprietary trading desks with $200,000 in revenues, a sub-unit of insurance sales with $300,000 in revenues, and Derek, a producing manager with $200,000 in revenues (the total of his own production and the production he supervises). According to this example:

     

  • Joe oversees a total of $700,000 in revenue.
  • Derek is responsible for $200,000 of the total $700,000 in revenue, or just over 28 percent of the revenues Joe (his supervisor) oversees.
  • Derek is subject to heightened supervision under Rule 3012.

  • Example
    If a supervisor oversees four producing managers, none of whom by themselves or together technically comprise what the firm regards as a business unit, the supervisor must nonetheless aggregate the total revenue derived from these four producing managers (their own production and the production they, in turn, supervise) and determine which producing managers exceed 20 percent.

     

  • Producing manager 1 produces $2 million
  • Producing manager 2 produces $3 million
  • Producing manager 3 produces $5 million and
  • Producing manager 4 produces $1.75 million.
  • The total revenue the supervisor oversees is $11.75 million.
  • Only producing managers 2 and 3 generate or exceed 20 percent of the total revenue overseen, and therefore, are subject to heightened supervision under Rule 3012.

Q: How often does the 20-percent calculation required by Rule 3012 need to be done?

A. The 20-percent calculation under Rule 3012 must be done monthly on a rolling 12-month basis.


Q: Is my firm still required to have heightened supervision for a producing manager if his or her personal production is not a large amount of revenue, but the amount of his or her personal production plus the revenue generated by his or her business unit meets the 20-percent threshold?

A. Yes. Rule 3012 specifically requires a firm to take into account all of the revenue generated by or credited to the producing manager and the business units he or she oversees. Rule 3012 does not place more emphasis on a producing manager's personal production than it does on the production that person oversees.


Q: Is a firm required to implement heightened supervision of its 20-percent producing managers under Rule 3012 if an otherwise independent person is conducting the general supervisory reviews of the producing manager required by Rule 3012?

A. No. If an otherwise independent person is reviewing and supervising the customer account activity of a producing manager, a firm does not need to perform the calculation to determine if the 20-percent threshold has been met and no heightened supervision of the producing manager is required under Rule 3012. The factors that define an otherwise independent person already protect against the possibility that any conflicts of interest may exist that might adversely affect the producing manager's supervisory reviews, especially the restriction that an otherwise independent person not be directly compensated based in whole or in part on the revenues accruing from the activities being reviewed.


Q: Do the heightened supervision requirements of Rule 3012 apply to a sole proprietorship?

A. Rule 3012 does not provide an exception from its Rule 3012's heightened supervision requirements. FINRA expects every firm to implement a supervisory control system reasonably designed to achieve compliance with Rule 3012.


Q: Does the person conducting heightened supervision have to be a principal?

A. No. The firm has discretion to determine whether the person conducting the heightened supervision is a principal. In many cases, however, firms may decide that it is best to have a principal conduct the heightened supervision.