The SEC Disregards the Legislative Scheme for an Independent “Duty to Supervise” to Deal with Legacy Cases
Of course, the Commission continued to address cases arising before the amendments. One involved a classic boiler room operation and manipulation scheme. The president of a securities dealer and a number of associates fraudulently sold shares in a company they organized and charged excessive mark-ups in secondary sales. The president persuaded the head trader of another broker-dealer to publish “suggested” quotations for the stock at prices well above what the trader paid or received for the shares. No one else at the broker-dealer, a company of substantial size, was involved. Nevertheless, a hearing examiner recommended revoking its registration because of the trader’s actions.
Chairman Manuel Cohen and Commissioners Owens, Byron Woodside, Hamer Budge, and Francis Wheat agreed “[the trader] entered into an arrangement with [the president] to place quotations . . . pursuant to [his] instructions and thereby assist the latter in the creation of an artificial market.” Citing Reynolds, they said “the firm’s failure of supervision made it a participant in [the trader’s] misconduct[,]” finding “[the broker-dealer], together with or aided and abetted by [the trader,] . . . willfully violated the cited anti-fraud provisions.” If the 1964 Amendments were in effect, the Commission could have proceeded against the trader separately and found he manipulated the market or willfully aided and abetted the president’s fraud. Instead, in order to discipline him, it had to sanction the broker-dealer. The case, and others like it, set the stage for an eventual confrontation between the theory in Reynolds and the basis of supervisory liability contemplated by Section 15(b)(5)(E).
Less than three years later, the SEC decided an action involving a salesman in the Cleveland office of a large wire-house who misled customers about another client’s investments to entice them to trade excessively from 1962 to 1963. A hearing examiner recommended a four-month suspension for the salesman for personally violating the anti-fraud provisions. The examiner advised that proceedings against the broker-dealer and its office manager be dropped. The firm’s supervisory procedures, “although not above criticism, constituted a ‘reasonably acceptable system[.]’” And “while negligence [by the manager] in the enforcement of established procedures had been shown . . . the record did not establish that absent such negligence [the salesman’s] violations would have been prevented or detected.”
Chairman Cohen and Commissioners Owens, Budge, and Richard Smith agreed with the finding against the salesman, deciding to bar him instead, but not on the issue of oversight. In a footnote, they claimed:
Although Section 15(b)(5)(E) was not adopted until 1964 the standards of supervision which it prescribes in substance represented a codification of the standards which the Commission had established prior to 1964 through administrative adjudication.
“That Section,” they said, “requires reasonable supervision with a view to preventing violations of the securities acts.” Reynolds offered the criterion for evaluating it. In their opinion, “the[] procedures left important gaps,” and the broker-dealer and the manager “did not reasonably discharge their supervisory duties.” Both were censured. The examiner’s decision was consistent with the intentions behind Section 15(b)(5)(E). Seemingly little was accomplished by imposing the least possible sanctions. But Section 15(b)(7) was unavailable. So unless an order was issued against the broker-dealer, there was no basis for disciplining the salesman (whose conduct was egregious enough to warrant a much stiffer sanction).
At once, the rubric from an obsolete jurisdictional device replaced the SECO and SRO regimes for supervisory responsibility. Congress clearly intended to govern oversight through self-regulation. The Commission’s authority over it was limited to a small number of broker-dealers by rulemaking and influence over SRO rules for the rest (also subject to legislative process). The decision asserted the power over all broker-dealers and their associates by adjudication. Moreover, the formula was completely different: SECO and SRO rules provided for company-level responsibility, central administration, definite supervisory relationships, and procedures that emphasized proactive surveillance. The injunction in Reynolds diffused responsibility among employees, was silent on administration, shed no light on relationships or performances, and centered on reaction to evidence of wrongdoing. The implacable standard invoked to relieve vicarious liability clearly conflicted with the more measured one intended to promote greater oversight:
It is a rare violation that, when viewed in retrospect, cannot be said to have been preceded by at least “a remote indication” of an irregularity. And the stated obligation to exercise “utmost vigilance” makes virtually any oversight, no matter how minor, a potential basis for imposing sanctions against a firm.
There was no limit to the violations it covered. Not surprisingly, the SEC has never dismissed a failure-to-supervise claim against a broker-dealer.
The departure would hinder the development of supervisory systems and procedures by broker-dealers and investment advisers. It would affect more acutely individuals for whom “guarantor” liability was rejected and un-assumed, indefinite responsibility was anathema. With discipline no longer tied to procedures they agreed to perform with regard to particular individuals, two questions would continue to arise: “Who was a supervisor?” and “What was he or she supposed to do to avoid liability (if, indeed, that was possible)?” Answers, often inconsistent, would emerge over time through pronouncements in decisions and settlements. Unfortunately for those involved, the effects were retroactive.
The “Reynolds Doctrine” Breeds Ambiguity in Supervisory Relationships and Standards and Impedes Development of Centralized Controls
Initially, discipline against individuals for failure to supervise centered on branch managers and their superiors, and liability for them was as stringent as it was for the broker-dealer. Over time, companies expanded their approach to compliance, largely in response to SRO rules: They appointed chief compliance officers and qualified principals in specialized areas; employed additional personnel to perform oversight functions alongside branch managers and department heads; built out legal, compliance, and audit departments; developed computer systems and exception reports; and hired dedicated surveillance analysts to support them. Supervisory cases, however, continued to focus on an associated person’s performance apart from the broker-dealer’s system and procedures, rendering individual liability uncertain and diminishing the significance of institutional oversight.
Tennenbaum
In Michael E. Tennenbaum, three Commissioners, Philip Loomis, John Evans, and Barbara Thomas, upheld an administrative law judge’s decision that the senior registered options principal (“SROP”) of a New York broker-dealer failed to supervise a salesman in San Francisco who abused his discretion over customers’ accounts while misrepresenting the risks of options trades and the effects of commissions on their returns.
Tennenbaum was responsible for developing the broker-dealer’s options compliance program. Among other things, the program called for a registered options principal (“ROP”) “[i]n every office where sales personnel dealt in options” to “assume responsibility for the options transactions in their branches.” Representatives generally were forbidden to have discretion over options accounts. There were few exceptions. Tennenbaum had “sole authority” to make them. He made one for the salesman even though there was no ROP in the San Francisco office.
Tennenbaum admitted he was in charge of the program but denied supervisory responsibility for the salesman. He was not identified as the salesman’s supervisor under the firm’s written supervisory procedures. Nevertheless, for the Commissioners the circumstances painted “a picture of parallel or collateral responsibilities shared by different individuals depending upon the nature of the matter to be supervised” that included Tennenbaum. “Of critical importance” was that “[he] had sole authority to permit a salesman to handle discretionary options accounts” and the “power to revoke that permission.” In their view, “[o]nce Tennenbaum had given . . . his approval, he assumed responsibility for ensuring that this grant of authority, over which he continued to exercise control, was not being abused.” However, “[he] failed to fulfill his concomitant responsibility.”
The origin of that responsibility and what it entailed were clear only through construction and hindsight. As the Commissioners observed, there were fundamental deficiencies in the broker-dealer’s supervisory program with respect to the salesman―chiefly, the failure to have an ROP onsite to review his trades. Under SRO rules, the member had to provide for proper supervision of the salesman. In Tennenbaum’s case, knowledge of its failure to do so created or enlarged his own supervisory responsibility.
As Tennenbaum admitted, registrant’s supervisory system required an ROP in any office where there were retail options transactions. . . . One function of such a qualified supervisor was to analyze the transactions being effected to make sure that they were suited to the objectives expressed by the customers. * * * Despite that fact, there was no ROP in San Francisco until the spring of 1977. Absent was the effective local supervision on which Tennenbaum should have been able to rely in granting and continuing [the salesman’s] authority to handle discretionary accounts. And Tennenbaum was soon put on notice that stringent supervision of [the salesman] was required.
In effect, Tennenbaum was enlisted to fill the vacancy left by the firm because of his ability, in their view, to preempt the violations he should have foreseen.
The firm’s procedures did not govern Tennenbaum’s supervisory responsibility; the Commissioners decided it based on the facts and circumstances presented to them. Although he and others took steps to address the salesman’s conduct, the situation warranted Tennenbaum take or recommend additional action to examine the salesman’s accounts and to curtail his discretion.
Here it is clear that Tennenbaum had far more than “a remote indication of irregularity” with respect to [the salesman’s] activities. Yet he did not take appropriate action.
Tennenbaum was suspended for a month. The firm, instrumental to his liability by the aperture in its controls, was censured and ordered “to revise and amend its existing procedures, with a view to preventing similar violations in the future.”
Decisions that ignored supervisory designations and procedures under SRO rules already showed signs of fostering their neglect. But instead of the deficiencies foreclosing individual liability, they engendered it. If broker-dealers had no more incentive to supervise where they were not rewarded for their efforts, they had even less where the repercussions for defective programs were shared by associates who bore much of the blame and relatively stiffer sanctions.
In Tennenbaum, the broker-dealer and its associate were evaluated according to the same stringent standard, which was inconsistent with the language in the statute (by then renumbered Sections 15(b)(4)(E) and 15(b)(6)). Several years later, another associate’s performance was judged under a more forgiving―if not informative―combination of agency and negligence precepts.
Trujillo
A salesman in the San Francisco office of a national retailer based in New York misrepresented the risks of trading options on margin, made unauthorized trades, and churned accounts. The company and the branch manager agreed they failed to supervise him. The manager was cited for not performing certain supervisory procedures and for negligence in responding to signs of wrongdoing. The manager’s assistant, Louis Trujillo, also was accused of failure to supervise. A law judge ruled against him; he appealed to the Commission.
Trujillo’s duties included several compliance functions. In performing them, he discovered the salesman had extended a customer beyond his means. He monitored the salesman’s activities, discovered additional misconduct, and reported it to the manager and a senior compliance official. The company imposed a series of guidelines and enhanced supervision over the salesman. Later, Trujillo discovered more churning, and the salesman was dismissed.
Chairman David Ruder and Commissioners Joseph Grundfest and Edward Fleischman assumed for purposes of the decision that Trujillo was the salesman’s supervisor even though there was no explicit designation and he had little or no authority over the salesman. It was not alleged Trujillo failed to carry out any assignment. Instead, the Enforcement staff claimed “[he] failed to uncover many of [the salesman’s] offenses that later came to light, and that he reacted inadequately to customer complaints.” Although the Commissioners called Trujillo’s performance “less than exemplary,” they decided it did not warrant discipline under the statute:
It is “with a view to preventing violations” that the statutory proscription of failure to supervise is directed, and it is for the same preventative purpose that we have interpreted the statute to require “that those in authority exercise particular vigilance when indications of irregularity reach their attention.” However, the statute only requires reasonable supervision under the attendant circumstances, and, applying that standard, we cannot conclude that Trujillo’s overall performance with respect to the activities of [the salesman] amounted to a failure to supervise within the meaning of the statutory language.
They acknowledged responsibility under the broker-dealer’s procedures, but liability turned on Trujillo’s reaction to “indications of irregularity.” The standard for measuring it, however, was walked back, at least for individuals, to something akin to negligence.
The rationale created alternative bases for liability: failure to perform assigned procedures and responding inadequately to signs of misconduct. And though the standard for assessing the latter was more forgiving, still it was impossible to know precisely what it required. Consequently, even associates had reason to eschew procedures that could assure discipline if they were not followed but did not protect them when they were (and any protection there was resided outside of them). More uncertainty would follow attempts to define who was a “supervisor.”
Huff
Arthur James Huff joined the compliance department of a major wire-house as the SROP in July 1979. Prior to his arrival, a salesman in the broker-dealer’s Miami office embarked on an elaborate scheme to defraud customers in options trades by falsifying account records, intercepting their mail, and issuing them false statements. The compliance department was leery enough to examine his accounts. In June, the compliance director, members of his staff, and an attorney in the legal department met with the salesman and his branch manager to go over the findings, which included a number of accounts with identical or post office box addresses. The compliance director was sufficiently satisfied and the legal department approved the accounts with additional documentation. Upon starting, Huff was handed the file and instructed by the compliance director, his boss, “to keep on top of [the salesman’s] activities and to follow through if any question arose[.]” He reviewed the dossier and selectively monitored the salesman’s accounts. Aware of the results of the earlier review, he did not consider the salesman a “compliance concern” at the time. In April 1980, the compliance director instructed Huff to contact one of the salesman’s clients who had reported making money in his account―the result of bogus statements. Huff spoke with the customer but could not locate his account. So he analyzed twenty-five other accounts covered by the salesman, identifying losses in twenty-four of them totaling $7.6 million. He reported the results and recommended the salesman be fired. Still, a law judge found that prior “red flags” required he investigate sooner the salesman who was subject to his supervision.
Chairman Richard Breeden and Commissioner Richard Roberts did not find it necessary to decide whether Huff was the salesman’s supervisor. Rather, they determined his conduct was sufficient. Though it too was “less than exemplary,” citing Trujillo, they agreed “the statute only requires reasonable supervision under the attendant circumstances.”
In a separate opinion, Commissioners Philip Lochner and Mary Schapiro disagreed with their colleagues’ approach, fearing it lowered expectation. They favored the benchmark in Reynolds, as expressed in Wedbush, calling it an “exacting standard.” Since the duty arose from the relationship, they “prefer[red] to ask, first, whether Huff was a supervisor.” They concluded he wasn’t, thereby avoiding his performance.
Ambiguity in the absence of an explicit supervisory relationship obviously weighed on their analysis:
The statute requires a supervisory relationship and such a relationship can only be found in those circumstances when, among other things, it should have been clear to the individual in question that he could take effective action to fulfill that responsibility. Basic notions of fairness and due process reinforce this conclusion.
The key to it, they said, was “whether the person has the power to control the other person’s conduct.” They observed that the vast majority of cases involved persons in the “line” of authority. Branch managers, regional managers, and others up to and including the board of directors “have clear and direct authority and responsibility to control the conduct of salespersons.” Accordingly, “employees in a broker-dealer’s administrative structure are, at least presumptively, supervisors of those whom they have the authority and the responsibility to hire and fire and reward and punish.” For others, the relationship still rested on control. Recounting decisions involving non-line administrators, they noted each had authority to affect the activity involved. They concluded:
[A] supervisor for purposes of Section 15(b)(4)(E) ought to be defined . . . as a person at a broker-dealer who has been given (and knows or reasonably should know he has been given) the authority and the responsibility for exercising such control over one or more specific activities of a supervised person which fall within the Commission’s purview so that such person could take effective action to prevent a violation of the Commission’s rules which involve such activity or activities by such supervised person.
Huff did not have the requisite control over the salesman, so he was not a “statutory supervisor.”
The rationale helped protect personnel in non-business areas like legal, compliance, and audit, performing oversight functions but lacking authority over the people they monitored. Business executives, on the other hand, presumably were supervisors whether or not they were assigned any preventative measures to take with respect to subordinates. The formula defied the objective: to discipline associates who failed to perform their duties under the broker-dealer’s supervisory system and procedures and to preserve their immunities when there weren’t any. It also lessened the significance of supervisory systems removed from business influence. The false dichotomy stemmed from the apocryphal search for meaning to language in the statute that existed outside of it―in the supervisory relationships and performances agreed to between broker-dealers and their associates. Control over the person subject to supervision was not necessary and the provision did not require it. Discipline founded on contractual responsibility also alleviated concerns about fairness and due process; control alone did nothing to indicate how it was to be used.
Chairman Breeden and Commissioner Roberts purportedly tied Huff ’s liability to the broker-dealer’s supervisory system and procedures. In assessing his performance, however, they looked beyond what he had agreed to do under them to whether he responded appropriately to abnormalities. On that basis, his supervisor status alone was sufficient to establish responsibility, which explained why the “procedures” could consist of as little as an instruction to “keep on top of the salesman.” A spectacular case involving novel improprieties abandoned all pretext to broker-dealers’ procedures as the basis of supervisory responsibility for associated persons.
Gutfreund
In the spring of 1992, the SEC charged a primary dealer in U.S. Treasury securities with fraud and recordkeeping violations for false bids by its head government trader in auctions between August 1989 and May 1991. In related settlements, the broker-dealer was censured and three officers were sanctioned and another admonished for improper supervision.
In July 1990, the Treasury Department limited to 35 percent the amount of an issue a person could bid for at auction, partly in response to outsized purchases by the broker-dealer, a dominant market-maker in Treasuries. In the February 21, 1991, auction for $9 billion of five-year notes, the trader requested $3.15 billion (35 percent of the offering) for the broker-dealer. He submitted two other bids for $3.15 billion, ostensibly for customers, then secretly arranged to “buy back” the allocations. One customer confronted him. The trader reported the incident to his boss, the head of the division, who called the conduct “career threatening.” The next day, April 25, the division head met with the company’s president and its senior legal officer to discuss the matter, and the three later conferred with the chief executive officer. They decided the matter should be reported to the government. They did not initiate a review, discipline the trader, or restrict his activities. Subsequent events prompted an internal investigation uncovering more false bids before and after the February 21 auction. On August 9, the CEO and the president disclosed the initial incident together with the results of the investigation. The trader was terminated the same day.
All three officers were supervisors by virtue of their authority over the trader. Their responsibilities were not based on supervisory procedures—there weren’t any. Each had an independent duty to supervise commensurate with his position. The order recited a litany of measures that should have been taken. All thought “someone else would take the supervisory action necessary.” Thus, each bore “some measure of responsibility for the collective failure of the group” to act. The disjointed response was symptomatic of the removal of primary responsibility for supervision from broker-dealers to their associates.
The Commission issued a report under Section 21(a) of the Exchange Act on the senior legal officer’s performance “to amplify [its] views on the supervisory responsibilities of legal and compliance officers in [his] position.” Unlike the others, he “was not a direct supervisor of [the trader] at the time he first learned of the false bid.” Nor did he control his actions. Control, however, no longer was necessary:
[D]etermining if a particular person is a “supervisor” depends on whether, under the facts and circumstances of a particular case, that person has a requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue.
True to earlier applications of Reynolds, his “ability” merely “to affect” the situation made him a supervisor once he was on notice of potential misconduct. Also consistent was the expectation he “ensure” the proper outcome.
The executives who, after learning of the trader’s initial misconduct, continued to direct his activities in general, were not cited for willfully aiding or abetting the subsequent violations, even though they might have been inclined to turn a blind eye to conduct that enabled the broker-dealer to maintain its prominent position in the Treasury market. Supervisory liability unencumbered by designations and procedures benefited them and others in similar positions under questionable circumstances. However, it meant uncontained liability for those whose only responsibilities were to protect investors.
Gutfreund and the 21(a) Report concluded a formal shift in primary responsibility for supervision from broker-dealers to their associated persons. In 1985, Commissioner Aulana Peters described the traditional hierarchy for policing the industry:
[A]t the top of the pyramid is the SEC, the federal watchdog. At the middle level are the SROs, and finally, at the largest and most important level are the broker-dealer firms themselves. It is at this level that customer protection begins.
Five years later, the Head of the SEC’s Enforcement Division wrote:
Former SEC Commissioner Peters’s pyramid metaphor, though accurate, is not quite complete. The real base of the supervisory pyramid is occupied not by the broker-dealers but by their individual supervisory personnel, who are governed by an independent statutory duty to supervise.
While it sounded like an extension to greater effect, responsibility fell to individuals with little or no “independent authority.” Their individual abilities did not approach what the broker-dealer could do through them by its authority. And though broker-dealers still had to maintain supervisory systems and procedures under SRO rules, there was far less incentive to build the comprehensive programs envisioned when responsibility at the federal level, where it mattered most, was measured by how associates performed autonomously under existing circumstances.
Following the SEC’s lead, the SROs similarly have shifted expectations for supervision from members to their associates. At each level, supervision has become an employee’s duty for which the company can be held responsible instead of the other way around. Meanwhile, the Reynolds doctrine has been applied to investment advisers and their associates under Section 203(e)(6) and (f ) of the Advisers Act, with no corresponding SRO regime, and expectations trained heavily on compliance officers under Rule 206(4)-7. Not surprisingly, the SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations (“OCIE”)), FINRA, and compliance professionals themselves routinely have found fault with broker-dealers’ and investment advisers’ supervisory programs and the resources dedicated to them.
State Law and SRO Rules Provide Appropriate Standards for Purposes of Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Advisers Act
In some states companies are compelled to provide sufficient internal regulations and controls to prevent undue risk of harm to others by their employees and agents. In many cases, managers and directors are bound by fiduciary duty to ensure there are systems to report, investigate, and respond to potential illegalities within their companies, including violations of federal securities laws. Proper supervision is expected of broker-dealers and investment advisers under state blue sky laws demonstrated by written supervisory procedures. And under the regime created by Congress, broker-dealers and investment advisers are relieved of supervisory responsibility integral to vicarious liability for their associates’ securities laws violations where they implemented and enforced systems reasonably designed to prevent them. State law and industry guidelines inform expectations, while SRO rules and Rule 206(4)-7 require them to devise written plans that specify who shall do what with regard to whom.
FINRA rules, in particular, require members to designate qualified supervisors for each representative, business, and major location, and to establish written procedures to monitor compliance with applicable securities laws and association rules. There are special requirements for brokerage, trading, investment banking, research, and other businesses. Members must review associates’ outside business activities, personal securities transactions, investments, and investigate their conduct prior to employment. They have to monitor functions outsourced to third parties. In some instances, the rules mandate specific practices or objectives. Otherwise, members have broad discretion over the substance of their programs. They must test and inspect periodically to ensure policies and procedures are enforced, and evaluate the efficacy of those procedures every year. The emphasis on administrative processes reflects the member organization’s responsibility to provide for appropriate supervision.
Rule 206(4)-7 provides a basic framework for similar efforts by investment advisers, supplemented by FINRA requirements for dual registrants.
In order to promote greater oversight by broker-dealers and investment advisers, they should be relieved of discipline when they complied with applicable laws, SRO rules, and other obligations for establishing, maintaining, and enforcing systems and procedures to prevent violations as Congress intended. Management approval of rationally designed surveillance programs and reporting systems administered in good faith normally should be dispositive of those duties. The companies themselves should be accountable for any substantive deficiencies or lapses in enforcement. Their associates—who do not have original supervisory responsibility—should be responsible only for performing their assignments under principles of agency and contract law. Individuals should not be held accountable for deficiencies in companies’ supervisory programs except as control persons. Indeed, consideration should be given to curtailing individual supervisory liability, which has detracted from institutional responsibility.
Conclusion
Undoubtedly, the vast majority of broker-dealers and investment advisers make genuine efforts to supervise their associates. Vicarious liability and reputational harm remain powerful incentives to prevent violations. As Congress recognized, however, more is needed to induce them to go further than visible risk would dictate and to extend their purview beyond employees.
The Reynolds doctrine, of questionable SEC judicial provenance, undermines the statutory regime created by Congress to promote comprehensive supervision by broker-dealers and investment advisers. Its vague exhortation to no one in particular supplants defined relationships and performances. The insuperable standard eliminates all added incentive to supervise. What remains is lessened by removing primary responsibility for oversight from companies to their employees. A false dichotomy places most of it with conflicted “line” managers over dedicated, unbiased, “non-line” professionals specially trained to administer complex legal requirements that take precedence over business considerations. Expectations focus on those individuals’ reactions to signs of wrongdoing over their administration of company-ordained procedures to prevent and detect specific violations. Central coordination is replaced by an admonition that individual supervisors should work together. The principle that holds the CEO or president, his or her delegate, or the CCO responsible for the entire organization’s policies and procedures lessens their potential. The 1964 Amendments and their legislative history make clear Congress intentionally withheld jurisdiction over supervision from the SEC in favor of state law, self-regulation, and the Commission’s ability to amend SRO rules (later granting it narrowly over the misuse of material, nonpublic information). The deleterious effects of Reynolds and its progeny on compliance with those regimes would seem to validate that decision.
Investor wealth, the health of the economy, and the country’s well-being depend on the integrity of financial services providers. A large part of it rests on diligent supervision. As the law recognizes, to maximize these efforts, broker-dealers and investment advisers must be rewarded―by dispensing with derivative liability in disciplinary proceedings where oversight was appropriate. By necessity, the standards must come from the industry itself. They rely on processes for establishing, enforcing, inspecting, and reevaluating policies and procedures that provide clear guidance on supervisory roles and assignments. Satisfaction depends less on the merits of methods that inevitably failed, than on genuine adherence to those processes.
Supervision is hard to judge: Success is immeasurable, while failure in the context of isolated misconduct can be deceiving. It is important, therefore, to evaluate statutory liability for it relative to the objective: to encourage broker-dealers and investment advisers to instill in themselves systems and procedures reasonably designed to prevent violations; and to extend to their associates supervisory liability only when they failed to do what they promised to do under those programs. Unfortunately, the design was discarded to implement ahead of time the legislation behind it. Formidable obstacles confront its reinstatement today, including a more attenuated SRO regime, purposefully vague legal requirements, and gained acceptance of the misguided notion of corporate illegality. Overcoming them will require rededication to self-government for professional and ethical standards, legal clarity, and renewed understanding of oversight as an institutional responsibility, with greater deference to the decisions made to carry it out, for broker-dealers, investment advisers, and their associates to do more to protect the public from miscreants in their midsts.
