Key Takeaways
- Firms must have written disciplinary procedures.
- Violations must be investigated promptly and thoroughly.
- Disciplinary actions must be documented.
- Serious violations may require regulatory reporting.
- Progressive discipline is typically used for minor violations.
Last updated: January 2026
Disciplinary Procedures
Effective disciplinary procedures are essential for maintaining compliance and protecting customers. As a supervisor, you must be familiar with your firm's procedures and apply them consistently.
Written Disciplinary Procedures
Required Elements
| Element | Description |
|---|---|
| Violation types | Categories of violations |
| Investigation process | How violations are investigated |
| Disciplinary actions | Range of available sanctions |
| Appeal process | How employees can appeal |
| Documentation | Recordkeeping requirements |
Common Disciplinary Categories
| Category | Examples |
|---|---|
| Sales practice violations | Suitability, churning, unauthorized trading |
| Documentation failures | Missing records, incomplete forms |
| Compliance violations | Rule violations, policy breaches |
| Supervision failures | Failure to supervise |
| Ethical violations | Dishonesty, conflicts of interest |
Investigation Process
Steps in Investigation
| Step | Action |
|---|---|
| 1. Identify | Issue identified through complaint, review, or report |
| 2. Preserve | Preserve all relevant evidence |
| 3. Interview | Interview relevant parties |
| 4. Analyze | Review evidence and determine facts |
| 5. Conclude | Determine if violation occurred |
| 6. Document | Complete investigation report |
Investigation Documentation
| Document | Content |
|---|---|
| Complaint/trigger | What initiated the investigation |
| Evidence gathered | All documents and materials reviewed |
| Interviews | Summaries of all interviews |
| Findings | Conclusions reached |
| Recommendations | Proposed disciplinary action |
Progressive Discipline
Typical Progression
| Level | Action | Typical Use |
|---|---|---|
| Level 1 | Verbal warning | Minor first offense |
| Level 2 | Written warning | Repeated minor offense |
| Level 3 | Suspension | Serious offense |
| Level 4 | Termination | Very serious or repeated offenses |
When to Skip Levels
Serious violations may warrant immediate severe action:
| Situation | Action |
|---|---|
| Fraud | Immediate termination |
| Theft | Immediate termination |
| Customer harm | May warrant immediate suspension |
| Regulatory violation | Based on severity |
Regulatory Reporting Requirements
When Reporting is Required
| Trigger | Reporting Requirement |
|---|---|
| Termination for cause | U5 must disclose reason |
| Internal review | May trigger Form U4 amendment |
| Statutory disqualification | Must be reported |
| Criminal charges | Must be disclosed |
Form U5 Disclosure
When an employee is terminated, the firm must:
| Requirement | Timeframe |
|---|---|
| File U5 | Within 30 days of termination |
| Disclose reason | If for cause, must explain |
| Amendments | Update if additional information discovered |
Documentation and Record Retention
Disciplinary Records to Maintain
| Record | Retention Period |
|---|---|
| Investigation files | 3 years minimum |
| Disciplinary actions | 3 years after action |
| Warning letters | Duration of employment + 3 years |
| Termination documentation | 3 years after termination |
Supervisor Responsibilities
During Disciplinary Matters
| Duty | Action |
|---|---|
| Report promptly | Escalate issues to compliance |
| Preserve evidence | Don't allow destruction of records |
| Maintain confidentiality | Limit disclosure to need-to-know |
| Be fair | Apply procedures consistently |
| Document | Maintain detailed records |
Test Your Knowledge
Progressive discipline typically starts with:
A
B
C
D
Test Your Knowledge
When an employee is terminated for cause, the firm must:
A
B
C
D